Request Demo

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

How Blockchain Analytics Aids LEA’s in Tracing Crypto Assets to Off-Ramps

Join the Merkleverse

Law enforcement agencies (LEAs) can utilize blockchain analytics to trace crypto assets to off-ramps. Blockchain analytics tools are a valuable resource for law enforcement agencies in investigating and tracking cybercrime activities. These tools can be used to monitor seized assets using blockchain data. Blockchain forensics provides transparency into an otherwise opaque ecosystem, arming agencies with intelligence to combat crypto-enabled crimes.

Investigators can gain valuable crypto insights to fast-track organized crime, cybercrime, terror, and money laundering investigations. Blockchain analysis software monitors, classifies, and investigates blockchain addresses and transaction data. This information is used to manage financial risk, combat financial crimes, and to comply with regulations associated with cryptocurrency assets. 

By using blockchain analytical tools, LEAs can trace the flow of cryptocurrency transactions, discover real-world identities of blockchain addresses and wallet holders, and scan crypto wallets for AML and sanctions compliance. LEAs can also use blockchain analytics to track down crypto criminals by identifying suspicious addresses and providing actionable insights to assist in asset recovery efforts.

The widespread use of cryptocurrencies for illicit financing has created huge challenges for law enforcement agencies (LEAs) tasked with tracing funds and identifying perpetrators. The pseudo-anonymous nature of crypto transactions generates considerable obfuscation, especially when sophisticated tactics like mixers are employed. However, advanced blockchain analytics techniques can help illuminate crypto cross chain transaction trails and unlock crucial investigative insights.

In particular, combining analytics with traditional investigative methods enables LEAs to trace crypto funds to off-ramps – the points where digital assets are exchanged for fiat currency. Identifying these illicit crypto-to-fiat exchanges is key for following the money and tracking criminals seeking to cash out proceeds into conventional financial systems.

Surging Crypto Use for Crime Funding

The scale of potential criminal abuse of cryptocurrencies has expanded dramatically in recent years. 68.819 million USD worth of funds have been sent to terrorist organizations over the year. In 2021, illicit addresses received $12 billion in funds – a 68% increase over 2020. Ransomware remains a major source of these ill-gotten gains. Payment tracing firm Bolster estimates that $1.1 billion in crypto ransom were paid in 2021, with demand multiplying amid the pandemic digital shift.

Terrorist organizations are also ramping up their use of cryptocurrencies to solicit donations and transfer funds across borders. A 2021 Center for New American Security paper found evidence of widespread adoption among militant groups, ranging from ISIS to right-wing extremists. The Treasury Department notes that terrorist group Al Qaeda is now active in crypto fundraising. Recently the OFAC also sanctioned the crypto wallets on the TRON blockchain which were linked with ISIS-K as well as Al Qaeda and the owner of the wallet addresses was Ali Shafiu.

As crypto-based crime surges, the anonymity inherent to blockchain technology poses a threat to law enforcement efforts to track and seize illicit funds. Advanced blockchain analytics techniques have emerged as indispensable tools for meeting this challenge.

Analytics Spotlights On and Off-Ramp Transactions

While the bitcoin blockchain is inherently transparent, the identities of entities transacting on it are not. However, combining analytics methodologies allows LEAs to extract crucial insights from the wealth of data contained on public blockchains.
  • A core focus is identifying the on-ramps and off-ramps – the points where crypto funds are exchanged with fiat currency.
  • On-ramps encompass the initial purchase of cryptocurrency using standard currencies. Off-ramps involve the reciprocal conversion from crypto back into spendable fiat money.
  • Being able to trace illicit funds to off-ramps provides critical leads for interdicting money flows and identifying accomplices. 
  • Many off-ramp transactions involve mainstream exchanges with KYC requirements, bringing perpetrators into contact with regulated financial systems.

On-ramp transactions also yield valuable entity information, as purchases through exchanges require personal data for KYC compliance. Furthermore, analyzing initial fund entry points can uncover broader criminal supply chains and reveal abuse enablers.

The Importance of Exchange Analysis

CFT Regulation
A central component of tracing on and off-ramps is gaining visibility into transactions on digital asset exchanges. Transactions with exchanges accounted for more than 95% of crypto-based money laundering in 2021.
Many exchanges globally still have inadequate KYC standards compared to traditional finance. Research suggests that more than 34% of global exchanges had weak customer onboarding protocols that scored below 45 out of 100.

Beyond KYC gaps, visibility into exchanges is key because they provide centralized chokepoints. While the blockchain itself is a distributed ledger, exchanges function as intermediaries with insight into customer identities and activities. Leveraging this via legal requests or partnerships can transform crypto tracing.

Analytics for Unmasking Obfuscation

As blockchain tracking has grown more sophisticated, threat actors have adopted anonymization techniques to avoid detection. Analytics innovations have emerged to meet the anonymization challenge.

  • Crypto mixing or tumbling services attempt to break the link between source and destination addresses by shuffling funds.
  • But pattern analysis, activity monitoring and timing correlations can often reconnect the dots. For example over 68% of mixed bitcoin ends up back on exchanges.
Transaction fracturing seeks to avoid scrutiny by spreading amounts across many outputs and chains. However, advanced clustering algorithms can accurately group related wallets and map fragmented activity trails.

Cryptocurrency threat intelligence data from both public and private sources provides attribute matching to triangulate connections among entities. Combined with network graphing, threat intelligence aids in unmasking sophisticated anonymization.

Orchestrating Diverse Analytics for Holistic Fund Tracing

Given the scale and complexity of blockchain-based money flows, orchestrating diverse analytics capabilities is crucial for LEAs. No single tool can provide the complete picture. Holistically integrating multiple data sources and techniques generates the most robust crypto tracing.

Automated trading and transfer monitoring, customizable alerts, regulatory screenings, and risk scoring streamline oversight and case management. Advanced analytics like funds flow mapping, identify linkage, and behavior profiling help overcome obfuscation and unfolding complex entity relationships.

Ultimately, combining blockchain data with open-source intelligence, institutional information and contextual knowledge creates an integrated web of digital evidence. Fusing crypto tracing with traditional investigative techniques is the key to fully leveraging blockchain analytics.

Building Capacity through Training and Partnerships

For many LEAs, leveraging blockchain analytics poses an organizational and workforce challenge. Lack of familiarity with cryptocurrency and limited data literacy hampers adoption. Allocating an adequate budget and building in-house analytics expertise is difficult.

These capacity gaps make public-private partnerships essential. Collaborations with experienced analytics firms provide immediate investigative support and deliver strategic training to develop law enforcement capabilities. The right organizational model can unlock blockchain analytics at scale for LEAs. Structured partnerships and training programs are instrumental to operationalizing crypto tracing.

Turning Crypto Challenges into Investigative Opportunities

Employing multi-layered analytics helps transform the challenges into a boon for investigations. Crypto tracing illicit funds to fiat conversion points provides the actionable intelligence needed to prosecute crimes, interdict money flows, and secure assets. Combining emerging analytics with collaborative partnerships promises to checkmate the use of cryptocurrencies for illegal financing.

Way Forward

The widespread adoption of blockchain and crypto presents great value combined with complex challenges. The blockchain space in itself aims to establish decentralization backed by a distributed system supported by a thriving economic ecosystem (DeFi). Consequently, there are actors who present a challenge to law enforcement agencies due to its trustless and anonymous nature. To summarize, here is how law enforcement agencies (LEAs) can utilize blockchain analytics to trace crypto assets to off-ramps:

  • Identify major crypto-to-fiat exchanges used as off-ramps through analysis of transaction flows. Trace funds from illicit wallets to exchanges known to have weak KYC or be favored by criminals.
  • Analyze blockchain data to map relationships between entities. Connect crypto wallet addresses to known exchange accounts or compromised user accounts.
  • Use tools like address clustering and attribution to group addresses controlled by an entity. Trace clusters to exchanges or services used to cash out.
  • Leverage transaction graphing and flow analysis to visualize fund flows between wallets and exchanges. Identify off-ramp transactions.
  • Incorporate OSINT data like reviews, leaked databases, and geo-ip mapping to pinpoint locations and identities of off-ramp services.
  • Monitor flow of crypto through mixers and tumblers to detect transfers to an exchange directly from a mixer. Associate obfuscated funds with an off-ramp.
  • Analyze timing of transactions. Large transfers from a wallet followed by exchange account withdrawals may indicate off-ramping.
  • Develop entity profiles connecting wallets, transactions, accounts, and personal identities. Trace flow of funds from illicit activities through conversion to fiat.
  • Implement tools like transaction monitoring and custom alerts to automatically flag potential off-ramping activities for investigation.

The wide range of analytic techniques available can help uncover off-ramps and provide crucial evidence for following the money to the point of crypto-to-fiat conversion. Combining these approaches allows LEAs to unpack complex blockchain transaction trails.

Stay connected with us for the latest insights and updates on crypto compliance and regulation by subscribing to our newsletter and blogs.