The rapid rise of cryptocurrency adoption has opened up new avenues for financial crimes and illicit activity. Illicit cryptocurrency transaction volume hit an all-time high of $20.1 billion in 2022, up 44% from 2021. Law enforcement agencies face significant challenges in tracking criminals exploiting the perceived anonymity of crypto transactions across global jurisdictions. This article outlines key strategies and methods for agencies to effectively identify, investigate and prosecute crypto-related crimes.
Leveraging Blockchain Analytics Tools
Specialized blockchain analytics software equips agencies with the capabilities to reveal connections and trace the flow of funds on public blockchains associated with crimes like fraud, money laundering, and terrorism financing.
According to a 2022 Rand Corporation report, over 80% of law enforcement professionals agree that blockchain analysis is highly relevant to investigations involving cryptocurrency. Analytics aids investigations by:
- Identifying high-risk entities through wallet profiling and clustering analysis. Analytics can uncover connections to dark web markets, criminal infrastructure, and sanctioned regions.
- Visually mapping the flow of funds between wallets, accounts and associated entities. Interactive graphs trace money flows and asset transfers to reconstruct crimes.
- Tracing cryptocurrency payments and transactions related to ransomware, dark web markets, scam operations etc. Another investigation reported tracing $5 billion in Bitcoin associated with illicit activity in 2021.
- Detecting patterns and anomalies indicative of suspicious activities like structuring, smurfing, or churning using statistical algorithms.
- Enriching blockchain data with off-chain sources to link transactions to real-world identities. Blockchain forensic firms assisted US agencies in tying 25 cases to real individuals in 2021.
- Supporting asset recovery and forfeiture through comprehensive fund flow tracing. The DOJ seized $3.6 billion in crypto between 2018-2021 with analytics assistance.
Analyzing Cryptocurrency Exchange Data
Cryptocurrency exchanges that operate legally within jurisdictions can serve as valuable partners to law enforcement. Exchanges have visibility into user identities, wallet activity, transaction histories and other valuable data.
Data from a 2022 Crypto Crime Report notes that transaction data from exchanges played a role in more than 90% of crypto investigations in 2021. Agencies should leverage data-sharing agreements with compliant exchanges to:
- Identify account holders involved in suspicious transactions like rapid cashouts or transfers to high risk regions.
- Profile user activity and detect criminal typologies using transaction details, login IPs, device fingerprints and more.
- Provide transactional evidence for investigations and prosecutions through comprehensive historical data.
- Trace funds flows across accounts associated with crimes by analyzing deposit patterns.
- Facilitate asset recovery through exchanges' custody controls to seize or freeze assets.
Monitoring Peer-to-Peer Platforms
P2P trading platforms allow direct cryptocurrency transactions between users without exchange mediation. Agencies should monitor these platforms through surveillance tools and exchange partnerships to:
- Detect recruitment of money mules through analysis of advertisement patterns and communications.
- Identify theft transactions involving hacked funds by profiling sources, timing, and destinations.
- Investigate potential identity fraud or account takeovers by comparing user patterns across platforms.
- Coordinate with exchanges that interact with P2P services to uncover further detail on entities.
Developing Specialized Training and Units
Agencies should invest in building skills and dedicated teams including:
Exploring Emerging Technological Investigative Aids
Beyond fundamentals like blockchain analytics and exchange data, agencies can tap into emerging technological aids like:
- Crypto ATM monitoring tools to detect transactions with illicit funds. DEA seized $30 million from Crypto ATMs in Operation Cryptosweep.
- Digital asset user attribution tools using advanced heuristics to identify owners of wallet clusters.
- Chain-hopping tracking tools using statistical algorithms to trace laundering across different blockchains.
- Automated transaction monitoring systems with machine learning to detect money laundering typologies.
- Cryptocurrency forensic tools to analyze artifacts in recovered wallets and extract identifying information.
Fostering Collaboration Between Organizations
Information sharing and joint investigations between agencies and organizations involved in cryptocrime issues are vital, including:
- Partnerships between local/state/federal-level enforcement agencies to share intelligence.
- FIU coordination across jurisdictions for tracing cross-border flows projected to exceed $15 billion in 2023.
- Public-private partnerships with trusted blockchain analysis firms providing technical expertise.
- Collaboration with financial institutions to trace fiat interactions associated with illicit crypto flows.
- Cooperation with global agencies through special investigative task forces.
Raising Awareness and Outreach
Proactive public awareness initiatives on crypto risks help protect consumers and businesses. Outreach efforts should focus on:
- Educating on common crypto crime typologies like fraudulent investment schemes which accounted for $7.8 billion in losses in 2021.
- Helping identify warning signs of crypto-related identity theft or scams. Reports of crypto crime to the FTC increased 10x from 2018 through 2021.
- Providing guidance for detecting and reporting suspicious activities to relevant financial crime bureaus.
- Encouraging robust security practices for holding cryptocurrency.
- Fostering participation from communities and citizens to prevent crimes
Incorporating Blockchain Forensics
Here is how blockchain analytics firms can support law enforcement agencies:
User-Friendly Investigative Software
Analytics firms provide access to advanced platforms through interfaces designed specifically for investigators' workflows.
- Robust visualization tools to map complex transactions, money flows, and entity connections critical for tracing crimes.
- Customizable dashboards to monitor wallets, addresses, and keywords associated with persons of interest.
- Link analysis to uncover relationships between wallets, accounts, transactions, and external identifiers.
- Timeline generation tools to recreate sequences of events for reconstructing crimes.
- Wallet attribute tools to cluster, risk-rate, and categorize wallets.
- Cross-chain tracking tools to follow laundering trails across different cryptocurrencies.
Expert Investigation Support
Analytics firms have teams of intelligence analysts to provide customized case support. Strategic consultation on appropriate investigative approaches for different crypto crime types further substantiates a case. With the help of In-depth investigative research on entities of interest using a combination of human and machine intelligence, Ongoing intelligence monitoring of key wallets, accounts, typologies, and developments related to cases becomes easy for law enforcement agencies.
Cryptocurrency Seizure and Forfeiture
Analytics firms aid asset recovery through tracing and documenting illicit fund flows to establish definitive links between crimes and cryptocurrency accounts/wallets. By providing authoritative reports and documentation that support seizure warrants and forfeiture proceedings, identifying additional cryptocurrency accounts associated with targets to maximize recovery and direct consultation with prosecutors on using blockchain intelligence as evidence in court.
Robust Blockchain Data and Off-Chain Enrichment
Analytics firms integrate blockchain data with external sources to enhance transparency including:
- Broad coverage of historical blockchain data beyond public explorers.
- Integration of sanction, criminal, corporate, and government databases for entity enrichment.
- Off-chain data like web traffic, botnets, forums, paste sites and dark web sources.
The acceleration of crypto adoption has surely given rise to the crypto enabled crimes as well. It becomes imperative for law enforcement agencies to continue developing strategies and partnerships to illuminate illicit activities shrouded under the perceived anonymity of crypto transactions. The methods covered in this article, from leveraging analytics tools to fostering collaboration, provide a strong foundation.
Our suite of blockchain intelligence products equip agencies with the actionable insights needed to track illicit fund flows. Our transaction monitoring solution helps investigators identify high-risk activity through risk scoring algorithms, pattern detection, and customizable alerts. Our crypto crime investigation software follows the digital money trail across entities and blockchain networks to trace laundered funds and stolen assets.
By leveraging our analytics capabilities built specifically for law enforcement's needs, agencies can gain the visibility and crypto intelligence necessary to stamp out threats as they arise. Just as blockchain provides transparency into financial transactions, our products shed light on the criminal abuses of this technology. The collaboration between blockchain analytics solutions and law enforcement is necessary to fully realize blockchain's potential while keeping customers safe.
Stay connected with us for the latest insights and updates on crypto compliance and regulation by subscribing to our newsletter and blogs.