A constant refrain from crypto skeptics has always been that cryptos and the blockchain technology that supports them enable the criminal element in our society to easily hide their nefarious activities, such as money laundering, drug trafficking, funding terrorism, illegal arms dealing, child pornography, and on and on. Skeptics and criminals, however, have mistakenly believed that all crypto transactions are anonymous, which, it so happens, they are not. The quickly evolving field of crypto forensics is revealing this fact to be so. Law enforcement officers are the beneficiaries of these new “tools of the trade”.
This basic negative refrain re-surfaced many times over during the past few weeks, when government officials across the globe attacked Facebook, its project Libra, and all things crypto. President Donald Trump went so far as to tweet: “Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity.” His Treasury Secretary, crypto terrorists,cryptocurrencies ,blockchain, also claimed that cryptos were a national security issue and that:
We will not allow cryptocurrency to become the equivalent of secret numbered accounts [and] we will allow for proper use, but we will not tolerate the continued use for illicit activities.
These snippets are but a few examples from press accounts, but, unfortunately, no one spoke on behalf of law enforcement officials in global jurisdictions on how they are benefiting from a host of newly developed forensic tools that can only become more powerful, as this sector of the crypto industry evolves. Although early presumptions regarding cryptocurrencies and blockchain technology purported that “anonymity” was a key characteristic, researchers, especially from the academic world, have refuted this early presumption.
Per one report:
Academic researchers throughout Europe, Asia, and the Americas quickly proved this wasn’t the case. UC San Diego researcher Sarah Meiklejohn has studied a variety of ways using external data points and big data can uncover people’s supposed anonymity. So even without using KYC/AML and other regulatory processes to identify customers, cybercrime using cryptocurrency does leave a trail.
No one is disputing that criminals have been drawn to Crypto-Land, due in part by the supposition of anonymity and the unregulated nature of the medium. Crime and white-collar fraud, however, are two different issues. It was true that crooks of all types quickly flocked to cryptos, the Silk Road being the first high-profile example of enabling the dark side of crime to have a refuge, at least and until the FBI successfully shut the operation down. Unregulated crypto exchanges with enormous concentrations of capital have also been too tempting a target for professional hacking gangs and shady operators to ignore. Forensic tools will do little to uncover embezzlement or outright fraud.
Forensic tools, however, offer an opportunity to track down the crooks that try to use the crypto railways to hide their tracks, perhaps, not in real time, but over time. There are several companies now offering services to businesses, governments, and law enforcement units to assist in these types of investigations. One example is Elliptic, a firm that offers blockchain-based solutions to help track criminal activity on Bitcoin’s distributed ledger. Its website clearly states that its tools help law enforcement “investigate bitcoin’s role in cases of narcotics distribution, child pornography, and ransomware”.
Based on market demand alone, a number of entities have come on stream in recent years to provide similar products that work across all cryptocurrencies to discover the “usage of the coins, recover missing coins, and provide other valuable information”. Three of these firms are already well known in the industry for their forensic expertise — CipherTrace, CryptoZorro and Chainalysis. These companies have also published several research reports detailing significant insights and trends within the blockchain.
We are now, however, definitely in a new age, where crypto forensics will play a major role in the evolution of crime fighting. The quality of these tools is developing on a quickened pace, but crime will still be around for a while, as this one observer notes:
Terrorist organizations, drug cartels, and other criminals aren’t likely to stop using cryptocurrency anytime soon. But banks and government have already created a slew of fintech forensic tools, which can track crypto transactions as easily as a trail of breadcrumbs.
The community of crypto critics has taken the industry to task over its attractiveness to organized crime, but it would be wrong to confuse the technology with its users. The Internet was rife with fraud in its early days. Ebay and PayPal can attest to the fact that the majority of their early users were involved in nefarious activities. Times changed, and new controls cleaned up the mess. Closer to home, retail forex trading was a haven for fraudsters in the nineties, until regulators addressed the issue head on. The same will be true for Crypto-Land. Regulations and modern forensic tools will drain the swamp.