Five years ago this month, I published a post that spoke to the challenges law enforcement was having with identifying criminals using (blockchain supported) cryptocurrency to hide the proceeds of their crimes.
Here are a few excerpts from the post I wrote then:
“Although there is software that can track cryptocurrency, prosecutors have trouble identifying individuals associated with those accounts because of its anonymity, thus, it’s reason for being so attractive to criminal enterprises.
“As one U.S. federal prosecutor was quoted as saying in the  Wall Street Journal article, “Even though investigators can follow the funds by analyzing the blockchain, they may not be able to connect those funds to a culprit in the real world.
“We have received ‘Mickey Mouse’ who resides at ‘123 Main Street’ in subpoena returns.”
Well, times have certainly changed.
In an April New York Times (NYT’s) article titled, “Crypto Detectives Are Cleaning Up By Cracking Down,” it highlights the services available to government and private entities to not only track but identify bad actors.
Here are a few quotes:
“To early advocates, crypto was appealing because it promised the secrecy and anonymity of cash, without the inconvenience of face-to-face exchanges.
“That secrecy was an illusion. Crypto transactions are inscribed on a publicly viewable ledger called a blockchain.”
The article gives a few prominent examples of how the government has tracked those who seek to hide (such as nailing former FTX CEO Sam Bankman-Fred) by using crypto tracking and wallet identification software.
FOCUS OF THIS POST
This post will introduce the services available to track cryptocurrency transactions and some fundamentals on how it’s done.
According to the NYT’s article, the crypto detective service that the U.S. government most relies on is a company named Chainalysis.
“From the government’s perspective, Chainalysis is arguably the most trusted company in the industry — but only because it sells powerful tools aimed at penetrating the veil of secrecy that made crypto attractive in the first place.
“The Justice Department, the Treasury Department and other federal agencies pay for the ability to use Chainalysis’ blockchain-tracing software, including a tool called Reactor, which maps transactions.
“At times, the transparency of the blockchain has been a boon to law enforcement.
“In 2020, Chainalysis worked with U.S. investigators to bring down the largest child-pornography website on the dark web.
“By analyzing the blockchain, agents located the digital addresses of customers who were using Bitcoin to buy the illegal pornography.
“The trail led to the crypto exchanges where the customers had bought their Bitcoin in the first place; the government could then subpoena those firms to establish the wallet owners’ identities.”
HOW CAN CRYPTO DETECTIVES DO IT?
Here’s a concise example of what Chainalysis was able to accomplish in one case as quoted in the NYT’s:
“In the courtroom, Ms. Bisbee [Chainalysis investigator] presented a colorful diagram mapping the movement of the millions of dollars’ worth of Ether that investors spent on [the target] Mr. Felton’s tokens.
“The funds had been routed to a series of crypto wallets, digital repositories where people can store their holdings.
“Using a forensic technique called clustering, Ms. Bisbee showed that all those wallet addresses belonged to the same person: Mr. Felton.
“From those accounts, he had moved his investors’ Ether to one exchange before transferring it to another. Then he’d converted the Ether into cash.”
The colorful diagram-link embedded in the NYT’s article is an intriguing play-by-play on how Chainalysis found the cryptocurrency in a case that identified the fraudster.
Here is a quote from the August 10, 2022, Chainalysis summary:
“… this case sets a precedent that blockchain analyses can be used in much the same ways as texts, emails, and other forms of electronic evidence.
“To the best of our knowledge, we are now the first and only blockchain analysis tool to be tested in U.S. courts.”
Although the software and expertise exist to now track cryptocurrency and (in many cases) the persons controlling those accounts, bad actors will continue to use it.
It makes sense for investigators and attorneys (government and private) in the IP protection space to become familiar with the range of crypto tracking and identification services available.
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