Law enforcement’s battle against Cryptocurrency crime

June 19, 2023  |  Alex Vakulov

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While cryptocurrencies have been celebrated for their potential to revolutionize finance, their anonymous nature has also been exploited for illicit activities. From drug dealing and arms trafficking to funding terrorism, black market activities have thrived under the cloak of cryptocurrency's pseudonymity. According to a report by Chainalysis in 2023, around $21 billion in crypto transactions were linked to illegal activities.

Money laundering, too, has found a home in the crypto space. Overall, between 2017 and 2021, crooks laundered over $33 billion worth of cryptocurrency.

Moreover, tax evasion has surged with crypto's rise. Crypto traders evading their tax obligations could be costing the Internal Revenue Service upwards of $50 billion annually.

Law enforcement's response to technological challenges

While the majority of cryptocurrency transactions remain legitimate, these dark sides of cryptocurrency cannot be ignored. Regulatory and law enforcement agencies worldwide have an urgent task ahead: to develop robust mechanisms to combat these illicit uses while supporting the technology's legitimate growth. We should craft and use Blockchains that are safe and advantageous to everyone except lawbreakers.

There is a long-standing tradition of law enforcement agencies modifying their approaches to chase criminals who exploit the newest technologies for illicit purposes. This adaptability was evident when technologies like fax machines and pagers were invented. Throughout history, the legal system has consistently demonstrated its ability to adapt and grow in order to confront emerging technological challenges.

Even though Blockchain represents a revolutionary development in the finance and tech spheres, it is merely the latest example of how law enforcement must continually innovate and adapt to new technologies. Given this perspective, it is hard to argue that Bitcoin and other coins pose an insurmountable problem for law enforcement.

As Blockchain technology is still young, we have a unique opportunity to enhance law enforcement's understanding of it and improve its security. Individuals interested in Blockchain should assist law enforcement in understanding and harnessing the potential of this technology.

A practical approach to achieving this is implementing a public-private information-sharing process like the one employed to exchange cybersecurity threat details. These dialogues can establish a mechanism through which the Bitcoin community can contribute their knowledge to help law enforcement overcome challenges encountered during cybercrime investigations.

Challenges for law enforcement in investigating cryptocurrency crimes

Still, certain features of Bitcoin and other popular cryptocurrencies present substantial challenges for law enforcement. Collaborating with distant international counterparts, each with its distinct policies often complicates investigative efforts. Identifying an individual from a Bitcoin address is also not easy. Cryptocurrency exchanges operating in different jurisdictions, the use of mixers and tumblers to obfuscate transactions, and the rapid evolution of technology pose significant hurdles for investigators.

The greatest obstacle in any cybercrime investigation is attributing a specific person to a virtual offense. Prosecutors often attempt to link a particular MAC or IP address, or an email address, to a specific individual. This becomes significantly more challenging when someone utilizes Tor, proxies, or employs privacy coins like Monero.

Another complication arises from the fact that many email providers, as well as cell phone companies, either cannot or do not find it necessary to validate the information their users provide them.

One potential solution to overcome these challenges is to employ data analysis from multiple sources, aiming to isolate and identify the single offender in the crowd.

Advantages of Blockchain for law enforcement

Despite the various challenges it presents, the Blockchain actually offers several advantages to law enforcement. One of the notable benefits is the ability to trace all transactions associated with a particular Bitcoin address, including records dating back to its initial transaction.

Cases like Silk Road, Mt. Gox, and others have showcased the proficiency of law enforcement agencies in tracing transactions on the Blockchain. Carl Force, a DEA agent, faced accusations of pilfering Bitcoins during the Silk Road investigation. During the trial, a chart was presented as evidence, demonstrating how law enforcement successfully tracked the funds across the Blockchain, despite Carl Force's attempts to divide the transactions among multiple addresses.

Contrary to popular belief, Bitcoin is not as anonymous as many people think. Each Bitcoin address may serve as an account number for an individual. If a person can be linked to a specific address, it becomes possible to access information about all the transactions associated with that person.

If an individual utilizes a crypto wallet to interact with the Blockchain, the wallet organization will associate the address with the individual, similar to how a bank keeps records of its customers and their accounts.

New software tools can identify patterns in Blockchain transactions, such as repeated transactions between specific addresses or sudden large transactions, indicating potential illegal activity and leading to particular people.

The Blockchain operates as a peer-to-peer system, where no single entity has exclusive authority to remove records. It functions as a publicly accessible ledger of data blocks, and it cannot be revised or tampered with. This ability allows law enforcement to track the flow of funds in a manner that was previously impossible.

Law enforcement agencies often face a significant challenge when dealing with phone and Internet companies due to varying regulations regarding the retention of customer data. The process of locating the specific provider that possesses the information needed to trace a high-level cyber-criminal can be time-consuming, spanning multiple providers and even different countries.

Furthermore, there is always a risk that the trail may have gone cold by the time the relevant provider is identified. In contrast, the Blockchain serves as a permanent repository for all data. It retains information indefinitely, ensuring that it is always accessible. This eliminates the need for extensive investigations across multiple providers and offers a streamlined way to obtain the required data.

The Third Party Doctrine states that individuals should not expect confidentiality for data shared with third parties such as ISPs, banks, etc., creating complications for law enforcement. It enables law enforcement to obtain records from ISPs, banks, and cellphone carriers through a subpoena rather than a search warrant. However, Blockchain operates differently in this regard. There are no such complications when it comes to Blockchain. It is straightforward to utilize Blockchain and trace transactions without needing a subpoena. The Blockchain is intentionally designed to be open and accessible to all, eliminating the need for legal procedures to access its data.

When evidence emerges in a foreign country, U.S. law enforcement is required to adhere to the Mutual Legal Assistance Treaty (MLAT) procedure in order to seek assistance from foreign agencies. One significant example highlights the Department of Justice engaging in a legal battle against Microsoft. This case revolved around the question of whether the DOJ possesses the authority to access data stored in a Microsoft data center located in Ireland. Microsoft argued that the DOJ could not employ a search warrant to obtain overseas data and must follow the MLAT procedure instead. However, with Blockchain, such issues do not arise as it allows access from anywhere in the world without the need for MLAT.

Final thoughts

It is an undeniable reality that illegal money transfers will persist. It is impossible to completely eliminate criminals from utilizing Blockchain or the internet as a whole. However, what we can strive for is to develop solutions that make it increasingly challenging for illicit parties to thrive. Law enforcement should concentrate their efforts on the specific areas of the Blockchain where criminal activities frequently emerge. Individuals must collaborate and devise innovative strategies that law enforcement can adopt to combat these challenges effectively.

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