Blockchain Ledgers Are Unlocking the Next Level of Forensics

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Cryptocurrency gets a bad rap, and the media loves to associate virtual currencies with criminal activity. But an immutable ledger is actually more useful as a tool to fight crime than it is for would-be criminals, as researchers, law enforcement and criminals are learning very quickly all over the world.

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.

Welcome to crypto forensics – the next evolution of crime fighting.

Tracking the Distributed Ledger

With the exception of privacy coins, most cryptocurrencies have public ledgers. After popping up at the dawn of the Occupy movement, it’s no surprise Bitcoin’s first adopters were in the counterculture, including anarchists and cypherpunks. The currency was soon used for a lot of illegal activity, due to the mistaken belief that transactions were anonymous.

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.

But tracking that trail in real-time isn’t easy, especially in a zero-day environment like cybersecurity and financial crime. There are now many companies lining up to show businesses and governments how to maintain privacy and protect information. Fintech has come a long way from the barter system.

Follow the Missing Bitcoin

Yet despite all our advances in tracking, we still lose cryptocurrency to crime quite often. QuadrigaCX lost over $100 million, and about a fifth of all BTC is missing, whether due to crime or neglect.

And that’s just one cryptocurrency. When you multiply that by the number of cryptocurrencies, there’s a lot of money on the line. It’s no wonder an industry is picking up to trace them.

White-collar crime is also a worry – from embezzlement to fraud, we’ve harvested plenty of bad apples. Korea’s M-Token ponzi scheme and ICO fraud allegations against Canada’s FUEL token are just a few recent examples.

Cryptocurrency even played a role in one of the biggest scandals of the past four years. When Russian operatives attempted to fund their operations with bitcoin, investigators followed the trail of their transactions on the blockchain, all the way back to the GRU.  This helped authorities pin down 12 alleged co-conspirators.

In August 2016, crypto exchange Bitfinex was robbed of over $72 million worth of BTC (making it the 4th biggest crypto-theft of all time). Now, nearly three years later, about $100k has been returned.

This is a great gauge of how long these investigations take, regardless of the tools available.

So who’s gonna save us?

Avengers Assemble!

I wish I could take credit for the term “crypto forensics,” but several startups were there first. They’ve been working with authorities on all sorts of criminal matters that don’t always make headlines.

Elliptic, for example, offers financial institutions (crypto or not) blockchain-based solutions to help track criminal activity on Bitcoin’s distributed ledger. The company website states it helps law enforcement investigate “investigate bitcoin’s role in cases of narcotics distribution, child pornography, and ransomware.”

CipherTrace, CryptoZorro and Chainalysis have similar products that also reach out into other cryptocurrencies. Each can discover the usage of the coins, recover missing coins, and provide other valuable information.

And bitcoins do play a role in a lot of these crimes – from the Dark Web’s Silk Road to U.S. Treasure Secretary Steve Mnuchin’s insistence it has laundered more money than the U.S. Dollar.  The Ryuk ransomware ravaged U.S. servers for bitcoin ransoms before heading to China, and several other cyber criminals have accepted BTC as payment for their services. HIPAA Journal reports over 200% increases in cyberattacks, including Trojans and ransomware.

The Next Evolution

Whether you believe in cryptocurrency or not, financial crimes are unlikely to stop soon. Criminals will likely continue using any tools at their disposal, whether cash, banks or crypto. 

But just like with vaping, cannabis, AI, and other emerging industries, it’s important to recognize the distinction between the technology and its users. Cryptocurrencies and blockchain technology may lend themselves to misuse, but they also provide tools for law enforcement. As long as that is the case, both cops and robbers will continue using these tools.

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