Sunday, July 3, 2022

How Bitcoin Detectives at the IRS and FBI Track Cryptocrime

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As an agent on the IRS’s cyber investigation team, Chris Janczewski led some of the government’s largest crypto break-ins, including the removal of a large child exploitation site and the confiscation of much of the $4.5 billion stolen from bitcoin during the 2016 Bitfinex hack. Those busts helped Janczewski make the leap into the private sector a few months ago† He is now the head of investigations at a private crypto intelligence firm called TRM Labs, which focuses, among other things, on detecting illegal crypto transactions. Most people probably aren’t even aware that this kind of crypto detective work is a thing, but Janczewski is making a career out of it.

“I don’t think the phrase ‘stolen NFT from a Bored Ape Yacht Club worth millions of dollars’ existed until a few weeks ago,” Janczewski told Recode. “There isn’t necessarily a script — or there isn’t a whole lot of experience — for people who’ve looked at that sort of thing.”

Cryptocurrency is an increasingly common factor in criminal activity. It shows up in everything, from terrorist financing operations and ransomware attacks constantly fraud and scam† The problem is also likely to get worse. Chainalysis, a crypto research firm, found that crypto crime transactions reaches a record high last year.

As a result, there is a growing interest in researchers like Janczewski, who know how to… blockchain — the massive public ledger that records cryptocurrency transactions — for clues linking anonymous crypto exchanges to real people who could be prosecuted or charged with a crime. These investigations have uncovered all types of criminal operations, including a network of illegal bitcoin ATMs that a New York man used for money laundering, and a $1.1 million “back pull” with NFT cartoons called Frosties. (An NFT carpet draw happens when someone misleads people into investing in an NFT project, only to cancel the project later and keep the money.)

The demand for crypto-crime fighters is booming. The Securities and Exchange Commission said last week it would? twice the size of his cyber unit and expanding its focus on the crypto industry, including NFTs and crypto asset exchanges. The Ministry of Justice formed a crypto enforcement group last fall, and the FBI said in February it would to assemble its own crypto team.

At the same time, there has also been a wave of business for private outfits conducting their own crypto investigations, often on behalf of individuals or other companies. Companies like TRM Labs and CipherBlade, another blockchain research firm, are acting almost like private investigators for the crypto era. There are even crypto vigilantes: independent, and often anonymous, internet sleuths looking for evidence of crypto scams and schemes in their free time

Like most things crypto, crypto detective work isn’t necessarily intuitive. Crypto transactions are all publicly recorded, meaning it is relatively easy to identify the wallets that criminals use to store their digital currencies. But because these transactions are also anonymous, crypto researchers must look for leads that can link a particular crypto transaction to other activities on the Internet.

For example, they can link a wallet, which is basically an address for a crypto account, to an established platform, such as Coinbase – these companies are required by law to track the identities of their customers – or part of the dark web that is already on the radar of the researchers. To conduct these investigations, you often have to go undercover online, sometimes using secret, disguised accounts that the government has confiscated and kept on hand for years.

“During traditional investigations, we know who committed the crimes and follow the money to prove it,” explains Dana Windsor, a spokesperson for the IRS Investigative Service, which had 80 crypto-related cases to her name late last year. . “In crypto investigations, we know what the crime is and we track the money to prove who committed the crime.”

That may sound simple enough, but finding these connections is extremely difficult and generally requires technical expertise that experienced detectives simply don’t have. Federal agencies such as the IRS, the FBI, and the State Department have spent millions of dollars on contracts with private crypto intelligence companies. These companies often have access to powerful machine learning software that can search huge numbers of transactions and search for leads. Even with this software, these investigations are becoming increasingly difficult as criminals are constantly developing new ways to hide their methods

One of the biggest hurdles to the fight against crypto crime is the fact that there isn’t necessarily an established pipeline of people who can help. Right now, there is no specific path to becoming a crypto researcher, so it has mainly been a career that people have stumbled upon. For example, Janczewski studied accounting before becoming a crypto agent for the IRS. And CipherBlade crypto researcher Paul Sibenik told Recode that he got into crypto detective work after performing a side gig as a advisor for people in divorce cases who thought their husbands were stashing bitcoin.

Another problem is that some of the companies that have the crypto expertise that the government needs are in conflict with regulators at the same time. For example, last month, Anchorage Digital – the bitcoin bank of the US Marshals Service rented to store the crypto that the government seizes after criminal investigation – was flagged by the Office of the Comptroller of the Currency for breaking money laundering rules† Now that contract is on hold

Of course, the people who know their way around the blockchain best may be more interested in make a profit of crypto than to regulate it. Many of the people most excited about crypto are actively opposed to the idea of ​​ramping up enforcement.

“The government has a very hard time competing in crypto because the technologists are heavily recruited in the Web3 space because there is so much venture capital,” said John Reed Stark, an outspoken critic of crypto and the former head of the SEC’s Office of Internet Enforcement, Recode told Recode. “There is definitely a real brain drain in government when it comes to technology.”

That can quickly become a major problem. President Joe Biden has insisted that there is a place for cryptocurrency in the mainstream, provided it is a place for cryptocurrency rules, at. But without people to enforce those rules, it’s not clear that much will change in the world of crypto. After all, as long as crypto flows through our financial system, there will be those who are determined to use it in less than legal ways.

This story was first published in the Recode newsletter. Register here so you don’t miss the next one!

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