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Blockchain Is a ‘Powerful Tool for Investigating Financial Crime’

Wednesday, March 9, 2022

Blockchain Is a ‘Powerful Tool for Investigating Financial Crime’

Earlier this month, the United States Department of Justice (DoJ) seized a massive $3.6 billion of Bitcoin (BTC) from the Bitfinex hack in 2016. Federal agents managed to track down the perpetrators of a crime that would have been untraceable and lost forever if it had been committed with fiat money.

Thanks to the ongoing operation, authorities finally detained a couple in New York on money laundering allegations, marking the largest financial seizure in the DoJ’s history at more than 94,000 BTC (around $3.6 billion at the time). The couple stands accused of laundering the remaining proceeds of the 119,754 BTC that were stolen from Bitfinex (a total valued at around $4.5 billion today).

Assistant Attorney General Kenneth Polite Jr. said in a statement, “Today, federal law enforcement demonstrates once again that we can follow money through the blockchain, and that we will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system.” 

Blockchain Technology Makes Transactions Traceable 

Cryptocurrency is often given a bad rap, accused of being a tool for criminals to launder money and fund their nefarious deeds. Yet, while that may have been true to a certain extent during the early days when regulators were still grappling to understand the technology, that argument ceases to hold water today. 

Blockchain, the technology underpinning Bitcoin and other cryptocurrencies, is transparent and every transaction is publicly recorded and viewable on the ledger. While no personal information is attached to the transactions, anyone can follow the movements to and from blockchain wallet addresses. This makes cryptocurrency a terrible tool for criminals to launder money as all their movements can be traced—and law enforcement officers can eventually connect the wallets to a physical person.

In this landmark case, the seizure took so long because most of the stolen BTC sat untouched in the wallet it had been siphoned off into. But, in 2017, when small amounts began to move and find their way into the traditional banking system, investigators started tracing the transactions to physical people.

Techniques Used to Obfuscate Transactions Hit a Wall

When money laundering has occurred in the cryptocurrency industry, the perpetrators of crimes have used various different techniques to obfuscate the transactions. Small amounts of the stolen BTC started to move in 2017 when the money was sent to a dark web currency exchange called Alphabay, used by criminals to transact for weapons, drugs, and other illicit goods. Sending the BTC to Alphabay, the hackers could launder the money and deposit it into a new Bitcoin wallet with an obscured provenance.

However, this practice quickly hit a wall as Alphabay was detected and shut down by law enforcement officers. The hackers then attempted other techniques, including turning to a dark web Russian marketplace called Hydra, using a practice called “coinjoin” to prevent blockchain tracing, and opening numerous different accounts at exchanges under false names. At the time, all these tactics were available to criminals to conceal the sources of the funds.

Yet, regulation in the space began to step up, and cryptocurrency exchanges were made to implement practices followed by traditional finance, such as anti-money laundering (AML) programs and KYC (know-your-customer). This made it much harder for the criminals to transfer money anonymously, and eventually, as more money appeared in accounts linked to the couple, officials were able to join the dots.

Solving Crime with Blockchain Technology

This case highlights more than ever that the old argument about cryptocurrency being a perfect vehicle for criminals is highly inaccurate. Rather than an illicit tool for “funny business” and “money laundering,” as stated by European Central Bank President Christine Lagarde, blockchain is actually instrumental in solving financial crimes. 

As crypto security expert and head of legal and government affairs at TRM Labs, Ari Redbord told Time Magazine, “This is not just an anonymous thing used only for money laundering and fraud. In fact, the blockchain itself can be a powerful tool for investigating financial crime.” 

The case further shows how law enforcement can solve crimes that happened years ago as all the information is immutably recorded on the blockchain. “Law enforcement investigators have never had a more open way to follow the money,” Redbord added. “This shows cybercriminals that just because it’s years after a hack, don’t think you’ve gotten away with it: We’re going to trace those funds until we can seize them.” This is something simply impossible when it comes to fiat money that is infinitely harder to trace. 

According to blockchain data platform Chainalysis, illicit activities like money laundering, cybercrime, or terrorist financing made up just 0.15% of all crypto transactions conducted in 2021. 

The need for safe custody

This case demonstrates the risk of holding crypto assets in a non-secure wallet. With the current geopolitical landscape and sanctions being imposed on Russia, the likelihood of hacks being undertaken is likely to increase, which could result in billions of hacked crypto assets. 

Ensuring your crypto assets are stored with a secure and authorised custodian will reduce the risk of losing them.







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