Blockchain investigators put a wrinkle in crypto money laundering
One of the major appeals to cryptocurrency versus fiat currency transactions is the pseudonymity crypto provides. However, pseudonymity is not synonymous with anonymity. The security of a blockchain is partly ensured by the transparent, open source nature of the blockchain and every transaction that takes place in that general ledger. And even if actual identities are not publicly displayed, each party to a transaction on the blockchain is represented by their pseudonym, or the public wallet address used in the transaction.
Just as the crypto market has evolved over the years, so have the techniques and tools used to track owners of or associations between crypto wallets. Investigators have different options regarding the investigative approach, but those with access to and expertise in blockchain analysis tools can build a timeline and comprehensive profile based on a wallet address by analyzing the transaction patterns of these wallets, as well as other wallets that may appear earlier or later in the blockchain’s history. . Most blockchain analysis tools rely on proprietary data collection, categorization and risk profiling, which often help determine the “location” and / or payout point (ie the last known wallet and where it is hosted) for digital assets on a particular blockchain, and in some cases across multiple blockchains.
Private sector investigators and financial institutions are not the only ones utilizing the power of blockchain analysis. Numerous state and federal agencies and regulators utilize blockchain analysis tools and / or investigators in their pursuits. During 2021, blockchain investigators enabled the IRS to find and seize approximately $ 3.5 billion in non-tax investigations and led to OFAC’s sanctioning of crypto OTC broker Suex based on the observed activity related to Suex wallet accounts.
Increase in illegal activity – a boom and a downturn for investigators
Despite the growing threat of discovery, criminals do not seem deterred, and cryptocurrency continues to be a popular choice for those who want to launder any bad winnings. In its 2022 Crypto Crime Report, the blockchain analysis firm Chainalysis estimates that total money laundering cryptocurrency increased by about 30% in 2021, and it only represents money laundering from cryptocurrency-related crime, and not criminal dividends that are later converted into a digital asset.
The probable reason why many offenders are not afraid of the alleged openness of their crimes is because they are activated by various entities that specialize in anonymity and cover-up services, such as so-called mixers or tumblers. These services often operate in under-regulated jurisdictions or nest within major stock exchanges. Criminals usually try to hide their cryptocurrencies by complicating the tracking process and by moving assets as quickly as possible, and these mixing services, peer-to-peer transaction schemes, stratification transactions and other techniques can be used to make fund tracking more complicated. . This is illustrated by the Chainalysis report which estimates that a group of around 580 wallet addresses received over 50% of all funds sent from illegal wallet addresses in 2021, and a smaller group of 45 addresses received almost a quarter of all illegal funds sent, for a total of around $ 1.1 billion. In other words, some, or all, of the 45 destination wallets are likely to host services that specialize in obscurity, or are ignorant participants based on inadequate or inadequate compliance programs.
These loopholes exploited by hackers, scammers and other criminals are sharpening. As cryptocurrency adoption continues to grow, regulations tighten, compliance improves, and enforcement increases, the data available for use by investigators in blockchain analyzes will shed light on those who help with the illegal movement of criminal proceeds and are currently hiding behind their current pseudonymity.
Despite the recent extreme volatility in the crypto market, the use of digital assets continues to increase. And as mentioned above, many blockchain analytics programs rely on data collection, including web scraping and clustering algorithms, and therefore the universe of data available for collection grows as adoption grows. Furthermore, advances in certain regulations, such as the FATF’s so-called “Travel Rule”, will provide investigators with critically identifying information about parties to certain transactions. The Rule of Conduct requires virtual asset service providers to exchange personally identifiable information, or PII, with the originator and recipient for amounts greater than $ 1,000 (even if the U.S. threshold is for amounts greater than $ 3,000). Although this will take time, as the FATF announced on 30 June 2022 that only around 30% of the member jurisdictions have passed the travel rule, and just over a third of these have enforcement and oversight programs in place.
The ingenuity of bad players, combined with the pseudonymity of crypto, has historically surpassed regulations and compliance in the digital asset ecosystem. But, bad guys, beware! The gap is narrowing, with the expectation of more regulation, including increased compliance requirements, and the increasing use of blockchain analysis and cross-border sharing of a growing dataset between suppliers, investigators, regulators and law enforcement.
