How the IRS seized $10 billion worth of crypto using blockchain analytics

Blockchain analysis has been key in helping the US Internal Revenue Service (IRS) seize an estimated $10 billion in cryptocurrency since it began investigating a wide range of crimes involving digital assets.

This was a key point raised by IRS Criminal Investigations (IRS-CI) chief Jim Lee in a wide-ranging, exclusive interview with Cointelegraph in Amsterdam. Lee was among a number of delegates from public and private institutions who shared knowledge and insights at blockchain analytics firm Chainalysis’ Links conference held in the Netherlands.

Lee, along with a cohort from the IRS-CI, provided an insight into how the enforcement agency has tackled the use of cryptocurrency and digital assets in a variety of financial crimes that fall under its purview.

Chief Lee has served as a special agent with the IRS for 28 years and has been at the helm of the unit since 2020. In the years leading up to his tenure, IRS-CI has seen an increasing amount of criminal investigations involving digital assets land on the desks of its agents to varying degrees .

Related: The IRS is bracing for a surge in crypto cases in the upcoming tax season

The tax authorities’ relationship with the cryptocurrency space began in earnest in the early 2010s when Bitcoin (BTC) began to spread into the monetary system as an alternative, decentralized means of holding and transferring value.

As Lee explained, the IRS’s efforts to build infrastructure to combat identity theft around 2011 preceded their efforts to begin investigating crimes involving digital money:

“When cryptocurrency came into the picture, we were already thinking about digital crimes and money trails using Web2.”

However, the organization’s ability to understand, investigate and ultimately prosecute and seize cryptocurrencies and digital assets became dependent on tools developed by private institutions.

IRS-CI is one of hundreds of law enforcement and government agencies that utilize a specific suite of blockchain analytics tools developed by Chainalysis. The company was established in 2014 and has become a lynchpin for blockchain-based research around the world over the past decade.

For the IRS, the partnership with Chainalysis has become invaluable, and Lee emphasizes that the unit’s efforts to investigate crypto-related crimes would be nearly “impossible” without the infrastructure and tools it now has access to. The public-private partnership with Chainalysis relies on investment in technology that can help track crypto and manipulate data from public blockchains to darknet marketplaces.

“Think about all the data I have working for the IRS. It might not be the most, but it’s the richest. Now I can take all this other data we have and then match it up against the records I have. I mean, it’s just incredibly powerful, but it takes time, energy and money.”

Even with the tools at their disposal, Lee admits that investigating crimes involving digital assets is a difficult task. Investment in people, data and technology has been key in the fight against crypto-related crime:

“When we talk about the crypto space, the way I look at it is data and technology combined. It requires significant investment because you can’t just get these results. You can’t just seize $10 billion in value.”

While the market value of seized cryptocurrency in IRS vaults has fallen in value from an estimated $10 billion at the time of seizure, the agency still needs to figure out how to safely hold billions of dollars of digital assets.

It’s a complex issue for the IRS-CI chief, who highlights simple considerations for storing cryptocurrency that become increasingly stressful when dealing with vast sums of digitized value:

“Where do I keep it? On chain or off chain? Do I keep it in my office? Do I unlock the seeds elsewhere? We’re talking a lot of money.”

The IRS-CI investigations have been fruitful, and the department has often become the largest contributor to the US Treasury Asset Forfeiture Fund in recent years. The seizure of $3.6 billion involved in the Bitfinex hack in 2016 is a prime example of Lee’s unit’s efforts to track down stolen funds.

Related: IRS Reminds Taxpayers to Report Crypto Income Before Filing in 2022

Another important part of IRS CI’s mandate is to share knowledge and skills to use tools like Chainalysis Reactor with local and international crime enforcement, which is mainly aimed at conducting financial crime investigations.

Part of Lee’s visit to Europe in May 2023 was to facilitate the training of over 60 different Ukrainian officials from a variety of law enforcement agencies. IRS-CI also donated Chainalysis Reactor licenses to Ukrainian law enforcement, which will help facilitate blockchain and cryptocurrency tracking amid the ongoing Russian-Ukrainian conflict.

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