The seizure by the U.S. Department of Justice of $3.6 billion worth of Bitcoin (BTC) lost during the 2016 hack of Bitfinex’s cryptocurrency exchange has all the ingredients of a Hollywood film — eye-popping sums, colorful protagonists and crypto cloak-and-dagger — so much so that Netflix has already commissioned a docuseries.
But, who are the unsung heroes in this action-packed thriller? Federal investigators from multiple agencies including the new National Cryptocurrency Enforcement Team have painstakingly followed the money trail to assemble the case. The Feds also seized the Colonial Pipeline ransoms paid in crypto, making headlines last year. The Internal Revenue Service (IRS) seized $3.5 billion worth of crypto in 2021 in non-tax investigations, according to the recently released Chainalysis cryptocrime 2022 report.
Law enforcement agencies are getting better at investigating crypto crimes: Regulators and law enforcement agencies in a select few countries have really upped the ante on blockchain forensics. Although initially lost at sea, some G-men and women have honed the playbook on the search and seizure of assets, prosecution in courts and disposal of seized digital currency after winning the case. Each of these specific steps demonstrates a deep understanding of this disruptive technology.
There are several considerations during the process of investigation, and all require an intimate knowledge of the blockchain space. The blockchains may be transparent but various techniques such as tumblers, mixers, chain hopping and structuring (doing multiple small transfers to avoid scrutiny) must be understood and analyzed. The suspects may be apprehended physically but law enforcement officials must also ensure that digital assets are not moved out of reach by the defendants or by their alleged accomplices. The seized crypto assets must be safely in custody during the pending case.
The financial cops certainly do not want the crypto assets stolen while the case is being prosecuted. Usually, confiscated crypto assets are auctioned and the proceeds go into designated government accounts. But, when there are innocent victims, a process for restitution is essential for there to be trust in the judicial system.
Blockchain forensics is a part of the larger digital forensics domain: Blockchain analysis and forensics do not live alone on a deserted island. There are several layers of collaboration required to bring wrong-doers to justice. Firstly, the growing success of law enforcement in tracking crypto crimes is due to the tightening of Know Your Customer (KYC) norms of entities that handle fiat to crypto and crypto to fiat currency conversions. Then, there are other digital forensic technologies involved, for example, gathering data and evidence from seized mobile phones and computers.
The intricate dance involved in investigating the Bitfinex hack shows that they might even become BFFs. With financial crimes, the mantra for the legal authorities has always been to “follow the money.” The public nature of blockchain transactions actually makes it easier to track and trace criminal activity. Working with technologists who know what they are doing makes it even easier.
Crypto libertarians may not like the increased involvement of investigative agencies in the space but the writing on the wall is clear: Such guardrails are better for all involved, consumers and crypto companies alike. The industry cannot be worth trillions of dollars and not attract the watchful eye of regulators.
