How do bitcoin detectives at the IRS and FBI catch crypto crimes?

How do bitcoin detectives at the IRS and FBI catch crypto crimes?

As an agent on the IRS’s cyber investigation team, Chris Janczewski has led some of the government’s biggest crypto raids, including the removal of a major child abuse site and the confiscation of most of the $4.5 billion bitcoins stolen during the 2016 Bitfinex hack. . These raids helped Janczewski move into the private sector a few months ago. He is currently the head of investigation at a private crypto intelligence firm called TRM Labs, which focuses, among other things, on detecting illegal crypto transactions. Most people probably don’t even realize that this type of crypto detective job is a thing, but Janczewski is making a career out of it.

“Until a few weeks ago, I didn’t think the phrase ‘The stolen NFT of a Million-dollar Bored Monkey Yacht Club’ existed,” Janczewski told Recode. “There isn’t necessarily a playbook for people researching this sort of thing – or a lot of experience.”

Cryptocurrency is an increasingly common factor in criminal activity. It shows up in everything from terrorist financing operations and ransomware attacks to casual scams and scams. The problem is probably getting worse, too. Chainalysis, a crypto research firm, found that crypto criminal activity hit an all-time high last year.

As a result, there is a growing interest in researchers like Janczewski, who know how to scour the blockchain (the huge public ledger that records cryptocurrency transactions) for clues that connect anonymous crypto exchanges to real people who could be tried or charged with a crime. These investigations have brought to light all manner of criminal operations, including the illegal network of bitcoin ATMs used by a New York man to launder money, and the $1.1 million “carpet pulling” featuring NFT cartoons called Frosties. (An NFT carpet pull occurs when someone tricks people into investing in an NFT project, only to cancel the project later and keep the money.)

The demand for crypto crime fighters is exploding. The Securities and Exchange Commission said last week that it will double the size of its cyber unit and broaden its focus on the crypto industry, including NFTs and crypto-asset exchanges. The Justice Department formed a crypto enforcement group last fall, and the FBI said it will set up its own crypto team in February.

At the same time, there has been a surge in the business of private companies that often conduct their own crypto research on behalf of individuals or other companies. Companies like TRM Labs and CipherBlade, another blockchain research firm, are acting almost like private eyes for the crypto age. There are even crypto vigilantes: independent and often anonymous internet detectives who, in their spare time, look for evidence of crypto scams and schemes.

Like most things crypto-related, crypto detective work is not necessarily intuitive. All crypto transactions are publicly recorded; this means that it is relatively simple to identify the wallets criminals use to store digital currencies. But since these transactions are also anonymous, crypto researchers have to look for leads who can link a particular crypto transaction to other activities on the web.

For example, they can effectively link a wallet with the address of a crypto account to an established platform like Coinbase – these companies are legally required to monitor their customers’ identities or part of the dark web – this is already on researchers’ radar. These investigations often involve going undercover online, sometimes using secret, disguised accounts that the government has seized and held for years.

“In traditional investigations, we know who committed the crimes and we follow the money to prove it,” explains Dana Windsor, spokesperson for the IRS’ criminal investigation unit. “We know what the crime is in crypto investigations and we follow the money to prove who committed the crime.”

This may sound simple enough, but finding these links is extremely difficult and requires technical expertise that seasoned detectives often lack. Federal agencies like the IRS, FBI, and State Department have spent millions of dollars on contracts with private crypto intelligence firms. These companies often have access to powerful machine learning software that can screen out large numbers of transactions and search for leads. Even with this software, these investigations become more difficult as criminals are constantly developing new ways to hide their methods.

One of the biggest hurdles to tackling cryptocrime is the fact that there shouldn’t be an established pipeline of people who can help. Currently, there is no specific way to become a crypto researcher so it has mostly been a career that people stumbled upon. Janczewski, for example, studied accounting before becoming the crypto police for the IRS. CipherBlade crypto researcher Paul Sibenik told Recode that he started a crypto detective business after running a side job as a consultant for people who think their spouse is hiding bitcoin in divorce cases.

Another problem is that some firms with the crypto expertise the government needs are also at odds with regulators. For example, last month, Anchorage Digital, the bitcoin bank that the US Police Service hired to store crypto that the government seized after criminal investigations, was flagged by the Currency Regulatory Office for violating money laundering rules. This contract is now suspended.

Of course, the people who know the blockchain best may be more interested in profiting from crypto than regulating it. Many of the people most excited about crypto actively oppose the idea of ​​increasing enforcement.

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

This could soon be a big problem. President Joe Biden has insisted that there is a place for cryptocurrency in the mainstream, provided there is also a place for cryptocurrency rules. But without people to enforce these rules, it’s not clear that much will change in the crypto world. After all, as long as there is crypto flowing in our financial system, there will be people determined to use it illegally.

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