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Cryptocurrency Crimes: How Blockchain Forensics Is The New Tool To Investigate Crypto Crimes

In the crypto world, scams and hacks have become the new normal – with a new scam or swindle making headlines every other day. While exact figures are difficult to come by, such criminal actions have duped unsuspecting investors of billions of dollars since crypto tokens first appeared on the market.

Crypto stakeholders are working hard to identify ways to prevent these crimes and apprehend those who are involved. Several digital forensic advances have resulted from their efforts, including crypto analytics and blockchain forensics.

For example, in November 2020, two Venezuelan software developers, Kelvin Jonathan Diaz and José Manuel Osorio Mendoza were arrested by local authorities for the theft of $1 million in bitcoin from Bancar, the country’s local exchange.

ALSO READ: FBI To Have Dedicated Unit To Counter Cryptocurrency Crime and Ransomware

Diaz and Mendoza maintained their innocence throughout their detention. Nonetheless, they were sceptical of their ability to prove it in court due to the country’s lack of blockchain and technological literacy.

“Despite being a crypto-friendly economy, there is a lot of technological ignorance in my country… “Even though we worked at a technology company, we had doubts about how we could explain something that was so new and difficult to understand,” Mendoza told.

During their detention, their employer, POSINT, a software development firm, intervened to demonstrate their innocence. Danny Penagos, POSINT’s Chief Operations Officer, hired the blockchain analytics and intelligence firm CipherBlade to investigate the cyberattack on Bancar.

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The investigation by CipherBlade discovered various aspects and details about the attack, such as the security flaws that led to the attack and a trail of stolen money that led to Russia-based crypto-firm SUEX.IO, which the US Treasury Department had recently blacklisted.

In January 2021, a report on the findings was submitted to the Venezuelan court. According to a court document obtained by Coindesk, Diaz and Mendoza were cleared of all charges in August 2021.

Various blockchain intelligence firms, such as CipherBlade, have risen to prominence in recent years as the number of crimes in this sector has increased. Chainanalysis, a blockchain intelligence firm, has received multi-million dollar contracts from the US government for blockchain analysis and surveillance over the last seven years. MasterCard purchased CipherTrace, a firm that scans blockchains for illicit transactions, in September of last year to improve fraud detection and further strengthen the security of its systems.

How blockchain forensics is assisting in the investigation of cryptocurrency crimes:

Once upon a time, cryptocurrency was thought to be a haven for criminal activity. However, as the number of crimes in this space has increased, law enforcement agencies are learning how to follow a trail of ill-gotten crypto gains and have dedicated new task forces to deal with these crimes.

As an example, consider the recent Bitfinex hack. In 2016, a married couple from New York used a sophisticated attack to steal 94,000 BTC from Bitfinex. A portion of the bitcoin stolen by the hackers was transferred to the darknet market exchange Alphabay. A darknet is a dark web market that engages in illegal trading and selling. The hackers then transferred the bitcoin from Alphabay to regular cryptocurrency.

ALSO READ: Fight Against Cybercrime: US Unites With 30 Countries To Counter Ransomware & Cryptocurrency Crime

Blockchains and user privacy: There is a widespread misconception that blockchain technology protects users’ complete privacy. This is only true in the sense that no real-world identification is associated with a user’s wallet address. In reality, blockchains are distributed ledgers in which the database is maintained on every node in the network. This provides a high level of transparency by allowing anyone to inspect the state of a database and the transactions that occur on it. Agencies could simply follow the trail of transactions on the blockchain to help narrow down a network user’s identity. While this may necessitate the use of specialised tools and knowledge, it is certainly doable.

Criminals use a variety of tools and techniques to circumvent blockchain transparency.

Blockchain analysis is a minor component of digital forensics.

Many moving parts work together to put the puzzle pieces together in digital forensics. To solve crypto or any other cybercrime, various entities must work together. The tightening of Know Your Customer (KYC) policies for exchanges and other financial firms is one of the most significant advantages that law enforcement has in this space. This limits the criminals’ options for redistributing the stolen funds. Any deposit or withdrawal made from these entities will leave some sort of identifying mark.

Several private intelligence firms, such as Chainalysis and CipherBlade, are devoting significant resources to developing blockchain intelligence tools and techniques. These techniques include identifying tainted wallets and assigning risk scores.

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Shambhavi Singh
Shambhavi Singh
The writer is a confident speaker with an irresistible affinity for stage and the zest to write. Currently pursuing History Honours from Miranda House, University of Delhi. She is an opinionated bird from the holy city of Varanasi who has been in love with exploring and learning about culture and heritage from the very beginning. She love writing in every niche because the pen and paper are magical.

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