Blockchain Investigations

Blockchain and cryptocurrencies have become essential tools for money laundering, evading sanctions and embargoes, and financing terrorism within the last decade. Nonetheless, the regulatory climate in the cryptocurrency industry is still in its infant stages, with observations of a lack of congruence amongst regulators globally on classifying cryptocurrencies and other virtual assets, formulating policies about their use, taxation, and implementation in the global economic system. As the regulatory environment around cryptocurrency comes of age, organizations must conduct cryptocurrency investigations to identify and mitigate any financial crime risk they may face.

Cryptocurrency investigations, also identified as blockchain forensics, refer to investigating transactions on the blockchain network to determine criminal or fraudulent activities therein. It is achieved through the use of various commercial analytical tools like Chainalysis Reactor, TRM Labs, and Elliptic, and open source blockchain investigations and intelligence tools like Blockchain Explorer, Bitref, Bitcoinwhoswho, Wallet Explorer, Oxt, and Bitcoinabuse.

Cryptocurrency investigations are crucial for financial organizations and law enforcement, as it allows them to identify illicit actors as they move funds that are possibly proceedings of criminal activities across the blockchain network. Government laws and industry regulations have significantly increased the difficulty of laundering fiat currency across the traditional banking and economic system, leaving criminals, terrorists, and sanctioned entities with blockchain as the only recourse. According to a Chainalysis report on the global cryptocurrency industry, only 1% of funds in the blockchain have been identified to have originated from illicit activity, including scams, fraud, stolen funds, human trafficking, money laundering, sanctions, and terrorism financing.

Cryptocurrency investigations take various forms according to the tools that are employed:

• Transactions analysis – involves the study of the blockchain networks to identify anomalies and patterns of suspicious activity or criminal activity. Herein, transactions are traced to identify counterparties engaged in illicit activities.
• Address clustering involves using various address clustering activities (including change address analysis) to identify addresses that belong to the same wallet and, thus, the same entity. It helps break the chain of pseudonymity on blockchain networks.
• Taint analysis – involves tracking the flow of funds from illicit actors to legitimate entities on blockchain networks.
• Wallet identification involves linking wallets to individual identities or specific entities. Allows investigators to analyze the movement of funds across wallets to detect suspicious patterns and identify addresses belonging to illicit actors.
• Blockchain explorers – tools which allow cryptocurrency investigators to search and analyze the blockchain in a text format or graphical format while providing information on specific blocks, addresses, and transactions on the blockchain network.
• Open-source intelligence (OSINT) – open-source intelligence is information gathered from the internet and other digital sources that facilitate blockchain investigations that enable the identification of owners of specific blockchain addresses or their exposure to illicit activities.

Cryptocurrency takes many forms, where multiple investigation tools can be employed. As such, cryptocurrency compliance professionals and law enforcement officers must utilize different investigation tools to ensure their investigations are exhaustive and complete to facilitate informed risk management practices and legal action against illicit actors on the blockchain network. However, cryptocurrency investigations continue to experience substantial challenges with the lack of proper training and awareness of the blockchain network and investigation tools. Organizations within the cryptocurrency compliance industry and law enforcement entities must train their staff to enable them to grasp foundational and technical knowledge concerning blockchain, virtual assets, cryptocurrencies, and cryptocurrency investigative tools.

If you would love to learn more about cryptocurrencies and cryptocurrency investigations or gain professional training for you or your staff, please reach out to us via (+254) 0708 078756 or email us at [email protected]