How IRS and FBI Bitcoin Investigators Pick Up Crypto Crimes

As an agent on the IRS’s cyber investigation team, Chris Janczewski has led some of the government’s largest cryptocurrency liquidations, including the takedown of a major child exploitation site and the confiscation of much of the $4.5 billion in bitcoin stolen during the 2016 Bitfinex hack. On the jump to private a few months ago. He is now the head of investigations at a private crypto-intelligence firm called TRM Labs, which focuses, among other things, on detecting illicit crypto transactions. Most people probably don’t realize that this kind of cryptographic work is a thing, but Janczewski is making a career out of it.

“I don’t think the sentence ‘stolen boring monkey million dollar yacht club NFT’ was there a couple of weeks ago,” Janczewski told Recode. “There isn’t necessarily evidence – or not a lot of experience – for people who have researched these kinds of things.”

Cryptocurrency is an increasingly common factor in criminal activity. It appears in everything from terrorist financing and ransomware attacks to regular scams and scams. The problem is likely to get worse, too. Crypto research firm Chainalysis found that crypto-crime transactions reached an all-time high last year.

As a result, there is a growing interest in investigators like Janczewski, who know how to rummage through the blockchain — the massive public ledger that records cryptocurrency transactions — for evidence linking anonymous cryptocurrency exchanges with real people who can be prosecuted or charged with a crime. These investigations shed light on all kinds of criminal operations, including a network of illegal Bitcoin ATMs used by a New York man to launder money, and a $1.1 million “rug pull” that includes NFT caricatures called Frosties. (NFT rollover occurs when someone deceives people into investing in an NFT project, only to cancel the project later and keep the money.)

The demand for crypto crime fighters is booming. The Securities and Exchange Commission said last week that it will double the size of its cyber unit and expand 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 in February that it would assemble its cryptographic team.

At the same time, there has also been a boom in private hardware businesses conducting their own investigations into cryptography, often on behalf of other individuals or companies. Companies like TRM Labs and CipherBlade, another blockchain investigation company, are serving as eyes on the age of crypto. There are even crypto vigilantes: independent, often anonymous, investigators on the Internet looking for evidence of cryptocurrency scams and schemes in their spare time.

Like most things related to cryptography, the work of investigating cryptography is not necessarily self-evident. All crypto transactions are publicly recorded, which means that identifying the wallets that criminals use to store their digital currency is relatively simple. But since these transactions are also anonymous, cryptographic investigators have to look for leads who can associate a particular crypto transaction with another activity on the web.

For example, they might be able to link a wallet, which is actually the address of a crypto account, to an existing platform, such as Coinbase – these companies are legally obligated to track the identities of their customers – or a part of the Dark Web that is already on investigators’ radar. Carrying out these investigations often requires going undercover online, sometimes with disguised secret accounts confiscated by the government and kept for years.

“In traditional investigations, we know who committed the crimes and pursue the money to prove it,” explains Dana Windsor, a spokeswoman for the IRS Criminal Investigation Unit, which had 80 crypto-related cases on file at the end of last year. “In investigations related to cryptocurrency, we know what the crime is and we are after the money to prove who committed the crime.”

This may sound simple enough, but finding these links is very difficult, and generally requires technical expertise that veteran investigators do not have. Federal agencies such as the IRS, the FBI, and the State Department have spent millions of dollars on contracts with private cryptographic intelligence firms. These companies often have access to powerful machine learning software that can examine a huge number of transactions and search for leads. Even with this program, these investigations are getting more and more difficult, because criminals are constantly developing new ways to hide their methods.

One of the biggest hurdles to fighting crypto crime is the fact that there is not necessarily a solid pipeline of people who can help. At the moment, there is no set path to becoming a cryptographic investigator, so it was mostly a career that people stumbled upon. Janczewski, for example, studied accounting before becoming a crypto cop at the IRS. CipherBlade researcher Paul Sibenik told Recode that he got into the crypto investigation business after running a side party as an advisor to people in divorce cases who believed their spouses were hiding bitcoin.

Another problem is that some of the companies that have the expertise in crypto that the government needs are, at the same time, conflicting with the regulators. Last month, for example, Anchorage Digital – a Bitcoin bank hired by the US Marshals Service to store cryptocurrency confiscated by the government after criminal investigations – was reported by the Office of the Comptroller of the Currency for violating money laundering rules. Now this contract is pending.

Of course, people who know the best way to beat the blockchain might be more interested in profiting from cryptocurrency than regulating it. Many of the people who are most enthusiastic about cryptocurrency are opposed to the idea of ​​increased enforcement.

“Government is having a very difficult time competing in the crypto space because technologists are being employed heavily in the Web3 space because there is a lot of venture capital money,” John Reed Stark, an outspoken crypto critic and former head of the SEC office at SEC, told Internet Application Recode said. “There is definitely a real brain drain in government when it comes to technology.”

It could soon be a big problem. President Joe Biden insisted that there is a place for cryptocurrency in the mainstream, provided there is a place for cryptocurrency rules as well. But without people imposing these rules, it’s not clear that much would change in the crypto world. After all, as long as there is encryption flowing through our financial system, there will be people who are bent on using it in illegal ways.

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