How bitcoin detectives at the IRS and FBI are catching crypto crimes


As an agent for the IRS’s cyber-investigation team, Chris Janczewski led some of the government’s biggest cryptocurrency attacks, including the demolition of a major child exploitation site and the seizure of much of the $ 4.5 billion stolen during the 2016 Bitfinex hacking. busts helped Janczewski make the leap to the private sector a few months ago. He is now the head of research for a private cryptographic intelligence company called TRM Labs, which, among other things, focuses on detecting illicit cryptographic transactions. Most people probably aren’t even aware that this kind of cryptographic detective job is one thing, but Janczewski is making a career out of it.

“I don’t think the ‘NFT theft of a Bored Ape Yacht Club worth millions of dollars’ sentence existed until a couple of weeks ago,” Janczewski told Recode. “There’s not necessarily a game book, or not a lot of experience, for people who have looked at this kind of thing.”

Cryptocurrency is an increasingly common factor in criminal activity. It appears in everything from terrorist financing operations and ransomware attacks to the usual scams and scams. The problem is likely to get worse as well. Chainalysis, a cryptographic research firm, found that cryptographic transactions reached an all-time high last year.

As a result, there is a growing interest in researchers like Janczewski, who know how to track the blockchain – the largest public book that records cryptocurrency transactions – in search of clues linking anonymous crypto exchanges with real people who can be sued or accused. of a crime. These investigations have revealed all sorts of criminal operations, including a network of illegal bitcoin ATMs that a New York man used to launder money, and a $ 1.1 million “carpet throw” that includes cartoons from the NFT called Frosties. (An NFT carpet shot occurs when someone tricks people into investing in an NFT project, only to cancel the project later and keep the money).

Demand for crypto-crime fighters is booming. The Securities and Exchange Commission said last week that it would double the size of its cyber unit and expand its focus on the crypto industry, including NFT and cryptocurrency asset exchanges. The Justice Department formed a cryptography application group last fall, and the FBI said in February it would assemble its own cryptography team.

At the same time, there has also been an increase in business for private teams conducting their own cryptographic research, often on behalf of individuals or other companies. Companies like TRM Labs and CipherBlade, another blockchain research firm, act almost like private eyes for the cryptographic era. There are even cryptocurrencies: independent, and often anonymous, Internet detectives looking for evidence of fraud and cryptographic schemes in their spare time.

Like most things related to cryptography, the job of a cryptographic detective is not necessarily intuitive. Cryptographic transactions are all publicly recorded, which means that identifying the wallets that criminals use to store their digital currency is relatively straightforward. But because these transactions are also anonymous, cryptographic researchers have to look for clues that can link a particular cryptographic transaction to other activities on the web.

For example, they could link a wallet, which is actually an address for a cryptographic account, to an established platform, such as Coinbase (these companies are legally required to track the identities of their customers) or part of the dark web. that’s already on researchers ’radar. Doing this research is often required to go undercover online, sometimes using covert and disguised accounts that the government has seized and had on hand for years.

“In traditional investigations, we know who committed the crimes and we follow the money to prove it,” said Dana Windsor, a spokeswoman for the IRS’s Criminal Investigation Unit, which had 80 cryptocurrency cases in its case late last year. “In cryptographic investigations, we know what the crime is and we track the money to prove who committed the crime.”

It may seem simple, but finding these connections is extremely difficult and generally requires technical knowledge that veteran detectives simply 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 companies. These companies often have access to powerful machine learning software that can analyze a large number of transactions and look for potential customers. Even with this software, these investigations are becoming increasingly difficult, as criminals are constantly developing new ways to hide their methods.

One of the biggest obstacles ahead for the fight against cryptocurrency crime is the fact that there is not necessarily an established channeling of people who can help. At this time, there is no specific path to becoming a cryptographic researcher, so it was primarily a career that people stumbled upon. Janczewski, for example, studied accounting before becoming a cryptographic cop for the IRS. And CipherBlade cryptography researcher Paul Sibenik told Recode that he got into the job of a cryptography detective after performing a side show as a consultant for people in divorce cases who thought their spouses were hiding bitcoins.

Another problem is that some of the companies that have the cryptographic experience the government needs are, at the same time, in conflict with regulators. Last month, for example, Anchorage Digital, the bitcoin bank that the US Marshals Service. UU. hired to store the cryptocurrency that the government seizes after criminal investigations, was flagged by the Office of the Comptroller of the Currency for violating money laundering rules. Now that contract is on hold.

Of course, people who are more familiar with the blockchain may be more interested in benefiting from cryptography than in regulating it. Many people most enthusiastic about cryptography are actively opposed to the idea of ​​intensifying the application.

“The government is having a very difficult time competing in the field of crypto, because technologists are hired largely in the Web3 space because there is a lot of venture capital money,” said John Reed Stark, a staunch critic of crypto and former head of the SEC Office. . Internet application, he told Recode. “There’s absolutely a real brain drain in government when it comes to technology.”

That could soon be a big problem. President Joe Biden has insisted that there is a place for cryptocurrencies in the mainstream, as long as there is a place for cryptocurrency rules as well. But without people enforcing those rules, it’s not clear that much has changed in the world of cryptography. After all, as long as there is cryptocurrency flowing through our financial system, there will be people determined to use it in less than legal ways.

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