Intro
While there was a 15% decline from 2022, the world still lost 3.3 billion to crypto hacks over 2023. With more institutions getting involved in digital assets, the stakes are even higher for law enforcement in 2024 and beyond.
Law enforcement can best protect the industry using a blockchain analytics tool like Merkle Science's Tracker.
This article will discuss how blockchain analytics provides investigators domain expertise in digital assets. It enables them to visualize on-chain fund movements and gather off-chain data, simplify collaboration with key stakeholders, and use this evidence in a court of law.
1. Building Domain Expertise
Law enforcement has expertise in investigating traditional crimes, including petty theft and capital murder. Unfortunately, the same is not the case for crypto crime. According to a study by CoinTelegraph, 74% of law enforcement agencies feel under-equipped for crypto crime investigations.
They experience two gaps: domain expertise and tooling. Crypto crimes are not just your typical crimes accomplished now with digital assets. A theft of a crypto exchange will be magnitudes more complex than a theft of a convenience store. The prior will employ sophisticated attack vectors to gain access to the illicit funds before laundering them through advanced techniques like chain-hopping and coin mixing.
Blockchain analytics solutions providers will teach law enforcement agencies about these latest trends and provide them with the tools to identify and track such crimes efficiently. To this end, Merkle Science offers Tracker. Through the Institute, we offer law enforcement a variety of ways to master Tracker in particular and crypto investigation in general, including certifications, on-demand consulting, and even in-person, instructor-led courses.
2. Intelligence Gathering
Law enforcement agencies can obtain intelligence from a blockchain's explorer, which is its public ledger. However, these were not designed to visualize complex transactions, so doing so would be difficult. Visualizing crypto crime and laundering is much easier through a blockchain analytics tool like Tracker.
Take, for example, the hack of the Bitfinex Hack Funds in October 2024. The picture makes it easy to see what transpired. As the saying goes, a picture is worth a thousand words: After the funds seized from Bitfinex were stolen, the vast majority were returned within a day to the US government-controlled wallet, while a small portion was moved to an account associated with Binance.
Authorities who use blockchain analytics will gain the same granular insight into any crypto crime they investigate. Tracker supports major blockchains like Bitcoin and Ethereum, which comprise the majority of crime conduits, and emerging channels like side chains and Layer 2 chains.
Furthermore, in addition to on-chain intelligence, blockchain analytics provides just as valuable off-chain intelligence, such as social media and dark web content. Criminals congregate there and frequently converse, possibly shedding light on the scope and scale of their crimes.
3. Knowledge Sharing
While an investigator can complete an entire investigation through a blockchain's native explorer, there would be no easy way to share their findings with collaborators, such as regulators, investigators from other agencies, and exchanges. At best, they could provide a list of the wallets involved in a particular crime and the associated laundering, but there would be no immediate reproducibility. The collaborators would have to recreate their colleagues' investigations from scratch, a duplication of efforts that would be an enormous waste of time and resources.
At worst, if the collaborator is unfamiliar with using a native explorer, the investigator would have to recap what transpired off-hand, which holds little, if any, investigative value. Blockchain analytics makes it easier to collaborate on any investigation. To this end, Tracker has one-click sharing so investigators can share a dashboard with any collaborator.
Crucially, investigators can also annotate the different nodes of a crypto crime with on-graph notes and labels. For example, an investigator could label the theft wallet, the nodes for laundering, and exit points, making it easier for even a collaborator without blockchain expertise to visualize the flow of illicit funds. Here is an example from the Steadefi wallet breach of August 2023.
This ease of sharing and annotation aligns everyone involved in the investigation, making it easier to understand where illicit funds went and, in turn, how to take appropriate action.
4. Attribution and Prosecution
A non-custodial wallet is pseudonymous. Transactions can be linked to specific accounts via the public ledger of each blockchain but not to real-world identities. This pseudonymity is understandably problematic: While law enforcement can take certain enforcement action against wallets, such as seizing funds, they cannot bring them to court.
Investigators must trace the flow of illicit funds and show how this was accomplished for the visualization to hold weight as evidence in a court of law. The technology, in other words, cannot be a black box. There must be some transparency into how the illicit funds were tracked, traced, and typically followed to a centralized exchange. Through a centralized exchange with rigorous KYC procedures, prosecutors can attribute the wallets associated with a crime to a real-world identity and bring that person or persons to justice.
Conclusion
Blockchain analytics is more than just tooling. Law enforcement professionals can gain crucial expertise in cryptocurrency and blockchain with the right solution. They can also more easily visualize the movement of illicit funds through powerful graphing capabilities and share these dashboards with labels so that even non-technical investigators can use them. Finally, these tools provide insight into how their attribution works so that prosecutors can use this evidence to bring perpetrators to justice.
To learn more about how Tracker can help with the above functions, contact Merkle Science for a free demo.