How Law Enforcement Can Take Action Against Crypto Crime

Blockchain analysis tools and appropriate training can help exchanges, law enforcement, and other stakeholders recover victim funds, says Gurvais Grigg.

As global adoption of cryptocurrency continues to rise and new use cases in Web3 emerge, it is clear that cryptocurrency is well on the path to mainstream adoption. It is also no surprise that more cybercriminals are using cryptocurrency.

The fact that the increase in crime was just 79% — nearly an order of magnitude lower than overall adoption — might be the biggest surprise of all. Although cryptocurrency-based crime hit a new all-time high in 2021, with illicit addresses receiving USD 14 billion over the course of the year, these transactions involving illicit addresses represented an all-time low in terms of share of total volume at just 0.15%.

Though increased law enforcement successes in tracing crime are one of the main drivers of declining illicit activity, there’s a common misconception that tackling cryptocurrency-based crime is solely in the domain of large national-level law enforcement agencies or elite cybercrime units.

International law enforcement agencies have used Chainalysis data and software on various high-profile cases such as the takedown of a global child abuse site, seizing billions of dollars connected to the darknet market Silk Road, and investigations into North Korean hackers and terrorism rings. But local agencies can take immediate action when equipped with the right tools and training, too.

Crypto scams carry enormous monetary and human cost

Scams are the biggest form of cryptocurrency-based crime, with over USD 26 billion taken from victims between 2017 and 2021.

So far in 2022, scammers have collected over USD 3.5 billion from victims, with an average victim transfer to a scam wallet of just over USD 1,000. That tells us two things:

• Even accounting for some people paying into scams multiple times, crypto fraud is impacting millions of victims
• Most of those victims are likely average, everyday people with just a bit of extra cash to spare

In Singapore for example, victims have lost more money to investment scams (including crypto and mainstream scams) than any other ruse in the last three years. It hit a record high in 2021, with USD 190.9 million stolen in such scams, more than five times the USD 36.9 million lost in 2019. Given the sheer numbers, it’s highly likely that any law enforcement agency, including the smallest of local agencies, can count the number of cryptocurrency scam victims amongst their population.

There are many new types of scams that could exacerbate this challenge. Most recently, investors reeling from the losses caused by the bankruptcy of cryptocurrency exchange FTX are the target of a new scam, where impacted investors are prompted to log into a fake website with their FTX username and password to withdraw funds after paying legal fees. In Singapore, the police also warned of another scam linked to cryptocurrency investments, where fraudsters promote auto-trading programmes through fake articles that mimic news outlets and feature political figures purportedly endorsing cryptocurrency auto-trading programmes.

We also saw the global rise of “pig-butchering scams”, a variant of investment scams where fraudsters spend months cultivating a relationship with the victims before urging them to invest in bogus investment schemes. In fact, as Chainalysis CMO Ian Andrews covered in a recent podcast, many perpetrators of these scams are victims themselves, trafficked from countries in Southeast Asia by powerful organised crime rings and forced to spend long hours scamming residents of wealthier countries.

Overall, research has shown that scams represent a significant threat to building trust in cryptocurrency. For years, scams have been the category of crime most lucrative to cybercriminals. Contrary to popular belief, one does not need to be an expert on cybercrime to investigate many of these scams. This is a problem that the industry can work to solve. With the right tools, key information such as a victim’s cryptocurrency address can be easily obtained as a starting point to retrace crime footsteps and unmask the scammer in as little as a few minutes. As such, Chainalysis is calling on exchanges around the world to leverage our data to prevent their customers from sending funds to known scams.

Ultimately, the goal of any crypto scammer is to eventually convert stolen funds back into fiat currency they can spend, but this can only be done through centralised cryptocurrency exchanges — think common brand names like Coinbase and Kraken — all of whom are subject to AML requirements similar to banks. Law enforcement can subpoena the exchange to learn who controls that address. Investigators could also use similar blockchain analysis techniques to identify other potential victims of the scam, and see how widespread the fraud is.

Lots of active scams stealing billions from users around the world can be identified and investigated today using blockchain analysis tools. With additional training, such tools can help exchanges, law enforcement agencies, and other impacted stakeholders track down bad actors and potentially recover victim funds.

Ultimately, investigations software is only as good as the underlying data that’s powering it. So while we look to improve investigations software for government agencies, it is also important to come up with new ways for agencies to benefit from our data capabilities, including by allowing the use of APIs to combine the data with other sources of intelligence.

Combatting crypto crime is a shared responsibility

Amidst the current crypto bear market, there is a silver lining – illicit cryptocurrency activity has fallen along with legitimate activity, albeit not as sharply. This is especially encouraging in scams, where the decrease in market hype seems to mean fewer are fooled by scammers, and in darknet markets, where law enforcement’s shutdown of Hydra Market appears to have dampened the entire sector.

However, scams are not the only form of cryptocurrency-based crime that local law enforcement agencies need to be thinking about. Ransomware, darknet markets and other illicit activities are also posing significant threats to the industry. The diversity and impact of these threats underline the importance of blockchain analysis training for local and regional law enforcement.

Criminals are causing billions of dollars in damage each year right in our own communities. The public and private sectors must continue to work together and hone their ability to fight cryptocurrency-based crime. Effective collaboration is critical to weed out bad actors, build trust in blockchains, and pave the way for the more mainstream adoption of cryptocurrencies.

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Gurvais Grigg is Global Public Sector CTO at Chainalysis, with 28 years of investigative and financial experience serving 23 years as a Special Agent and executive with the FBI.