Crypto Investigative Process
Cryptocurrencies are digital assets that use cryptography to secure transactions and control the creation of new units. They are decentralized, meaning that they operate without the need for a central authority or intermediary. However, this also poses challenges for law enforcement and regulators who want to investigate illicit activities involving cryptocurrencies, such as money laundering, tax evasion, fraud, and cybercrime.
In this blog post, we will outline the main steps of a crypto investigative process, from identifying the source of funds to tracing the flow of transactions and linking them to real-world identities. We will also discuss some of the tools and techniques that can help investigators in their work.
Step 1: Identify the source of funds
The first step of a crypto investigation is to identify the source of funds that are involved in the suspicious activity. This can be done by analyzing the blockchain data, which records all the transactions that occur on a cryptocurrency network. Blockchain data can provide information such as the amount, date, time, and address of each transaction.
However, blockchain data alone is not enough to identify the source of funds, as cryptocurrency addresses are usually pseudonymous, meaning that they do not reveal the identity of their owners. Therefore, investigators need to use other sources of information, such as:
Exchanges are platforms that allow users to buy, sell, or trade cryptocurrencies with fiat currencies or other cryptocurrencies. Exchanges often require users to provide personal information and verification documents, such as ID cards or passports, to comply with anti-money laundering (AML) and know your customer (KYC) regulations. Therefore, exchange data can help investigators link cryptocurrency addresses to real-world identities.
Wallets are software or hardware devices that allow users to store and manage their cryptocurrencies. Wallets can also provide information such as the balance, transaction history, and metadata of each address. Some wallets may also have features that allow users to label their addresses or contacts with names or notes, which can help investigators identify the owners or beneficiaries of the funds.
OSINT refers to any publicly available information that can be used for investigative purposes. OSINT sources include social media platforms, forums, blogs, news articles, websites, and databases that may contain clues or evidence related to cryptocurrency activities. For example, investigators can use OSINT to find posts or comments where users share their cryptocurrency addresses or transactions, or to find profiles or websites that are linked to cryptocurrency addresses or services.
Step 2: Trace the flow of transactions
The second step of a crypto investigation is to trace the flow of transactions that are involved in the suspicious activity. This can be done by following the trail of funds on the blockchain from the source address to the destination address. However, tracing transactions on the blockchain can be complicated by several factors, such as:
Mixing services are platforms that allow users to mix their funds with other users’ funds in order to obfuscate the origin and destination of their transactions. Mixing services usually charge a fee for their service and return the mixed funds to new addresses that are not linked to the original ones.
Chain hopping refers to the practice of moving funds across different cryptocurrency networks in order to evade detection or avoid regulation. For example, a user may convert their Bitcoin into Monero, which is a privacy-oriented cryptocurrency that uses advanced cryptography to hide the details of transactions, and then convert it back into Bitcoin or another cryptocurrency.
Layer 2 solutions are technologies that aim to improve the scalability and efficiency of cryptocurrency networks by moving transactions off the main blockchain (layer 1) and onto a secondary layer (layer 2). Layer 2 solutions can reduce transaction fees and increase transaction speed, but they can also make it harder for investigators to track transactions on the blockchain.
To overcome these challenges, investigators need to use advanced tools and techniques that can help them analyze and visualize the flow of transactions on the blockchain. Some of these tools and techniques include:
Clustering is a technique that groups together cryptocurrency addresses that are controlled by the same entity based on certain heuristics or patterns. For example, if two addresses are involved in the same transaction as inputs or outputs, they are likely to belong to the same entity. Clustering can help investigators reduce the complexity of the blockchain data and identify entities of interest.
Graph analysis is a technique that uses graphs to represent and explore the relationships between entities on the blockchain. A graph consists of nodes (entities) and edges (transactions) that connect them. Graph analysis can help investigators visualize and understand the flow of funds on the blockchain and find connections or patterns that may indicate suspicious activity.
Attribution is a technique that assigns labels or identities to entities on the blockchain based on external sources of information, such as exchange data, wallet data, or OSINT. Attribution can help investigators link cryptocurrency addresses to real-world identities and verify their involvement in the suspicious activity.
Step 3: Link transactions to real-world identities
The third and final step of a crypto investigation is to link the transactions that are involved in the suspicious activity to real-world identities. This can be done by using the information and evidence gathered from the previous steps, such as exchange data, wallet data, OSINT, clustering, graph analysis, and attribution. By linking transactions to real-world identities, investigators can:
- Identify the perpetrators and beneficiaries of the suspicious activity
- Determine the motive and modus operandi of the suspicious activity
- Estimate the amount and impact of the illicit funds
- Provide legal proof and testimony for prosecution or litigation
Conclusion
Cryptocurrencies are a new and evolving phenomenon that pose both opportunities and challenges for law enforcement and regulators. To investigate illicit activities involving cryptocurrencies, investigators need to follow a crypto investigative process that consists of three main steps: identify the source of funds, trace the flow of transactions, and link transactions to real-world identities. To perform these steps effectively, investigators need to use a combination of tools and techniques that can help them analyze and visualize the blockchain data, as well as other sources of information that can provide clues or evidence related to cryptocurrency activities.