How Law Enforcement Created Modern Blockchain Analytics
Blockchain analytics tools have become an integral part of law enforcements' cyber arsenal. Photo by Guido Kirchner/picture alliance via Getty Images.
Key Takeaways
- Law enforcement agencies use blockchain analytics to track the movement of illicit crypto.
- The IRS was among the US’s first agencies to develop blockchain analytics capabilities.
- However, private sector partners have also been critical in developing the technology.
Blockchain analytics refers to the process of collecting, analyzing, modeling, and visually representing data pulled from the diverse ecosystem of modern blockchains.
Crypto firms use analytics techniques to meet their anti-money laundering (AML) obligations. They are also a crucial component of the modern cyber crime-fighting toolkit. One law enforcement agency in particular has played an outsized role in their development: the Internal Revenue Service (IRS).
The IRS: An Early Pioneer
While most people think of the IRS exclusively as a tax authority, the agency’s criminal investigations division has been heavily involved in operations targeting darknet markets, fraud rings, child pornography distribution, and other forms of crime that involve crypto.
Until February of this year, the department was led by Jim Lee, who explained to CCN that the IRS had “led the way across the public sector” in developing blockchain analytics capabilities.
“Over the course of my career in law enforcement, the illicit world has become increasingly more complex,” he observed. “But one thing has remained constant: virtually all forms of crime are financially motivated.”
That isn’t to say Lee thinks crypto is a bad thing. “Any technological advancement in how we interact with money will inevitably become a tool for virtually all those involved in nearly all forms of crime,” he observed. “Even if that advancement is net beneficial to humanity.”
During his time at the IRS, Lee felt it was imperative that the agency invest in its blockchain analytics capabilities. Having gained an early headstart in operations such as the 2013 Silk Road bust, the IRS was able to share tools and knowledge with other agencies, helping to build a crime-fighting toolkit that has become integral to modern law enforcement.
However, the IRS and three other letter agencies couldn’t do it alone.
Public-Private Sector Collaboration
From the outset, law enforcers have relied on outside help to counter crypto crime.
Law enforcement agencies use analytics platforms like Chainalysis, Cognate, and Elliptic to track the movement of dirty money. At the same time, they provide crucial anti-money laundering technology to crypto exchanges and financial institutions to ensure they comply with relevant regulations and don’t unwittingly facilitate illicit transactions.
In a diverse crypto ecosystem, exchanges hold the power to stifle the flow of illicit currency. Agencies like the IRS play an important role in building sanctions lists like the ones compiled by the Office of Foreign Assets Control. Meanwhile, blockchain intelligence providers help connect the dots between crypto wallets and sanctioned entities.
Operation Spincaster
This tradition of collaboration between the public and private sectors informed Lee’s decision to move to Chainalysis after retiring from the IRS. There, he has participated in programs like Operation Spincaster, which earlier this year brought together a group of global law enforcement agencies and crypto exchanges who pooled their resources to help disrupt and prevent crypto scams.
The resulting “operational sprints” identified thousands of compromised wallets connected to approximately $162 million worth of losses. These leads were used to close accounts, seize funds, and build intelligence to prevent future scams. In one case, participants were able to warn the victim of an ongoing scam and prevent the theft of a six-figure sum!
Ultimately, blockchain analytics solutions must deliver results for AML to be anything more than a box-ticking exercise. The fact that they do proves just how valuable on-chain transparency can be when the right forces align together.
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