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Government Surveillance of Your Crypto Has Never Been so High

Published November 1, 2023 11:49 AM
Josh Adams
Published November 1, 2023 11:49 AM
Key Takeaways
  • Crime on the blockchain has become a staple of online life.
  • As a result, governments and law enforcement are taking a harder look.
  • CCN spoke to some of the key figures helping them do it.

The recent Hamas attack and accusations that they used cryptocurrencies  have renewed focus on governments and their monitoring of blockchains. The days when digital assets existed in a near-untouchable world shrouded in inscrutable code have long gone. 

Now, knowledge is widespread enough that many blockchains are essentially an open book, and government agencies are most definitely looking.

Governments Rely on Public-Private Partnerships

One company helping to fulfill that demand is Blockchain Intelligence Group, a digital asset investigations firm. “They will invite us in for day or two-day training, for us to pass on our knowledge, basically,” says Robert Whitaker, their head of Law Enforcement. “It’s becoming less and less with the federal people, they’ve really got a pretty good handle on digital assets.”

Whitaker notes that the understanding of blockchain and crypto among local Sheriffs is predictably limited, although there is still a very broad range of experiences and knowledge. “We get calls every day from local law enforcement,” he says.

Sometimes, it’s as simple as telling local law enforcement to subpoena an exchange after following a straightforward line of inquiry. Public blockchains, after all, are transparent for anyone to see if you know how and where to look.

On the more seasoned end of the spectrum, Whitaker makes clear there are some “really good, top-notch people” in the police and allied agencies—specifically, in the US and UK. 

Scams and Stablecoins

The biggest scam Whitaker and his colleagues are encountering at the moment is the “romance” or “pig butchering” scam—where fraudsters promote investment opportunities with apparently great returns but ultimately end up stealing investors’ funds. Usually, after seducing them in a fake, online relationship.

How worried should criminals be that they’re crimes are being tracked, either by law enforcement or their allies in private blockchain analysis firms? “You better be really good at what you’re doing,” said Whitaker, with a slight, almost imperceptible grin on his face.

Five years ago, criminals took Bitcoin’s pseudonymity for granted and were generally less sophisticated. “Things have really changed,” said Whitaker. “We’re also seeing these bridges where we can swap token for token.”

“The more experienced people doing this… they might scam you in Bitcoin, but within seconds it’s turned into Ethereum, and seconds after that it’s USDT and it’s gone.”

USDT, Tether’s dollar-pegged stablecoin, is “heavily used in the scamming world” and a particular favorite in scams originating in China. According to Whitaker, Circle, the issuer of USDC, a competitor stablecoin, is a lot more willing to deal with law enforcement. 

A Battle Against Criminal Privacy

A lot has changed in the last five years or so. Back then, Chainalysis and Elliptic were the only two big operations in town helping law enforcement and government officials decipher the blockchain. Now, there is plenty of competition, with increasing numbers of tools and services entering the market.

“They’re good,” says Whitaker when speaking of the competition. “If you’re going to scam somebody in digital assets these days, you better have your game on because investigators using our tools will catch you.”

There are, however, some difficulties in their work. Privacy coins and mixers are among the most troublesome. “Truth be told, we’ve found our way through some mixers.” Although, Whitaker was less keen to tell CCN which ones—”That would be crazy, right?!”

Crypto mixers, a service that anonymizes cryptocurrency transactions by mixing and reshuffling funds from multiple sources, are only as good as the algorithm, he said. “If it’s not that great, our scientists will get through it,” said Whitaker. Privacy coins are a whole different issue, however.

There is talk amongst industry professionals that some coins, like Monero, Dash, or Zcash, have been cracked, or partially so. Whitaker is skeptical about their claims, to put it mildly. Others, however, offer an apparently even more insurmountable wall of code. Mimblewimble  and Grin ? “Good luck breaking them.” 

Blockchain Analysis Plays Catch-Up

It’s not just so-called “privacy coins,” either. Traditional cryptos are evolving, too. Bitcoin’s Taproot upgrade enhances privacy to a certain degree, and its associated Lightning Network provides its own challenges. But no matter how criminals decide to swerve teams like his, the race will continue. 

How Bitcoin's Taproot upgrade improves privacy.
Source: x.com/therationalroot

“I used to tell my boss, Look, we’re here. The guys we’re trying to catch are just slightly ahead of us. But they are just as tech-savvy as we are. And then if there’s a problem, technology’s gonna step in, and they will find the right people to solve their problem, just like we will.”

“We have to be constantly moving and looking for the next big thing coming around the corner,” he said.

Chainalysis Operates in 50 Countries

Phil Larratt, Director of Investigations (International) at Chainalysis—the industry leader—tells CCN that public and private sector partnerships are more important than ever. Especially as blockchains are increasingly used for a variety of crime types. 

Just in recent years, Chainalysis has helped the IRS Criminal Investigation (IRS-CI) division to foil Russian oligarchs who wanted to use crypto to evade sanctions. Investigators also contributed to the Ronin Bridge  case involving North Korean hackers.

“Cryptocurrencies aren’t just a cybercrime issue,” he said. “Nor are they something to be understood by only a few highly-trained analysts and investigators. They are now mainstream payment networks.”

Larratt was keen to emphasize the local nature of many law enforcement actions, too, and that crimes facilitated by blockchain run from local fraud to national security. As a result, in-house analytics capabilities are rapidly developing at pace. 

That doesn’t mean firms like theirs will be going out of business. To date, Chainalysis has “public sector customer relationships” in 50 countries. You don’t have to be a betting man to believe that number will go up.

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