Blockchain as a Compliance Mechanism
Why Law Enforcement Prefers When Criminals Use Bitcoin
Cody Garrison | 6/9/2021
With the FBI and US Justice Department seizing $2.3 million in bitcoin ransom from the hackers of the Colonial Pipeline on Tuesday, the age-old debate of cryptocurrency and crime is brought back into the market spotlight.
The price action of Bitcoin turned negative on speculation that the FBI was able to hack the actual Bitcoin network to retrieve the illicit ransom – something that if proven would be a major security vulnerability in the digital currency. However it’s reported to be much more likely that the FBI actually exploited sloppy password storage by the criminals of the “private keys” (the password into their Bitcoin wallet).
Since it’s early days, Bitcoin has been marred by the media and opponents as solely a vehicle for criminal activity, and illicit exchange. And while they may have been correct about certain use cases of the past such as Silk Road, or even headlines today showing Fortune 500 companies having no choice but to pay up the ransom to digital terrorists, there remains one common and longstanding misconception in Bitcoin and the broader crypto markets – it’s sole purpose is not to be a vehicle of transaction for illicit or criminal activity – in fact, law enforcement actually prefers that criminals use Bitcoin vs cash.
Following the Money
At it’s very core, blockchain technology is exactly what it says it is – a continuous digital chain of blocks, filled with a widely distrusted, uneditable, historical ledger of transactions, each coded to a specific wallet address at a specific time. No matter where funds are sent, past, present or future, it is recorded and documented on the Blockchain.
Can someone tell us why this doesn’t sound like law enforcement’s dream?
Just as our everyday lives have become more digitally intertwined, so has the day to day of our nations law enforcement agencies – from utilizing CIA-backed Palantir’s data intelligence tools, or even sophisticated facial recognition software, do we really think they would just ignore the growing $2+ trillion cryptocurrency markets with a documented history rooted in illicit and criminal transactions? We didn’t think so.
‘Blockchain forensics’ is an emerging field in the anti-fraud and intelligence community geared towards identifying, monitoring and tracking illicit cryptocurrency transactions such as money laundering, terrorism financing, drug and weapon sales, and human trafficking, in real time, on the blockchain.
Dedicated blockchain forensic firms such as Chainalysis and Elliptic, as well as legacy consulting shops such as PwC have entered the arena, and partnered with government agencies from the CIA, NSA and FBI to local law enforcement to bring a more compliant, and safer blockchain network to the masses.
Source: Chainalysis
The above chart shows the majority (54%) of cryptocurrency-related crime in 2020 was related to scams (through Twitter, Facebook, Email, etc.) with darknet market activity as the second largest crime category. The emergence of ransomware based activity is also evident.
Cryptocurrency-related Crime is Trending Down
A January 2021 report by blockchain forensics firm Chainalysis reports:
In 2020, cryptocurrency criminal activity fell to just 0.34%, or $10.0 billion in [cryptocurrency] transaction volume, compared with 2019, when criminal activity represented 2.1% of all [cryptocurrency] transaction volume or roughly $21.4 billion worth of transfers.
They also note:
The “big story” for cryptocurrency-based crime in 2020 is the rise of ransomware which, while only accounting for 7% of all funds received by criminal addresses at just under $350 million worth of cryptocurrency, was up 311% from 2019. The COVID-19 pandemic has forced more people to work-from-home and in turn this has opened up new vulnerabilities to ransomware attacks for many organizations.
Despite the recent trends declining, it is clear that Bitcoin and cryptocurrencies remain appealing for criminals due to their pseudonymous nature (even if we know now that their addresses will be flagged and monitored by law enforcement, many times unable to be liquidated or spent after the crime anyway).
This means while cryptocurrency-related crimes only made up a mere 0.34% of transaction volume on the networks last year, we’ll likely continue to see headlines of hackers demanding Bitcoin ransom from vulnerable companies around the globe.
The narrative shouldn’t be focused on getting rid of bitcoin and cryptocurrency to counter ransomware hacks — such a miniscule percentage of total transaction volume — but rather arming companies with the necessary cybersecurity technology to counter the attacks.
It’s important that companies large and small make the necessary investments in cybersecurity infrastructure to combat hackers from entering their systems and exploiting them for ransom. While an investment in a cybersecurity provider such as Crowdstike or Palo Alto Networks may cost a company a few thousand, or even a few hundred thousand dollars to leverage, it could likely end up saving them millions in the long run. These hackers are “big game hunting” large corporations with antiquated and vulnerable technology infrastructure. They aren’t going after the buttoned up companies protected with cybersecurity. Evidenced just last week when JBS Foods, the largest meat processor in the world, paid $11 million in Bitcoin to notorious Russian-linked ransomware hackers, REvil, who paralyzed their networks, and potentially threatened to cripple the meat supply chain.
Final Thoughts
As more institutional players have entered the crypto markets, as more regulators have focused their eyes on the rapidly emerging space, and as the infrastructure being built and legitimized through the support of governments, Silicon Valley giants, and everyday people across the globe grows, so do the use cases beyond Bitcoin solely being used for illicit transactions and criminal activity.
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The views above are the opinions of the author and Clearblock Insights. They are not to be taken as investment advice.
