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Compliance & Risk

US law enforcers partner with cryptocurrency tracking firm to fight financial crime

Brett Wolf  Regulatory Intelligence

Brett Wolf  Regulatory Intelligence

High-profile law enforcement successes in tracking cryptocurrency this past year demonstrate that virtual currencies are not as anonymous as some believe.

The successes include the November seizure of more than $1 billion in Bitcoin linked to the now-defunct Silk Road online black market.

U.S. authorities also have disrupted two terrorism financing campaigns that utilized cryptocurrency donations, arrested three people allegedly associated with a high-profile Twitter hack, shut down the largest ever child pornography site, and seized hundreds of cryptocurrency addresses linked to North Korea-affiliated hackers.

Federal agents have been able to crack these cases in part by drawing on the expertise of a private firms such as Chainalysis, which provides compliance and investigation software to banks, businesses, and governments around the world, chiefly to track virtual currencies. The company has been contracted by most federal agencies, including Internal Revenue Service-Criminal Investigation and Department of Homeland Security Investigations, agencies at the tip of the spear for U.S. financial crime probes.

Such firms analyze the blockchain public ledger of all cryptocurrency transactions, by using proprietary data to overlay real world entities on the blockchain and determine which ones are involved. In the end, this can lead law enforcement to individuals and crime-tainted assets. The successes demonstrate importance of private-sector cooperation in fighting technology-assisted financial crime, current and former law enforcement sources say.


It is likely that many enforcement agencies around the world are similarly retaining private-sector blockchain tracking firms, in part because the global anti-money laundering standard-setter… has begun pressuring member nations to effectively police cryptocurrency.


The private-sector involvement also reveals a dependence on the part of federal agencies, which say they cannot effectively police financial crime in the cryptocurrency space without assistance.

The role of firms like Chainalysis is “absolutely vital” to unearthing illicit activity in cryptocurrency, a senior Homeland Security official who has worked with the firm told Regulatory Intelligence. It also frees agents — whose job is to collect evidence and present it to the U.S. Attorney’s Office — from having “to get into the minutia” of sophisticated cryptocurrency tracking. “We couldn’t do it without them, at this point,” the official said. “They don’t care about chasing bad guys; they have a skill, they’re smart, and they are there to focus on a specific issue.”

For one thing, law enforcement can’t compete with salaries offered by the private sector for tech-savvy experts, the Homeland Security official said. “It unlikely we could hire people with this skill,” he said. Indeed, contracting for private-sector expertise to track down dirty cryptocurrency can pay off when the assistance helps federal agents track down and seize large sums of money. “Their work causes seizure and forfeitures which feeds back into (our budget). So, if we give $10,000 for (contract work), we may be looking at $13 million in forfeitures,” the official said.

Chainalysis provides access to databases, training, and behind-the-scenes expertise to help piece together cryptocurrency transactions. It provides experts who work with federal agents, in some instances on-site at law enforcement facilities, sources said.

A spokeswoman for Chainalysis declined to confirm or discuss law enforcement agencies the firms is working for, but law enforcement sources said, and media reports suggest most U.S. law enforcement agencies have turned to the firm.

Chainalysis began working for U.S. law enforcement authorities in 2015. It leads competitors when it comes to federal investigative contracts, cryptocurrency-focused publication CoinDesk said in a report published in February. The publication reviewed contracts and found that federal agencies have spent more than $10 million on Chainalysis’ products and services over the past five years. It added that CipherTrace is the chief competitor, having raked in roughly $6 million, mainly via research and development contracts, and that Elliptic, a British firm, had just begun to pick up work.

Assistance from the outside

It is likely that many enforcement agencies around the world are similarly retaining private-sector blockchain tracking firms, in part because the global anti-money laundering standard-setter, the Financial Action Task Force, has begun pressuring member nations to effectively police cryptocurrency.

Chainalysis and other private sector firms that aid probes are integrated into law enforcement cybercrimes units as part of their contracts, sources said.

Formerly, enforcement agencies fighting illicit transactions would add groups of agents, most with accounting backgrounds, to their staffs. When a new technology-based criminal scheme emerged, some agents would receive training in the new technology, federal law enforcement sources said. But it could take years to bring an agent up to speed, and criminals would have already moved on to new technologies.

It is more efficient for private-sector technology experts to trace dirty money on, for instance the Bitcoin blockchain, they said.

Chainalysis has “chain data and attributions — entities we have identified within the ecosystem,” Jesse Spiro, head of policy and regulatory affairs at Chainalysis, told Thomson Reuters. The data was generated from a combination of human intelligence and analysis and heuristics — technical problem-solving shortcuts — that the firm has assembled since 2014, he said.

Former IRS investigations chief Don Fort worked with Chainalysis experts on law enforcement cases until leaving his post in October. The help “was a key ingredient in tracking and tracing cryptocurrency transactions on a number of high-profile investigations in 2020,” said Fort, who now is director of investigations at Kostelanetz & Fink. “Their work with law enforcement is helping to root out bad actors who transact in cryptocurrency with the mistaken belief that they will remain beyond the reach of law enforcement authorities.”


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