When the Department of Justice announced in February that it had seized bitcoin worth $3.6 billion, it was more than the largest recovery of alleged proceeds of crime in history. the United States. It was the biggest signal yet that cryptocurrency, once seen as attractive to criminals for its supposed anonymity shield, may not be so crime-friendly after all.
Just a few years ago, the federal government barely knew what to do with cryptocurrency. Today, most federal law enforcement agencies employ experts who can find it. Investigators are using a new generation of sophisticated software that leverages big data to link transactions to people, taking advantage of the fact that most cryptocurrency transactions are recorded in public ledgers that can never be erased.
“If a bank was robbed five years ago and you’re still trying to track down those leads, you have no idea where that stolen money might be at this point,” said Chris Janczewski, who spoke in an exclusive interview when he was the Internal Revenue Service’s lead crypto investigator. “With cryptocurrencies, like Bitcoin, every transaction is on a public ledger. It’s public and it’s there forever.
Janczewski has made a career out of this proposition, including serving as lead agent in this $3.6 billion seizure. He helped shut down a child exploitation ring to a North Korean hacking scheme to a terrorist funding appeal — all involving cryptocurrency. He recently left for a job at TRM Labs, whose software helped trace the cryptocurrency at the heart of these cases and many others.
“We at the IRS have always been focused on being financial investigators – following the money,” he said. “We would have posters [that said] “The best financial investigators in the world.” And I would like to point out that there is no asterisk at the end. It’s not just for US dollars or Euros – it’s all types of financial activity, including cryptocurrencies, like Bitcoin.
There are different types of cryptocurrency; the most commonly traded, including bitcoin, is digital money that is not backed by any government. It exists on a decentralized network of computers based on a technology called blockchain and protected by unbreakable codes.
Crypto has not become a mainstream form of payment, but many cryptocurrencies have demonstrated their staying power as “stores of value” similar to gold and other precious metals. The value of bitcoin and other currencies, although fluctuating widely, has increased significantly over time, attracting investor interest.
Initially, bitcoin and other cryptos were seen as a useful tool for criminals trying to avoid scrutiny of their transactions because while transactions are recorded, the identities of those making them can be obscured. But more and more, the forces of order manage to pierce the veil of anonymity.
“What we’ve seen is that many of the reasons that have made things like bitcoin attractive to criminals are also making it less and less attractive to criminals,” said attorney Urszula McCormack, a partner based at Hong Kong at King & Wood Mallesons, specializing in cross country. -frontier finance and technology.
“When you look at what’s actually involved in a transaction, you’re looking at the use of what’s called a public key or a wallet, and that’s a string of letters and numbers,” she added. , but “it’s not purely anonymous.”
Janczewski and other IRS investigators use analysis software made by TRM, Chainalysis and other companies to scrape the web and dark web for bits of information.
According to Chainalysis’ annual crime report, only 0.15% of crypto transactions last year involved criminal activity, compared to 3.37% in 2019.
Still, this represents a significant volume of criminal transactions, the company noted in a blog post.
The amount of illicit activities, 14 billion dollars, “represents a significant problem”, the post said. “Criminal misuse of cryptocurrency creates huge barriers to continued adoption, increases the likelihood of government-imposed restrictions, and, worst of all, victimizes innocent people around the world.”
Jared Koopman, head of the IRS’ Criminal Investigations Division, said his agency has become adept at tracking cryptocurrency.
“Most crimes involve money,” he said. “They involve some type of effort to intrigue or defraud individuals or profit from illegal activities. So our job is to track and trace those financial flows, regardless of the underlying crime, and hold those people responsible.”
In its latest challenge, the IRS has been tasked with helping the Justice Department investigate how some Russian oligarchs are evading sanctions, some of them with cryptocurrency.
As a lead crypto investigator, Janczewski has played a role in a series of extraordinary cases, including one involving a massive child pornography ring called “Welcome to Video.” Consumers paid in bitcoin and thought they were anonymous. In 2019, nearly 340 people in 23 states and 12 countries were arrested. And 23 children were saved from their abusers, the Justice Department said.
“Following the money has saved children and impacted real lives,” Janczewski said.
In 2020, Janczewski helped the Justice Department expose a massive scheme to steal $250 million worth of cryptocurrency from the North Korean government, seizing an unspecified sum he said was in the millions. dollars to the rogue scheme.
The case involved working with military hackers from US Cyber Command, who initially wondered why the IRS was knocking on their door, Koopman said.
“A lot of times, when we often walk into the room with many other agencies, the question is, why is the IRS here? And I think that’s both a common question, but also a question that we try to prevent it from happening, as we feel we offer a unique skill set that many other law enforcement agencies and intelligence community partners do not necessarily have.
Also in 2020, Janczewski and the IRS ended three online terrorist financing campaigns, involving the armed wing of Hamas, Al-Qaeda and the Islamic State terrorist group, in what the IRS called the largest seizure of government cryptocurrency in the context of terrorism.
The Department of Justice has seized millions of dollars from over 300 cryptocurrency accounts. For a time, the IRS created a fake fundraising website that funneled terrorist contributions into US government coffers.
“It was pretty nice to think that the money people thought was going to a terrorist entity was going to the fund for victims of terrorism instead – like the opposite of what they actually intended to do,” said Janczewski.