Less than 1% of cryptocurrency transactions are linked to illicit activities, challenging crypto’s association with crime, according to a Chainalysis executive.
On this week’s episode of Yahoo Finance Future Focus, blockchain data platform Chainalysis’ global head of capacity building and former US Internal Revenue Service, Criminal Investigation chief, Jim Lee, shed light on the extent and nature of criminal activities involving crypto.
Despite the popular perception of cryptocurrency being synonymous with criminal undertakings, traditional cash remains the dominant medium for illegal transactions, according to Lee. “Cash is still king,” he emphasised.
Transparency of blockchain ledgers
Blockchain technology offers an advantage for law enforcement, Lee said. “Everything is transparent on blockchain ledgers, you can see it.”
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Most blockchains are public, with every transaction recorded in a way that is open for anyone to see and cannot be altered or deleted. This traceability allows law enforcement agencies to follow the flow of funds, identifying patterns that may indicate illegal activities.
Even though the identities behind the transactions are often pseudonymous, with sufficient analysis and additional data, these blockchain addresses can sometimes be linked to real-world identities.
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“As a law enforcement officer, I often said to my division, I wish everything was done in crypto from the criminal element just because it is so transparent,” Lee said.
Criminals exploit cryptocurrency innovations
Lee noted, however, that criminals are still exploiting innovations in the cryptocurrency sector to target retail investors.
For the average retail crypto investor, Lee identified Ponzi schemes and initial coin offering (ICO) scams as the most prevalent threats. The allure of high returns often attracts unsuspecting individuals, making them prime targets for fraudsters.
“In a market that’s up, everybody’s looking to get rich quick, and they see this as a potential but so do the criminal elements,” he warned.
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Crypto Ponzi schemes promise investors unrealistically high returns through complex trading or technological advancements but they operate on a fraudulent model, where early investors are paid with funds from new investors.
This deception can lead retail investors to invest heavily, hoping for significant profits, only to suffer substantial losses when the scheme inevitably collapses.
Due to minimal regulation in the cryptocurrency space, these schemes flourish unchecked, posing serious risks to unsuspecting investors who may struggle to recover their funds.
Initial coin offering scams pose serious risks to retail investors by exploiting the decentralised and often unregulated nature of cryptocurrency fundraising. Scammers can mislead investors with false information about a cryptocurrency development team’s credentials and the overall viability of the project they are disingenuously promoting, leading to substantial financial losses when the scam collapses.
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Recovery of funds in such cases is typically challenging due to the anonymity of transactions and the global reach of cryptocurrency markets.
This can undermine trust in legitimate cryptocurrency investments and highlights the importance of thorough research and caution before participating in any ICO.
High-profile cases of crypto crime
One notable example is the shutting down of Hydra, the world’s largest darknet market, primarily involved in narcotics trafficking.
“Think of eBay selling narcotics,” Lee said, describing the scale and scope of the operation. This investigation marked the largest darknet market takedown in the US.
Another significant case was the Bitfinex hack, where hackers stole approximately $3.6bn (£2.8bn) worth of bitcoin. “We actually seized $3.6bn in value from the hackers,” Lee said, noting it as the largest single financial seizure in US government history.
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Lee also discussed a case that left a profound impact, the shutting down of the Welcome to Video (WTV) child pornography website, which allowed users to buy content with bitcoin (BTC-USD) or to upload their own.
Using Chainalysis tools, investigators were able to trace transactions, identify the market administrator, and make over 330 arrests worldwide, saving 23 children from ongoing abuse.
“This is what really put us on the map,” Lee said.
The insights from these cases underscore the dual-edged nature of cryptocurrency technology. While it offers enhanced financial inclusion and efficiency, it also presents opportunities for criminal exploitation.
However, Lee emphasised how tools, like those developed by Chainalysis, are helping to combat these threats, providing transparency and traceability that are crucial for modern law enforcement.
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The use of cryptocurrency technology by criminals and law enforcement agencies for investigating crime is an evolving landscape. It requires continuous innovation and cooperation between public and private sectors to ensure that its benefits are not overshadowed by its potential for misuse, Lee said.
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