Crypto Forensics: Industry Outlook [2024]

Cryptocurrency forensics involves analyzing and investigating blockchain transactions to find, organize, and present evidence of illicit activities such as money laundering, fraud, hacking, or plain old theft. Crypto forensics specialists help law enforcement bring crypto criminals to justice and, depending on the circumstances, return misappropriated funds to the rightful owners.

Cryptocurrencies like Bitcoin are peer-to-peer pseudo-anonymous payment and value storage solutions that present law enforcement with unprecedented challenges. Criminals who target these technologies and networks count on the difficulties the novelty of cryptocurrencies can pose for law enforcement. Crypto forensics experts can close that gap.

Cryptocurrency Forensics

The Prevalence of Crypto Crime

How widespread is crypto crime? Its prevalence defines the utility of cryptocurrency forensics and the raison d’etre of the crypto forensics industry.

In a 2012 report, the FBI assessed that cryptocurrencies like Bitcoin would present attractive payment options for cybercriminals. Since then, we’ve learned that fiat currencies are still much more suitable for illicit activities, and criminals continue to prefer them over the technologically more convoluted and challenging crypto sector. None of that means, however, that we shouldn’t aim to close the loopholes cryptocurrencies provide in this respect.

Challenges Cryptocurrency Forensics Faces

In the same report, the FBI identified potential ways in which criminals may use cryptocurrencies and concrete gaps in law enforcement’s abilities to fight crypto crime. Some of these gaps are:

  • Lack of information on entities trying to evade the regulations of the US Bank Secrecy Act
  • Lack of information on other criminal entities likely to resort to crypto crime
  • Crypto services that may aid illegal activities, such as tumblers and mixers
  • Other privacy-enhancing technologies
  • Jurisdictional problems with freely flowing cross-border transactions
  • Limited regulatory powers and oversight
  • Quickly evolving technologies, some of which further enhance privacy

Some regulatory and law enforcement agencies may also struggle with limited resources to invest in a challenging field of expertise that doesn’t promise easy success.

Malicious Crypto Activities that Require Crypto Forensics

The range of malicious activities cryptocurrencies enable expands all the time as criminals find new and creative ways to exploit the power of blockchain technology. Regulatory bodies and law enforcement agencies need crypto forensics to tackle activities like:

  • Scams and fraud. Cryptocurrencies’ relative anonymity encourages many scams, such as pump-and-dump ICOs, fake investments, Ponzi schemes, and phishing. Criminals have devised various schemes to get crypto owners to reveal their seed phrases.
  • Dark web transactions. The dark web hosts a bustling trade in illicit goods such as drugs, weapons, various counterfeit items, and hacked data. Criminals who use the dark web find cryptocurrencies convenient for powering their transactions.
  • Ransomware. Criminals love to infect computers with software that encrypts files, preventing the owners from opening and using them. Then, they demand ransom to decrypt the files. They prefer ransom payments in cryptocurrencies.
  • Hacking. Cybercriminals love cryptocurrencies. They go to great lengths to target crypto wallets and exchanges for theft. When they succeed in hacking an exchange, the damage they cause is in the millions of dollars.
  • Illicit financing. Some criminals resort to cryptocurrencies to finance terrorist organizations, crime rings, fraudsters, and other criminal activities.
  • Money laundering. Through cryptocurrencies, criminals can obfuscate the origins of illicit funds. They can take money from activities like theft, corruption, drug trafficking, etc, and attempt to integrate them into the financial system.

Crypto forensics plays an essential role in fighting these activities. Forensic experts can derive data that helps law enforcement make arrests, recover funds, and bust crime rings.

How Crypto Forensics Works

How do crypto forensic experts trace funds and derive data they can use to link wallet addresses to real-world identities? A crypto forensic specialist is impartial and produces objective data. Forensics does not look to incriminate anyone. The data from forensic analysis must be quality data so law enforcement can use it to pursue criminals in court and obtain the necessary subpoenas to freeze funds and facilitate recovery.

Some of the techniques crypto forensic experts use are:

  • Pattern analysis. By analyzing blockchain activity patterns, crypto forensic specialists can identify suspicious transactions and map them out using specialized tools.
  • Address clusters. Related addresses tend to create transaction patterns that allow investigators to tie them together and determine whether they belong to the same individual or group of individuals. To draw relevant conclusions, investigators use advanced heuristics and clustering algorithms.
  • Transaction history. Once they identify a suspicious wallet, investigators analyze its transaction history to understand the flow of funds to and from it. This allows them to establish links between addresses and transactions.
  • Transaction tracing. The blockchain registers every transaction. By tracing these transactions, investigators can map the path of funds as criminals move them around. They can also identify wallet addresses that law enforcement can later freeze to recover the illicit funds.
  • Exchange analysis. Cryptocurrency exchanges play a key role in identifying illegal transactions through KYC regulations. Forensic teams analyze transactions to highlight criminal activity, and with legal approval, law enforcement can issue subpoenas for deeper investigation. This process aids in recovering assets and enforcing the law.
  • Attribution data. Linking real-world identities to digital wallets is the most spectacular task crypto forensic experts can accomplish. Accurate attribution data is the key to apprehending cyber criminals and perhaps recovering the funds they have misappropriated.
  • Active capture. Honeypots are like bait for cybercriminals. They dangle opportunities for them and capture addresses, as well as other information investigators can later use to identify other transaction patterns.
  • OSINT. Open-source intelligence involves analyzing publicly available information that may help link real-world identities to suspicious crypto transactions and wallets. It is available through social media, forums, message boards, and public databases.

Digital forensics is a quickly evolving industry that must be agile to keep up with the ever more creative and innovative methods of cryptocurrency criminals.

The Future of Crypto Forensics

Cryptocurrency forensics has been playing catch-up with criminals since its inception. Seemingly always a day late and a dollar short until a few years ago, the crypto tracing industry has taken significant strides recently due to the efforts of innovative, forward-looking organizations.

It has become more common for law enforcement to use information from cutting-edge crypto forensic services, such as attribution data.

The field of cryptocurrency forensics is continually evolving, with tools and methodologies being refined to enhance accuracy and reliability. As the industry grows, so does the emphasis on the precision of attribution data, a cornerstone for successful investigations and asset recovery.

In cryptocurrency forensics, data quality and investigative tool reliability are of the utmost importance. At CNC Intelligence, we use tools and methodologies that are at the forefront of technology. We benefit from the robust heuristics established by leading forensic platforms by companies such as Chainalysis and Blockchain Intelligence Group. These heuristics have been validated through academic research, upheld in legal precedents, and widely accepted by the academic and legal communities.

Embracing this evolution, we are committed to:

  • Continuously refining our tools and methodologies to ensure they meet the highest standards of data quality and reliability.
  • Strengthening partnerships and strategies prioritizing data verification, leveraging the latest innovations and fostering collaboration across sectors.
  • Deepening our engagement with law enforcement and the legal community, sharing insights and education on the latest developments and successes in the field.
  • Expanding our investigative capabilities to encompass a broad range of resources and data sources, ensuring a comprehensive approach to each case.
  • Attracting and nurturing top talent in the industry, with a focus on experts who bring both depth and breadth of knowledge to our forensic investigations.
  • Prioritizing the integrity and validity of our investigative efforts, ensuring that every piece of evidence we provide is built on a foundation of reliability and can withstand rigorous legal scrutiny.
  • Investing in sustainable, innovative solutions that not only advance the field of cryptocurrency forensics but also safeguard the interests of our clients and the public.

By upholding these principles, we ensure that our contributions to cryptocurrency forensics not only adhere to the highest standards but also pave the way for future advancements and legal successes in the digital asset space.

As long as the cryptocurrency industry exists, crypto forensics will have a purpose and a raison d’etre.

Crypto intelligence, tracing, and forensics are indispensable tools for fighting crypto crime and ensuring the financial safety of well-meaning, law-abiding crypto users.

As the landscape of cryptocurrency crime continues to evolve, so does the need for specialized forensic investigation to navigate these complex challenges.

It is critical to have timely, expert intervention in cases of cryptocurrency fraud, theft, and other illicit activities. If you suspect you’ve been a victim of a crypto-related crime or if you’re a law firm or law enforcement agency seeking expertise in crypto forensics, our team is here to assist.

Start by contacting us through our website for a complimentary consultation. Our cryptocurrency investigators will guide you through the initial steps to secure your assets and begin the investigation process.

With CNC Intelligence, you can access cutting-edge crypto forensic techniques, deep industry knowledge, and a dedicated team committed to providing actionable intelligence. This intelligence can assist law professionals in recovering misappropriated assets.

Let us help you navigate the complexities of the digital currency landscape with confidence and expertise.

We offer complimentary consultations to determine whether our Asset Tracing and Intelligence Services are appropriate for your case.

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