Cryptocurrency Tracing (How It’s Done)

Blockchain forensics and cryptocurrency tracing are tracking methods specialists use to decipher transactions on a pseudo-anonymous blockchain like Bitcoin’s.

The software tools experts use to become more and more capable, turning the limited information the ledger provides into a visual trail of illicit funds.

They may even identify the persons behind the transactions.

Cryptocurrency tracing and asset recovery specialists can also freeze and recover funds in cooperation with local law enforcement, making this an important role in defeating crimes like:

Online fraud
Hacking
Theft
Phishing schemes
Extortion

Cryptocurrency investigations aim to recover money people lose to crime and deception. The end goal is always asset recovery.

To achieve this, investigators must have real-life investigation skills and be capable of effectively liaising with law enforcement worldwide.

The more advanced tools investigators use, the more likely they bring their tracing efforts to a satisfactory conclusion.

Cryptocurrency Tracing - Two Professional IT Programers Discussing Blockchain Data Network Architecture Design and Development Shown on Desktop Computer Display. Working Data Center Technical Department with Server Racks

Cryptocurrency Tracing Tools

Blockchain analysis tools are ingenious software solutions that allow investigators to peer into the transactions on the blockchain and make sense of them.

Eventually, these tools may even be able to match real-life entities to individual transactions and addresses.

What are the primary functions of a blockchain analysis tool?

Transaction monitoring. Knowing the history of the funds, the money flow through an address, the origin of the funds, and other details can help investigators determine whether they are dealing with legitimate activity or fraud. It can also help them attach real-world identities to transactions and determine the likely intent behind them.
Classifying addresses. Blockchain analysis tools classify addresses and establish connections with real-world people. Address classification is a basic step in crypto tracing, so tracing tools use several techniques to ensure they produce reliable, solid information in this respect.
Visualization. Analysis tools compile the information they gather and deduce, into visually appealing graphs. Investigators can make connections based on these graphs and manually investigate the outstanding transactions.

Detailed Methods and Processes in Cryptocurrency Forensics

Cryptocurrency forensics employs various advanced methods and processes to trace, analyze, and recover digital assets. Each method is designed to unveil different aspects of the blockchain transactions, making it possible to identify criminal activities and recover stolen funds effectively. Here are the key methods and processes used in cryptocurrency forensics:

Attribution Data

Attribution data involves collecting and analyzing information that can link cryptocurrency transactions to various entities. By identifying associations with criminal groups or fraud schemes and tracking transactions with exchanges and fiat off-ramps, investigators can pinpoint the origins and destinations of illicit funds. This data is crucial for connecting the dots between different transactions and establishing a comprehensive picture of fraudulent activities.

Transaction Mapping

Transaction mapping converts raw transactional data into visual maps and flowcharts, providing a clear and understandable representation of the flow of funds. This visual representation helps investigators recognize patterns commonly used for money laundering, such as layering and peel chains. By mapping out these transactions, investigators can trace the movement of assets from their origins to their endpoints, making identifying and tracking the perpetrators easier.

Cluster Analysis

Cluster analysis groups cryptocurrency addresses controlled by the same person or entity. This method expands the scope of evidence available to investigators, allowing them to link multiple addresses to a single suspect or criminal organization. By identifying clusters of addresses, investigators can gather more comprehensive evidence and increase the chances of successfully tracing and recovering stolen assets.

Subpoena Targets

Subpoena targets focus on Know Your Customer (KYC) and Anti-Money Laundering (AML) compliant entities to obtain personally identifying information. Many cryptocurrency exchanges and service providers require users to verify their identities when opening accounts. By targeting these entities with subpoenas, investigators can access valuable personal information about the owners of suspicious addresses, facilitating de-anonymization and aiding in asset recovery.

Current/Historical Value

Identifying cryptocurrency addresses’ current and historical value is essential for financial recovery efforts. Addresses with significant value are critical targets for seizure warrants by criminal prosecutors or garnishment during civil judgment enforcement. Understanding the value of these addresses helps prioritize recovery efforts and ensures that the most substantial assets are targeted first.

Total Transactions

The volume of cryptocurrency transactions can indicate the size of a fraud scheme and the number of victims involved. Large-scale frauds with numerous victims are more likely to attract the attention of law enforcement and regulatory agencies. By analyzing the total number of transactions, investigators can assess the scope of the crime and determine the most effective approach for recovery and legal action.

Risk Profiling

Risk profiling involves conducting automated risk-scoring through advanced algorithms. These algorithms analyze the activity of target addresses and identify associations with known entities, such as exchanges, mixers, peer-to-peer exchanges, sanctioned parties, ransomware rings, and darknet markets. Risk profiling helps prioritize investigative efforts by highlighting the most suspicious and high-risk addresses for further scrutiny.

IP Address Tracking

IP address tracking collects privacy-piercing metadata through blockchain surveillance systems. These systems run network nodes that “listen” and “sniff” for IP addresses associated with certain transactions. By identifying IP addresses, investigators can determine the geographical location of the entities using the suspicious Bitcoin addresses, providing valuable clues about the perpetrators’ whereabouts and aiding in their capture.

These detailed methods and processes form the backbone of effective cryptocurrency forensics, enabling investigators to trace, analyze, and recover digital assets with precision and efficiency.

How Blockchain Analysis Tools For Cryptocurrency Tracing Work

As tracing tools grow more complex and effective, crypto criminals employ more refined tactics to hide the trail of the funds they steal.

In response, investigators deepen their research.

Thus, this cat-and-mouse game is like a virtual, crypto-focused arms race that continues to escalate.

Blockchain analysis tools can trace relevant information on a pseudo-anonymous blockchain like Bitcoin.

Investigation Process in Cryptocurrency Forensics

The investigation process in cryptocurrency forensics is a meticulous and multi-faceted approach designed to uncover the full scope of fraudulent activities and facilitate the recovery of misappropriated assets. Here’s a detailed overview of the steps involved:

Reviewing the Narrative of Events and Timeline of the Scheme

Every investigation begins by thoroughly reviewing the events’ narrative and the fraudulent scheme’s timeline. This initial step involves gathering all available information about the incident, including how the fraud was perpetrated, the perpetrators’ actions, and the impact on the victims. Understanding the context and specifics of the scheme is crucial for guiding the subsequent investigation steps.

Tracing Cryptocurrency Transactions

Investigators trace cryptocurrency transactions to determine the disposition of misappropriated funds. By analyzing the flow of funds through various addresses and wallets, they can follow the money trail from its origin to its final destination. This step is essential for identifying where the stolen assets are held and how they have been moved or laundered.

Forensic Analysis and Blockchain Intelligence Tools

Forensic analysis and blockchain intelligence tools are employed to develop attribution data on account owners. These advanced tools can reveal critical information about the entities behind the transactions, such as linking addresses to known criminal groups or individual perpetrators. The tools help transform the raw data from the blockchain into actionable intelligence, making pinpointing those responsible for the fraud easier.

Digital Forensics

The investigation also includes digital forensics, which analyzes email metadata, domain servers, and IP address geolocation. These techniques can provide additional clues about the fraudsters’ identities and locations. By examining digital communication channels and server logs, investigators can uncover connections and gather evidence that supports the attribution of suspicious activities to specific individuals or groups.

Legal Discovery through Subpoenas or Warrants

Legal discovery is often necessary to obtain personally identifying information and other critical evidence. Through subpoenas or warrants, investigators can compel KYC/AML-compliant entities, such as cryptocurrency exchanges and service providers, to produce documents and data that reveal the identities of account holders. This legal process is vital for de-anonymizing blockchain transactions and holding perpetrators accountable.

By following this comprehensive investigation process, cryptocurrency forensics experts can uncover the full extent of fraudulent schemes, identify the individuals involved, and lay the groundwork for recovering stolen assets. This structured approach ensures that all aspects of the investigation are covered, from initial analysis to legal action, maximizing the chances of a successful resolution.

The Application of Cryptocurrency Forensics

Cryptocurrency forensics and asset tracing are not just about tracking stolen funds; their applications are vast and critical in various legal and regulatory fields. These advanced investigative methods are used in:

Civil Litigation: Helping to identify and recover misappropriated assets in legal disputes.
Criminal Prosecution: Providing evidence to prosecute cybercriminals and fraudsters.
Bankruptcy Proceedings: Tracing assets to ensure fair distribution among creditors.
Regulatory Enforcement: Assisting regulators in monitoring compliance and identifying illicit activities.
Judgment Collection: Locating assets and assisting law enforcement in recovering them to satisfy legal judgments.

These applications highlight the importance and versatility of cryptocurrency forensics in modern financial investigations.

Attribution Data

Collecting and processing attribution data can help investigators tie cryptocurrency transactions to various entities.

At this point in the tracing process, attribution data is not likely to yield direct associations between individuals and transactions.

It can, however, link transactions to groups, fraud rings, and schemes investigators may already know.

Attribution data may also allow investigators to identify fiat off-ramps the criminals may use or exchanges where they try to convert their coins into other cryptos or fiat money.

Monitoring scam databases is also a practice cryptocurrency investigators use to establish connections between transactions and criminal entities.

Web Scraping

Web scraping is a legitimate practice people use to make sense of large volumes of data on the internet.

They collect the data based on filters to ensure relevance.

They then process it and draw conclusions.

Cryptocurrency market analysts routinely use scraping to attempt to predict the movements of the markets.

Social media yields a trove of information and is a great target for scraping.

Cryptocurrency investigators can use advanced tracing, scraping, and analysis tools to find and extract data from social media.

Transaction Mapping

The mapping process is the visually most revealing part of the blockchain investigation.

It establishes links between entities and crypto addresses and traces transactions from their origins to their endpoints.

The visual examination of these flow charts and graphs allows investigators to recognize patterns and identify obfuscation techniques the thieves may use.

The charts offer visual clues on layering, peel chains, and other money laundering practices.

Although they use publicly available data through the blockchain, cryptocurrency tracing tools eliminate the manual labor from the data analysis.

It would be impossible to pore over the raw data manually and identify patterns.

Scam Database Monitoring and Prevention

Fraud monitoring is constantly surveilling bank accounts and crypto addresses for suspicious changes and activities.

By monitoring scam databases and comparing the findings with suspicious activities through various crypto channels, investigators can discover relevant connections.

People can report crypto scams, rip-offs, and theft through various channels.

Many of the organizations behind these channels maintain exhaustive databases.

By monitoring these databases and suspicious activities on the blockchain and through crypto exchanges, investigators can link transactions to crime rings and even individuals.

Identifying Address Clusters

Cryptocurrency users can generate an almost infinite number of addresses.

And skilled criminals know how to take advantage of this peculiarity to obfuscate the trail of their activities.

That said, the patterns they leave on the blockchain can give investors a clue about the addresses individual criminals use.

By identifying behavioral and other patterns in transactions, investigators can expand the scope of their efforts to address clusters.

This way, they can collect more evidence and have a higher chance of connecting individuals to suspicious transactions.

Through cluster analysis, investigators can also determine whether the connected addresses have substantial value.

Common Spend and Address Reuse

Identifying instances of common spend is an interesting way of establishing connections among addresses.

Common spend happens when multiple small-value addresses “pool” their resources to finance a high-value transaction.

When investigators see such a transaction, they automatically link the addresses as belonging to the same entity.

Reusing an address is a crypto amateur mistake.

Whenever someone reuses an address, the transactions compromise privacy.

The more transactions one completes on a single address, the easier investigators can link that address to a specific person.

Establishing Targets for Subpoenas

This is a critical stage of the investigation process.

The crypto world comprises individuals, exchanges, service providers, and other actors.

Many of these entities are regulated.

Those who value compliance observe Know Your Customer (KYC) and Anti-money Laundering (AML) rules.

They collect personal information on their users.

And when a criminal transfers crypto or fiat funds to an exchange, he/she leaves a trail.

Due to the data they collect on users, exchanges and crypto service providers are valuable targets for investigators.

If they obtain the subpoenas they need, they can lift the veil of anonymity from the suspicious transactions they are tracing.

Through exchanges, investigators may even discover the criminals’ bank details.

In cooperation with the authorities, freeze accounts to recover funds later.

IP Address Tracking

Once they have a crop of suspicious crypto addresses, capable investigators can use them as starting points to obtain more relevant information.

Advanced Bitcoin surveillance systems can run full nodes on the network and “listen” to the chatter of transactions.

They can identify IP addresses linked to suspicious addresses and transactions.

Once they do, based on these IP addresses, investigators can determine the geographic location of the entities using the suspicious Bitcoin addresses.

Reading into Total Transactions

Crypto tracing specialists can uncover the size of fraud by determining the volume of transactions.

Larger frauds draw more attention from the authorities.

Law enforcement is more willing to assist when a crime entails several victims.

Wrapping up large-scale fraud sets the stage for class action lawsuits.

Automated Risk Profiling

When an experienced and skilled investigator looks at a Bitcoin address and its associated activity, he/she can tell if it’s suspicious.

Combing through millions of addresses manually is not realistic.

Advanced tracing tools can assign risk scores to addresses based on their calculations.

Investigators then only double-check the addresses the system flags.

Identifying High-value Addresses

Although the value of Bitcoin addresses may not seem particularly important in the tracing process, it is highly relevant.

Not only does it help investigators trace funds through a web of transactions, but it also provides them with a juicy target for seizure.

After they wrap up a scam, investigators go into asset-recovery mode.

Seizing high-value Bitcoin addresses gains added importance at this stage of the investigation.

Capable Crypto Tracing Specialists

Many organizations advertise and peddle their crypto tracing and recovery prowess these days.

How do you recognize the best and most capable crypto-tracing service providers?

A good tracing specialist uses powerful tools. Relying on one crypto tracing tool is not a problem. However, those looking for optimal results make an extra effort and use two or three tools. A tracing specialist may use CipherTrace. Another may use CipherTrace, Reactor, and Qlue. The second investigator may find connections the first one may miss.
Serious tracing specialists provide you with an expert report. You can use this report to sue the perpetrators for recovering your stolen assets. Cryptocurrency Tracing Certified Examiners can compile such expert reports.
Good investigators can trace assets worldwide. Serious tracing organizations maintain international teams with specialists and analysts in every country. Crypto crime is borderless. So should be the efforts to stop it.
Strong crypto-tracing organizations have worldwide connections. Tracing cryptocurrencies online is the first part of the asset recovery effort. When they identify and locate the criminals, investigators must pursue them in person. They must have local information sources, whistleblowers, and liaising capabilities with law enforcement.
Serious crypto investigators offer full client confidentiality. Professionals value confidentiality and respect their clients’ rights to it. They encrypt the data clients provide to aid the investigation and ensure it does not fall into the wrong hands.

Support for Legal Counsel

In addition to tracing and recovering cryptocurrency assets, CNC Intelligence offers robust support for legal counsel involved in related litigation. Our comprehensive support services ensure legal teams have the information and resources to pursue justice and recover misappropriated funds effectively. Here are the key ways we assist legal counsel:

Logistical Support

CNC Intelligence provides logistical support by vetting subpoena targets and examining bank records. Our team identifies the most relevant and valuable entities to subpoena, ensuring the legal process yields critical information. By thoroughly examining bank records, we can uncover financial details that link perpetrators to their fraudulent activities, providing solid evidence for legal proceedings.

Class Action Lawsuits

Our investigators identify and interview other victims for class action lawsuits to include them as class members. This process strengthens the case by demonstrating the widespread impact of the fraudulent scheme and increasing the chances of a successful outcome. By gathering testimonies and evidence from multiple victims, we build a comprehensive case highlighting the fraud’s extent.

Due Diligence on Identified Principals

Conducting due diligence on identified principals is crucial to our support for legal counsel. We investigate the criminal history, professional credentials, and financial liabilities of individuals involved in the fraud. This thorough background check provides valuable insights into the perpetrators’ past activities and helps legal teams build a stronger case. By uncovering patterns of fraudulent behavior and financial misconduct, we contribute to a more compelling argument in court.

By offering these support services, CNC Intelligence ensures that legal counsel has the tools and information to pursue justice effectively. Our expertise in cryptocurrency forensics and comprehensive support for legal proceedings make us a valuable partner in the fight against cybercrime and financial fraud.

Coordination with Law Enforcement

Effective cryptocurrency tracing goes beyond identifying and tracking assets. At CNC Intelligence, we assist clients in preparing formal criminal complaints and coordinating with law enforcement agencies in the U.S. and foreign jurisdictions. This coordination ensures that the legal aspects of the investigation are thoroughly managed, enhancing the chances of recovering stolen assets and bringing perpetrators to justice.

Bottom Line

Cryptocurrency tracing may be an emerging industry, but it is already highly capable. Expert teams can track down assets worldwide, identify perpetrators, freeze accounts, and seize the proceeds of crimes. Crypto crooks can no longer enjoy the fruits of their devious activities.

At CNC Intelligence, we specialize in cryptocurrency forensics and asset tracing. We conduct investigations for law firms, investors, exchanges, regulators, and law enforcement. Every investigation is led by a Cryptocurrency Tracing Certified Examiner (CTCE) and Certified Fraud Examiner (CFE).

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

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