As the headline states, there is now indeed a field called blockchain forensics that help, not only regulators and law enforcement agencies, but also virtual asset providers themselves keep bad guys from using digital currencies for their own nefarious intentions.
Day 3 of the latest CoinGeek Conference held in New York City not only illustrates the value of the BSV blockchain, but also shows the importance of blockchain forensic tools in ensuring virtual asset entities are regulatory compliant and safe from criminal activities that plague the cryptocurrency world.
A digital currency is built on a blockchain that allows for all kinds of data to be timestamped and immutable stored. This means that data, no matter how small or big, exists on the blockchain forever in chronological order. And this is what criminals tend to forget. A public blockchain is a perpetual treasure trove of evidence for law enforcement officers.
“What’s really exciting about blockchain that’s really changing the dynamics around compliance and investigation, I think it’s about the fact that, for the first time, we have so much data. We have so much visibility as to where these cryptocurrencies are coming from. We can see the entire life cycle of a wallet and monitor its behavior,” Ian Lee, founding member and associate director for sales at predictive crypto risk and intelligence platform Merkle Science, said during a panel discussion about investigating criminal activities on blockchain.
A wide array of crimes, such as illegal drug sales, ransomware, money laundering and even romance schemes, involve the use of digital currencies. It may be that a digital currency is used to buy illegal drugs or that cryptocurrency exchanges and wallets are used to store or launder money from other criminal activities.
Whatever the case, virtual asset providers are always at high risk of handling dirty money or being unknowingly complicit to a crime. And the ramifications are huge. Litigation, being on a law enforcement agency’s watchlist and reputational harm are just some of the costly consequences of being involved in cryptocurrency crime.
“Oftentimes today, there’s a couple of exchanges out there that say, ‘My client is transacting less than 2 BTC, for example, I can do away with KYC.’ And the unfortunate side effect of that is something like this, where criminals today are realizing that crypto is basically programmable money. ‘If you tell me that I can do less than 2 BTC in one account, well, I’ll just write a script that basically moves my money through hundreds of different wallets and deposit it into each account less than 2 BTC in order to evade the kind off thresholds that you have,’” Lee revealed.
It must be noted that ignorance to a crime is an excuse no court of law will accept, and proving ignorance is also extremely difficult to do. This is why there is an urgent need for virtual asset entities to make use of blockchain forensics in order to keep companies safe. And even though exchanges and wallets think they are being regulatory compliant, working with other service providers that are not will also place them in danger of breaking the law.
“So, when you’re an exchange with strong KYC and AML, what you don’t want to do is to then be dealing with an exchange with weak KYC and AML, who then launders funds and passes [those] ill-gotten gains to you,” Lee pointed out.
“One of the things that we’re realizing is oftentimes when we conduct investigations, we’re just looking at a single address. Whereas the great thing about blockchain is we have the ability to do analysis clusters and entities. So, one of the recent things that we’ve launched is a way for regulators and financial institutions that we’re working with to monitor the blockchain activity of their counter-parties, so that they can actually see in real time if the partners they are working with are receiving funds from potentially illicit source,” Lee added.
So, it is best for virtual asset providers to make sure they have a compliance officer, compliance team or a reputable third party that can provide blockchain forensic analytics who are credible, highly trained and experienced to detect and handle criminal activities on blockchain. It may be costly at first, but it is a price worth paying for to ensure the safety and longevity of the company.