How bitcoin detectives at the IRS and FBI are catching crypto crimes
As an agent on the IRS’s cyber investigations team, Chris Janczewski led some of the government’s biggest crypto busts, including the takedown of a major child exploitation site and the seizure of much of the $4.5 billion of bitcoin stolen during the 2016 Bitfinex hack. Those busts helped Janczewski make the jump to the private sector a few months ago. He’s now the head of investigations at a private crypto intelligence firm called TRM Labs, which, among other things, focuses on detecting illicit crypto transactions. Most people probably aren’t even aware that this kind of crypto detective work is a thing, but Janczewski is making a career out of it.
“I don’t think the sentence ‘stolen NFT of a Bored Ape Yacht Club worth millions of dollars’ existed until a couple of weeks ago,” Janczewski told Recode. “There isn’t necessarily a playbook — or there isn’t a whole lot of experience — for people that have looked into those types of things.”
Cryptocurrency is an increasingly common factor in criminal activity. It shows up in everything from terrorist financing operations and ransomware attacks to run-of-the-mill fraud and scams. The problem is likely getting worse, too. Chainalysis, a crypto research firm, found that crypto crime transactions reached an all-time high last year.
As a result, there’s growing interest in investigators like Janczewski, who know how to scour the blockchain — the massive public ledger that records cryptocurrency transactions — for clues that link anonymous exchanges of crypto to real people who can be sued or charged with a crime. These probes have brought to light all types of criminal operations, including a network of illegal bitcoin ATMs that a New York man used for money laundering, and a $1.1 million “rug pull” involving NFT cartoons called Frosties. (An NFT rug pull occurs when someone tricks people into investing in an NFT project, only to cancel the project later and keep the money.)
Demand for crypto crime-fighters is booming. The Securities and Exchange Commission last week said it would double the size of its cyber unit and expand its focus on the crypto industry, including NFTs and crypto asset exchanges. The Department of Justice formed a crypto enforcement group last fall, and the FBI said in February it would assemble its own crypto team.
At the same time, there’s also been a surge in business for private outfits that run their own crypto investigations, often on behalf of individuals or other companies. Companies like TRM Labs and CipherBlade, another blockchain investigation firm, act almost like private eyes for the crypto age. There are even crypto vigilantes: independent, and often anonymous, internet sleuths who search for evidence of crypto scams and schemes in their free time.
Like most things crypto-related, crypto detective work isn’t necessarily intuitive. Crypto transactions are all publicly recorded, which means that identifying the wallets criminals use to store their digital currency is relatively simple. But because these transactions are also anonymous, crypto investigators have to look for leads that can connect a particular crypto transaction to other activity on the web.
For instance, they might be able to tie a wallet, which is effectively an address for a crypto account, to an established platform, like Coinbase — these companies are legally required to track the identities of their customers — or a portion of the dark web that’s already on investigators’ radar. Doing these investigations often requires going undercover online, sometimes using covert, disguised accounts that the government has seized and kept on hand for years.
“In traditional investigations, we know who committed the crimes and follow the money to prove it,” explains Dana Windsor, a spokesperson for the IRS’s criminal investigations unit, which had 80 crypto-related cases on its docket at the end of last year. “In crypto investigations, we know what the crime is and follow the money to prove who committed the crime.”
That might sound simple enough, but finding these connections is extremely difficult, and generally requires technical expertise that veteran detectives just don’t have. Federal agencies like the IRS, the FBI, and the State Department have spent millions of dollars on contracts with private crypto intelligence firms. These companies often have access to powerful machine learning software that can sift through huge numbers of transactions and look for leads. Even with this software, these investigations are getting harder, since criminals are constantly developing new ways of concealing their methods.
One of the biggest hurdles ahead for crypto crime-fighting is the fact that there’s not necessarily an established pipeline of people who can help. Right now, there’s no specific pathway to becoming a crypto investigator, so it’s mostly been a career people have stumbled upon. Janczewski, for instance, studied accounting before he became a crypto cop for the IRS. And CipherBlade crypto researcher Paul Sibenik told Recode he got into crypto detective work after he ran a side gig as a consultant for people in divorce cases who thought their spouses were stashing away bitcoin.
Another problem is that some of the firms that have the crypto expertise the government needs are, at the same time, running afoul of regulators. Last month, for instance, Anchorage Digital — the bitcoin bank the US Marshals Service hired to store the crypto the government seizes after criminal investigations — was flagged by the Office of the Comptroller of the Currency for violating money-laundering rules. Now that contract is on hold.
Of course, the people who best know their way around the blockchain may be more interested in profiting from crypto than regulating it. Many of the people most excited about crypto are actively opposed to the notion of stepping up enforcement.
“Government has a very difficult time competing in the area of crypto because the technologists are recruited heavily into the Web3 space because there’s so much venture capital money,” John Reed Stark, an outspoken critic of crypto and the former chief of the SEC’s Office of Internet Enforcement, told Recode. “There is absolutely a real brain drain in government when it comes to technology.”
That could soon be a big problem. President Joe Biden has insisted that there’s a place for cryptocurrency in the mainstream, provided that there’s a place for cryptocurrency rules, too. But without people to enforce those rules, it’s not clear that much will change in the world of crypto. After all, as long as there’s crypto flowing through our financial system, there will be people determined to use it in less-than-legal ways.
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