How Governments, Financial Institutions, and Security Agencies can Benefit from Blockchain Forensics
Introduction
If you live long enough, you’d understand that new technology is not always perfect. They are often riddled with loopholes and weaknesses that are eliminated over time as usage, and more knowledge is acquired regarding the technology. As more knowledge is acquired through feedback from user experiences and setbacks due to manipulation of existing weaknesses by criminal elements, technology is incrementally developed to deliver its promised services and protect its users from its design limitations.
Blockchain and cryptocurrency technologies are no different in this regard. While the technologies have transformed the world of global finance in their 13 short years of existence and opened up new vistas of fintech possibilities, cryptocurrencies, and the blockchain are no less technological babies in their late formative stage.
Whereas crypto experts would protest the baby remark with some angry frown as if to say my wallet are so old, my bitcoins are grey now; our point is that blockchain and cryptocurrencies are still fresh out the innovation block and thus still require a lot of work to ensure user safety, security of assets, and regulations to discourage its present and a somewhat growing attraction to criminal elements and more.
Since 2009, billions have been lost to cryptocurrency scams and hacks every year. Specifically, $1.7 billion was stolen in 2018, $4.5 billion was stolen in 2019, and in 2020, $1.9 billion was stolen. According to Chainanalysis, with reference to money laundering, over $8.6 billion was laundered by criminal syndicates through cryptocurrencies in 2021. Therefore, it is arguably correct to say that the industry has witnessed more hacks and ransomware attacks with the expansion of blockchain and cryptocurrencies to Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs), and money laundering.
The safety concerns of the technology, its tendency to be employed for fraudulent activities, and its decentralized design, which puts it outside the boundaries of legal scrutiny, make Cryptocurrencies and the blockchain a technology viewed with skepticism by governments and big institutions when global adoption is discussed.
But despite the blemished reputation of cryptocurrencies, the blockchain beams a ray of hope. This immutable public ledger which tracks and documents all transactions on the network for validation and trust makes it possible to view details of transactions irrespective of where they are initiated and executed in the world. What this means is that all transactions on the blockchain leave data traces. With these data, experts can identify, track and follow suspicious transactions from their point of initiation to cash-out terminals and even apprehension of the human agents behind them.
This new era of blockchain policing is made possible by blockchain forensics, the superhero of the crypto-verse.
What is Blockchain Forensics?
The concept of blockchain forensics is a fusion of two important individual components: Forensics and Blockchain.
Briefly, Forensics has been an essential part of crime investigation. It involves the use of science and technology to analyze data directly (on the crime scene) or indirectly related to crimes to reach objective conclusions that assist in the identification of culprits in order to dispense justice. It is largely tied to data provided by crime scenes and more.
On the other hand, a Blockchain is a public digital financial book that keeps track of every cryptocurrency transaction while linking it to previous and future transaction blocks to create an immutable data chain. Therefore, Blockchain forensics refers to the use of science and technology to interpret, analyze, and investigate blockchain transaction data to apprehend cybercriminals.
The primary focus of the field is to take the digital footprints left by transactions on the blockchain, analyze these data, and reach conclusions that identify and eliminate cybercriminals.
It is a much recent department of a relatively established industry — Data Forensics — and has only risen to prominence with the rise in fraudulent use of cryptocurrencies and the blockchain. With blockchain forensics, organizations, with the help of experts, can monitor and combat financial crimes associated with cryptocurrencies. It has also helped organizations overcome reputational risks that might have adversely affected the integrity of organizations had they fallen to cybercriminals, resulting in loss of customers’ vital assets and information. Blockchain forensics, therefore, promotes trust and the integrity of the blockchain and pokes a huge hole in the belief that cryptocurrencies are the perfect stop for money laundering and fraudulent schemes.
One of the recent miracles of blockchain forensics was the recovery of 63.7 bitcoins out of 75 bitcoins paid as ransom by Colonial Pipeline to REvil, a group affiliated with the Russian cybercriminal syndicate named DarkSide. Through the use of blockchain forensics, the US FBI was able to follow the ransom, identify the IP addresses of the culprits, geolocate the host company running the bitcoin core used by the perpetrator, and through the corporation of the US Department of Justice, took over the host together with the required private keys needed to access the accounts housing the ransom payment and retrieve the funds.
The team of FBI experts involved in this operation was so sure of their methods and forensic abilities that they permitted the ransom money to be paid so that they could follow the money to retrieve it.
Blockchain Forensics Tools
Some of the popular blockchain forensic tools created by security companies and used to police the crypto space include the following:
- Bilic’s Follow the Money (Transaction explorer, Wallet identifier, Funds tracker)
Bilic’s FTM uses a blockchain transaction explorer technology to gather crypto transactions data which builds the foundation for forensic investigations. The wallet identifier uses a unique identifier system to uncover the identities behind cryptocurrency wallets, while the funds’ tracker keeps track of money movements from one wallet to another.
- Bitquery’s Coinpath
Coin path allows users to build transaction monitoring and visualization tools which aids the investigation of crypto crimes and money laundering.
- Elliptic Lens and Navigator
Elliptic is a popular crypto-security solution service provider. It provides the lens and Navigator. The former is used to investigate the identity behind wallets, follow the money trail and explore crypto wallets. In contrast, the latter is used to trace and uncover the origins and destinations of funds.
- Chainanalysis Know Your Transaction and Reactor
The Know your transaction tool helps organizations to identify scams, suspicious transactions from the Dark Web, and suspicious wallet addresses with fraudulent history, while the Reactor helps to visualize the movement of Cryptocurrencies from one address to another.
Benefits of Blockchain Forensics
Without any doubt, blockchain forensics holds great security promises for both the direct and indirect stakeholders of the cryptocurrency industry, and some of the benefits it provides include the following:
1. Crypto space surveillance and investigations
Blockchain forensic tools and software allow for monitoring the crypto space to identify suspicious crypto transactions and wallet addresses associated with fraudulent activities. Surveillance helps to foil fraudulent schemes before crypto users become victims.
It also helps to counter cybercriminal campaigns immediately. With blockchain forensics, transaction data can now be analyzed and converted from a seemingly unrelated bunch of complex machine-like language into useful data transformed into charts, clusters, and diagrams, giving the forensic expert knowledge to make informed decisions. The surveillance and investigation capabilities of blockchain forensics made it possible for the FBI to follow the Colonial Pipeline money trail until the funds were recovered.
More than anything else, governments can keep an eye on the use of cryptos to apprehend terrorist rings that use the technology to stay under the radar. The use of cryptocurrencies on the dark market to purchase illicit materials such as radioactive, guns, e.t.c., can now be effectively combated.
2. Compliance
Blockchain forensics now provides a tool for business organizations to monitor users while using their platforms and services. No crypto platform wants its users to use its services and platform for laundering money. The ability to track and identify suspicious transactions makes it possible for crypto platforms to refuse or hinder certain transactions, thus enforcing compliance with terms and conditions for its proper usage.
3. Assets of Recovery
If someone said there would come a time when lost cryptocurrencies could be recovered or when wallets addresses could be successfully traced and the identities behind them uncovered, many persons would have preferred to purchase Giraffe shit than bet on that. However, with the help of blockchain forensics, the Colonial Pipeline recovery is a loud piece of advice to never bet against innovation. Blockchain forensics has made data interpretation possible, making it possible to follow money trails and recover lost funds. With the use of explorer technologies to scrape cryptocurrency transaction data off different networks, the use of a funds tracker to follow the money trail, and a unique identifier to uncover the identity of perpetrators, crypto-asset recovery is becoming easier with the emergence of blockchain forensics.
4. Trust and integrity protection
The cryptocurrency space has been branded as the den of cybercriminals for a while. This narrative has created trust and integrity issues for organizations within the crypto space. Fortunately, the emergence and increasing success of blockchain forensics are promoting trust for organizations built on crypto technology. With the increasing apprehension and clamp down on hackers and money launderers, the crypto security community sends a message to users that the crypto space is not a den of thieves.
In addition, crypto organizations that have lost user assets to cybercriminals rarely recover from the integrity assassination after their attacks. With blockchain forensics, the movement of these monies can be tracked to identify the persons responsible for hack attacks and laundering. This will at least exonerate crypto organizations from the usually widely circulated narrative that asset loss was calculated and planned from the inside. At best, recovery of the asset, in the case of Colonial Pipeline, cements the integrity of organizations as formidable and trustworthy.
Summary
Blockchain Forensics is a new chip of the old block of data forensics. Due to its effectiveness and efficiency in monitoring, tracking, and recovering stolen crypto assets, it has risen to prominence. With large companies like Master Card and other private interests jumping into the cybersecurity arena, blockchain forensics is bound to witness significant software and infrastructure capabilities development.
Moreover, more than anything else, blockchain forensics will continue to promote trust, crypto surveillance proficiency, security investigations, and compliance, among others, for governments, security agencies, and institutions.
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