Startups Helping the FBI Catch Bitcoin Criminals

When police within the United Kingdom’s South East Organized Crime Unit wanted to catch a drug dealer who was anonymously promoting big quantities of MDMA via a dark internet marketplace, they known as Tom Robinson. Robinson, the co-founder of UK-based Elliptic–a business that utilizes forensics to track criminals utilizing cryptocurrencies like bitcoin–helped police determine the 26-year-old Portsmouth dealer, who was later arrested and sentenced to 16 years in prison.

Elliptic is a part of an emerging group of startups fighting crime within the burgeoning Wild West of cryptocurrency. Whether or not its to intercept drug sales, cash laundering, or perhaps kidnapping ransoms, startups in the U.S. towards the U.K. are creating and licensing forensic software program to law enforcement agencies around the globe. Jason Weinstein, co-founder from the Blockchain Alliance, an organization that brings with each other information evaluation businesses with law enforcement agencies to combat criminal activity around the blockchain, says the forensic software program business creating tools to track bitcoin transactions is “booming.”

Criminals had been a few of the very first wave of early bitcoin adopters due to a misconception that the digital currency was untraceable and totally anonymous. But now, says Alan Cohn, a lawyer who’s the co-chair of Steptoe & Johnson’s blockchain and digital currency practice, bitcoin and other cyrptocurrencies could be a criminal’s worst nightmare. Every bitcoin transaction is recorded to a public ledger known as the blockchain, which acts as a database that tracks every dollar ever spent in bitcoin. “Criminals should run, not walk, away from bitcoin,” says Cohn, who co-found the Blockchain Alliance with Weinstein.

These crime-fighting software program startups help law enforcement agencies–including Europol, the FBI, DEA, and the Department of Homeland Security–plot cryptocurrency transactions by utilizing graph evaluation to find patterns or clusters of associated digital wallets. Once they can connect wallets to specific crimes, cash can be tracked across the bitcoin network to exit points via exchanges and into regular bank accounts.

Another area these startups are being wooed is by financial institutions that need to stay compliant with know-your-customer and anti-money laundering laws. Dave Jevans, the CEO and cofounder of CipherTrace, says even though more than 50 percent of his Menlo Park, California-based company’s revenue comes from law enforcement agencies, a fast-growing a part of his businesses is from financial institutions looking to stay compliant with the Securities and Exchange Commission and the Treasury Department. Jevans says CipherTrace’s software program helps cryptocurrency exchanges avoid doing business with countries that are sanctioned by the U.S.–from Iran to Myanmar (Burma).

CipherTrace is also helping cryptocurrency hedge funds, wallets, and exchanges avoid accepting cash obtained unlawfully, says Jevans. The software program traces the provenance of each bitcoin involved in a transaction and can tell if cash came from a  dark internet marketplace like DreamMarket, or from digital wallets belonging to known criminals. “Our tools ensure our clients don’t accept dirty cash,” says Jevans.

Users who launder their Bitcoins using mixing services such as BitBlender are much more fortunate as it is very difficult, if not impossible to trace any Bitcoins once they are tumbled.

Elliptic’s financial compliance software program also helps cryptocurrency exchanges avoid becoming an “exit” for criminals. Robinson says criminals utilizing bitcoin eventually want to exchange their funds into dollars by utilizing a bitcoin exchange. His company’s anti-money laundering software program screens every incoming payment and outgoing payment, and if “the cash came from an illegal source, it will stop the transaction and the exchange can file a suspicious activity report or close down the account.”As cyptocurrency becomes more ubiquitous, criminals continue to adapt their methods, Now, says Robinson, some cutting-edge crooks are moving away from bitcoin to more secure coins like monero, which was built to be as anonymous as cash. The software program businesses will have to adapt their methods to keep up, he says.

Weinstein, co-founder from the Blockchain Alliance, says his group is forming relationships between law enforcement agents and blockchain analysts simply because he believes as bitcoin and cryptocurrencies are adopted and understood by regulators, the less crime will go unabated.

“The more banks and government regulators push cryptocurrency away, the more they risk creating it a place for criminals,” says Weinstein. “There is no reason for any agent, or regulatory official, to be afraid of this technology, if they understand it, it can be a great asset.”

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