When police in the United Kingdom's South East Organized Crime Unit wanted to catch a drug dealer who was anonymously selling large quantities of MDMA through a dark web marketplace, they called Tom Robinson. Robinson, the co-founder of UK-based Elliptic--a company that uses forensics to track criminals using cryptocurrencies like bitcoin--helped police identify the 26-year-old Portsmouth dealer, who was later arrested and sentenced to 16 years in prison.
Elliptic is part of an emerging group of startups fighting crime in the burgeoning Wild West of cryptocurrency. Whether its to intercept drug sales, money laundering, or even kidnapping ransoms, startups from the U.S. to the U.K. are making and licensing forensic software to law enforcement agencies all over the world. Jason Weinstein, co-founder of the Blockchain Alliance, an organization that brings together data analysis companies with law enforcement agencies to combat criminal activity on the blockchain, says the forensic software industry making tools to track bitcoin transactions is "booming."
Criminals were some of the first wave of early bitcoin adopters because of a misconception that the digital currency was untraceable and completely anonymous. But now, says Alan Cohn, a lawyer who is 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 called 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 startups help law enforcement agencies--including Europol, the FBI, DEA, and the Department of Homeland Security--plot cryptocurrency transactions by using graph analysis to find patterns or clusters of associated digital wallets. Once they can connect wallets to specific crimes, money can be tracked across the bitcoin network to exit points through 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 over 50 percent of his Menlo Park, California-based company's revenue comes from law enforcement agencies, a fast-growing 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 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 money obtained unlawfully, says Jevans. The software traces the provenance of each bitcoin involved in a transaction and can tell if money came from a money-laundering site, like BitBlender, a dark web marketplace like DreamMarket, or from digital wallets belonging to known criminals. "Our tools ensure our clients don't accept dirty money," says Jevans.
Elliptic's financial compliance software also helps cryptocurrency exchanges avoid becoming an "exit" for criminals. Robinson says criminals using bitcoin eventually want to exchange their funds into dollars by using a bitcoin exchange. His company's anti-money laundering software screens every incoming payment and outgoing payment, and if "the money 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 companies will have to adapt their methods to keep up, he says.
Weinstein, co-founder of the Blockchain Alliance, says his group is forming relationships between law enforcement agents and blockchain analysts 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 making 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."