Crime and Technologies: blockchains alarm

Last update Dec/11/2024

Note: I am not a hacker, but an ex-software programmer passionate about technology, but equally interested in understanding the 'two sides of the coin' that concerns it.

In some interviews, a well-known italian magistrate stated that, unfortunately, criminal organizations are one step ahead of investigative bodies as regards to technology; thus, I deduce that it's a constant battle between the two. And since as we know, nowadays technologies are moving forward at an incessant pace more than ever, I therefore wanted to bring to attention one of the recent technologies that have made a 'qualitative leap' in money laundering from the proceeds of illegal activities: the so-called blockchains.

Blockchains and Money Laundering

The blockchain technology emerged as a software technology with the advent of the Bitcoin crypto-'currency', followed by the subsequent appearance of an ever-increasing number of virtual cryptocurrencies. Many of these have acquired market values that defy any reasonable rationale, and behind them, there is nothing of material value - not even like banknotes, which at least you can touch! It is easy to imagine that nowadays criminal organizations hide many proceeds from illicit activities through Bitcoin and Ethereum, to name a few, as well as through more anonymous options like ZCash, Monero, and Dash.

Let’s consider that anyone possessing any cryptocurrency 'wallet' not managed by online web services such as Coinbase or Blockchain.com, but instead uses so-called 'offline' cryptocurrency wallets (among the many available I mention MetaMask, Trust Wallet, Crypto.com DeFi Wallet, Ledger Nano, or Exodus) or a so called paper wallet or an hardware wallet (like Trezor), the owner can make transactions (sending and receiving virtual tokens) simply communicating or exposing 'messy' alphanumeric addresses with numbers and letters, like this example bitcoin address: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa, previously generated by any wallet, and these wallets are available to everyone.

Not only that, every cryptocurrency wallet, whether managed on the web, on local devices or hardware, can generate as many addresses as the previous example, as the owner wants.

The virtual currency is therefore exchanged not between Bobby and Charlie, but between addresses like the one showed in the above example, thus making it almost impossible to trace back to their personal details.

Moreover, there are software tools for laundering dirty money, which allow users of cryptocurrencies to "remix" their transactions by scattering them among various transit addresses during the transmission or reception of each transaction; this is a procedure deployed in dirty money laundering.

It will be very difficult for law enforcement and forensic agencies to contain and bring to justice the criminals who use this technology.

Then there is the so called dark web, where a variety of illegal and very dangerous businesses circulate, for which blockchains represent a highly useful tool to carry out their criminal activities.

The only radical proposal that comes to mind, which I would like to add to the magistrate's aforementioned interviews, is to implement structural actions at a global level to make cryptocurrency financial markets illegal because prices are created where markets exist.

Then, if cash or valuables are hidden somewhere and exchanged 'by hand', this is obviously a further and dated concealment option.

The CGIA of Mestre (Italy), association of artisans and small businesses, has estimated in 2023 that the mafias "invoice" around *40 billion euros* per year. 😭

A further consideration concerns the enormous hidden mass of money subject to tax evasion!

I therefore remain of the opinion that at present there are no radical solutions to this great problem, if not implementable at a legislative level of the states, which in essence, as regards every transaction of value in general, should legally recognize only those in which it is possible to identify or trace the subjects (natural or legal persons) participating or whoever for them, thus making illegal the transactions and transfers that do not have this requirement.

Let's take for example payment platforms like PayPal or Western Union or Remit: nowadays, to activate an account or make a payment, one has to provide personal/company documents (the fact that someone might use fake ones, or one from a front company, is another story, but at least for eventual investigations one would at least have something in hand).

However, in anticipation of a hoped-for ban on crypto-currencies by states, I have gathered below from a chatBOT I.A. a summary on the current investigative 'state of the art,' from which I draw a conclusion like the one in the introduction: a technological war between investigators and criminality, chasing each other.

Cryptocurrencies and blockchain technology have become powerful tools for money laundering, enabling criminals to obscure the origin of illicit funds[1][2][3]. Organized crime groups are often ahead of law enforcement in adopting new technologies for this purpose[4].

Cryptocurrencies like Bitcoin, Ethereum, Dash, Zcash, Monero, offer varying degrees of anonymity, making it difficult to trace transactions back to individuals[1][4]. Offline wallets further obfuscate ownership[4], and this study reports recent proposals to make cryptocurrency exchanges even more anonymous. Then there are so-called mixing services that scatter transactions across multiple addresses to launder money[1][2].

The dark web also facilitates crypto-based money laundering, with marketplaces offering laundering services[2]. Estimates suggest Italian mafias may "invoice" around €40 billion per year, probably also by making use of money laundering through cryptocurrencies[4].

Combating this threat requires global coordination to strengthen anti-money laundering (AML) regulations and enforcement[1][3][5]. Crypto platforms must implement robust know-your-customer (KYC) and AML controls[2][3]. Law enforcement needs expertise in blockchain analysis to trace illicit funds[5].

While dismantling crypto markets may seem a drastic measure, the transparency of public blockchains can also aid investigations if properly leveraged[5]. Proactive monitoring and data-driven techniques can help uncover potential money laundering activity[5]. Ultimately, staying ahead of increasingly sophisticated criminals requires a multi-pronged approach combining policy, technology, and international cooperation.

What are the latest advancements in forensic tools to trace cryptocurrency transactions?

Recent advancements in forensic tools for tracing cryptocurrency transactions include:

1. **AI and Machine Learning**: Companies like Elliptic are employing deep learning models to identify illicit transaction patterns and wallets. Their tools analyze over 200 million transactions to detect money laundering activities by focusing on transaction subgraphs rather than just specific wallets, enhancing detection capabilities significantly [2].

2. **Blockchain Analytics Tools**: Tools such as Encase, Wireshark, and FTK are crucial for analyzing blockchain data, tracing transactions, and recovering lost records. These tools help forensic experts map transaction patterns and identify suspicious activities [1].

3. **Emerging Technologies**: The integration of machine learning and AI is revolutionizing cryptocurrency forensics, allowing for automated analysis and quicker identification of illicit activities. This is essential as criminals increasingly utilize privacy coins and decentralized exchanges [3][4].

4. **Collaborative Efforts**: Initiatives like those supported by Europol aim to enhance cooperation among law enforcement agencies across Europe, focusing on developing tools and methodologies to improve cryptocurrency transaction tracing [5].

These advancements are crucial in the ongoing battle against cryptocurrency-related crime.

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