CRYPTOCURRENCY INVESTIGATIONS:

A Comprehensive Guide for Law

Enforcement

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CRYPTOCURRENCY
INVESTIGATIONS:
A Comprehensive Guide for Law
Enforcement

zenledger.io
INTRODUCTION

Cryptocurrencies, with their decentralized nature and the anonymity they offer, have been
increasingly exploited for illicit activities. This whitepaper aims to provide law enforcement
investigators with a comprehensive understanding of cryptocurrencies, their potential uses
in criminal activities, the challenges faced in investigations, and the advanced tools and
strategies available to combat these issues.

Central banks, Fortune 500 companies, and hundreds of millions of individuals are using
cryptocurrency to transact, invest, communicate, and innovate. The total market capitalization
of cryptocurrencies has recently ranged between $1-3T with annual trading volume of +$100T.
The industry is highly innovative and disruptive to existing industry and regulation.

UNDERSTANDING CRYPTOCURRENCIES

What is Cryptocurrency?
Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. Unlike
traditional currencies issued by central banks (like the US Dollar or Euro), cryptocurrencies operate
on decentralized platforms.

Cryptocurrency Adoption
The global cryptocurrency market has seen a
surge in popularity and acceptance in recent
years. As of 2023, the market capitalization
of cryptocurrencies exceeded $3 trillion,
according to CoinMarketCap, representing
a significant increase from the $130 billion
market cap seen at the beginning of 2018.

In the United States, the story is similar. With

more than 46 million Americans owning
Bitcoin as of 2022 according to Newsweek, the
adoption of crypto has become mainstream.
How Does Cryptocurrency Work?

Cryptocurrency operates on a technology This decentralized nature of the blockchain

known as blockchain, which forms the
backbone of most digital currencies. A
blockchain is essentially a distributed ledger
or database, maintained by a network of
computers, often referred to as nodes. Each
node in the network holds a copy of the entire
blockchain and works in unison to maintain
and update the ledger, ensuring its accuracy
and reliability.
When a transaction is initiated, it is broadcasted
to the network. The nodes then work to validate
the transaction. This validation process
involves solving complex mathematical
problems, a process known as mining in the
context of cryptocurrencies like Bitcoin. The
first node to solve the problem gets the right
to add the transaction to the blockchain, and
in return, it receives a reward in the form of the
cryptocurrency.
network is what makes cryptocurrencies
immune to control or manipulation by any
single entity or authority. Since the ledger is
distributed and maintained by multiple nodes,
it is nearly impossible for a single party to alter
past transactions or control the network. This
decentralization also adds a layer of security to
the network, as it would require an enormous
amount of computational power to override
the entire network, making fraud and cyber
attacks highly unlikely.
Furthermore, the transparency of the
blockchain ensures that every transaction is
visible to everyone on the network, promoting
accountability and trust. However, the identities
of the parties involved in the transactions are
encrypted, providing a level of privacy and
anonymity.

Key Features of Cryptocurrency

Decentralization: Cryptocurrencies are not controlled by any central authority, making them
highly resistant to government interference or manipulation.
Anonymity: While transactions are transparent and visible to everyone in the network, the
identities of the people involved in the transactions are encrypted.
Auditability: the rules for governance and cryptocurrency creation (inflation, deflation) can
be clearly defined in the software code, creating trust in the ecosystem. All transactions are
tracked and validated by the distributed network, making forgery impossible.
Self Custody: Digital assets do not need to be stored at a bank or brokerage. The assets are
controlled solely by the entity holding the passwords to the encrypted wallets.
Security: Cryptocurrencies use cryptographic techniques to secure transactions and control
the creation of new units. This makes them secure and resistant to fraud.
Limited Supply: Most cryptocurrencies have a limited supply, meaning that there is a
maximum number of coins that can ever exist. For example, the total number of Bitcoin that
will ever be created is capped at 21 million.
Popular Cryptocurrencies

While there are thousands of cryptocurrencies,

the most well-known is Bitcoin, which was
created in 2009. Other popular cryptocurrencies
include Ethereum, Ripple, Litecoin, and Bitcoin
Cash. Each of these has unique features and
uses. For example, Ethereum allows for “smart
contracts” which automatically execute when
certain conditions are met.

Teams of programmers and business

people come together to found startups
with the explicit purpose of issuing a new
and better functioning blockchain protocol
and cryptocurrency. Cryptocurrencies are
intentionally created with certain features,
benefits, and tradeoffs to make them stand out
versus competitors in the hopes of garnering
more use and investment.

USES OF CRYPTOCURRENCY

Cryptocurrencies have a wide array of uses,
many of which stem from their decentralized
and digital nature. One of the most common
uses of cryptocurrencies is as a medium of
exchange or a form of investment. Given their
potential for high returns, many individuals
and institutions buy and hold cryptocurrencies
with the expectation that their value will
increase over time. This speculative nature of
cryptocurrencies has led to their popularity as
an alternative investment class.
Another significant use of cryptocurrencies
is for transactions, particularly cross-border
transactions. Cryptocurrencies can be sent
directly between parties, without the need for
intermediaries, making transactions faster and
often cheaper which is particularly useful in
remittances and international trade.
Cryptocurrencies also play a crucial role in
the realm of decentralized finance, or DeFi.
DeFi applications aim to recreate traditional
financial systems, such as loans and interest,
without the need for intermediaries like banks.
Cryptocurrencies are used in DeFi applications
to create decentralized lending platforms,
stablecoins, and yield farming platforms,
among others. These applications provide
users with greater control over their finances
and can often offer higher returns than
traditional financial products.
Crypto is also increasingly being used for
transactions that are largely focused on privacy.
While all transactions on a blockchain are
transparent and can be traced, the identities of
the parties involved are often pseudonymous.
Some cryptocurrencies, known as privacy
coins, take this a step further by implementing
features that make transactions untraceable.
This has made cryptocurrencies popular for
individuals who prioritize privacy, although it
has also led to their use in illicit activities.
Illicit Use of Cryptocurrencies
While they certainly offer numerous benefits, cryptocurrencies, have also become a tool for various
types of criminal activities. Here are some examples of crimes involving cryptocurrencies:
Payments
the core impact cryptocurrency has on illicit
activity is the facilitation of payments quickly,
securely, and confidentially at any time
between any entities. Whether the core crime is
narcotics, human trafficking, ransom, hacking,
extortion, smuggling, or money laundering-
the use of cryptocurrency removes barriers
and friction to these activities and allows for
the circumvention of sanctions or financial
monitoring (KYC/AML).
Intelligence/National Security
Cryptocurrency is being used for bribery,
espionage, to funnel weapons, and to
circumvent sanctions by nations such as North
Korea and Russia.
Cryptojacking
This involves hackers using someone else’s
computer to mine cryptocurrency without their
knowledge or consent. The victim’s computer
slows down due to the high processing power
required for mining, while the hacker reaps the
rewards.
Phishing Scams
In these scams, fraudsters trick victims
into revealing their private keys or wallet
passwords. They do this by creating fake
websites or emails that resemble legitimate
cryptocurrency exchanges or wallet providers.
These examples underscore the importance of robust tools and strategies for law enforcement
agencies to effectively combat cryptocurrency-related crimes.
Pig Butchering Scams
Pig butchering scams involve fraudsters
feigning romantic interest to lure victims
into fake investment opportunities. They
show false asset growth to encourage larger
investments, then disappear once substantial
funds are invested, leaving victims with
significant losses.
Ransomware Attacks
Hackers encrypt the victim’s data and demand
a ransom, usually in Bitcoin, to decrypt it.
The anonymous nature of Bitcoin makes it a
preferred choice for such crimes.
ICO Scams
Initial Coin Offerings (ICOs) are a way for
cryptocurrency startups to raise funds.
However, some ICOs are scams where the
creators have no intention of developing a
product and disappear with the investors’
money once the ICO is over.
Money Laundering
Cryptocurrencies can be used to launder
money. The process involves making numerous
small transactions or using mixers/tumblers
to obscure the origin of the funds.
Darknet Marketplaces
Cryptocurrencies are often used for
transactions on the darknet, where illegal
goods and services, such as drugs, weapons,
and stolen data, are sold.
CHALLENGES IN LAW ENFORCEMENT: THE DARK SIDE OF
CRYPTOCURRENCY

The use of cryptocurrencies presents significant challenges for law enforcement agencies.
Cryptocurrencies can be used for a variety of illicit activities, including money laundering, tax evasion,
fraud, and financing of terrorism. The pseudonymous nature of cryptocurrencies allows criminals to
hide their identity and transaction details, making it difficult for law enforcement agencies to trace
and apprehend them. These challenges include:

The Anonymity Challenge

While all transactions on a blockchain are
transparent and can be viewed by anyone, the
parties involved in the transactions are often
pseudonymous. This means that they can
conduct transactions without revealing their
real-world identities, making it difficult for law
enforcement agencies to identify and track
criminals.
Case Study: In May 2019, Dutch and
Luxembourg authorities in collaboration with
Europol shut down BestMixer.io, a significant
player in the world of crypto-based money
laundering. BestMixer was responsible
for ‘mixing’ at least $200 million of crypto
transactions in a bid to obscure the origin of
funds and thwart traceability.

The Decentralization Challenge

The decentralized nature of cryptocurrencies
means that they operate outside the control
of any single authority, such as a government
or financial institution. This makes it difficult
for law enforcement agencies to regulate
cryptocurrency activities or take action against
illicit activities.
Case Study: In 2016, the Ethereum blockchain
was hacked. The anonymous hacker exploited a
vulnerability in the DAO (Decentralized Autonomous
Organization) smart contract to siphon off
approximately $50 million worth of Ether. Despite
extensive investigations and the drastic measure of
a ‘hard fork’ to mitigate the damage, the individual
behind the hack remains unidentified.

The Self Custody Challenge

An individual or organization can hold a vast
amount of wealth in cryptocurrency and send it
anywhere in the world, to anyone they like with
no need to head banking regulations or KYC/
AML controls.
Case Study: In the 2020 KuCoin exchange hack, an
unidentified entity stole over $280 million in various
cryptocurrencies. The hacker(s) later transferred
a significant portion of the stolen funds to various
self-custodied wallets - essentially, digital wallets
controlled solely by the anonymous user, not by any
third-party institution.

The Volume and Variety Challenge - The sheer

volume of cryptocurrency transactions, coupled
with the variety of cryptocurrencies available,
makes it challenging for law enforcement
agencies to monitor all transactions and
identify suspicious activities.
Case Study: As of July 2023, there are more than 1.8
Million different cryptocurrencies traded publicly,
according to CoinMarketCap. In terms of volume,
the daily global cryptocurrency transactions have
ranged from tens to hundreds of billions USD.
Challenges in Law Enforcement (cont.)

The Evolution and Adaptation Challenge
The cryptocurrency landscape is constantly
evolving, with new cryptocurrencies and
technologies emerging regularly. Criminals
are quick to adapt to these changes and find
new ways to exploit cryptocurrencies for illicit
activities.
Case Study: In early 2023, a hacker exploited a
vulnerability in the NFT marketplace OpenSea to
trick users into transferring their valuable Euler
Beats NFTs, cumulatively worth over $1.2 million,
to their wallet. The hacker then quickly resold
the NFTs on the same marketplace before users
realized they had been scammed.

The Legal and Jurisdictional Challenge

The global nature of cryptocurrencies
means that transactions can cross multiple
jurisdictions, making it difficult for any single law
enforcement agency to take action. Additionally,
the legal status of cryptocurrencies varies
from country to country, further complicating
enforcement efforts.
Case Study: The notable “Welcome to Video” child
pornography site in 2019 had 1.2 million members
and relied heavily on Bitcoin transactions.
Chainalysis’ tools were used to analyze the
transactions, leading to the identification and arrest
of the site’s operator and 337 site users across 38
countries.

The rapid growth of crypto presents unique opportunities for efficient payments, it also poses new
challenges for law enforcement agencies worldwide, particularly regarding crypto-related crime.
For instance, the 2022 Twitter Bitcoin scam involved hackers breaching the accounts of high-profile
individuals including Bill Gates, Barack Obama, Warren Buffett, and corporations including Apple, and
Uber. The Bitcoin scam led to the theft of over $120,000 within hours.
Another example includes the notorious DarkSide ransomware attack in May 2021, where the
attackers demanded and received a ransom payment in Bitcoin worth approximately $5 million from
the Colonial Pipeline Company, causing a significant gas supply disruption across the Southeastern
United States.
Moreover, the complexity of cryptocurrency transactions has amplified due to the rise of Decentralized
Finance (DeFi). As per DeFi Pulse, the Total Value Locked (TVL) in DeFi exceeded $150 billion by
June 2023, soaring from just $1 billion in early 2020.
DeFi in particular has introduced new elements like decentralized exchanges (DEXs), yield farming,
and flash loans, all contributing to an intricate web of transactions difficult to trace using traditional
methods. For instance, DEXs, by facilitating peer-to-peer exchanges without intermediaries,
processed over $1 trillion in trading volume in 2022, as reported by CryptoSlate, adding an additional
layer of complexity to cryptocurrency investigations.
ADDRESSING THE CHALLENGES

Addressing these challenges requires a multi-faceted approach that includes:

Understanding the Blockchain Increasing International Cooperation

Law enforcement agencies need to understand
how blockchain technology works and how it
is used in cryptocurrencies. This includes un-
derstanding how transactions are recorded on
the blockchain, how new blocks are created,
and how cryptocurrencies are mined.
Given the global nature of cryptocurrencies,
international cooperation is essential for ef-
fective law enforcement. This includes shar-
ing information and intelligence, coordinating
investigations, and cooperating on legal and
regulatory matters.

Enhancing Legal Frameworks Improving Technical Capabilities

Governments need to develop clear legal
frameworks that define the legal status of
cryptocurrencies and establish regulations for
their use. These frameworks should also pro-
vide law enforcement agencies with the legal
tools they need to investigate and prosecute
cryptocurrency-related crimes.
Law enforcement agencies need to improve
their technical capabilities to effectively in-
vestigate cryptocurrency-related crimes. This
includes developing tools and techniques to
analyze blockchain data at scale, trace crypto-
currency transactions, and Identify the parties
involved in transactions. This is where compa-
nies like ZenLedger can really help.

BATS BY ZENLEDGER: A POWERFUL ALLY FOR

LAW ENFORCEMENT

BATS (Blockchain Analytics and Tax Software) by ZenLedger, is a leading cryptocurrency forensic
accounting and blockchain analytics platform. It offers a suite of tools and services that can sig-
nificantly aid law enforcement agencies in their investigations involving cryptocurrencies.

Data Aggregation Transaction Tracing / Cryptocurrency Asset

BATS can aggregate data from multiple sourc-
es, including blockchains, wallets, exchanges,
subpoenas, and customized CSV files. This
provides a single, cohesive view of cryptocur-
rency transactions, making it easier for law
enforcement agencies to monitor and analyze
these transactions.
Advanced Analytics
BATS uses AI/ML-powered data analytics to
quickly categorize data in bulk and identify any
gaps in the dataset. This can help law enforce-
ment agencies identify suspicious activities
and patterns.
and Pattern Detection
Starting with an initial subpoena, BATS can
identify holes in the transaction history, flag
suspicious transaction patterns, and identify
additional exchanges/accounts that could be
subpoenaed.
BATS can also start with a small number of
transactions with no hash/blockchain ID and
find them on the blockchain, which can then
start the process of tracing all transactions
and accounts connected to those initial trans-
actions.
ZenLedger: A Powerful Ally for Law Enforcement (cont.)
Forensic Accounting Analysis
BATS utilizes accounting methods like FIFO/
LIFO/HIFO, along with cost basis, profit and
loss calculations, and the identification of tax-
able events. This financial comprehension can
be extrapolated over millions of transactions.
It’s specifically designed to handle intricate
DeFi transactions where the determination of
cost basis and profit and loss is challenging.
Unique Market Insights
BATS assists hundreds of thousands of retail
customers with their crypto portfolios, en-
abling the technology to collect and analyze
unique market insights data. This data can
help law enforcement agencies identify vic-
tims of fraud, track the speed of self-transfers,
track exchange/gas fees, identify wallets that
belong to exchanges, identify bridges, and con-
duct historical market analysis.
Direct Integration Support
The BATS platform has a multitude of import/
export integrations with subpoena data, 400+
exchanges, 50+ blockchains, 100+ DeFi & NFT
protocols. This extensive integration support
allows BATS to provide comprehensive and ac-
curate data for law enforcement investigations.
Subject Matter Expertise
ZenLedger provides blockchain, data sci-
ence, and accounting experts with decades
of real-world experience who understand the
unique complexity of cryptocurrency audit and
criminal investigation. These experts can en-
hance the strength of case closure rate, inves-
tigative leads’ integrity, and the fidelity of ana-
lytic intelligence products.
Continuous Improvement
BATS’s capabilities are continually expanding
to advance the effectiveness and scope of
algorithms for assets/account discovery and
suspicious transactions detection. As part of
their aggressive Continuous Improvement ini-
tiative and investment, they are currently de-
veloping new algorithms that they expect to
deploy on a rolling basis.
These include algorithms to identify new as-
sets and accounts, darknet transactions, mix-
ers/tumblers, ransomware wallets, and the use
of the Lightning network and decentralized ex-
changes. This ensures the investigation suite
can always work with the blockchains that
criminals are currently using.
CLOSING THOUGHTS

The digital age has ushered in a new era of financial transactions with the advent of cryptocurren-
cies. These digital assets, while innovative and transformative, have also become a tool for illicit
activities due to their anonymous and decentralized nature. This presents a unique set of chal-
lenges for law enforcement agencies worldwide.
A deep understanding of cryptocurrencies and blockchain technology is crucial for law enforce-
ment to effectively navigate this complex landscape. However, the technical intricacies, global
reach, and vast volume of data involved necessitate the use of advanced tools and strategies.
BATS by ZenLedger stands as a powerful solution in this context. Its capabilities to aggregate
data from diverse sources, provide advanced analytics, identify suspicious patterns, and integrate
seamlessly with traditional accounting software make it an invaluable asset for law enforcement.
Moreover, its commitment to continuous development and innovation ensures its readiness to
tackle emerging challenges.
The challenges posed by cryptocurrencies are indeed significant, but they are not insurmount-
able. With the right tools, such as BATS, and strategies, law enforcement agencies can effectively
address cryptocurrency-related crimes, ensuring the safety and security of our increasingly digital
world.
If you are interested in learning more about how ZenLedger can help your organization with cryp-
tocurrency investigations, please contact us at sales@zenledger.io.
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