OPINION:
For an investigator, seeing an illicit transaction on the blockchain is not the same as identifying the person behind it, understanding the transaction or preventing further illegal activity.
In September, federal prosecutors announced three separate enforcement actions: a $135 million drug money laundering indictment in South Carolina; a civil forfeiture complaint seeking $61 million in cryptocurrency allegedly tied to Iranian oil sales; and a guilty plea involving more than $2.5 million in laundered proceeds from sextortion and romance fraud.
Cryptocurrency helped move money in all three cases.
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As a former director of intelligence analysis at the New York City Police Department, I supervised analysts and investigators. So I understand that any proposed legislation or policies must judge crypto safeguards by their usefulness in an investigation.
Knowing that money changed hands is just the start. The transparency and permanence of the blockchain are useful only when paired with the real-world information and cooperation that investigators need to identify actors and stop crime.
Some of the features that make crypto fast and easily accessible also serve as tools for laundering for bad actors. Bad actors exploit crypto’s ability to move money quickly across borders, pass it between wallet addresses and convert it back into spendable currency.
Consider the case involving $135 million in drug money laundering. Prosecutors allege that drug proceeds tied to trafficking in the Greenville, South Carolina area moved from bank accounts associated with shell companies into a U.S. cryptocurrency exchange. There, the money was converted into stablecoins, then transferred to a foreign exchange, converted into Colombian pesos and distributed across 207 Colombian bank accounts.
Approximately $135 million passed through the defendant’s account over roughly 14 months.
Investigators used customer identity information supplied to the crypto platforms to connect the accounts to the defendant. The blockchain record alone was not enough.
Investigators need the ability to hold these platforms to consistent anti-money-laundering and know-your-customer standards so that criminals can be connected to their crimes.
A wallet address alone does not necessarily identify its owner. A transaction history does not establish the purpose of a transfer or prove a crime. The blockchain can tell investigators what happened without necessarily telling them who was responsible, why it happened or who had a duty to intervene.
When money passes through services in several countries, investigators must obtain information from different institutions under different legal systems. Blockchain analysis can help reconstruct the route, but it cannot remove those demands.
September’s enforcement actions demonstrate that investigators can overcome these obstacles, though it takes tremendous effort. In the sextortion and romance-fraud case, authorities secured a guilty plea after extraditing the defendant from Britain.
The investigation involved U.S. and foreign authorities, and the proceeds had moved through payment apps and crypto wallets. Those results depended on institutions cooperating and producing evidence beyond transaction records.
We should expect rigorous investigations, and law enforcement deserves the resources and the right regulations to conduct them. We should also expect the organizations that handle these transactions to help detect and disrupt criminal activity before another victim loses money.
Oversight should examine whether exchanges and other intermediaries verify customer identification records, preserve them and produce them promptly in response to lawful requests. It should also test whether their systems can identify suspicious patterns across multiple transactions and escalate them in time for action.
Cross-border cooperation matters just as much. A laundering network can span numerous organizations and institutions that each see only part of the activity.
Washington should evaluate crypto regulation against three questions that help combat that challenge: Can investigators identify the person behind a transaction? Can they quickly obtain the records they need? Are platforms required to detect and act on suspicious activity before losses multiply?
A blockchain trail is a valuable investigative tool. Washington must insist on the safeguards and cooperation in cryptocurrency markets that make it useful in practice. Success means disrupting criminal networks and preventing funds obtained through illicit activities from supporting hostile organizations.
As crypto is further embedded in the U.S. financial system, the public deserves accountability before it needs a prosecutor.
• Mitch Silber is an adviser to Crypto Watchdog and a former director of intelligence analysis at the New York City Police Department.
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