Fortune

FOCUS
TO CATCH A
BITCOIN THIEF,
CALL THESE
DETECTIVES
Forensic firms specializing in digital
currency are helping law enforcement track
criminals—and helping companies maintain
compliance too. By Jeff John Roberts
BITCOIN AND OTHER DIGITAL CURRENCIES
TECH
caught on with criminals
thanks to their reputation as an anonymous, untraceable
way to move money around the Internet. That reputation may
be overblown. Companies like Chainalysis have built fast-growing
businesses helping law enforcement track the mysterious money.
The New York City company employs a gaggle of doctoratewielding
data scientists and statisticians who study Bitcoin’s
blockchain—its indelible public ledger that records transactions—
to gain clues about who owns given hoards of the digital currency.
The practice is possible because the blockchain contains a series of
digital “wallets” that have a unique identifier and show the flow of
money into and out of the wallet.
Though the “keys” that identify the wallets are random alphanumeric
strings, Chainalysis can identify clusters of wallets tied to
criminal activity, enabling law enforcement to look for other online
clues to connect them to a real-life identity. The most famous example
of this came in 2015 when forensic sleuthing by Chainalysis
helped the FBI identify two corrupt federal agents who had been
stealing Bitcoins from the owner of a notorious online drug market.
Chainalysis isn’t the only Bitcoin detective out there. A California
startup called CipherTrace infects its own computers with ransomware
to observe the movement of Bitcoin paid to free the machines.
The activity can provide clues about who is behind a given shakedown
and, in some cases, help law enforcement recover the money.
It’s not just Bitcoin the firms are chasing. “Other currencies such
as Ethereum, Litecoin, and Ripple are rapidly expanding,” says
Tom Robinson, cofounder of London-based forensic firm Elliptic.
“Whatever form value is stored in, it can be used for illicit purpose.”
Bitcoin detectives’ work may be cut out for them in the years
ahead. The arrival of so-called privacy coins like Zcash do not leave
Where
technology and
finance intersect.
behind a transaction record like Bitcoin. But
Chainalysis CEO Michael Gronager is not
fazed. He says that relatively few people use
them and that it’s still possible to glean some
insight about those who do.
Besides, tracking criminals is just one line
of business for forensic firms. As cryptocurrency
investing enters the mainstream, these
companies are working to help banks, hedge
funds, and others comply with “know your
customer” and anti–money laundering laws.
“These laws have been, and will continue to
be, a hurdle for incumbent financial institutions
becoming more comfortable with digital
currencies,” says Tom Mason, an analyst with
S&P Global Market Intelligence.
Cryptoforensics could give rise to another
intriguing business: detecting market trends.
An uptick of Bitcoin activity in countries such
as Venezuela or China, where governments
impose capital controls, could indicate that
a national currency is under stress. Insights
could even help investors understand macroeconomic
trends months before authorities
make oicial statements about them. Call it
putting your money where your mouth is.
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FORTUNE.COM // JULY.1.18
ILLUSTRATION BY CHRIS GASH