When the Justice Department announced in February that it had seized bitcoin worth $3.6 billion, it was more than just the largest recovery of alleged crime proceeds in U.S. history. It was the biggest signal yet that cryptocurrency, once seen as attractive to criminals for its supposed shield of anonymity, may not be so crime-friendly after all.
Just a few years ago, the federal government barely knew what to do with cryptocurrency. Now, most federal law enforcement agencies employ experts adept at tracing it. Investigators are using a new generation of sophisticated software that harnesses big data to link transactions to people, taking advantage of the fact that most cryptocurrency transactions are recorded in public ledgers that can never be erased.
“If a bank was robbed five years ago and you’re still trying to chase down those leads, you have no idea potentially where that stolen cash could be at this point,” said Chris Janczewski, who spoke in an exclusive interview when he was the lead crypto investigator with the Internal Revenue Service. “With cryptocurrencies, like Bitcoin, every transaction is on a public ledger. It’s public and is there forever.”
Janczewski made a career’s worth of cases on that proposition, including acting as the lead agent in that $3.6 billion seizure. He helped shut down a child exploitation ring to a North Korean hacking scheme to a terrorist fundraising appeal — all involving cryptocurrency. He recently left for a job with TRM Labs, whose software helped trace the cryptocurrency at the heart of those and many other cases.
“We at the IRS have always been focused on being financial investigators — following the money,” he said. “We’d have posters [that said] ‘The best financial investigators in the world.’ And I’d like to point out that there’s not an asterisk at the end of that. It’s not just for U.S. dollars or the euro — that is all types of financial activity, to include cryptocurrencies, like Bitcoin.”
There are different types of cryptocurrency; the most commonly traded, including bitcoin, is digital money that is not backed by any government. It exists on a decentralized network of computers based on technology called blockchain and protected by unbreakable codes.
Crypto has not caught on as a common method of payment, but many cryptocurrencies have demonstrated staying power as “stores of value” similar to gold and other precious metals. The value of bitcoin and other currencies, while fluctuating significantly, has risen dramatically over time, drawing the interest of investors.
Initially, bitcoin and other crypto was seen as a useful tool for criminals trying to avoid scrutiny of their transactions, because while the transactions are recorded, the identities of those making them can be obscured. But more and more, law enforcement has been able to pierce the veil of anonymity.
“What we’ve seen is that a lot of the reasons that made things like bitcoin attractive to criminals are also making it increasingly unattractive to criminals,” said lawyer Urszula McCormack, a Hong Kong-based partner at King & Wood Mallesons specializing in cross-border finance and technology.
“When you look at what is actually involved in a transaction, you’re looking at the use of what’s called a public key or a wallet, and that’s a string of letters and numbers,” she added, but “that isn’t purely anonymous.”
Janczewski and other IRS investigators use analytic software made by TRM, Chainalysis and other companies to scrape the web and the dark web for bits of information.
According to Chainalysis’ annual crime report, just 0.15 percent of crypto transactions last year involved criminal activity, down from 3.37 percent in 2019.
Still, that represents a large volume of criminal transactions, the company noted in a blog post.
The amount of illicit activity, $14 billion, “represents a significant problem,” the post said. “Criminal abuse of cryptocurrency creates huge impediments for continued adoption, heightens the likelihood of restrictions being imposed by governments, and worst of all victimizes innocent people around the world.”
Jared Koopman, the head of the IRS’s Criminal Investigations Division, said his agency had become adept at tracing cryptocurrency.
“Most crimes involve money,” he said. “They involve some type of effort to scheme or defraud individuals or make a profit on illegal activity. So our job is to follow and trace those financial flows no matter what the underlying crime is and to hold those people accountable.”
In its latest challenge, the IRS has been tasked with helping the Justice Department investigate how some Russian oligarchs evade sanctions, some of them with cryptocurrency.
As the lead crypto investigator, Janczewski played a role in a series of extraordinary cases, including one involving a massive child pornography ring called “Welcome to Video.” The consumers paid in bitcoin and thought they were anonymous. In 2019, nearly 340 people in 23 states and 12 countries were arrested. And 23 children were rescued from their abusers, the Justice Department said.
“Following the money led to saving children and actually impacting real lives,” Janczewski said.
In 2020, Janczewski helped the Justice Department expose a massive scheme to steal $250 million worth of cryptocurrency by the North Korea government, seizing an unspecified sum he said amounted to millions of dollars from the rogue regime.
The case involved working with military hackers from U.S. Cyber Command, who initially wondered why the IRS was knocking on their door, Koopman said.
“Often, when we often walk into the room with a lot of other agencies, the question is why is the IRS here? And I think that’s both a common question but also one that we’re trying to work to stop from occurring, because we feel like we offer a unique skill set that many other law enforcement agencies and intelligence community partners don’t necessarily have.”
Also in 2020, Janczewski and the IRS took down three online terrorist financing campaigns, involving Hamas’ military wing, Al Qaeda and the Islamic State terrorist group, in what the IRS called the government’s largest seizure of cryptocurrency in the terrorism context.
The Justice Department seized millions of dollars from more than 300 cryptocurrency accounts. For a time, the IRS set up a fake fundraising website that routed terrorism contributions to U.S. government coffers.
“That was pretty enjoyable to think that money that people thought were going to go to a terrorist entity was instead going to the victims-of-terrorism fund — like the complete opposite of what they actually intended to do,” Janczewski said.