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The Shift: DOJ’s Crypto Enforcement Is Ready for Primetime
The U.S. Department of Justice revealed the scope of its ability to trace and recover digital assets used in cyber crime when it announced the landmark seizure of $3.6 billion in stolen Bitcoin and charged two people last month with conspiracy to commit money laundering.
The arrests came months after the Justice Department announced the creation of a cryptocurrency task force, and highlighted the agency’s strengthened sophistication to delve into the nascent industry and the darkweb, which are often associated with anonymity. The news also highlights that DOJ’s investigative techniques have judicial support.
The Conversation
The record seizure of bitcoin and the arrest of a married couple accused of trying to launder the assets created ripples throughout the legal community last month. Of note was that it showed law enforcement’s ability to trace digital assets through the blockchain despite complicated efforts to launder the funds.
“For anyone who still thinks that, bitcoin in particular, but blockchain transactions in general, are an anonymous world, they should be disabused of that notion at this point,” said Laurel Loomis Rimon, a partner in the white-collar defense and fintech and payments practices at Paul Hastings. “Blockchain analytics are having a moment and the department has put the resources and priority into doing this work. Those things are coming together to make a big seizure and arrest like this possible.”
The arrest is the latest instance of law enforcement piercing the veil of anonymity that blockchain was believed to offer alleged criminals. Other recent successes include recovering a portion of the $5 million ransom paid in bitcoin to a hacking group that shutdown the Colonial Pipeline.
“They’re basically using the blockchain against the criminals, whereas I think the perception before was that the blockchain was a place to hide,” said Rachel Maimin, a white-collar defense partner at Lowenstein Sandler and former federal prosecutor in the Southern District of New York.
Court documents and warrants laid out the in-depth techniques investigators used in order to trace assets through the blockchain.
“What was amazing about this case is the laundry list of obfuscation techniques [the couple allegedly] used,” Ari Redbord, the head of legal and government affairs for TRM Labs, a cryptocurrency tracing and forensics firm, told Wired. The Significance
This latest success indicates DOJ’s crypto enforcement team is ready for primetime. A DLA Piper analysis of the arrest and investigation highlighted that the public nature of blockchains coupled with DOJ’s analysis was effective, and more importantly, had judicial buy-in.
The hackers believed to be responsible for the initial theft used complex laundering schemes—including converting the stolen bitcoins from one cryptocurrency to another, and breaking up the funds into multiple and progressively smaller transactions—in order to conceal their assets.
U.S. Magistrate Judge Zia Faruqui praised the Justice Department’s search techniques, which relied on various algorithms and clustering software to identify patterns within the blockchain.
Faruqui noted that most of those techniques, and the blockchain itself, are public, absolving criminals of any expectation of privacy when investigators apply for search warrants. What’s more, Faruqui added that startup companies use similar techniques and software to conduct their investigations, which have proven to be reliable, adding an extra layer of veracity to DOJ’s investigation.
“It is human nature to assess technological confidential sources with greater skepticism. Yet humans are ‘Flawed. Weak. Organic,’ whereas clustering software strives for perfection,” Faruqui wrote, quoting a line from the movie “Star Trek First Contact.” The judge also went on to quote “The Big Lebowski,” writing that “cryptocurrency and related software analytic tools are ‘the wave of the future, dude. One hundred percent electronic.’”
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The Forecast
DOJ will continue to prioritize its blockchain analysis techniques to keep up with criminals, and those tools will enable law enforcement to continue to trace and recover digital assets, according to DLA Piper's analysis.
That priority was evident with the selection of Eun Young Choi to lead DOJ’s cryptocurrency enforcement team. Choi is expected to grow the department’s enforcement capabilities, but is also expected to shift from focusing on individual actors to targeting crypto exchanges with lax compliance policies that enable money laundering.
“Eun Young was one of early practitioners when it came to prosecuting cybercrime,” said former Southern District of New York prosecutor Edward Imperatore, who’s now at Morrison & Foerster. “Cryptocurrency is at the intersection of these various disciplines within the government’s enforcement regime, and she has very broad-based experience that will allow her to approach this work from different perspectives.”
DLA Piper noted that cryptocurrency exchanges using “know-your-customer” techniques also played a key role in the latest DOJ investigation, as they asked questions about where the money was coming from and froze assets they thought were suspicious. The law firm added that many exchanges are regulated by the federal government, and must report suspicious activity, compliance that will be key to investigations.
Nate Robson is the regulatory and Supreme Court editor for ALM. Contact him at nrobson@alm.com. On Twitter: @Nate_Robson1
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