The identities of the parties involved in crypto transactions are pseudonymous. Users can choose to operate under pseudonyms or even use randomly generated public keys, making it difficult to trace the true identity behind a transaction. This is thanks to the decentralized nature of crypto.

Decentralization ensures that no single entity has control over the network or the transactions taking place on it. This feature makes it nearly impossible for any one individual or organization to manipulate or govern the system. However, it also means that there is no central authority to rely on when attempting to identify the person behind a transaction.

For law enforcement investigators tasked with investigating crypto-related cases, the difficulties of identifying the identity behind a transaction can be especially daunting.

In traditional financial systems, banks and other financial institutions act as intermediaries between transactions. This means that law enforcement agencies can work with these institutions to obtain information on a transaction or the parties involved in it. However, in the world of crypto, there are no such intermediaries, making it more challenging to obtain relevant information.

Without a central authority to turn to, investigators must rely on more advanced techniques like blockchain analysis. 

Blockchain analysis is a technique that can be used to identify the true identity behind a crypto transaction. By tracing a transaction’s path through the blockchain, investigators can potentially uncover information about the parties involved, such as:

• Linking transactions to specific wallet addresses
• Visualizing and mapping transaction flows
• Identifying exchanges
• Monitoring darknet markets
• Identifying patterns of behavior

With this evidence, how can investigators nab a suspect? The information obtained through blockchain analysis can be critical in building a case and securing a subpoena.

Using KYC Information in a Subpoena

However decentralized, crypto is still subject to Know Your Customer (KYC) requirements in many jurisdictions where the biggest cryptocurrency exchanges operate. 

KYC refers to the process by which financial institutions conduct due diligence on customers during onboarding, including background and identity checks. It is a crucial AML compliance process that must be followed to ensure regulatory compliance. 

KYC helps financial institutions assess whether there are any AML/CFT risks associated with allowing individuals to conduct business with them, thus enabling them to take appropriate measures to mitigate these risks.

The regulatory landscape surrounding crypto and KYC requirements varies by jurisdiction and is constantly evolving. 

In the US, crypto transactions are treated as money transmission and centralized providers are required to comply with the KYC requirements laid out by the Bank Secrecy Act (BSA) and its implementing regulations, as enforced by FinCEN. These include 

• identifying the customer by collecting an identification document such as a driver’s license, collecting their residential address, and social security number;
• verifying this information; and
• storing it securely. 

KYC also includes screening for politically exposed persons, i.e. individual members of government or those closely associated with such persons, significant negative news related to a potential customer, and whether or not that customer is included in the OFAC sanctions list – in which case they should be blocked from the platform. 

KYC doesn’t end at onboarding as crypto service providers need to risk-rate their users, monitor them on an ongoing basis, and confirm their onboarding information annually. 

FinCEN clarified this rules as they relate to cryptocurrency businesses in 2019 with a guidance document. In it FinCEN stated its rules apply to custodial crypto providers and not non-custodial or self hosted wallets, miners, nodes, or validators. If a crypto service holds and transfers crypto on behalf of a user then they must comply with the requirements to undertake KYC.

As regulators around the globe follow suit with crypto firms, this can be especially useful when your suspect has made transactions to a regulated crypto exchange.

How Can Investigators Leverage KYC Information To Identify Criminals?

Investigators can leverage KYC information in a subpoena to obtain critical information that can help in building a case.

For example, if a cryptocurrency exchange has completed KYC procedures on an individual involved in a transaction, investigators can subpoena the exchange to obtain additional information about that individual, such as their identity, address, and transaction history. This information can be used to link transactions to specific individuals and potentially uncover other transactions related to the case.

Furthermore, KYC information obtained through a subpoena can be used to strengthen a case by providing evidence of an individual’s involvement in criminal activity. For instance, if an individual has falsified information during the KYC process, investigators can use this as evidence of fraudulent activity.

Blockchain analysis are the perfect crypto investigative support tools. One such tool is QLUE™, the leading blockchain investigative tool. It strengthens an investigator’s case in court by providing a clear and irrefutable record of transactions. Evidence collected in QLUE™ was used to win several two major court cases in 2022 worth $10s of millions of dollars. Learn More, visit: https://blockchaingroup.io/crypto-investigations-for-pros/