Tracers in the Dark: An Inside Look into Cracking Crypto's Biggest Cases

This week, TRM was joined at the National Law Enforcement Museum in Washington, D.C., by a panel of experts - former United States Attorney, and partner at Skadden Arps, Jessie K. Liu, Federal Magistrate Judge for the District of Columbia Zia Faruqui, Former IRS-CI special agent and TRM’s head of global investigations Chris Janczweski, and author Andy Greenberg to discuss Mr. Greenberg’s acclaimed book, Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency.

The book is a riveting account of some of the biggest cases in cryptocurrency-related financial crime — Silk Road, AlphaBay, BTC-E, Mt. Gox exchange, Welcome to Video — but it is unique in that it tells the story from the perspective of law enforcement, particularly the IRS-CI’s key role in investigating these cases by quite literally following the money to the doorsteps of criminals who believed they were hiding behind the perceived anonymity of cryptocurrencies.

The power of collaboration in investigations 

Tracers in the Dark focuses on the IRS-CI’s pivotal role in cracking some of the most prominent cryptocurrency related cases. Over the last several years, the small but mighty IRS Criminal Investigations (IRS-CI) team, the criminal investigative piece of the larger IRS tax apparatus, has been leading the way in many of the cryptocurrency-related investigations that have been in the headlines.

“It was just so perfect in a way that IRS-CI would be the central agency [in this case] because this is a follow the money story” said Mr. Greenberg. “But IRS-CI agents also do exciting physical work that is the kind of cinematic like raids and surveillance and the street level work that is exciting to read about in a book.”

But, IRS-CI has definitely not been alone. A major theme of the panel was the importance of interagency - and international - cooperation. As blockchains enable cross border value transfer at the speed of the internet, it is more important than ever to bring together diverse expertise, training, and experience. The cases in Mr. Greenberg’s book were made by agents from across the country - HSI in Colorado Springs, IRS-CI in Michigan, FBI in Chicago, and prosecutors like Judge Faruqui and Ms. Liu in Washington, D.C. During the discussion, Judge Faruqui focused on the importance of the need for great teams, with a diversity of background and experience, dedicated to a mission.

“We had a team of different genders, race, national origin. It was this really diverse group of people, and we represented the United States.” Judge Faruqui continued, “We worked on this incredibly high profile, impactful, meaningful case, and we got to do it on behalf of our country. It really is humbling, and it was just an extraordinary experience to get that kind of trust from Jessie and the Department of justice as well as other colleagues.”

Welcome to Video: The takedown of a marketplace for child exploitation

One of the most impactful cases featured in the book was the Welcome to Video case, a takedown of a darknet site featuring child exploitation materials. 

This investigation showcased the critical international agency collaboration needed to crack a complex case. Specifically, on March 5, 2018, agents from the IRS-CI, homeland security investigations (HSI), the U.K.’s National Crime Agency (NCA), and Korean National Police arrested the administrator of the site — a 23-year-old South Korean national — and seized the server that he used to operate the darknet market that exclusively advertised child sexual exploitation videos available for download by members of the site. The operation resulted in the seizure of approximately eight terabytes of child sexual exploitation videos - the largest such seizure of its kind.

The images contained over 250,000 unique videos, and 45 percent of the videos currently analyzed contain new images that have not been previously known to exist. Most importantly, the operation resulted in the arrest of 337 site users across the globe and saved dozens of children from abuse.

As panelist Jessie Liu — the U.S. Attorney who presided over many of the biggest cryptocurrency-related investigations — said at the time the case was announced, “Children around the world are safer because of the actions taken by U.S. and foreign law enforcement to prosecute this case and recover funds for victims.”

On the panel, Ms. Liu, now a partner at Skadden Arps, explained that the most rewarding thing about cryptocurrency investigations is the real world impact. “Welcome to Video is a prime example. The case not only involved cryptocurrency by also a couple of dozen children who were rescued from hands-on abuse ”

“Follow the money” - from darknet markets to terrorist financiers, North Korean cybercriminals to hackers

Welcome to Video was not the only big case chronicled in Tracers in the Dark. A team - of investigators from across the interagency - including IRS-CI - traced stolen funds from the 2016 Bitfinex hack leading to arrests and a $3.6 billion seizure - the largest in U.S. history. In addition to the Bitfinex haul, IRS-CI was involved in two other crypto seizures worth over a billion dollars - both related to illicit activity on original darknet marketplace Silk Road - bringing it’s total seizures to around $6 billion. To provide perspective $6 billion amounts to the world's 148th largest GDP or the GDP of Seychelles, Belize, and Aruba combined.

What is also noteworthy is the diversity of cases and agencies involved. Cryptocurrency tracing has led to arrests, prosecutions, and seizures in cases involving North Korea cybercriminals, terrorist financiers, operators of darknet cryptocurrency mixers, darknet market administrators, and two colorful characters in New York City who allegedly laundered the funds from the Bitfinex hack.

But all these cases have one thing in common - they are built by following the money. As Judge Faruqui explained, referring to Welcome to Video, “We’re going to treat this case like we would any other,” he said. “We are going to investigate this by following the money.”

And it was this very concept of following the money to solve these crimes that inspired Mr. Greenberg to write Tracers in the Dark. As Mr. Greenberg explained, “In 2020 I began to see the Department of Justice using cryptocurrency tracing in its cases and I started to see that I had been not just a little wrong about this, but, like, fully wrong. Not only was it traceable, but that traceability had turned out to be this incredibly powerful tool. And as I started to look into this . . . I saw that there was actually a small group of detectives who had together really taken on these cryptocurrency tracing cases and just made one massive bust after another.”

💡 TRM Insights: Tracing into the future

If Mr. Greenberg explores the early days of cryptocurrency investigations, the logical question is what comes next. Even since Mr. Greenberg finished writing Tracers, we have seen arrests in the Bitfinex case, the collapse of crypto exchange FTX, the takedown of darknet market Hydra, and many other cases. As Ms. Liu explained, “We have seen one big crypto case after another. And it I think the reason for that is because crypto has become so much more mainstream and it's become so much more integrated into our financial system.”

Tracers explores the work of a small cadre of agents and investigators armed with mostly self taught skills and new and innovative tools. But, as cryptocurrencies gain mainstream adoption, crypto will be used as the means of payment in myriad criminal cases meaning the tools, training and expertise will need to be commonplace among investigators of every crime. Because, as the old saying goes, “every crime is a financial crime.”

That starts with education. 

As Judge Faruqui explained, “The takeaway from the book for me is education. Andy's skill is to take this very dense material and make it really concrete and make it so that people can be educated. Judges, regulators, policymakers, they need to understand [the importance of education on these topics]  so that they can make sound decisions not based on a misperception. ”

At TRM our mission is to build a safer financial system. To that end, our goal is to educate and provide next generation tools needed to unlock these investigations. For more insights from these experts, check out the TRM talks below.

•TRM Talks: Cryptocurrency Investigations with Judge Zia Faruqui and Chris Janczewski

•TRM Talks: DOJ Cryptocurrency Enforcement framework with Jessie K. Liu