TLDR: Crypto forensics is the act of analyzing public blockchain data to solve investigations. Companies that specialize in crypto forensics assist individuals and companies by combing through data, identifying the origins of crypto transactions and creating detailed reports that law enforcement can use to track down scammers. Some even consider blockchain forensics teams to be "unsung heroes."
The crypto space has often been referred to as the “wild west” by investors, degens and the SEC. It's considered a land of opportunity among outlaws and quick-draw shooters looking to make a quick buck. The slogan “DYOR” or “do your own research” is passed from one person to the next like strong bourbon in an old saloon.
Now, imagine you’re new to cryptocurrencies. You haven’t been around to witness the crypto scams of the past like OneCoin or BitConnect. You aren’t aware of the history of digital money and why ownership has been a founding pillar of the crypto movement. All you know is that you want to make some money, so when an ad pops up online saying you can make a 15% return on investment, you jump on it. Only, the business is far from legitimate and instead of making money, you lose it, all of it.
That’s what happened to Stephen Carr, a Canadian resident who watched a YouTube video promising large returns on trading cryptocurrencies. He had initially invested $250, followed by an additional $2,500. When his funds seemed to be growing he asked for a withdrawal of $1,000 which was approved. After trust in the platform was formed, he invested $498,000 over a period of four months.
“What I didn’t know at the time is this trading platform I was on was a simulation,” Carr told CTV news. “It wasn’t connected to anything, like a flight simulator that’s not connected to a real airplane.”
If crypto is like the wild west, then those who work in crypto forensics are the sheriffs here to help people recover their lost funds.
Crypto forensics is the act of analyzing public blockchain data to solve investigations. Although there are private blockchains, most in use today are public, including perhaps the most famous, Bitcoin.
Crypto forensic investigators are people who analyze and decipher transactions made across public blockchains in order to locate wallet addresses used and obtain a record of events. They then create a detailed forensic report that includes visualizations that can be used by law enforcement. Many investigators will work with law enforcement to help track down victim funds and begin the process of potentially seeking some form of justice.
“I conduct blockchain investigations like exit scams, hacks, frauds, thefts, ransomware, embezzlement and civil disputes,” says Paul Sibenik, the lead case manager of Cipherblade a blockchain forensics company.
One high-profile example of crypto forensics took place in June 2021, when the U.S. Federal Bureau of Investigation (FBI) recovered $2.3 million in bitcoin paid in ransom to DarkSide, a cybercriminal hacking group that conducted a ransomware attack on Colonial Pipeline. According to CNBC, FBI Deputy Director Paul Abbate said agents pinpointed the crypto wallet used by the hackers to receive Colonial Pipeline's payment.
Crypto crime doesn't only happen on a massive scale, as in the Colonial Pipeline example. Unfortunately, it can happen to individual consumers as well. There are many types of crypto scams and new ones roll across the dusty digital plains all the time. If you’re going to be a crypto pioneer, you’re going to have to stay vigilant. Here are some of the most common scams to date.
Fake traders, investment managers, or platforms convince you to invest your money with them for a return. They assure you that your crypto is better kept with them until you realize they’ve run away with it.
Crypto wallets are hacked through seed phrase breaches usually involving a phishing scam. Once the scammer has access to your wallet, they remove the funds or transfer ownership of other digital assets to themselves.
Scammers will gain access to your mobile phone by contacting the phone company and having them activate a SIM card that they possess, essentially granting them access to your device. Once they have the access they will take any assets including those stored on your mobile crypto wallet.
Scammers will impersonate someone else while getting you to trust and develop feelings for them. Once you do they will pull all sorts of tricks to get you to part with your funds. One of the most common is money for a plane ticket so that they can visit you, only something always happens and you never end up meeting face to face.
“I’ve seen cases where a founder of an exchange runs off with the money,” says Sibenik. “They leave everyone else in the dark including sometimes their own employees.” This scam usually happens with crypto projects and exchanges that issue tokens to investors or promise to keep tokens for holders on a platform. Instead of fulfilling their promises, these projects simply vanish along with their social media presence. Some will claim to have been hacked or sold, resulting in holders losing their funds.
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If you find yourself a victim of a crypto scam there are steps you can take. It’s important to remember that most scammers count on you staying quiet. Fraud Hunters Canada, a group created by individuals who had been victims themselves and now work with authorities to help other victims of fraud, suggests seven initial steps.
If possible, you can also work with crypto forensics companies like Cipherblade. When seeking assistance look for a reputable company, review their past work history, and don’t be afraid to interview them in person or via video call.
Keeping your funds in a cold wallet, a crypto wallet that is not connected to the internet or your mobile phone and resembles a USB stick is necessary. A cold wallet is the only place where you truly own your funds. You should therefore only keep a small portion of your total crypto holdings on an exchange, even widely trusted ones.
“An exchange is a custodial account, meaning you don’t control the funds in your account,” says Sibenik. “If an exchange decides they’re no longer going to grant you the balance of a given coin because they’re not supporting it anymore, they can do that, and you don’t have a lot of recourse outside of potential litigation.”
Do not share your seed phrase, the twelve randomly generate words given to you when opening your wallet, to anyone at any time. Your seed phrase provides instant access to all of your cryptocurrency and other digital assets. Keep it as you would one of your most protected secrets!
Don’t click on any suspicious links and be critical of any emails that seem off. Phishing scams happen when a scammer sends a malicious link; once clicked, the scammer gains access to your device. Be mindful of this when navigating any crypto Discord channels, Telegram groups or even new Twitter profiles.
Crypto forensics is a new and growing field. Many professionals enter the field through niche programs such as those offered by Chainalysis where they learn to trace, track, and analyze data while working with authorities to solve crypto-related crimes. As the crypto space grows so will the field of investigators looking to assist those who have been scammed — and the wild west might not be so wild anymore.
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Carlee is a content writer and copywriter working in the Web3 space. Connect with her on Twitter @carlee_writes
This article and all the information in it does not constitute financial advice. If you don’t want to invest money or time in Web3, you don’t have to. As always: Do your own research.