Forensic Accounting and Cryptocurrencies

Apr 3rd 2017
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Credit: Jason Benjamin; Flickr [Public Domain CC0]

The advent of the bitcoin heralded an era of digital finances and cryptocurrencies that are difficult to trace or track. During the height of the Silk Road (an online black-market), it seemed as if bitcoin could be used to purchase or sell nearly anything without repercussions. Guns, drugs, and all manner of illegal substances were sold regularly to the highest bidder.

Bitcoin was touted as practically anonymous and capable of keeping less than reputable financial transactions away from prying eyes. The Silk Road’s cryptomarket naturally caught police attention, but the secrecy of the currency put law enforcement agencies in a bind. It was difficult to find any sellers or ringleaders until they knew what they were looking for from the forensics side of cryptocurrency.

You see, cryptocurrency can be discreet, but it also creates a trail that forensic accountants and digital investigators can follow and use to identify you. There are many users and advocates both past and present who chose bitcoin for the level of privacy it affords. Bitcoin is not exactly untraceable, but it is designed to protect the privacy of users, though it still produces a data trail that investigators can follow.

If these investigators can connect specific transactions that are publicly recorded in the bitcoin blockchain to sales on black markets, then they can follow these back to the original sellers. In the darknet, buyers and sellers trade goods and services in exchange for bitcoins. Investigators searched the blockchain to discover who paid what to whom and found others to verify their transactions and narrow down the search.

The ultimate goal is to uncover the IP addresses of sellers, because from there, it's a stone’s throw to identifying the seller themselves. The public ledger of the blockchain is the most important piece of the puzzle. The true identity of any particular bitcoin owner is not revealed and is instead associated with the code that acts something like an online signature.

Bitcoin mining is where things really start to get interesting and is a unique aspect of digital currency. Bitcoins are ‘minted’ through this mining process where volunteers verify each transaction in the blockchain using specialized computers that can complete complex math. When a miner finishes verifying a block of transactions, they are rewarded with a specified amount of bitcoins. Unless you are a miner, the only way to get bitcoins is from someone else who already has some.

Investigators eventually discovered that sometimes computers engaged in transactions only send information to the blockchain about a single transaction, indicating that this transaction 'belongs' to that specific address. In this way, investigators are capable of tracking the untraceable to identify sellers. Bringing down the rest of the Silk Road was simply a matter of catching simple mistakes.

Law enforcement caught the creator of the Silk Road, Ross Ulbricht, because he sloppily used an old pseudonym that was then traced to him. In a San Francisco internet cafe, the FBI caught him in the act of logging into his administrator account on the Silk Road. Ulbricht is now serving a life sentence for facilitating the sale of $1 billion in illegal drugs.

The Silk Road itself became defunct, yet the bitcoin remains a popular currency among Insurance Tech startups and privacy advocates. Cryptocurrency is here to stay and continues to redefine the way banks and citizens across the globe define ‘money.’ The trail that led to the end of the Silk Road started and ended with the blockchain and forensic accounting.

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