Cryptocurrencies have transformed the financial landscape, disrupting traditional banking systems. As their adoption grows, so do the challenges associated with them. This article explores how the intersection of crypto investigations and artificial intelligence (AI) is a major step against illicit activities.

Understanding Cryptocurrency

What Is Cryptocurrency?

Cryptocurrencies are digital currencies that leverage blockchain technology for pseudonymity, transparency, security, and decentralization. While not widely adopted for everyday transactions, they attract attention and investment.

Fundamental concepts

Blockchain: Cryptocurrencies operate on a public ledger named blockchain. This ledger records all crypto transactions in a secure and immutable manner, imprinting trust on the data.
Decentralisation: Cryptocurrencies are neither issued by the Government nor a central bank. Instead, they rely on a network of computers and cryptographic techniques to verify and record transactions. The bigger the network the more secure it becomes.
Digital Assets: Unlike traditional money, cryptocurrencies have no tangible form, they exist purely in digital format.

Crypto Investigations

What Is a Crypto Investigation?

Cryptocurrency investigation is about tracing digital asset movement and connecting virtual ownership with a real-world identity. For simplicity, let us assume we are dealing with illicit activity.

Transaction Analysis: By analysing the flow of funds, an investigator aims for two main goals: to confirm the illicit activity and to detect where the funds are consolidated.
Address Identification: The investigator works to discover which address contains the stolen or illicit funds. Because criminals also evolve their techniques, the number of addresses used is becoming incredibly high, a way to hide and mask the real flow.
Entity association: During the investigation, several addresses can be identified as strong candidates for further investigation. By giving the address a risk factor, the investigator can determine the importance of it. For example, if an address is part of the fund’s flow and belongs to a real-world entity, like an Exchange, there is a good chance to unmask its owner.
Owner Unmasking: After an address is identified as a strong lead, it is time to try to obtain the identity of the wallet owner. Using a combination of Know Your Customer (KYC) data and Open-Source Intelligence (OSINT), the investigator tries to unmask the owner of a cryptocurrency address.

Challenges in Crypto Investigations

As VALEGA Chain Analytics CTO I am well aware of the challenges. We are always improving our tools, to be able to deliver premium service to customers and to guarantee that our investigation department delivers the best outcome possible.

There is a colossal amount of money invested in cryptocurrencies and this enables criminals to perfect their craft. With time investigations are becoming more complex and in some cases, even impossible to deliver a good conclusion. It is a true fight between good and evil.

Data volume: Long are the days when it was possible to trace funds by hand. Not only are the blockchains themselves constantly growing and evolving (DeFi platforms for example), criminals are using techniques to increase the size of the funds flow, as a way to obfuscate their actions. Without the use of specialized tools, it is nearly impossible to perform a quality investigation.
Data quality: As we saw previously, a crucial step is to link the digital to the real world. During an investigation, several addresses are identified and each address belongs to a wallet. That wallet may be linked to a real-world entity, like an Exchange. To be able to link the two worlds, the investigator needs to use systems that keep track of entities and their wallets.
Pseudonymity and Privacy: Cryptocurrencies offer pseudonymity, allowing users to transact without revealing their real identities. While privacy is beneficial, it poses challenges in terms of investigation. Only with the right tools it is possible to relate an address/wallet to an entity and then reach that entity to enquire about KYC data and obtain a real-world identity. A common practice is for users to obscure their funds by using a crypto mixer/tumbler service. It is a paid service that allows users to convert potentially tainted funds into clean addresses. Due to the nature of the operation, it becomes extremely hard, if not impossible to trace. Keep in mind that the use of this kind of service is not illegal and not everyone has evil intent, but it is heavily used by criminals.

Role of Artificial Intelligence (AI)

What Is AI?

AI refers to the simulation of human intelligence in machines and being able to execute tasks associated with intelligent beings. These tasks include reasoning, discovering meaning, generalizing, and learning from experience.

To fully understand the concept of AI, it is essential to consider the nature of intelligence itself. While all but the simplest human behaviours are attributed to intelligence, even intricate insect behaviour, for example, is not necessarily seen as a sign of intelligence but a way of instinctual nature.

Tasks such as speech recognition, decision-making, and pattern identification are perfect AI examples that have already achieved perfection.

AI in Crypto Investigations

Artificial Intelligence plays a crucial role in enhancing crypto investigations by streamlining processes, improving accuracy, and addressing complex challenges.

Data Analysis: AI processes vast amounts of data quickly. The ability to identify patterns and detect anomalies is important. Criminals are always evolving and creating new ways to hide their actions. AI helps to validate enormous fund flows and identify transaction patterns, like peel chains, for example, and it allows the detection of unknown entities. Certain entities, like Exchanges of DeFi platforms, create an easily identifiable transaction pattern, so even if we don’t know what real-world company it is, digitally we can move accordingly.
Risk Assessment and Fraud Detection: Whenever an address is tainted, a Ponzi scheme for example, the risk assessment system starts to identify the address as dangerous. By clustering, we can also know other addresses associated with the main one, improving risk detection. But let us imagine that the criminal mind behind the Ponzi decides to create a fresh wallet with fresh addresses. It can take a while for the new addresses to be reported. AI can be trained to flag suspicious patterns and allow the detection of fraud as early as possible. This is also called Predictive Modeling.
Natural Language Processing: NLP enables machines to understand and generate human language. Crypto investigations require tools, like the ones created by VALEGA Chain Analytics, able to process blockchain data, generate an address/wallet risk assessment and identify entities like Exchanges, DeFi, Mining pools, etc. It is easy to understand that, every day, new data is available on the Internet. Instead of having people gather data, an error-prone tedious task,, modern systems use NLP to analyze text data from forums, social media, news articles, reporting platforms, etc.

Conclusion

Within the dynamic field of digital forensics, artificial intelligence presents itself as a formidable ally. Three important factors emerge when we probe deeper into the field of crypto investigations: natural language processing, pattern recognition, and data volume processing

Data Volume: Cryptocurrency transactions generate an immense volume of data. Traditional investigative methods struggle to keep pace. AI, however, thrives on data. It can sift through vast datasets, identifying anomalies, tracing patterns, and revealing hidden connections that might otherwise remain concealed.
Pattern Identification: Investigating crypto-related activities demands a keen eye for patterns. AI algorithms excel at recognizing recurring behaviours, irregularities, and trends. By training on historical data, they learn to distinguish legitimate transactions from suspicious ones
Natural language processing: Being able to extract valuable data from the Internet and increasing the data quality of the tools used by Investigators, AI is actively contributing to a favourable investigation outcome.

In summary, AI revolutionises crypto investigations by taming data, illuminating patterns, and decoding language. As we embrace this symbiotic relationship between technology and investigation, the future holds promise, a world where AI-driven insights safeguard our digital assets and unmask illicit activities.