As an investigative tool, blockchain is a godsend. Essentially, it provides a transparent, immutable window into the inner workings of complex transactional environments, allowing authorities to uncover in moments what used to take months to ascertain.
To do this, however, they need access to the chain. Many blockchains are public, which gives virtually anyone the means to view them. But it stands to reason that those with something to hide will use private chains, where access is restricted to a finite number of participants.
This is no different from standard records management, of course, which often (but not always) requires a warrant before law enforcement can seize ledgers and other documents as evidence in either civil or criminal cases. But should there be special rules for distributed ledger technology (DLT)? And should those rules be more or less restrictive regarding seizure and examination, particularly when the transactions cross national boundaries?
The crypto world is certainly not immune to crime. A recent report from Chainanalysis claims the value of illicit blockchain activity topped $20 billion last year, and this is only the known activity uncovered by investigators. The actual amount could be much higher, as in 2021 when the number jumped from $14 billion to $18 billion as new scams were uncovered.
The increased illicit activity in 2022 is also noteworthy because it came when the overall volume of crypto transactions fell. Nearly half of the unlawful exchanges came from sanctioned actors, like Russia’s Guarantee exchange, and overall, this activity increased a stunning 100,000-fold compared to the year earlier.
Bill Callahan, a former financial special agent with the U.S. Department of Justice and now director of government and strategic affairs at the Blockchain Intelligence Group, says the need for robust investigation into blockchain-related activity will accelerate regardless of whether crypto valuations rise or fall. Global regulatory agencies, after all, are responsible for stopping not only the rising tide of fraud surrounding cybercurrencies, NTFs, and other digital assets but also cyberattacks, cross-border money laundering, and even drug and human trafficking.
Regional, state, and local law enforcement will become increasingly involved in this effort as well and will need a low-cost means of accessing complex financial structures that are designed to confuse and deflect outsiders. Blockchain offers the means to do that at low cost and relative ease.
But are there lines in the law’s use of blockchain that should not be crossed? Last month, a U.S. judge ordered the activation of an internal enforcement tool on a blockchain called Jurat to freeze the accounts of several Russian and North Korean participants who were sanctioned for money laundering and ransomware schemes designed to purchase weapons for North Korea.
Few Westerners may shed a tear over the fate of Russian and North Korean criminals, but some purists were nonetheless shocked that this could happen on a decentralized chain. However, Jurat CEO Mike Kanovitz argues that such mechanisms bring much-needed due process to blockchain, which is essential for mainstream adoption.
“Some of the people who currently think that there should not be effective law enforcement on-chain would feel differently if they got hacked, defrauded, or lost their private keys,” he said to Cointelegraph. “Then they would be relieved that they can recover their property.”
Skirting the Courts
What might prove even more controversial is a proposal by the Biden administration that could potentially allow the U.S. government to access blockchains and even seize crypto and other assets without a criminal conviction or even charges. A recent article in Forbes describes efforts by U.S. Attorney General Merrick Garland to update civil and criminal forfeiture laws so that current administrative or “nonjudicial” seizures can be more easily applied to digitized assets.
These types of seizures have long drawn the ire of civil libertarians and other groups because they allow the seizing authority, not a judge, to determine if property should be taken. At the moment, there is a cap of $500,000 on this practice, but the DoJ wants to remove that altogether.
Forbes says current administrative forfeitures comprise 80 percent of all DoJ seizures and 96 percent of those performed by the Treasury Department. And since the forfeitures are administered under the authority of a single agency, all appeals must go through that agency, which rejects them in about a third of all cases.
The conflict between the rights of citizens to be safe and secure from government intrusion versus the government’s need to fight crime is as old as civilization itself. Blockchain, and digital technology in general, do not change this argument – it just moves it to a new playing field.
Ideally, rules of law, including the issuance of warrants and the right to due process, should apply to all privatized assets, including digital ones. But given the speed and scope at which digital ledgers enable the transfer of those assets, some may argue that it’s better to be safe than sorry by giving law enforcement a little leeway – for the moment, at least.
This can be a slippery slope, however. If the history of governmental bureaucracy is any guide, it tends to be eager to acquire power and loathe to give it up.
As Benjamin Franklin once said: “Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”