While digital currencies — Bitcoin or one of its many variations — continue to make inroads into payments markets, many companies, financial institutions, government bodies and others are still playing catch-up.
With increased momentum in the adoption of digital currencies, people are scouring information sources to amass knowledge of cryptocurrency, blockchain technology and “smart” contracts for the lucrative opportunities they may present.
Meanwhile, others are focused on unearthing the risks and vulnerabilities of this new world where it seems funds can be stealthily moved around the globe, largely flying below the radar of regulators and law-enforcement.
In a paradoxical system of transaction anonymity and transparency, participants of digital currency transactions are offered a means to transact outside of the bounds of regulated financial systems and with apparent ease and speed. Payment transactions between parties are made using pseudonyms which represent each party’s “address” in a blockchain, identified as a long string of alphanumeric characters and which may be likened to a bank account number.
These transactions are recorded, irreversibly, in a blockchain or distributed ledger, which can be viewed by anyone with access to the network. So, while the transactions remain visible, they are in principle anonymous. That is, until an address is matched to an identity.
In contrast to the old “brown paper bag” payment scenario, there are additional layers of complexity to navigate with an illicit payment situation involving digital currency. However, investigations are about putting together pieces of a puzzle, and many of those pieces reside in the information systems that individuals and companies are connected to and leave imprints on, which are outside of blockchains.
For example, in the case of the brown paper bag payment, it may be emails, chat messages or accounting records that give away the name of the hotel at which the exchange was made, or an employee expense report that connects the employee to the hotel bar on that date. In the digital currency scenario, it might be the one email that includes a blockchain address to which a bribe payment should be sent, or the seemingly unconnected reference on a chat service to “payment in Bitcoin” that helps connect the dots and reveal an identity.
As digital currencies and associated systems continue to evolve, so too will our analysis and investigative techniques. Before making any radical changes, let’s start by making sure digital currency transactions raise a red flag in the same way as for cash. That way we will be poised to pick out the prime pieces of information to slot together.
Emma Hodges, pictured above, is partner at FRA. She’s an experienced forensic and investigative accountant and is included in this year’s GIR 40 under 40. She has performed in-country compliance reviews and investigations in over 15 countries across a range of industries, including oil and gas, mining, manufacturing, engineering, infrastructure, and banking. She can be contacted here.