Blockchain analytics has been key in helping the United States Internal Revenue Service (IRS) seize an estimated $10 billion worth of cryptocurrency since it began investigating a wide range of digital asset crimes.
This was the key point raised by IRS Criminal Investigations (IRS-CI) Chief Jim Lee in an extensive, exclusive interview with Cointelegraph in Amsterdam. Lee was one of many delegates from public and private institutions to share knowledge and insights at the Blockchain analytics firm’s Links conference held in the Netherlands.
Lee, along with the IRS-CI cohort, looked at how the law enforcement agency has tackled the use of cryptocurrency and digital assets in a wide range of financial crimes under its purview.
Commander Lee has served as a special agent with the IRS for 28 years, and as of 2020, is the head of this unit. they end up on their agents’ desks to varying degrees.
Related: The IRS is preparing for an increase in cryptocurrency cases in the upcoming tax season
The IRS’ relationship with the cryptocurrency space began in earnest in the early 2010s, when Bitcoin (BTC) began to proliferate in the monetary system as an alternative, decentralized way to store and transfer value.
As Lee explained, efforts by the IRS to build an infrastructure to combat identity theft around 2011 thwarted his efforts to launch an investigation into digital money crimes:
“When cryptocurrency came out, we were already thinking about digital crime and money routes using Web2.”
However, an organization’s ability to understand, investigate, and ultimately pursue and seize cryptocurrencies and digital assets has become dependent on tools developed by private institutions.
IRS-CI is one of hundreds of law enforcement and government agencies that use a specific set of blockchain analytics tools developed by Chainalysis. The company was founded in 2014 and has become a pillar of blockchain-based investigations around the world over the past decade.
For the IRS, the partnership with Chainalysis has become invaluable, with Lee stressing that his unit’s efforts to investigate cryptocurrency crimes would be nearly “impossible” without the infrastructure and tools he now has access to. The public-private partnership with Chainalysis is based on investing in technology that can help track cryptocurrencies and manipulate data from public blockchains to darknet markets.
“Think of all the data I have working for the IRS. Maybe not the richest, but the richest. Now I can take all the other data we have and then match it with the records I have. I mean, it’s just incredibly powerful, but it takes time, energy, and money.”
Even with the tools, Lee admits that investigating crimes involving digital assets is a difficult endeavor. Investing in people, data and technology has been central to its efforts to fight cryptocurrency crime:
“When we talk about the crypto space, the way I look at it is a combination of data and technology. It requires significant investment because you simply cannot get results like this. You can’t just take over $10 billion worth of money.”
While the market value of seized cryptocurrency in IRS vaults has dropped from an estimated $10 billion at the time of the seizure, the institution still has to figure out how to securely store billions of dollars in digital assets.
It’s a complex issue for the head of the IRS-CI, who draws attention to the simple issues of cryptocurrency storage, which become increasingly stressful when dealing with huge sums of digital value:
“Where should I store it? On a chain or without a chain? Do I keep it in my office? Do I close source phrases elsewhere? We’re talking big money.”
IRS-CI investigations have been fruitful, and the department has often become the largest contributor to the U.S. Treasury’s asset forfeiture fund in recent years. The $3.6 billion seizure related to the Bitfinex hack in 2016 is a prime example of Lee’s unit efforts to track down the stolen funds.
Related: IRS Reminds Taxpayers to Report Cryptocurrency Income Before Filing in 2022
Another key part of IRS CI’s mandate is to share knowledge and skills in the use of tools such as the Chainalysis Reactor with local and international law enforcement agencies, primarily to support financial crime investigations.
As part of Lee’s visit to Europe in May 2023, he facilitated the training of more than 60 different Ukrainian officials from various law enforcement agencies. The IRS-CI has also provided Ukrainian law enforcement with Chainalysis Reactor licenses that will help facilitate blockchain and cryptocurrency tracking in the ongoing Russian-Ukrainian conflict.
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