Investigators and Compliance Officers Need to Understand Cryptocurrency

January 9, 2023

Being an investigator or compliance officer often requires you to learn about new products, technologies and fraud exploits arising from them.  Virtual currencies and blockchain technology may not be new but they are becoming more mainstream and ubiquitous.  At the same time, there is heightened regulatory and law enforcement attention being paid to cryptocurrency exchanges, traders, issuers, mixers and other businesses involved in cryptocurrency transactions. The public’s first introduction into crypto wasn’t necessarily what it’s inventors had in mind when hackers and other criminal organizations gravitated to it as a way of securing payment for the sale of contraband on the dark web or receiving ransomware payments. The recent implosion of FTX,  Office of Foreign Assets Control (OFAC) actions against Tornado Cash, Garantex, darknet marketplace Hydra and the New York State Department of Financial Services’ (NYS DFS) recent imposition of a record fine against Coinbase only served to reinforce the negative stigma surrounding cryptocurrency. But just like paper currency, cryptocurrency is neither good nor bad. It is just an alternative means of exchanging value and it is here to stay.  It is therefore very important for investigative, compliance and legal professionals to know the basics.

Blockchain Technology

Blockchain technology is necessary in order for virtual currency to exist and to be exchanged. It acts as a type of electronic ledger keeping track of all transactions that are made from peer to peer.  Blockchain enables transactions to occur without relying on a central clearing framework such as those needed in conventional monetary transactions. Blockchain can be used to transfer virtual currency, settle trades and validate other types of transactions.


Cryptocurrency is a virtual currency that is an alternative to paper currency as a medium of exchange.  It is created and stored electronically using blockchain technology.  The term “crypto” is derived from the fact that virtual currencies are created using cryptographic technology to authenticate transactions and algorithms to establish and control the monetary units. Popular types of cryptocurrencies include Bitcoin, Ethereum and Tether.  It only exists in digital form.

How Cryptocurrency is Used in Transactions

A typical cryptocurrency transaction works like this.  An individual requests a virtual currency transaction. The request is then transmitted to a peer-to-peer network of computers. The network then validates the transaction using known algorithms identifiable with the currency being transacted. This validation process can be used to securely transact and confirm other types of transaction such as contracts, business records or to validate votes cast in an election. Once validated, the transaction becomes verified.  After it is verified, the transaction details are then combined with other records to create a “block” of data which is then recorded in the blockchain’s permanent and unalterable ledger.  This then completes the transaction.

Blockchain’s Other Potential Uses

Blockchain technology has potential uses and advantages that go well beyond the exchange of virtual currency.  It promises to provide a more transparent way to transact and verify parties to a transaction. It allows for more accurate tracking including the creation of a permanent and unalterable ledger of the transaction. Over the long term, it is believed that the widespread adoption of blockchain technology will lower transactional costs. One way blockchain is being explored is to improve intercompany business processes take place.  Blockchain’s ability to use known algorithms could reduce the costs of identify management and verification in completing trusted transactions.

One way to look at blockchain technology is to think of it as a type of business process improvement software. It is a collaborative technology that can improve the business processes that occur between companies and significantly reduce the cost of completing trusted transactions. By lowering the costs of completing recurring transactions requiring validation, the technology may yield higher returns than some more traditional internal technology investments. Another way that blockchain could drive efficiencies and lower costs is if financial institutions begin utilizing it as a means of clearing transactions and settling broker-dealer trades.

While the legal and regulatory frameworks that govern cryptocurrency are still evolving, it is incumbent on investigators, compliance officers and attorneys in regulatory and litigation practice to keep abreast of the various ways that cryptocurrencies and blockchain technology is being used both in legitimate business transactions as well as how money launderers, fraudsters and cybercriminals are exploiting them in the furtherance of their criminal endeavors.

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