How the IRS seized $10B worth of crypto using blockchain analytics

Blockchain analysis 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 broad body of crimes involving digital assets.

This was a key point raised by IRS Criminal Investigations (IRS-CI) Chief Jim Lee in a wide-ranging, exclusive interview with Cointelegraph in Amsterdam. Lee was among a variety of delegates from public and private institutions sharing knowledge and insights at blockchain analytics firm Chainalysis’ Links conference held in the Netherlands.

Lee, alongwith with a cohort from the IRS-CI, gave an inside look at how the enforcement agency has tackled the use of cryptocurrency and digital assets in a wide variety of financial crimes that fall under its purview.

Chief Lee has served as a special agent with the IRS for 28 years and has been at the helm of the unit since 2020. In the years leading up to his tenure, the IRS-CI has found an increasing amount of criminal investigations involving digital assets in varying degrees land on the desks of its agents.

The IRS’ relationship with the cryptocurrency space began in earnest in the early 2010s as Bitcoin (BTC) began to proliferate its way into the monetary system as an alternative, decentralized means of holding and transferring value.

As Lee explained, the IRS’ efforts to build infrastructure to combat identity theft around 2011 preempted its effort to begin investigating crimes involving digital money:

“When cryptocurrency came into the picture, we were already thinking about digital crimes and money trails using Web2.”

However, the organization’s ability to understand, investigate and eventually prosecute and seize cryptocurrencies and digital assets became dependent on tools developed by private institutions.

The IRS-CI is one of hundreds of law enforcement and government agencies that make use of a specific suite of blockchain analysis tools that have been developed by Chainalysis. The company was established in 2014 and has become a lynchpin for 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 crypto-related crimes would be near ‘impossible’ without the infrastructure and tools it now has access to. The public-private partnership with Chainalysis hinges on investing in technology that can help trace crypto and manipulate data from public blockchains to darknet marketplaces.

“Think about all the data that I have working for the IRS. It may not be the most, but it’s the richest. Now I can take all this other data we have and then match it up against the records that I have. I mean, it’s just incredibly powerful, but it takes time, energy and money.”

Even with the tools at its disposal, Lee admits that investigating crimes involving digital assets is a difficult undertaking. Investing in people, data and technology has been key in its efforts to combat crypto-related crime:

“When we’re talking about the crypto space, the way I look at it is data and technology combined. It takes significant investment because you can’t just get those results. You can’t just seize $10 billion in value.”

While the market value of seized cryptocurrency in the IRS’ vaults has dropped in value from an estimated $10 billion at seizure, the institution still has to figure out how to safely hold billions of dollars of digital assets.

It’s a complex issue for the IRS-CI Chief, who highlights simple considerations for cryptocurrency custody which becomes increasingly stressful when dealing with huge sums of digitized value:

“Where do I store it? On chain or off chain? Do I keep it in my office? Do I lock up the seed phrases elsewhere? We’re talking about a lot of money.”

The IRS-CI investigations have been fruitful, with the department frequently becoming the largest contributor to the U.S. Treasury asset forfeiture fund in recent years. The seizure of $3.6 billion involved in the 2016 Bitfinex hack is a prime example of the efforts of Lee’s unit to track down stolen funds.

Another key part of the IRS CI’s mandate is sharing knowledge and skills to use tools like Chainalysis Reactor with local and international crime enforcement, which is chiefly aimed at powering financial crime investigations.

Part of Lee’s visit to Europe in May 2023 was to facilitate the training of over 60 different Ukrainian officials from a variety of law enforcement agencies. IRS-CI also donated Chainalysis Reactor licenses to Ukrainian law enforcement, which will help facilitate blockchain and cryptocurrency tracing amid the ongoing Russian-Ukrainian conflict.

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