How Dark Web Monitoring is Overcoming the Challenge of Tracing Illicit Cryptocurrency Transactions

The connection between cryptocurrency and the dark web

Cryptocurrency has been associated with the dark web since the early 2010s, and is favored over more traditional payment systems like credit cards or bank transfers, due to the levels of privacy cryptocurrency offers. In 2023, $24.2 B was received by illicit addresses alone.

Bitcoin began gaining traction on the dark web around 2011, with the launch of Silk Road, an infamous online marketplace where users could buy illegal drugs, counterfeit documents, and other illicit goods. The anonymity of Bitcoin, combined with the encrypted nature of dark web transactions, made it the ideal currency for these marketplaces. By using Bitcoin, buyers and sellers could obscure their identities and reduce the risk of being tracked by law enforcement or financial institutions.

While cryptocurrency transactions are recorded on a public ledger, the users’ identities behind the transactions are hidden by complex alphanumeric addresses. This makes it more difficult to trace transactions back to specific individuals, without significant investigative effort.

As cryptocurrency gained popularity, it became the default payment method for various forms of cybercrime, including ransomware attacks, where attackers demand payment in Bitcoin or other cryptocurrencies. Over time, the use of cryptocurrencies on the dark web has evolved, with newer coins like Monero and Zcash, which offer even stronger privacy features, becoming more popular among criminals. In fact, throughout 2021, Bitcoin reigned supreme as the cryptocurrency of choice among cybercriminals, likely due to its high liquidity. But that’s changed over the last two years, with stablecoins now accounting for the majority of all illicit transaction volume.

The correlation between cryptocurrency and the dark web is rooted in the shared desire for anonymity and freedom from centralized control. While cryptocurrencies were not created for illicit activities, their attributes have made them appealing, in a part of the internet where anonymity and privacy are key.

What challenges do law enforcement face when tracing cybercriminals using cryptocurrency?

Due to the anonymity involved in both the dark web and cryptocurrency, law enforcement agencies face many challenges when tracing cybercriminals. As well as anonymity, what other challenges do law enforcement face?

Decentralization and lack of oversight

Cryptocurrencies operate on decentralized networks, meaning there is no central authority that can monitor or halt transactions. This contrasts with traditional financial systems, where banks or payment processors can be compelled to provide account details or freeze assets. With no governing body overseeing blockchain networks, law enforcement lacks a clear intermediary to target or gather information from, further complicating investigations.

Cross-border transactions

Cryptocurrency allows users to easily move funds across borders without relying on traditional financial institutions. Cybercriminals often exploit this feature to spread their operations across multiple jurisdictions, making it harder for law enforcement to track them. International cooperation between law enforcement agencies is required, but is often slow and hampered by differing legal frameworks, privacy laws, and levels of technological expertise in different countries.

Use of mixers and tumblers

Cybercriminals frequently use services known as cryptocurrency “mixers” or “tumblers” to further obfuscate their transactions. These services make potentially identifiable cryptocurrency funds with others, making it harder to trace a specific path of funds. This technique creates multiple layers of transactions and noise on the blockchain, making forensic analysis extremely time consuming and complex.

Technological expertise and resources

Investigating cryptocurrency-related crimes requires specialized knowledge and tools, which many law enforcement agencies lack. Analyzing blockchain data, decrypting communications, and using advanced software for forensic analysis can be resource-intensive. In many cases, cybercriminals are often more technologically savvy than the investigators pursuing them, giving cybercriminals an advantage in evading detection.

Overcoming the challenges of tracing cryptocurrency transactions on the dark web

Despite the challenges discussed, law enforcement has made significant strides in recent years by using advanced tools and collaborating with other agencies across the world. How can dark web monitoring help overcome the challenges law enforcement face?

Decentralization and lack of oversight

Dark web monitoring plays a vital role in helping law enforcement overcome the challenges posed by decentralization of cryptocurrency. Cryptocurrencies operate without centralized authority making it difficult for investigators to track illicit transactions and seize assets. However, dark web monitoring tools can identify patterns of criminal behavior, track wallet addresses linked to illegal activities, and pinpoint when cybercriminals use centralized services, such as cryptocurrency exchanges, to convert their digital assets into fiat currency. By monitoring conversations, transactions, and marketplace activity on the dark web, law enforcement can gather valuable intelligence that helps link decentralized cryptocurrency transactions to real-world identities.

Cross-border transactions

Dark web monitoring helps law enforcement tackle the challenges of cross-border cryptocurrency use in cybercrime by providing real-time intelligence on global illicit activities. Cryptocurrency transactions are often used to move funds across borders without the need for traditional banking, making it harder for authorities to trace and regulate. However, dark web monitoring can track international marketplaces, forums, and communication channels where cybercriminals discuss or execute cross-border activities, revealing connections between actors in different jurisdictions, This intelligence can be used to identify the flow of cryptocurrency across borders and pinpoint specific wallets or services being used to facilitate these transactions.

Use of mixers and tumblers

Dark web monitoring can help law enforcement address the challenges posed by cryptocurrency mixers and tumblers, which are used by cybercriminals to obscure the origin of illicit funds, making it difficult for authorities to trace the source or destination of illegal activities. By monitoring dark web forums, marketplaces, and communication channels, law enforcement can identify when and where mixers and tumblers are being discussed or promoted. This information can provide valuable leads on the specific services or techniques criminals are using to launder funds, helping investigators target these operations more effectively.

Combining this intelligence with blockchain analysis, law enforcement can map out how funds are moving through these services and identify potential vulnerabilities or points where criminals interact with more traceable platforms, such as exchanges.

Technological expertise and resources

Law enforcement can leverage dark web monitoring to compensate for technological limitations and resource constraints when tracing cryptocurrency used on the dark web. Dark web monitoring tools automatically allow law enforcement agencies to view illicit marketplaces, forums, and communication platforms for signs of illegal activity involving cryptocurrency. By automating much of the intelligence-gathering process, these tools reduce the need for manual oversight and allow law enforcement to identify key trends, wallets, and services linked to criminal activity. This not only saves time but also provides law enforcement with actionable intelligence, even if they lack specialized personnel or resources to conduct deep blockchain analysis on their own.

Examples of law enforcement tracing cryptocurrency to cybercriminal gangs

Silk Road takedown

One of the earliest and most famous cases involving the successful tracing of cryptocurrency was the shutdown of Silk Road, a marketplace that facilitated the sale of illegal drugs, weapons, and other contraband, primarily using Bitcoin. The FBI was able to trace transactions on the Bitcoin blockchain, following the trail of cryptocurrency used for payments on the platform. Eventually, they linked transactions to Ross Ulbricht, the creator and operator of Silk Road, who was arrested and convicted.

Colonial Pipeline ransomware attack

In one of the most significant ransomware attacks in recent years, the DarkSide ransomware gang targeted the Colonial Pipeline, disrupting fuel supplies in the U.S. The attackers demanded a ransom of 75 Bitcoin (roughly $4.3 million at the time), which the company paid. However, law enforcement agencies, including the FBI, were able to trace the Bitcoin transactions using blockchain analysis tools. This led to the recovery of about $2.3 million of the ransom by tracking the movement of the cryptocurrency to wallets that were eventually linked to the attackers.

Hydra Marketplace takedown

Hydra, one of the largest dark web marketplaces for illicit goods and services, primarily used cryptocurrency for transactions. Law enforcement agencies, including German authorities and U.S. investigators, conducted a multi-year investigation that combined blockchain analysis with dark web monitoring. This allowed them to trace cryptocurrency payments back to the administrators and sellers operating on Hydra. The operation led to the seizure of cryptocurrency wallets containing millions of dollars and the shutdown of the marketplace.

Using dark web monitoring to trace cryptocurrency on the dark web

Dark web monitoring plays a crucial role in tracing cryptocurrency transactions on illicit marketplaces by identifying suspicious activities, tracking wallet addresses, and mapping transaction flows. By monitoring dark web forums and marketplaces, law enforcement can gather intelligence on emerging threats, identify key players, and trace cryptocurrency transactions back to real-world individuals or groups, aiding agency efforts to combat cybercrime.