What an FBI Section Chief Has Learned Investigating Virtual Currencies

Aaron Tapp, Section Chief of the Financial Crimes Unit of the FBI

At this year’s virtual 2021 ACFE Government Anti-Fraud Summit, attendees walked away with a wealth of knowledge on fighting fraud in law enforcement and government agencies. The opening keynote address was given by Aaron Tapp, section chief of the financial crimes section of the FBI. Tapp’s position grants him the unique ability to oversee all of the FBI’s financial crimes programs — and his past experience as a special agent connected him with agents around the globe to detect, disrupt and prosecute those who fund terrorism.

During the downfall of Silk Road in 2013, Tapp was approached by his son, Adam, who at the time was 13 years old, looking to invest in bitcoin. After careful consideration, he instructed his son to make a safe investment elsewhere. While Tapp kicks himself now over not taking his son’s advice, he still supports the importance of speculation and understanding in where you place your investments. He encounters virtual currency more often in his line of work now, and during his keynote address he shared his knowledge and experience in investigations involving cryptocurrencies.

Depth of crypto crime activity

According to a 2018 study, around $76 billion in illegal activity per year involves bitcoin, making up 46% of all bitcoin transactions. To put this into scale, that is close to the size of the U.S. and European markets for illegal drugs. Tapp mentioned how the ever-evolving threat landscape has benefited from the complexity of cryptocurrency investigations.

Investigative process

Tapp explained that the investigative process in cryptocurrency fraud cases is similar to that of cases involving traditional currency — investigators just need to utilize different tools. While fraudsters rely on the anonymity of crypto, blockchain technology provides all transactions to be publicly viewable. Investigators can use analytical software to follow the transactions, but the catch is that the crypto user will need to use an exchange or somewhere where investigators can serve legal process.

Future of cryptocurrency

Looking forward, we can expect to see cryptocurrency frauds continue to evolve to negate anti-fraud efforts. Over the counter trades, or OTC trades, are conducted through brokers for sellers and buyers who don’t want to interact over an open exchange — thus allowing more privacy. It is believed that a majority of cryptocurrency transactions are facilitated through OTC desks. Tapp also made note of decentralized currencies, which are commonly used for lending, exchanging and storing wealth.

Decentralized currencies take the responsibility that would normally be on central authority and places it on the users mutually — meaning there is no entity that law enforcement can serve legal process. Flash lending enables users to take uncollateralized loans, which is often used for arbitrage, collateral swapping and wash trading.

With this in mind, Tapp spoke about the changes already occurring to combat virtual currency fraud. Within the FBI, there has been the formation of the Virtual Currency Response Team, Virtual Currency Evolving Threats Team, and a dedication to collaboration and innovation.

Tapp closed out his address by reminding attendees to continue using resources like trainings and communities from the ACFE, and to not be afraid of investigating virtual currencies.