Discussion on the Anonymity of Virtual Money Transactions: How Law Enforcement Tracks Fund Flows and Locates Suspects

During the interrogation of a virtual money pyramid scheme case, the suspect Zhang asked the investigating police with confusion: "This project was indeed organized and planned by me, but I want to know how you found the mastermind behind it? As I understand it, you shouldn't be able to find me, so what exactly did you rely on?"

Such questions are not uncommon in criminal cases involving black and gray industries and Virtual Money. Many parties often ask: "At that time, I was abroad, and my superior was also abroad. We usually communicated using instant messaging software and also used the self-destruct feature. Isn't Virtual Money trading anonymous? How could law enforcement catch me?"

Today we will discuss how law enforcement agencies track the transaction process of virtual money and identify the identities of criminal suspects in criminal cases related to virtual money.

Is Virtual Money trading really anonymous?

Virtual Money, as one of the applications of blockchain technology, has advantages such as decentralization, privacy protection, lower transaction costs, and high returns. However, due to its certain degree of Anonymity, it is often exploited by criminals as a tool for money laundering and gray and black market transactions.

In fact, virtual money is not completely anonymous. The transaction process is public on the blockchain, but the addresses are not directly linked to identities. Moreover, virtual money trading platforms must comply with "Know Your Customer" ( KYC ) and Anti-Money Laundering ( AML ) regulations, which makes it easier for law enforcement to track transactions on the blockchain.

Due to the public and immutable ledger behind virtual money, the collection of evidence for virtual money transactions is actually relatively easy for law enforcement agencies.

How do law enforcement agencies trace coin flows and identify suspects?

As law enforcement agencies deepen their understanding of Virtual Money, their capabilities in on-chain data tracking and data analysis are also continually improving. Here are several common tracking methods:

1. On-chain Address Association Analysis

By analyzing transaction patterns through a blockchain explorer, common inputs and fund aggregation patterns between addresses can be identified. For example, if multiple addresses frequently transfer to the same target address, it can be inferred that the same entity controls them.

In cases of virtual money pyramid scheme crimes and illegal gambling, this analytical method is often used. For example, in the aforementioned virtual coin pyramid scheme case, law enforcement discovered that the pyramid scheme platform generated multiple addresses through digital wallets to pool funds, ultimately directing the funds to a main address and withdrawing them through a trading platform. By analyzing the transaction frequency and scale of these addresses, the key perpetrators were identified.

2. Exchange Platform KYC Verification

Currently, most mainstream Virtual Money trading platforms and digital wallet platforms have publicly announced their policies and special channels for cooperating with law enforcement.

Law enforcement officers can send a letter of assistance to the trading platform via email, requesting the registration information, facial photos, financial management information, deposit and withdrawal coin transactions, wallet addresses for various coins, fiat currency transactions, coin-to-coin transactions, contract transactions, login IP, MAC, and other device information of the suspect.

In addition, the trading platform will also freeze the virtual money in the suspect's account at the request of law enforcement agencies, with the freezing period usually being one year, but it can be applied for renewal.

3. Transaction Fee (Gas Fee) and Transaction Hash Tracking

Every virtual money transaction requires payment of Gas fees. When tracing the wallet address that the suspect received the illicit funds, it is possible to trace the record of the suspect purchasing Gas fees from the trading platform.

In virtual money transactions, the transaction hash ensures the uniqueness and immutability of the transaction. The transaction hash allows you to view transaction details, including the sender's address, the receiver's address, the transaction amount, transaction fees, and more.

Law enforcement will provide the Gas fee transaction records and transaction hash to the virtual money trading platform to obtain the suspect's KYC information (such as passport, ID card, email, phone number, etc.).

4. Device fingerprint and IP association

Law enforcement can associate the operational behavior of multiple addresses through the login IP and device ID (such as phone IMEI, MAC address) of the trading platform or wallet, thereby locking onto the target.

5. Cross-chain Exchange and Coin Mixing Solution

Many suspects mistakenly believe that they can better conceal their identity through cross-chain transactions or by using mixers, but that is not the case.

Cross-chain tracking: By using the transaction hash of cross-chain bridges (such as Bitcoin → Ethereum), the transfer path of funds can be tracked.

Mixed Coin Analysis: Using on-chain fingerprinting techniques (such as transaction time and amount patterns) can identify the input and output addresses of a mixer.

6. International Cooperation and Stablecoin Freezing

For stablecoins like USDT, law enforcement can request the issuer to freeze funds at the involved address. At the same time, international law enforcement cooperation can also be conducted.

For example, in a cross-border online gambling case involving a total of 400 billion, law enforcement agencies coordinated with virtual money issuance institutions and successfully froze the related virtual money accounts.

7. Trace back from the final withdrawal flow

Due to the fact that Virtual Money cannot be directly used for daily consumption in most countries, there is always an outlet for black and gray market transactions, which is to exchange Virtual Money for fiat currency. Therefore, individuals who assist in exchanging for fiat currency have become a breakthrough point in tracing the identities of upstream criminals.

8. Abnormal transactions trigger risk control

Similar to traditional financial systems, there are also risk control mechanisms in the Web3 world. Frequent quick in and out trades may trigger the risk control system of the trading platform and be marked as suspicious addresses.

Conclusion

Some lawbreakers mistakenly believe that virtual money transactions are completely anonymous, or that cross-border transactions are difficult to investigate and gather evidence, and therefore engage in black and gray market transactions without restraint. However, this kind of complacency will ultimately lead them into deeper trouble.

The continuous advancement of law enforcement technology has made tracking virtual money transactions increasingly easier. For those who break the law, the wisest choice is to repent in a timely manner, rather than seeking more covert means of crime.