The topic of blockchain forensics is expanding quickly and has many uses in the contemporary digital economy, which is fuelled by decentralised finance (DeFi). Blockchain forensics is the process of identifying and tracking down individuals and organisations involved in illicit conduct, as well as extracting and analysing data from the blockchain, such as transactions, addresses, and other data, using specific tools and processes.

What is blockchain forensics?

The cryptographic algorithms that form the foundation of blockchain technology shield data from unwanted access. A distinct cryptographic hash is present in every block of the chain, connecting it to the one before it and forming a chain of blocks. Blockchain can keep an accurate and unbroken record of transactions or information because of its tamper-resistant nature.

Analysing blockchain data to look into illegal actions including fraud, money laundering, and financing terrorism is known as blockchain forensics. Investigators can track the movement of money and find suspicious activity, illegal transactions, and criminals with the aid of blockchain forensics tools. Investigating and proving facts in criminal or civil courts is the last step in blockchain forensics.

Why do we need blockchain forensics?

The fact that about 74% of agencies believe they are ill-prepared to conduct crypto investigations is one of the main worries. The goal of blockchain forensics is to solve the problems caused by illegal activity with cryptocurrency. It entails examining blockchain data to find trends, track transactions, and compile proof for court cases. Investigators can discover fraudulent operations by using analytical tools to link seemingly unrelated transactions and unearth hidden traces. The Treasury Designating Leaders and Financial Facilitators of ISIS and al-Qa’ida Cells in the Maldives are among the most recent instances of this.

The Role of securities in blockchain forensics?

Among the many benefits of blockchain technology are improved security, lower operating costs, more efficiency, and higher openness. Blockchain’s decentralised structure makes it possible for peer-to-peer transactions to happen more quickly and directly by doing away with the need for middlemen.

But despite all of its benefits, blockchain technology has drawbacks as well. Scalability is still a major issue since the increasing number of transactions could affect the network’s performance and speed. Concerns that require consideration include interoperability problems, regulatory ambiguity, and possible environmental effects of energy-intensive mining operations.

Difficulties faced by law enforcement regarding blockchain forensics

Although blockchain forensics provides strong instruments for looking into crimes involving cryptocurrencies, it also poses difficulties for law enforcement. Investigations may become more difficult due to the absence of standardised protocols and different blockchain systems. Furthermore, tracking criminal activity is made more difficult by the quick development of cryptocurrencies and the rise of privacy-focused coins.

1. The invisibility and namelessness

Users frequently don’t need to divulge personal information in blockchain transactions. Instead, cryptographic addresses are used to identify users. Because of this anonymity or pseudonymity, it may be difficult for law enforcement to track down anyone engaged in illicit transactions or money laundering. Since all cryptocurrency exchanges are required to have strong anti-money laundering (AML) procedures, this has recently become a major problem for digital asset service providers, providing financial crime investigators even more reasons to be upset.

2. Vacuumed Central Authority

A distributed ledger system without a central authority powers blockchain technology. Since the blockchain network is decentralised and not governed by a single institution, it is challenging for law enforcement to subpoena or freeze assets.

3. Encrypted Transactions

The identity and activities of users are further protected by the encryption of many blockchain transactions. Investigators may need a lot of time and resources to decode encrypted data.

4. International Jurisdiction

Because blockchain transactions transcend national borders, it is difficult for law enforcement to enforce rules in different jurisdictions. This feature makes it simple for criminals to avoid being discovered and prosecuted.

5. Mixing Services and Tumbling 

In bitcoin transactions, criminals might conceal the source of payments by using tumblers or mixing services. Because these services combine several transactions, it is more difficult for investigators to track down the money trail.

6. Limited Investigative Tools

Blockchain data analysis may be beyond the capabilities of conventional forensic instruments. To efficiently explore blockchain networks and obtain pertinent data for investigations, specialised knowledge and equipment are needed.

7. Data Privacy and Protection

In order to conduct investigations, law enforcement must strike a balance between protecting user privacy and following data protection laws and the requirement to access blockchain data.