Unraveling crypto crimes through blockchain tracing
3rd September 2025
Ever since cryptocurrency moved from the margins of the financial ecosystem into the mainstream, crypto crimes have been on the rise. Today’s global crypto market is valued at $3 trillion, and news about the latest criminal activity tied to the pseudonymous digital currency is no longer the exception but the norm. As a result, crypto-related legal investigations are proliferating for fraud, ransomware attacks, money laundering, insider trading, tax evasion, and a litany of other crimes.
From large international crypto hacks to white-collar fraud, crypto crimes can be successfully unraveled through methodical blockchain tracing. With sophisticated techniques, digital forensic experts use blockchain tracing to follow the money through complex transactions, peel back layers of anonymity, and ultimately unmask the actors and their actions with tangible evidence.
Understanding how forensic investigators solve real-world crypto crimes requires a solid grasp of cryptocurrency and blockchain fundamentals as well as the most effective tracing methods and tools available.
The basics of cryptocurrency and blockchain
At a basic level, cryptocurrency is an entirely digital form of currency secured by cryptographic methods that hide identifying information. Crypto is decentralized, meaning there is no central authority, such as a government or bank, overseeing the currency. Instead of transactions being private, transactions are publicly visible and transparent on blockchain. There are some exceptions to this, but most tend to follow this pattern.
Given that users are identified by strings of numbers, not names, there is a common misconception that crypto transactions are anonymous. In reality, crypto transactions are pseudonymous, and users’ identities can often be uncovered with the right kind of tracing.
The primary differences between traditional government-issued fiat currency like the U.S. dollar and cryptocurrency are summarized below.
| Aspect | Fiat Currency | Cryptocurrency |
| Form | Physical (cash, coins) and digital | Entirely digital |
| Control | Centralized (government, banks) | Decentralized (no central authority) |
| Supply | Potentially unlimited | Limited supply (e.g., Bitcoin capped at 21 million) |
| Transaction Transparency | Transactions private, controlled by institutions | Transactions publicly visible and transparent on blockchain |
| Recordkeeping | Traditional banking systems (private) | Publicly visible blockchain |
| Anonymity | Generally not anonymous, regulated | Pseudonyms, publicly visible but identities hidden |
| Security | Dependent on institutions and regulations | Secured by cryptographic methods |
Cryptocurrency is powered by blockchain technology. Blockchain is a decentralized digital ledger that securely records transactions across many computers and makes them visible to the public. Blockchain’s most notable features are:
- Decentralization: No single entity controls the ledger.
- Transparency: Anyone can view transactions.
- Security: Information is stored in “blocks” and linked cryptographically.
- Immutability: Once recorded, data cannot be altered or deleted.
Think of blockchain as a notebook (ledger) shared openly with everyone, where each page (block) is connected to the previous page. Everyone can see each entry clearly, and once written, an entry cannot be erased or changed. These transparency and security features have generated a groundswell of trust among the general public.
Why cryptocurrency matters in today’s economy
Approximately 861 million people around the world use cryptocurrency.[i] This includes more than one in four Americans.[ii] The growth and appeal of cryptocurrency are fueled by several factors, including:
- Limited supply: Many cryptocurrencies, such as Bitcoin, have a capped total supply. This scarcity helps drive demand and can increase value over time, similar to gold and other precious resources. Others may not be limited but are controlled in some way to follow an economic model.
- Utility and functionality: Cryptocurrencies facilitate fast, secure, global transactions without intermediaries like banks. This functionality provides practical value, especially for cross-border payments and financial inclusion.
- Market demand and speculation: Like traditional currencies or commodities, cryptocurrency value is driven by supply and demand dynamics. Investor speculation and belief in future adoption or technological innovation contribute significantly to their valuation.
- Transparency and security: The blockchain technology underpinning cryptocurrencies offers unparalleled transparency and security, boosting trust and perceived value in the financial ecosystem.
- Community and network effect: A strong community supporting adoption, use, and development increases cryptocurrency’s usability and, thus, its overall value. The larger and more active the user base, the more valuable the cryptocurrency tends to become.
Key techniques for effective crypto tracing
With an extensive user base, crypto transactions generate massive amounts of blockchain data. Navigating this data and successfully tracing crypto transactions calls for skilled investigators, a keen understanding of crypto criminal behaviors and transaction patterns, and advanced technical tools.
Investigators may use various blockchain tracing techniques. Among the most common are:
- Exchange interaction analysis: Analyzing transactions at crypto exchanges where users convert traditional currency into different types of crypto coins, and vice versa, can provide critical insight that bridges the online and offline worlds. Because these exchanges have “know your customer” (KYC) regulations to verify the identities of users upfront, they can also be subpoenaed to reveal who owns a particular account.
- Address clustering: This entails spotting distinct crypto wallet addresses that regularly pool or cluster their money and send it to another account. When this happens frequently, it typically indicates that the feeder addresses are owned or controlled by the same entity, helping to connect the dots and providing pathways for further investigation.
- Common spend analysis: Similar to address clustering, common spend analysis links two or more crypto wallets together based on common, recurring transactions that fund larger accounts.
- Address reuse: When crypto addresses are reused for multiple transactions, historical transaction data that offers additional clues about a user’s activity and behavior can be investigated. The more an address is reused, the more potentially identifying information is available.
- IP correlation: It is possible, albeit difficult, in some cases to analyze network-level data and link IP addresses with specific cryptocurrency transactions or wallet addresses, potentially revealing users’ geographical locations and Internet service providers. When users access crypto exchanges, web wallets, or blockchain explorers without proper anonymization tools, they leave digital footprints that can be captured and correlated. By combining IP data with transaction timestamps and patterns, investigators can build profiles that connect online activities to real-world locations, although this method faces challenges from VPN usage, Tor networks, and other privacy-enhancing technologies.
- Dusting attack analysis: In a dusting attack, a small amount of crypto is sent to or dusted over several addresses. Often, users transfer this crypto to a larger account to consolidate their holdings, pointing investigators to additional addresses that can be tracked and analyzed.
- Suspicious pattern detection: Certain crypto transaction patterns are clear red flags that indicate a user is trying to obfuscate the money trail and confuse tracing attempts. These include peel chains, that is, the repeated splitting of funds into smaller transactions; using tumbler services that mix transaction inputs and outputs to obscure their origins; and the rapid splitting and combining of funds.
Advanced blockchain tracing tools
One of the biggest crypto tracing challenges lies in the sheer volume and complexity of blockchain data. Professional tools are the key to efficiently and effectively applying tracing techniques to this digital sea of information. These tools can visualize highly complex transaction patterns, attribute crypto addresses to offline identities, automate monitoring, and much more, allowing investigators to transform detailed data into actionable intelligence.
Key capabilities of professional crypto tracing solutions include:
- Advanced visualization and pattern recognition: There are various technologies that transform millions of blockchain transactions into intuitive visual maps and network graphs, revealing hidden connections between wallets, exchanges, and entities that would be impossible to detect manually. These tools can identify complex laundering patterns, mixing service usage, and multi-hop transaction chains.
- Attribution and entity identification: Cutting-edge software can link crypto addresses to known entities, including exchanges, darknet markets, ransomware groups, and legitimate businesses, by leveraging extensive databases. This attribution capability enables investigators to assign names and context to otherwise anonymous blockchain addresses.
- Real-time monitoring and alerts: Automating surveillance of specific addresses or transaction patterns triggers instant notifications when suspicious activities occur. This proactive monitoring helps prevent crimes in progress and enables rapid response to emerging threats.
- Risk scoring and compliance analytics: Tracing tools can automatically assess the risk level of transactions and counterparties based on their historical behavior, connections to illicit activities, and compliance with regulatory requirements. These risk assessments help organizations meet anti-money laundering (AML) and KYC obligations.
- Cross-chain analysis: As criminals increasingly use multiple blockchains to obscure their trails, this capability is crucial for tracking assets as they move between different blockchains through bridges, atomic swaps, and cross-chain protocols.
- Integration and reporting features: Select tracing tools can seamlessly connect with existing investigation platforms, case management systems, and compliance workflows while generating court-ready reports that document the entire investigative process with proper chain of custody, simplifying the management of crypto investigations.
Staying ahead of crypto crime
The crypto landscape and, in turn, the challenges of crypto tracing are constantly changing. However, as blockchain technology continues to evolve, so will the techniques used for tracing illicit activities. By continually honing tracing strategies and staying on top of the latest technological capabilities, we can ensure blockchain remains a tool for transparency and accountability—not crime.
About the author
Richard Peters is a cybersecurity and crypto asset forensic expert with over 25 years of experience in cybersecurity breaches, security posture assessments, ransomware incidents, and crypto asset investigations. He has managed, performed, and delivered information technology security solutions, including technology risk management, auditing, security assessments, compliance assessments, attack-and-penetration testing services, and security analysis for domestic and international entities in the energy, technology, medical, financial, and manufacturing industries. He specializes in penetration testing, cybersecurity breach analysis, crypto tracing, and smart contract security assessments.
[ii] https://www.security.org/digital-security/cryptocurrency-annual-consumer-report/
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