What Web3 and the blockchain revolution mean for law enforcement

Most of today’s Internet, known as Web2, is owned by corporations. They control the majority of the websites, data and profits. However, many experts believe that blockchain is enabling a revolution towards Web3: a decentralized internet owned by individuals and user communities, where they control their data, content, privacy and profits.

While this sounds like utopia to content creators and grassroots investors, it also creates an opportunity for criminals and terrorists to exploit an unregulated, anonymous, and decentralized landscape. Despite the recent volatility in the cryptocurrency market, which has caused numerous cryptocurrencies to fall in value sharply, most experts agree that blockchain technologies and cryptocurrencies are here to stay and mainstream adoption will continue to grow. Here’s what law enforcement and security organizations need to know to protect the public.

What is the blockchain?

Web3’s underlying technology is the blockchain, a distributed public ledger that records information, including cryptocurrency transactions, non-fungible tokens (NFTs), and smart contracts. Information is managed using a network of decentralized nodes that require consensus to add new records.

Every blockchain transaction and associated metadata is recorded in the public ledger, with the information being publicly available but the identities of the transaction providers being anonymous. The anonymous and unregulated nature of the blockchain and the applications of its technologies invite a variety of illegal activities.

Cryptocurrencies: enabling crime

The first applications implemented on the blockchain were cryptocurrencies like Bitcoin, Bitcoin Cash and Ethereum. These monetary alternatives leveraged the key features of the blockchain to create an alternative to standard financial systems: a currency that is decentralized, fast, global, and pseudo-anonymous.

Crypto is now being exploited by illegal actors in a variety of ways: as a way to sell and trade illicit goods on dark marketplaces, as a method of money laundering, as a way to fund terror campaigns, and as a means of payment for ransomware campaigns. This is just the tip of the iceberg of known illegal cryptocurrency-based activities.

NFTs: A new money laundering tool

An example of a non-fungible item is a baseball card with a unique serial number and value that cannot be replaced. This differs from a fungible or exchangeable item such as a B. a one euro coin, which can be replaced by another one euro coin with no difference in parameters such as value or appearance.

An NFT is a unique token that represents ownership of a digital asset and is verified by blockchain technology. While cryptocurrency might be analogous to fiat currency, an NFT is like a title deed. Instead of a home registered with a municipality’s land registry, an NFT is a digital asset registered on the decentralized blockchain.

NFTs are commonly used in money laundering, such as wash trading, where one party or conspiring parties buy and sell an asset to manipulate the market or launder money. Due to the pseudo-anonymous nature of the blockchain, one can use multiple wallets to make a transaction appear to be between multiple parties. This tactic is popular in money laundering because the same person or company can create an NFT and sell it to themselves, declaring the funds legal.

The next step: Web3

Today’s Internet is centralized, with the vast majority of data and servers owned by large technology companies. Web3 is the decentralized evolution of the internet that uses blockchain technology to enable applications, platforms, data and more. A decentralized internet is effectively “owned” by the users themselves and is fueled by the natural integration of cryptocurrencies and NFTs into every platform and application, such as Decentralized Applications (Dapps), Decentralized Autonomous Organizations (DAOs) and Metaverses are facilitated.

Decentralized Applications: An anonymous way of doing business

Dapps are applications that run on the blockchain instead of on centralized servers. Today’s standard apps are enterprise-owned, with data and servers controlled by a single entity. Dapps are open source, decentralized and use blockchain technology to validate the data and actions.

An example of a type of Dapp can be a crowdfunding application that takes advantage of decentralized features. In this case, the Dapp offers an anonymous and trusted way to donate money and track funds without centralized control.

In today’s Web2 world, donations are generally made through non-profit organizations that are registered with local government agencies, maintain bank accounts and report donations on tax returns, or through crowdfunding websites such as GoFundMe, which are operated by private companies. Bad actors like terrorist organizations that seek to hijack donations in a traditional setting may have to orchestrate fake bank accounts, shell companies and money laundering operations, or be forced to work exclusively with cash. Working within a decentralized application structure is a faster and less risky way to raise funds anonymously.

Decentralized Autonomous Organizations: Automation of Illegal Activities

A DAO consists of a set of rules built on top of the blockchain. It is member-owned, with no centralized leadership or hierarchy. Automated organizational decisions are made through smart contracts and token-based voting.

DAOs can be legitimate companies, like venture fund Metacartel, which uses automated rules to pool funds, vote on investments, and distribute proceeds to members. DAOs can also be used for illegal activities like illegal gambling. In this case, a DAO can have embedded rules that allow anonymous users to buy tokens and place bets, and the DAO can automatically distribute winnings and associated fees. These activities can be carried out worldwide without oversight from regulators and on users’ smartphones.

Metaverse: A new forum for crime

The Metaverse is a virtual world made possible by virtual and augmented reality. Essentially, it is a set of decentralized and interconnected open-source platforms built on top of the blockchain and deploying ecosystems based on cryptocurrencies and NFTs to facilitate trade and ownership. Such ownership may be independent of corporations or larger entities. This new framework can create entirely new crime waves, such as B. Ransomware attacks on individuals to lock or steal personal data, NFTs, cryptocurrencies or accounts.

summary

As applications of blockchain technology become more mainstream, they continue to be exploited by criminals, requiring proactive actions by law enforcement and security organizations. While bad actors can benefit from the anonymous and decentralized nature of these technologies, law enforcement agencies can use the open ledger and public data of the blockchain to follow the money trail and uncover suspicious transactions – if they are armed with advanced blockchain analysis technologies to help them The blockchain helps to monitor, detect illegal activities and de-anonymize bad actors.

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