A commonly held stereotype has long been that cryptocurrency and crypto exchanges are
A case in point is Coinbase, which held a Law Enforcement Summit last week in Washington, D.C., in which the cryptocurrency exchange shared some of the ways it is collaborating with law enforcement to ensure online financial safety. The
John Kothanek, vice president for global intelligence at Coinbase, spoke with American Banker about what the company has been doing to catch and deter crime.
Kothanek has led Coinbase's global intelligence team for over a decade and spent the last 25 years working to investigate cyber crimes, beginning at PayPal. Prior to that he served in the U.S. Marine Corps. Coinbase's global intelligence team may be small, with less than ten employees, but it processes upwards of 5,000 law enforcement requests each year.
Illicit activity represented 0.14% of all crypto transactions, according to a recent
Coinbase launched the Tech Against Scams Coalition in May of last year alongside other major companies including Meta, Kraken, Ripple, Gemini, Match Group which includes Tinder and Hinge, and the Global Anti-Scam Organization. The conglomerate shares intel on trending online fraud and financial schemes.
"At the end of the day, we want to protect our customers. We want to help protect the infrastructure, the financial systems in every country that we work in," Kothanek said. "So, the more that we can kind of get together with [law enforcement], have face to face meetings – we talk to them every day on the phone and through web conferences – but it's always better in person. We wanted to show them a couple of case studies and some pretty cool cases that we've worked with law enforcement over the last year, actually, the last six months."
In one example, prisoners in Georgia were using crypto and other methods to sell marijuana. Coinbase investigators recognized this was happening and turned information over to law enforcement. The case included law enforcement officers from the department of corrections who don't traditionally work crypto cases.
"It was an opportunity for us to help them learn how," Kothanek said "We have been focused on helping law enforcement with fentanyl sprints and trying to help them track down the flows of this stuff. One of the great parts of Coinbase is we're able to help law enforcement, even if [the incident wasn't] necessarily transacted on Coinbase, we've got a lot of knowledge to share. So we help law enforcement just on the greater kind of crypto issues and stuff."
The rest of the interview has been edited for length and clarity.
How receptive has law enforcement been? Are they interested in working with you?
JOHN KOTHANEK: Yeah, absolutely. I helped start PayPal many years ago, and basically did the same thing – ramped up an investigative group to help them with financial crime transactions and stuff like that. And back then, they were a bunch of old guys like me, number-two pencil kind of folks where they didn't really know that much about tech, so the idea of being able to send money with an email address was foreign. Fast forward a little bit to 2014 when I joined Coinbase, we had the same challenges.
There was a little bit of a tech deficit, but one of the things I was really happy to see was that a lot of the younger agents were very technically proficient. They were hungry to learn this kind of stuff. For the 11 years that I've been at Coinbase, we've had a great partnership with them. We've helped them on many, many cases, but probably the best thing about it for us is that law enforcement trusts us, and they trust the information that they get from us and where that comes in handy for our customers.
We talk about being able to follow transactions on the blockchain, but sometimes mistakes are made. Someone's crypto address may be pulled into a case that it should not be there. So when we look at it, and we say, 'Hey, this address is not part of that. This customer is not doing these things' – that helps our customers in a big way. If our customers lose money, we're able to help them track it down. We've had great success recovering funds for our customers and for people who have been victimized through crypto. That's always a really big win for us.
I like that you brought up your experience at PayPal. There are a lot of people – both in law enforcement and not – that don't fully understand crypto still.
Kothanek: It goes back to my very first week at Coinbase. There were only a few people at the company, with Brian [Armstrong] and Fred [Ehrsam], the two founders, included in that. We had a lot of discussions and at the time, Fred and Brian were filing suspicious activity reports. I've been doing tech investigations into financial crimes for 25 years. I don't know of any other CEO or founders that have been filing SARs. I mean, they were on top of it in the early days, and it was very clear to me that they were.
I was still working for another company. I wasn't looking for another job. I was helping the compliance officer set some stuff up because she was a friend of mine. And I was drawn to just the enthusiasm of how they wanted to protect their customers and help protect the financial services industry. The whole way we move money around the world is affected by this. When they offered me the job and said, 'Hey, would you like to come on board,' I couldn't pass it up, because it was exactly what I wanted to do. When I first met with Elon and Peter Thiel and David Sachs and all those folks in the early days of PayPal, I said, 'I want people like my mother to be safe online. I want kids to be safe online. And I want to be able to help kind of make that a reality for people.' And so just just listening to Brian and Fred and how enthusiastic they were about that kind of stuff – I just couldn't pass it up.
What are some things that law enforcement want to learn from your team?
Kothanek: If you look at the entire law enforcement community, one of the things I'm really proud of is they've got all these task forces all over the place, and it may not be a crypto-focused task force, but it will be something that touches crypto at some point. They're hungry to learn, because they're smart, they're go-getters. They really want to get the job done. So they bring us in, and we help educate them on crypto. One of the great points of this team is we have the time to research and learn. We can study the bridging, and all the new tactics, and then we can pass that on to law enforcement to help them out. I think that's one of the things that they come to us for.
One of the favorite things that we do across the team is working with local law enforcement. The feds have good budgets, sometimes the states have pretty good budgets for this kind of stuff, but local law enforcement doesn't, and they're the ones where Pam or John, are coming into the office and they're victims of a crime, and they're they're looking for a remedy, or they're looking for help, and local law enforcement wants to be able to do that. We're really happy and proud to be able to kind of give them the tools to and and teach them how. And so they walk away now as the subject matter expert for their division.
How often do you hear questions about how to track transactions?
Kothanek: Law enforcement wants to be accurate. They want to gather fact-based evidence and not make assumptions – the typical investigative stuff. They really want to learn how crypto goes from point A to point B, how it's converted, how it's moved, the tactics used. We know that some groups around the world will hold digital assets in a wallet for a long time. They're very patient. They're willing to sit there and let them just sit there for a while and wait for the attention to go away from it. Law enforcement is interested in learning those tactics from us and it's very helpful for them.
Could talk a little bit broadly about how you handle investigations?
Kothanek: So, very broadly: I put what my team does in two different buckets. One is the reactive side. We will get a subpoena from law enforcement. We review it to ensure that it abides by the legal process and there's some probable cause and all that good stuff, and we will start the investigation on our side with that. A lot of times, we will find a kernel of truth in there. We'll find related accounts, or we'll find something that is a little bit bigger than law enforcement may have originally happened. What we do is we will notify law enforcement, or we'll just produce the records that they ask for. It doesn't always link to something bigger, but sometimes it does, and we're happy to let them know.
The other side that we do is proactive. The team spends a lot of time – I'm very proud of what they do, we call them sprints – the team will sit there for a few days, and that's all they concentrate on is a typology – drug sales, any typology – and they'll focus on that. We will work with our law enforcement partners. We'll notify them before we do the sprint that we're working on it. A lot of times they're sitting by their phones waiting for us to call, and we can say, 'Hey, New York City, we've got this case that you might be interested in,' and they're happy to get that information from us.
So, we do the proactive side of it. We spend time looking on the dark net markets. We spend time looking around, just looking at transactions. We're pretty nerdy, and we like that kind of stuff. It's very intellectually stimulating because it's all so very, very new. And that for me, it's what I like to work on. In the early days of PayPal, moving money around the world electronically as an individual was unheard of. It was mostly only wealthy people who were moving money around the world with wires. Bob wasn't. But now, with that technology, he could. I think that grander vision and that grander ability to move money is really stimulating for us.
From what you say, it seems like law enforcement is eager to learn these new tactics. How do you convince people who recognize that it's a big deal but maybe think the technical aspects are over their heads?
Kothanek: We just step back and go through it on a basic level with them. I'm not the brightest guy on the face of the earth. My team is very bright, and they are very good at it. So, sometimes they'll put me on the phone with them, and I'll sit down and kind of go through the knucklehead marine way of doing things, and they're very receptive to it. Through that they can eventually become subject matter experts. When you're on that task force or that agency, and you're working your way through things, you become that subject matter expert. And, now, Special Agent Jane Smith is now the person that they go to for the help on these things, and that helps their career. So there's a lot of law enforcement who are very interested in learning more.
One of the touts of blockchain technology and cryptocurrency is how global it is. How does that affect your view?
Kothanek: This is kind of a personal crusade of mine. If you look at financial crimes and computer crimes around the world right now, and it's been this way for quite a while, it's an international issue. A group that normally would work by itself out of Nigeria is now working with somebody out of some other country, and they're crossing borders and they're cooperating. We need to set up a world where law enforcement is able to kind of share information, share knowledge and where financial institutions are able to do that kind of stuff too. There's the 314(b) process where banks can ask about terrorism financing and money laundering, but what we would love to see is we've come up with some ways that we can anonymize data. So it's not giving a bank specific information that they can identify a specific customer, but now we can take that information we give them and apply it to a typology and start looking for it. We're not violating anyone's privacy, all we're doing is protecting our customers, our shared customers, a little bit better. The same thing goes with law enforcement: they need the ability to be able to go out and take on these cases. It's getting better, but I think we're at times a little bit slower than the criminals.
Ultimately what are you hoping comes from this collaboration?
Kothanek: I want them to understand that we are here to support their efforts, because we ultimately want the best thing for good people and to definitely help protect good people. If they walk away from the conference saying, 'Hey, Coinbase is the company that's helping us do that,' that's great. It's really important that law enforcement and the private sector start working together to make a better system for the client, for the customer, for the average citizen.
