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Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.

We’re ending 2023 not far from where we started the year: The gridlock in D.C. continues, with lawmakers still debating the efficacy of blockchain technology.

The perpetual joke is that besides speculation, the best use case for crypto is money laundering. In a year defined by criminal trials and historic settlements, the punch line doesn’t seem too far from the truth, especially as legislation addressing illicit finance and terrorism funding has moved to the front of the queue. There’s a flip side, however: Crypto is great for law enforcement.

A new survey from analytics firm TRM Labs found that 2023 was a golden year for agencies dedicated to busting crypto crime. According to the report—which polled respondents at state, federal, and international law enforcement agencies who had worked on at least one criminal case involving crypto in the past year—blockchain tracing has become as commonplace as drug-sniffing dogs.

The trend seems like yet another ironic truth for an industry, once predicated on an ethos of decentralization, that is now eagerly awaiting the approval of a BlackRock-sponsored Bitcoin ETF. As laid out in one of the best recent crypto books, Andy Greenberg’s Tracers in the Dark, the public and immutable nature of cryptocurrencies makes them easier for law enforcement agents to track than cash. They just have to know how to look—a function eagerly offered by a growing crop of firms like TRM Labs, Chainalysis, and Elliptic, whose goals often seem in tension with their more ideological counterparts in the DeFi space.

Respondents to the TRM Labs survey estimated that more than 40% of offenses investigated by their agencies involved cryptocurrency, with the number expected to rise to 51% by 2027. While the figure is skewed by the methodology, which biases toward respondents who had worked on at least one crypto-related case, it still reflects that blockchain tech has become a key nexus in finance—maybe not for everyday use, but certainly for criminal activity. Everyone from low-level drug dealers to state-sponsored hacking groups turns to crypto, with the survey finding that crypto cases involved money laundering, fraud, phishing, and tax evasion, with an average of $295,000 in stolen funds per individual case. It’s not surprising that lawmakers want to make illicit financing a top priority.

Even if an anti–money laundering law does not pass, politicians can be assuaged by the fact that law enforcement agencies are catching on. Over half of U.S. agencies polled were working with blockchain analytics tools, although 61% said they did not have sufficient technology to match the threat of crypto criminals, and 99% said they needed more training.

Besides Bitcoin ETFs, blockchain analytics is one of the few clear applications for crypto going into 2024. The money hasn’t quite caught up. According to data from intelligence firm Caplight, secondary shares for Chainalysis are still trading at a steep 70% haircut relative to its last valuation. But as Sen. Elizabeth Warren (D-Mass.) pointed out in a letter to the trade group Blockchain Association this week, the revolving door between law enforcement and crypto firms is always swinging open. Crypto crime fighting is a lucrative business.

Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz

DECENTRALIZED NEWS

A cybersecurity expert argues that the Ledger hack could have been prevented with higher industry standards. (Fortune)

Sen. Elizabeth Warren (D-Mass.) ramped up her attack on the crypto industry with a letter calling out the revolving door between government officials and digital asset firms. (Politico)

The Bahamas wing of FTX reached a deal with its U.S. counterpart, potentially streamlining a way for assets to be redistributed to creditors. (CoinDesk)

The Bitcoin mining firm Marathon Digital is expanding its capacity by acquiring two facilities in Texas and Nebraska. (Blockworks)

The Office of the New York Attorney General and the Department of Financial Services are headed to a high-profile political showdown over the future of crypto regulation. (Fortune)