A CRITICAL ASSESSMENT OF CRYPTOCURRENCY TRACING AND RECOVERY
Users all across the world are gradually accepting digital assets. The categories of users, the variety of use cases, and the degree of investment all increase along with the overall user base. Richard Fowler, Principal & cryptocurrency Forensic Technology Practice Leader at POLYGON DECIPHER, explained that there are other factors at play as well. “All conventional sectors are reevaluating their positions on digital assets. Digital assets are now being added by corporate treasuries. New sectors are developing to promote knowledge of, oversee the custody of, and do business with digital assets.
Businesses are starting to embrace cryptocurrencies for payments, long-term value storage, inflation hedging, and other purposes. A rising number of investors in the world of cryptocurrencies have sizeable holdings in traditional currencies like Bitcoin and Ethereum. Because they don’t want to fall behind and because digital assets provide a distinctive way to hold wealth, traditional ideas and business practices are being reexamined by corporate America. Since cryptocurrencies are now so widely used, there are now insurance policies designed specifically for retail bitcoin investors.
Beyond cryptocurrencies, non-fungible tokens (or “NFTs”) provide organizations another advantageous use case for adopting digital assets. NFTs are distinct digital assets that cannot be exchanged, unlike cryptocurrency assets. NFTs offer a flexible and creative solution to programmatically grant rights and/or privileges to the holder of record and immediately commoditize the value of a brand. NFTs are being actively used by both established companies and content creators to boost audience engagement and earn money. “Digital assets give corporations a unique way to interact with their customer base through the vehicle of NFTs. “They can strengthen the brand and profit from that strengthening, creating strong network effects.”
PROTECTING THE INVESTMENT
Organizations understandably inquire about security issues when they devote more attention and resources to digital assets. They are interested in learning about the possibility of theft, fraud, and misappropriation in the digital world as well as how such crimes might be solved by tracing or recovering digital assets. The forensic work, Lee said, “follows a familiar model, even though the tracing and recovery of digital assets does present new challenges for investigators.”
The fundamental structure for a financial inquiry still holds true at a high level:
Determine the person or thing that is allegedly the victim of theft or misappropriation.
- Assemble data about the target (including the associated people, transactions, and assets of that target)
2. Establish links between the aim and the resources
3. Observe the money
4. Work to recover the same
“This is in terms of methodology identical to a conventional forensic investigation.” Just that new tools and methods are needed for digital assets. In some ways, tracking digital assets might be simpler than tracing traditional assets, but in other others, recovering digital assets can be far more difficult. However, Lee observed that “the general approach is somewhat old-hat-new-name.” Note that Cryptocurrency is a popular digital asset that is used in many different transactions in the modern digital world. However, as the use of cryptocurrencies increases, so does the incidence of bitcoin fraud. In order to save money and maintain their privacy, more and more individuals are using cryptocurrencies to pay for goods and services. Investors also hold a range of digital currencies as investments in order to boost their earnings. These circumstances have led to a number of internet scammers being interested in Bitcoin. Cryptocurrency thieves made a record-breaking $14 billion in theft in 2021. The main goal of a cryptocurrency scam is to steal your digital assets by unethical means including phishing, blackmail, Ponzi schemes, and fake exchanges.
HOW TO RECOVER ASSETS LOST TO CRYPTOCURRENCY THEFT AND FRAUD
With the collapse of multiple cryptocurrencies and the misappropriation of investor funds by centralized cryptocurrency exchanges, investor funds losses are growing. Last year, losses from investor cryptocurrency fraud were close to $680 million, and they have increased dramatically this year. Numerous investors are being duped by traditional scams that have been updated for the Web3 era, such cryptocurrency investment schemes promoted by phoney influencers or con artists acting as financial advisors.
As decentralized finance continues to grow, there are new sorts of hacks, thefts, and fraud that take advantage of this development and target blockchain technology or smart contracts. Formerly licensed and unregistered investment advisers are still luring unsuspecting customers into investing in cryptocurrency projects and other ventures. In order to address their losses, victims of fraud and hacking have recourse and recovery options.
Leaves a trail
Victims do have options, though. The blockchain is used to transact and transfer bitcoin, making it far simpler than most people realize to track different cryptocurrency moves and volumes. The blockchain is fundamentally open-source information, therefore full cryptocurrency tracing is possible without legal permissions. By contrast, you would require a civil subpoena if you wanted to locate conventional bank transfers. Or, if the government were conducting an investigation, they may use grand jury subpoenas and search warrants issued by the court to get financial data.
Blockchain technologies were developed with the intention of using a connected peer-to-peer network to produce a permanent, decentralized digital record that maintains transparency for attribution reasons. Investigations into cryptocurrency fraud are becoming more complex and feasible as a result. The recent wave of scams and financial collapses have taught us a lot about the flow of stolen and plundered assets. There is a trail because blockchain keeps track of each transfer and transaction made.
Bad actors have adopted new strategies, utilizing “mixers” to transmit stolen and withdrawn tokens into “pooling” wallets in an effort to obscure their ownership. They have also historically transferred stolen cryptocurrency using a single blockchain. However, lately, criminals have been adopting chain-hopping to hide the flow of stolen money. Chain-hopping, which obfuscates the flow and movement of illegally obtained assets, entails switching cryptocurrencies from one token to another, like on Uniswap. It is possible to track the flow of stolen and misused money using the transaction IDs of a victim’s assets. Because of the importance of the market share to be won, many exchanges decide to operate within the US jurisdiction, where know your customer rules are often necessary for exchanges.
A LARGER SCOPE IN CRYPTO RECOVERY
FINDING HELP
Numerous exchanges outside the US that do not have KYC standards and are thus not otherwise obligated to, voluntarily collect the information and react to requests for it in order to be deemed compliant. Investigations are therefore more successfully tracking down exchanges and pressuring them to reveal account holders, balances, and transactions. Exchanges have been served with subpoenas in recent investigations the authors have conducted, and some parties have expressed a readiness to comply. Victims also have the option of enlisting the assistance of law police.
A National Cryptocurrency Enforcement Team was established by the Department of Justice in 2021 to look into and prosecute cases of unlawful cryptocurrency use. Similar to this, the FBI and other federal law enforcement organizations have created specialized sections to look into crimes using cryptocurrencies. Many high-profile indictments, arrests, and successful prosecutions have resulted from the government’s increased capacity and resources. These inquiries will only grow in scope and complexity, if the FTX case is any indication. It might be challenging to provide a successful referral to investigating authorities due to the sophisticated and quick technologies utilized to steal bitcoin. The government must carry out an impartial probe on its own. A government case might, however, forward with the right referral utilizing recognized investigation techniques and well-known tracking tools.
These investigations are time-sensitive, thus seizing any chance to find and follow diverted assets should be a top priority. In a number of recent instances, the writers were successful in forwarding bitcoin loss cases to the proper law enforcement agencies. Crypto was intended to be a secure, moderately direct mechanism of trade. Crypto has a clear and compelling appeal. Aside from the previous runs-ups in asset values, cryptocurrency transactions may be completed quickly and with no cost. Direct wallet-to-wallet transfers of digital assets may be done without the use of third-party middlemen. But bitcoin is still in its infancy, as seen by the FTX catastrophe and other recent meltdowns at centralized exchanges. However, centralized exchanges continue to undercut the main goal of cryptocurrencies, which is to offer investors a means of direct asset transfer across borders without the expenses, red tape, and delays associated with middlemen and the banking industry.
It is difficult to pinpoint the origin of fraud and the location of assets when there is insufficient regulatory control. Private digital wallets, as opposed to certain exchanges, are fundamentally held by people and do not need the provision of personal identity information, which is most frequently used to determine the ultimate beneficial ownership of an individual or business. In addition to the absence of a regulatory framework, a significant current concern is the fact that, unlike regulated financial institutions, there is no government insurance or the Federal Deposit Insurance Corporation to compensate innocent investors who have lost custodial funds or crypto assets left on exchanges.
Criminals follow the money, therefore it’s hardly surprising that as the value of bitcoin and other virtual assets has increased, so have crypto frauds. And since so many users are still learning about cryptocurrency, it could be much harder for them to spot and prevent any fraud. According to the Federal Trade Commission, this dynamic led to recorded losses from bitcoin fraud of $680 million in the market for cryptocurrencies last year, which is estimated to be worth a trillion dollars. Many people are falling prey to well-known scams that have been updated for the Web3 era, such as romance scams or investment schemes for cryptocurrencies that are advocated by phoney influencers.
The ongoing growth of decentralized finance is the target of other new sorts of hacks, thefts, or fraud, in which thieves attempt to take advantage of a decentralized system, blockchain, or smart contract. While the inherent openness of cryptocurrency transactions may, to some extent, aid in the monitoring of your lost coin, the patchwork of laws governing the area and a lack of knowledge regarding this type of financial fraud are some of the elements that make it difficult to recover stolen bitcoin.
Act fast!
