STOLEN CRYPTO-ASSET TRACING AND RECOVERY
The world is only now beginning to understand the brand-new possibilities and difficulties that cryptocurrencies and crypto-assets, particularly those in the law field, present. Around the globe, completely new frameworks for regulating cryptocurrencies are being created based on fundamental principles because current finance methods are inadequate. When it comes to crypto assets, asset recovery lawyers who are accustomed to monitoring and retrieving conventional asset classes encounter a new technical challenge. In this piece, we will examine whether crypto assets and cryptocurrencies are regarded as property under the law, the difficulties in tracing and recovering crypto assets and how to solve them, and whether crypto-assets are subject to temporary remedies like freezing orders.
ARE CRYPTO ASSESTS CONSIDERED AS PROPERTY?
A commodity must be recognized as property in law in order to be located, recovered, or subject to another type of relief, like a freezing order. Traditional English and Welsh law meanings of property, such as those used in the 1885 case of Colonial Bank v. Whinney, are difficult to extend to cryptocurrencies. Cryptocurrencies like Ethereum do not meet this definition’s criteria for property because they are neither a “chose in ownership” or “chose in action.” Fortunately, a legal opinion ordered by the UK Jurisdiction Taskforce in 2019 helped to partially settle this conundrum. The goal of the taskforce was to define how the law of property and contract applies to digital assets and smart contracts. The legal statement confirmed that the novel and characteristic features of crypto assets are:
· intangibility;
· cryptographic authentication;
· use of a distributed transaction ledger;
· decentralisation; and
· rule by consensus.
The taskforce asserted that traditionally, “courts have found no problem in treating novel types of intangible assets as property,” despite these novel features. When it comes to other asset classes, like cryptocurrencies, they came to the conclusion that applying the English common law definition of property is simply too strict; “we conclude that the fact that a crypto-asset might not be a thing in action on the narrower definition of that term does not in itself mean that it cannot be treated as property.”
CRYPTO ASSET TRACING AND RECOVERY
Many think that the possession of commodities and coins can be concealed or obscured. While some degree of anonymity is feasible for blockchain users, it is also true that blockchain data are visible to everyone and cannot be removed. Everyone can see the ownership history of this public blockchain document from its start to the present, which is an advantage. By blending “tainted” funds with others using cryptocurrency tumblers and mixing services, people who don’t want to be affiliated with cryptocurrencies can make it more difficult to trace their assets.
Exchanges for cryptocurrencies are another important partner for crypto tracers. Exchanges for cryptocurrencies are essential to the global administration of crypto assets. About 60% of Bitcoin investors, according to estimates, have wallets that are housed on these platforms. Exchanges can be crucial in supplying information to detectives and crypto analysts because they are the caretakers of crypto assets. Those monitoring such assets may ask cryptocurrency platforms or other crypto organizations for due diligence records. Exchanges can choose to reveal information voluntarily or they can be ordered by the courts to do so. Exchanges may also be informed that a restraining order has been issued for one of their customers. When the exchange is the wallet’s administrator, this is more efficient.
Finding and recovering non-custodial crypto assets kept outside of exchanges is currently the greatest challenge, particularly in cases where intentional efforts have been made to mix those assets with other assets. In recent years, cryptocurrencies have become increasingly popular as an alternative form of investment and payment. While they offer several benefits such as decentralization, anonymity, and security, the lack of regulation and oversight has made them a favorite for criminals looking to launder money or engage in illicit activities. This has led to the development of crypto asset tracing and recovery tools that can help law enforcement agencies and other organizations track down and recover stolen or illegally obtained cryptocurrency.
We will take a closer look at crypto-asset tracing and recovery, how it works, and its importance in today’s digital economy. Crypto asset tracing involves identifying and tracking the flow of cryptocurrency transactions from one wallet to another. This is done by analyzing the blockchain, which is a public ledger that records all transactions made on the network. Blockchain analysis tools can help identify suspicious transactions, addresses, and wallets, and provide insights into how funds are being moved around. One of the challenges of crypto asset tracing is that cryptocurrency wallets can be anonymous, making it difficult to identify the real-world identity of the owner.
However, cryptocurrency tracers at POLYGON DECIPHER does this by analyzing patterns of transactions and using other investigative techniques, it is often possible to connect a wallet to a specific individual or group. Crypto asset recovery, on the other hand, involves retrieving stolen or lost cryptocurrency.
This can be done through a variety of methods, including legal action, social engineering, or technical exploitation. In some cases, law enforcement agencies can seize assets that were obtained through criminal activity, and return them to their rightful owners. One of the most high-profile cases of crypto asset recovery is the Mt. Gox exchange hack in 2014. Mt. Gox was one of the largest Bitcoin exchanges at the time, and the hack resulted in the loss of 850,000 bitcoins, worth over $450 million at the time. The recovery effort involved tracking down the stolen bitcoins and negotiating with the hackers to return a portion of the stolen funds to the victims. Another example of crypto asset recovery is the case of the PlusToken Ponzi scheme in China, which scammed investors out of over $2 billion worth of cryptocurrency.
The Chinese authorities were able to seize and recover a significant portion of the stolen funds, and arrested over 100 individuals involved in the scheme. Crypto asset tracing and recovery is becoming increasingly important as the use of cryptocurrencies continues to grow. As more businesses and individuals adopt cryptocurrencies as a means of payment, there is a greater risk of fraud and theft. Having tools and processes in place to trace and recover stolen funds can help deter criminal activity and provide recourse for victims. There are several companies and organizations that specialize in Blockchain Analysis and Intelligence. These include Chainalysis, CipherTrace, and Elliptic, which offer blockchain analysis tools and services to help identify suspicious activity and track down stolen funds.
LAW ENFORCEMENT IN RELATION TO CRYPTOCURRENCY TRACING
Law enforcement agencies such as the FBI and the Department of Justice also have specialized units that investigate cryptocurrency-related crimes and work with industry experts to recover stolen funds. In addition to tracing and recovery, there are other measures that can be taken to prevent cryptocurrency theft and fraud. These include implementing strong security measures such as two-factor authentication, using reputable exchanges and wallets, and being cautious of phishing scams and other fraudulent activity. Overall, crypto-asset tracing and recovery is an important tool for combating cryptocurrency-related crime and providing recourse for victims. As the use of cryptocurrencies continues to grow, it is likely that we will see more cases of theft and fraud, making the need for these tools and processes even more critical. By working together with law enforcement agencies and industry experts, we can help ensure that cryptocurrencies are used for legitimate purposes and not as a tool for criminal activity.
CAN INTERIM REMEDIES BE APPLIED TO CRYPTOCURRENCIES?
Saying that assets like cryptocurrencies are property that can be monitored, recovered, or submitted to temporary solutions like freezing orders is one thing, but how would this actually function in practise? The value, nature, and location of the asset(s) that will be frozen must all be specified on the entry form for a freezing order. To make this as precise and effective as feasible, asset tracking & recovery practitioners need to be aware of the characteristics of the crypto-assets they are working with. In the instance of a coin, they would have to learn more details like:
Any cryptocurrency accounts’ public names will be blocked. if the bitcoin accounts are stored by exchanges, which exchanges, and if so, how many. The technological information of the questioned coin wallet, such as whether it is a custodial or non-custodial wallet. This is crucial because private wallets necessitate the owner’s supervision in addition to that of the pertinent exchange. Who (if any third parties) has a secret access passcode for the wallet? Whether the cryptocurrency that will be suspended is bound by a formal contract (e.g. contract or equitable rights). The specifics of the agreement or rights are necessary in this situation to implement the restraining order.
In the upcoming years, the field of crypto asset tracking and recovery will surely expand significantly. This will probably develop into a successful profession all on its own. The legal sector needs to better comprehend the difficulties it confronts in this regard, just as governments and authorities are still catching up when it comes to regulating the crypto industry, particularly in the UK. Throughout 2023, law firms will likely experience an increase in the number of inquiries from clients wanting assistance with tracking and retrieving crypto assets and cryptocurrencies.
What novel methods are criminals using to scam victims and evade detection?
The recovery of misappropriated crypto-assets has many success stories, but this has not yet deterred criminals, and we have seen adaptation to the changing environment as enforcement agencies and asset recovery specialists flex their muscles. Ransomware attacks were reportedly up 311% between 2019 and 2020, with USD350 million paid by victims. The number is likely to be far higher when you consider thwarted and unreported attacks. Individual payments to wallet addresses known for scams are up from 5 million to 7.3 million in the same period; a 48% increase in victims. Criminals are using mixers and tumblers to obfuscate their trails, and even pose as an asset recovery specialist or a party connected to a bad actor. Some victims are so overcome from the first attack that they will seize on any hope, often paying the price a second time.
How does the strategy differ between tracing/recovering crypto assets and traditional assets?
It is not that different. Blockchain analysis allows us to trace the flow of funds through an unlimited number of hops (akin to having every bank statement you need). Some working in this space can be too focused on this element and there are benefits to applying more ‘traditional’ asset tracing techniques to broaden the scope of the investigation. Corporate intelligence skills, including the use of OSINT, domain name investigations and social media capture can help identify ‘real world’ targets. Receiverships or insolvency procedures bring significant powers of investigation and a wide range of recovery actions.
