Bitcoin and Cryptocurrency Tracing and Recovery
As cryptocurrencies slowly but surely move past the status of online collectibles/interesting financial experiments, scammers, thieves, and hackers redouble their efforts to siphon digital currency out of the pockets of rightful owners.
In 2018, studies estimated that within the crypto sector, legitimate actors lost some $9 million worth of digital assets to theft every day. That problem has likely grown more acute since.
The proliferation of crypto-related crime has boosted the demand for solutions to trace stolen digital assets, identify the thieves, and recover the funds. “Regular” hackers, thieves, and cyber-crime perpetrators only represent the tip of the iceberg when it comes to crypto-related fraud.
Experience has shown that improper transfers from bankrupt debtors through judgment- and arbitration award creditors are also channels of crypto fraud.
The cryptocurrency industry can only step onto the path of sustained growth through mass adoption if reliable mechanisms exist to support private dispute resolution and crypto-asset tracing and recovery.
The distributed ledger technology most digital assets use, coupled with the ambiguous legal status of this emergent asset class, hinders the implementation of reliable mechanisms.
For effective Bitcoin tracing and recovery, the asset should legally qualify as property. While some nations have moved ahead and granted legal definitions to cryptocurrencies, others have not yet bothered. The resulting global patchwork quilt of laws governing the ownership of digital assets has, therefore, turned digital asset recovery into an exercise in legal acrobatics and liaising with various law enforcement agencies.
With that in mind, it is clear that any entity purporting to offer reliable cryptocurrency tracing and recovery services needs to possess a solid legal team as well as liaising abilities in addition to the raw technical capabilities required to trace digital assets.
How Does Crypto Asset Tracing and Recovery Work?
Let us take a look at the procedural steps of crypto-asset tracing and recovery.
• Investigating the movement of the crypto assets.
• Acquiring information on the perpetrators.
• Initiating recovery efforts/legal action.
Investigating the Movement of Crypto Assets
Throughout this phase of the recovery operation, one should bear in mind that courts will require legally acceptable proof regarding the illicit transfer of the lost assets.
Individuals may be able to track some assets to some degree, using free tools. However, to complete a successful investigation, the involvement of trained professionals is of the essence.
CNC Intelligence Inc. can track more than 200,000 digital assets, meaning that it can almost certainly track down any pilfered cryptocurrencies.
The services of such professionals cover much more than finding the destination of fraudulent transfers.
• Professional investigation management capabilities cover solutions to which only law enforcement agencies and intelligence professionals have access. One cannot match that level of sophistication through free tools. Open source tracking tools do not show which Virtual Asset Service Provider holds a wallet. Professional investigators use law enforcement-grade, specialized software to gain access to such information.
• Certified investigators can perform professional-level cyber investigations.
• Professionals can reliably track a staggering range of digital assets. For an intelligence-based asset recovery specialist such as CNC Intelligence Inc., almost nothing is beyond the realm of possibilities.
• The intelligence-gathering capabilities of professional cryptocurrency tracing and recovery specialists are way beyond what an amateur can ever hope to muster. These capabilities include human intelligence, open-source intelligence, cyber intelligence, as well as financial intelligence.
• Acquiring raw data is one thing. Making heads and tails of it and drawing the right conclusions is quite another. Intelligence analysis is yet another area that calls for the skills and capabilities of professional, certified investigators.
• Professional investigators such as CNC Intelligence Inc. can and do directly help law enforcement trace misappropriated digital assets. The investigators at CNC Intelligence Inc. pride themselves on being able to actively assist law enforcement agencies with active cases. If you are a member of law enforcement, please feel free to reach out to us.
• The range of digital assets that specialists like CNC Intelligence Inc. can trace is impressive. The company can trace Ether/ETH and Litecoin/LTC as well, in addition to tens of thousands of other altcoins. Positioning themselves as the silver to Bitcoin’s gold, Ether and Litecoin have drawn increasing interest from hackers and cyber thieves lately. Thus, the need to reliably track these cryptocurrencies has grown more acute.
This stage of the asset recovery process requires intelligence gathering techniques beyond the means of a layperson. Professional investigators can draw relevant conclusions from:
• Social media analysis.
• Public records sourcing from legal and financial databases.
• Persistent monitoring of the general- and dark web for signs of the fraudulently obtained assets.
KYC Information Gathering and Identification of the Perpetrators
To know the target(s) of your recovery efforts, you need to identify the wallets used to move the stolen funds and the people/entities to whom the wallets belong.
Following successful tracing, the crypto asset tracing and recovery specialists have to petition the relevant court to obtain KYC information from exchanges and cryptocurrency trading platforms.
Big exchanges are usually cooperative and will readily disclose KYC information if requested by any law enforcement agency worldwide, without a court order. However, there may be exceptions. Also, there are always uncooperative exchanges and other Virtual Asset Service Providers that will skirt the law one way or the other.
This stage of the recovery process may be costly. Therefore, it calls for a cost-benefit analysis that takes into account the ability of the mentioned platforms to retain KYC information, based on the jurisdiction where they operate.
The intricacies of cross-jurisdictional legal action are many. Such action requires thorough offshore legal expertise, coupled with liaising capabilities.
There are altcoin exchanges that do not gather KYC information on their users. It is quite a cross-jurisdictional legal exercise to obtain relevant information from such platforms.
Legal action and the Initiation of Recovery Efforts
The legal intricacies and subtleties begin after the identification of the holder of the stolen crypto assets. To recover Bitcoin, Litecoin, Ethereum, or other crypto coins, clients may have to implement a lawsuit to freeze the misappropriated digital funds. This stage of the recovery process aims to stop the holders of stolen assets from dissipating the funds.
While it sounds simple in theory, such a legal move poses some extraordinary requirements.
• It has to prove beyond doubt that the asset holder can dissipate the funds to avoid judgment and that the risk of this happening is real.
• It also has to prove that the balance of convenience favors the plaintiff.
If we add to that a general skepticism that US and Canadian courts have expressed toward cryptocurrencies that they see as highly speculative assets, the legal picture becomes a murky and challenging one.
The legal territory concerning digital assets is continuously shifting. The trends point toward emerging tests regarding the investigation and recovery of digital assets lost to white-collar crime, shady insolvency proceedings, and downright fraud.
Navigating the Cryptocurrency Legal Labyrinth
In addition to being trust-minimized, decentralized, and censorship-resistant, cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and others, are global in scope. Their users transfer them unhindered by geographical distances and borders.
While this is certainly an advantage, it is a complicating factor for Bitcoin tracing and recovery.
Investigators and recovery specialists have to navigate a patchwork of laws and perform cross-jurisdictional acrobatics.
In the UK and Australia, for example, the 2002 Proceeds of Crime Act provides solid legal ground for recovery efforts.
This law defines digital assets as “property” and “realizable property” in two of its sections. This definition gives investigators and cryptocurrency recovery specialists a legal basis that allows them to pursue all crypto assets obtained as the results of a crime or used to launder criminal funds.
A subsequent 2019 High Court ruling has reaffirmed the mentioned definitions, thus establishing a legal precedent concerning the applicability of the 2002 POCA to crypto asset tracing and recovery.
Through its ruling, the High Court granted a proprietary injunction to help an insurance company recover a Bitcoin ransom it had paid to unknown perpetrators of a malware ransom attack.
In the US, the legal status of Bitcoin is still subject to legal wrangling. In theory, US property law could treat digital assets like property, but there are several hurdles in the path of such recognition.
The pseudo-anonymous nature of Bitcoin and other crypto coin means that the asset class may not pose a legitimate claim to “exclude others”, in the context of US property laws.
However, some US jurisdictions allow the ownership of a property through trusts, thus allowing pseudo-anonymous ownership. What pseudo-anonymity means in this context is that in the absence of a court order, trusts do not have to disclose their beneficial owners.
For the cryptocurrency space, this means yet another battle to fight for the recognition of digital assets as property.
Numerus Clausus is a US legal notion that the number of forms property can take should be limited and predetermined. For instance, the law limits property forms on estates in land to a handful, expressly forbidding the creation of other forms. The rationale of this notion is to minimize verification costs and to improve property disposition efficiency. Based on that, it should not prove much of a hurdle for the legal recognition of Bitcoin as property.
Multi-signatures pose a challenge to the recognition of Bitcoin as property by making it difficult to define default rules for ownership. Specifically, such arrangements challenge the notion of “control” as a practical rule.
The more one considers the subtleties of multi-signature setups, the murkier the issue of ownership becomes. This is, again, a tall order for US lawmakers to clarify before admitting that Bitcoin does indeed qualify as property.
The conundrum of Bitcoin’s legal status in the US comes full-circle with the limitations on its traceability.
There are indeed problems on this front, particularly in the case of serial transactions. And interestingly, the lack of legal clarity surrounding the status of Bitcoin at present makes it more difficult for cryptocurrency tracing and recovery professionals like CNC Intelligence Inc., to address this issue.
To recover cryptocurrency, slighted parties need to adopt a well-coordinated, intelligent, and cautious approach. Such an approach calls for specialist skills and know–how far exceeding the capabilities of individuals, regardless of their level of expertise.
For more information about CNC Intelligence Inc.’s cryptocurrency and recovery services schedule a free consultation
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