The cryptocurrency footprint: out of sight isn’t out of reach
October 31, 2019
Everyone has heard of Bitcoin, but this is just one of more than 2000 cryptocurrencies in virtual circulation, with a combined market capitalisation of over $250 billion. New cryptocurrencies are launching all the time. As cryptocurrency edges into the mainstream, traditional banks such as JP Morgan are beginning to create their own digital tokens, and Microsoft is allowing customers to deposit Bitcoin into their Microsoft account.
With the surge in cryptocurrencies, there also rises the challenge of tracking cryptocurrencies during forensics investigations and fraud cases. This article explores the benefits of cryptocurrencies, but also how they can be used dishonestly. And, if they are used dishonestly, how we can trace the assets involved in a cryptocurrency transfer.
Cryptocurrency transfers can be likened to sending an encrypted email. The address is public, but a private digital code is needed to access it at one end, and unencrypt and receive the funds at the other. The transaction is recorded on an open blockchain ledger, but the sender and recipient can use digital pseudonyms.
The ability to carry out transactions anonymously using cryptocurrency means that they can be used to conceal or divert assets, as part of wider fraud and misconduct schemes. But just because there isn’t an obvious owner, doesn’t mean you can’t track down and recover the virtual funds.
Private and secure
Cryptocurrency transactions have the advantage of not requiring a financial intermediary such as a bank. This makes them attractive for people who want to exchange funds with less friction than conventional transfers, along with those looking for increased security and privacy over where their money goes. This, however, comes with some negatives such as huge energy consumption - some have speculated that Bitcoin has the same energy consumption as Switzerland.
… but can be used dishonestly
As with any payment system, the majority of transactions will often be routine, and have a legitimate purpose. However, the anonymity offered by cryptocurrency, combined with its global reach, is also attractive to organised criminals. In the world of fraud, and forensic investigations, the use of cryptocurrency in diverting assets and funds, to what is hoped will be untraceable locations, is starting to be seen.
Hidden, but not untraceable
If you’re part of a team looking to recover assets that have vanished in a cryptocurrency transfer, there may be a temptation to think that there is no hope of making a recovery.
In fact, every cryptocurrency transaction leaves a digital footprint, however much the counterparties seek to cover their tracks. The combination of forensic technology, and forensic accounting techniques, means that it is possible to map transactional data - bank transactions, accounting records, and user files, with related communications - email and instant messaging, stored either on hard drives or in the Cloud. This sort of linked analysis can reveal a comprehensive view of when cryptocurrencies were acquired, details of ownership, and transfers made over time, which has great value to those seeking recoveries.
So, whilst cryptocurrency has the advantage of security and anonymity, it is still possible, with the right information and techniques, to track cryptocurrency activity and users. Case law is also evolving to keep pace with the issue. Thanks to the CMOC Sales & Marketing decision (which enabled freezing the assets of “persons unknown”), the at risk assets can be frozen whilst investigation takes place. So my advice, if you are confronted with cryptocurrency in asset tracing cases, is not to give up hope; the funds aren’t necessarily out of reach.
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