“Cryptocurrency draws in a lot of charlatans. It’s something where people who are of less than stellar character see an opportunity to clip people who are trying to get rich. It will come to a bad ending.” – Warren Buffet
In April 2021, Coinbase, a cryptocurrency exchange start-up, went public on the US stock exchange. The first major exchange to do so, it brought cryptocurrency into the mainstream, and the company was valued at $85.7 billion by the end of the first day of trading.
A Securities and Exchange Commission approved business, with over 1700 employees and 56 million users, it was a phenomenal success story. Fast forward to March 2022 and President Biden signed an executive order to examine greater regulation of cryptocurrencies; with the aim of helping financial regulators better understanding the associated risks and opportunities.
The President’s move direction demonstrates both the rapid speed with which this decentralised and predominantly unregulated financial renegade has developed since the introduction of Bitcoin in 2008, and the concerns over the relative anonymity and illegal activity that surrounds it.
The rise of cryptocurrency
For many, the world of cryptocurrency is a complex one, however; put simply, it is just a digital currency designed to work as a medium of exchange. Decentralised finance (DeFi), it is not controlled by a government, or an institution, like traditional fiat money, i.e., the US Dollar or the British Pound, and the investor in essence manages their own money.
Transactions are secured through the use of complex cryptography (mathematical techniques) which controls the creation of additional coins, as well as verifying the transfer of coin ownership. Blockchain technology underpins this and acts as a digital ledger; a computerised database, recording each transaction in real time across a peer-to-peer network.
Whilst most people have heard of Bitcoin or Ethereum, there are now over 10,000 different cryptocurrencies or altcoins, and an entire range of DeFi products and services, including lending, exchanges and synthetic derivatives.
Started by an unknown programmer called Satoshi Nakamoto in 2008, what can we put the inordinate rise of cryptocurrency down to? There are a range of factors:
- There is no bank or centralised authority in control. It is a peer and community-led process where individuals are in control. This has proven attractive for those with levels of mistrust in conventional ways of financial management, as well as countries such as Turkey, where economic crisis and inflation have been prevalent.
- It offers privacy, as governments and third parties cannot see transactions.
- Rapid transactions with low fees are carried out, recorded and validated in real-time.
- All an individual requires to start is a unique identifier. In the case of bitcoin, this is a Bitcoin address and a private key enabling them to spend the bitcoins associated with that address.
- It has offered a means of evading traditional scrutiny and financial channels, making it appealing to those seeking ways to hide assets, avoid tax, or launder money.
- Despite its often volatile nature, for investors and speculators alike, it can offer huge financial rewards.
Why is cryptocurrency a good asset to hide wealth?
The very reasons that have made cryptocurrency an attractive investment opportunity for many, are the same reasons why others view it as a perfect asset to hide their wealth, in situations such as divorce, or in more sinister activities such as money laundering.
The most obvious reason is anonymity. As these digital assets are stored online with no need to provide personal details and no Government, central authority, or third-party oversight, there is no paper trail.
The only thing that ties an individual to cryptocurrency, is their wallet and unique private key I.D, which allows them to buy and sell. This poses a significant challenge for tracing.
As mentioned in the introduction, regulatory controls and legislation are only beginning to now catch up to the advances made within cryptocurrencies, thus leaving many loopholes that people can exploit to hide their wealth.
Why do fraudsters use crypto scams to target people?
In March 2022, a brother and sister were arrested for scamming investors out of $124 million, between 2017 and 2021, in a crypto-mining scam named Ormeus Coin. In April 2021, the largest scam to date occurred, when the two founders of Africrypt disappeared with $3.8billion of bitcoin.
With revenue generated from scamming rising 82% in 2021 to $7.8billion worth of stolen cryptocurrency, it is unsurprising that fraudsters have turned to crypto scams as a way of making money. As the SEC Chair Gary Gensler describes it, cryptocurrencies are the “Wild west of finance”.
There is very little transparency, or Know your Customer (KYC) protocols, associated, as individuals are not required to hand over personal details to make a transaction. The lack of third-party involvement also means that once you make a transaction, you cannot reverse, or stop it. Once gone it is gone, there is no insurance or fraud protection.
Whilst criminals continue to refine and adapt their modus operandi, the most common cryptocurrency scams centre around fraud and extortion:
- Romance Scams: As is the case with many scammers, online dating sites are a lucrative pool. Once the target believes they are in a committed relationship, they are asked to invest in cryptocurrency.
- Phishing Scams: Are used to get private information relating to crypto wallet private keys; those required to access funds held in wallets.
- Investment Scams: As with the brother and sister mentioned earlier, targets are duped into investing in the ‘next big thing’.
- DeFi Rug Pulls: A new scam type, but one increasing in popularity amongst DeFi projects and new tokens. This sees scammers build what appears to be a legitimate investment opportunity, however; once investors hand over their money, it disappears along with the scammer.
- Imposter Scams: Here the scammer pretends to be someone else, usually a social media influencer, or celebrity, to get investors to part with their money in exchange for what they promise will be a generous return.
Scammers are in essence relying on the fact that most investors do not have the heightened level of technical sophistication required to understand the true complexities of cryptocurrency and its pitfalls.
Can you track assets hidden in cryptocurrency?
Whilst cryptocurrency continues to provide a level of transaction speed and anonymity not seen with other forms of assets, innovations in investigative technology, software and law enforcement are catching up.
This is reflected in statistics which report lower criminal activity in comparison to the usage uptake. According to their Crypto-Crime Report 2022, blockchain analysts, Chainalysis, found that total transaction volume of cryptocurrencies grew to $15.8 trillion in 2021, up 567% from 2020’s totals, but the increase in illicit transaction volume was just 79%.
$14 billion is still a major problem though, and a significant issue for parties when it comes to tracking and recovering hidden assets.
Let’s look then at what an investigative team such as Matrix Intelligence, can use to help you track hidden cryptocurrency assets.
Blockchain analysis: Whilst no personal details are recorded in blockchain, every single transaction has a timestamp and date, and these cannot be altered once in the public domain. This means a level of transparency does exist. Analysts can use this information to work out in greater detail the flow of funds from one wallet to another.
Blockchain analysis has been used to great effect to help with cryptocurrency focused criminal investigations. One of the most well-known is the 2014 case of Chainalysis and Mt Gox, the latter the largest exchange at the time, where $450million worth of bitcoin went missing. In this case, whilst the location of the bitcoin became known, the chances of recovery were deemed slim.
Analysis such as this is reliant on criminals not employing ‘mixers’, or ‘tumblers’, which break up the flow of funds on the blockchain. For a fee, money is transferred to a mixing service, whereby it is mixed with that of others users before transferring the mixed currency to the desired address.
Legal Enforcement and Regulations: Law enforcement and regulations governing the use of cryptocurrencies, as seen with the recent announcement from the White House, are gaining greater traction. This follows the news in December 2021, that the IMF are seeking a co-ordinated and consistent approach to supervising cryptocurrencies. In the UK, all firms operating in this area must register with the Financial Conduct Authority.
Long unregulated, or partly regulated, service providers and platforms, are now having to gather greater detail from individual users.
In the EU for example, cryptocurrency exchanges are regulated and must meet due diligence requirements, as well as those relating to AML and KYC. They must report any suspicious activities and can be subject to subpoenas like any other financial institution. This aids an asset tracing investigation from a legal point of view, in gathering personal information.
Inevitably, illegal exchanges exist, and criminals can find other non-compliant ways to buy and sell currency, such as person to person trading, or by using Bitcoin ATMs. Europol has also stated that partly due to the pandemic, “virtually all crime now has a digital element”, with cryptocurrencies and encrypted networks often at the heart.
Forensic Analysis: Digital forensics are increasingly being used to aid cryptocurrency-related investigations. As mentioned, a cryptocurrency wallet contains a unique address and all activity involving digital assets starts and ends with a wallet and address.
A forensic investigator can use these wallet files and associated addresses to map the flow of activity and piece together related transactions.
If the analyst also has access to the associated computers and mobile phones of the wallet holder, then they can examine the searches related to exchanges, or apps, and link these to the transactions made. The discovery of additional parties can be facilitated in such a search, as well as information relating to the dates/times and places of transfer.
Furthermore, bank statements, tax returns and other financial documents may show transactions related to crypto purchases and activity around crypto exchanges or trading apps.
As outlined, for all the steps being taken to regulate and address the fast-moving world of cryptocurrency, in relation to crime and asset tracing, there is much still to be done. It presents considerable challenges in an investigation and to address these takes time, experience and significant investment.
At Matrix Intelligence we will help you to understand the complexities of cryptocurrency when it comes to fraud and asset tracing and help you achieve the best outcome.
For more information on our asset tracing capabilities, contact us at: info@matrix-intelligence.com or online at www.matrix-intelligence.com
