Online cryptocurrency scams cause significant financial losses to more consumers every month. US-based victims already lost more than $4 billion from complex criminal networks and hackers in the past year.
Sophisticated, usually foreign-based networks host fictitious trading platforms that appear legitimate but are programmed to portray false trading gains and fraudulently route consumer funds.
The platforms look so authentic that the average user can’t distinguish a scam crypto site from a legitimate one.
It is widely believed that once a victim’s cryptocurrency is transferred from their wallet, typically held on a centralized exchange, to a decentralized exchange or private wallet, the coins are lost forever.
Law Enforcement Route
Referral to law enforcement is often considered the only available avenue for any chance of recovering stolen funds and identifying bad actors. But decentralized wallets and private platforms are even out of reach of US law enforcement in most instances.
The law enforcement referral option is also quickly becoming less available to victims who complete the Federal Bureau of Investigation’s online iC3 loss form. In most cases, local authorities lack training, resources, and ability to investigate cross-border criminals or recover cryptocurrency coins from private offshore wallets.
FBI and Department of Justice crypto task forces, in collaboration with other federal agencies, still remain the best route for investigations. But the challenge is to persuade the appropriate authorities to accept and then investigate a crypto case.
The massive explosion in the number of scams has produced a corresponding explosion in the number of referrals. Consequently, a long waiting list of complaints is piling up, and federal authorities likely cannot handle all the cases.
Threshold loss amounts for investigation and prosecution have increased. Losses under the millions of dollars may not be a priority. Federal authorities are more likely to accept a case investigated by a competent professional they know and who has done much of the legwork in support of the referral.
Tracing Funds
This leaves victims in very challenging circ*mstances. Private investigation and pursuit of these cases can be an option. In some cases, teams with the right mix of forensic investigative and tracing capability, coupled with an asset recovery attorney experienced in cryptocurrency investigations and law, can sometimes help locate lost coins and identify bad actors.
While recovering stolen crypto from a scammer’s private wallet is challenging, blockchain provides significantly useful information and evidence and presents avenues to possible recovery.
Unlike traditional money transfers with financial institutions, every blockchain transaction is publicly recorded and available to those who know how to search for it. Every transfer is traceable, and significant information about the transfer is memorialized on the blockchain.
Captured data includes the wallet address where the stolen crypto has been sent. The recipient’s address is available for identification by a trained specialist through the tracing process, which might reveal the stolen funds sitting in the criminal’s wallet.
Other beneficial information is available about the movement of the funds and the activity of the recipient wallets.
The heavy lift is recovering the tokens.
Tokens—or coins—maintained on private wallet platforms are difficult to seize. However, circ*mstances may provide some opportunities. To transfer crypto back to fiat currency, a criminal must, for now, use an account at a legitimate, centralized cryptocurrency exchange.
To do so, an account holder must present proof of identity and know-your-customer identification, typically a valid driver’s license or passport.
Credible exchanges are heightening their requirements even further. In some cases, criminals have transferred stolen coins to an account at an exchange, then let the coins sit for an extended period.
Where Courts Can Help
A civil court order served on an exchange in the jurisdiction can retrieve this information. Other civil court processes may be available to freeze and ultimately recover the coins.
Exchanges outside the jurisdiction have, in some instances, been willing to honor subpoenas. US-based entities must respond to a court order or validly issued civil subpoena. But entities that host private wallets will not typically honor either a criminal or civil subpoena.
With the proper monitoring, tracing, investigations, and subpoena use, stolen funds that have been carelessly stored on an exchange have the possibility of being recovered.
The challenge is that often by the time a case has been referred to a firm, scammers have transferred the coins several times, more commonly into pooling accounts—akin to cocaine drug money laundering cartels of the 1980s.
This may be done to disguise and clean the coins. The difference, however, is that subpoena power isn’t needed to see the transfers and where the coins have gone.
Recovery remains challenging and quite difficult in many cases. The advantages of digital currency platforms are also its curse. Peer-to-peer transactions and near-instantaneous transfers across the ecosystem and the globe eliminate middlemen and financial institutions.
In this case, there is no bank involved, and no FDIC or other government insurance for lost funds. Crypto accounts at exchanges and wallets are not insured. And securing stolen funds from a bad actor’s private wallet is nearly impossible.
The key is to respond early, along with some luck that criminals have carelessly left stolen tokens on an exchange, or transferred the coins there to exchange into fiat currency.
Given we can now track movement of coins in wallets through blockchain, all hope may not be lost. The old adage, “You can run, but you cannot hide” may remain in the crypto ecosystem.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Robert Appleton is a partner at Olshan Frome Wolosky and former senior US federal prosecutor specializing in international white collar and cross-border financial transactions and due diligence.
