While cryptocurrencies have increasingly become more mainstream, they are still relegated to the edges of financial systems because they are still not widely accepted as legal tender and are limited to private transactions between individuals online. Cryptocurrencies are global, and bad actors that use them to perpetrate fraud may be located in various jurisdictions around the globe. Not all countries have the framework to freeze and seize crypto assets. This has to be considered when designing plans to recover these assets.
As with any recovery effort, it is necessary to ascertain where the assets are located, ensure they will not be dissipated and then, compel the return to the victim. When recovering crypto assets, it will often be necessary to confront additional complications of (a) not knowing the identity of the perpetrator; b) potentially having to unravel numerous transactions by which the tainted cryptocurrency has been moved across different accounts or by which converted into another form of currency; and (c) determining the relevant governing law.
The key to a successful recovery is to assess the information available to you. Cryptocurrency is not entirely anonymous. Transactions are publicly available on the blockchain. The first analysis involves reviewing the public ledger to trace the transactions. You will need a forensic blockchain investigator.
The chances of recovering crypto assets increase if they are hosted in a wallet held by an exchange. The exchange then holds the private key. The exchange may be required to maintain “know your customer” information (“KYC”). If the assets are in a hosted wallet, then traditional devices to trace assets can be employed, such as discovery authorized by the jurisdiction.
If the exchange does not hold KYC information, then the chances are the owner will be limited to a single transaction on the exchange or the type of asset he or she can receive. Disclosure orders under English common law may be sought under those circumstances against the unknown wrongdoer, known as “Spartacus Orders”, although they will only be effective if the wrongdoer is sufficiently concerned about being in contempt of court to comply with the order.
Most exchanges limit the extent to which crypto can be exchanged for fiat currencies unless the account holder has provided KYC information. This will mean the wrongdoer has either retained the proceeds of crypto, which should be traceable or converted the proceeds to fiat currency in which they likely used an exchange for which they would have had to provide KYC information revealing their identity and residential address.
On the other hand, if the assets are in un-hosted wallets, then anonymity is much greater. The key here is to identify the institutions and entities that can be compelled to produce evidence that will allow for the trace.
Crypto assets move in milliseconds. If you find them in a particular place, it is imperative you ensure legal action can be taken swiftly. You will need to determine whether a court will exercise jurisdiction over the party and grant the type of relief that has been used in the past to secure the seizure of other forms of assets or impose equitable remedies such as the naming of a trustee, receiver or another disinterested third-party holder to take control of the assets. But these mechanisms are difficult when the private key to the wallet is not in the possession of the plaintiff or exchange.
In addition, it is important to define the crypto asset before the court. Countries currently define the asset in different ways—currency, securities, commodities or general intangibles. For instance, in AA v. Persons Unknown (2019) EWHC 3556 (Comm), the court in England & Wales decided cryptocurrency is a form of property such that injunctive relief can be obtained.
The recent case before an English court is instructive. In ION Science, Ltd. and Duncan Johns v. Persons Unknown, Binance Holdings Limited and Payward Limited, the claimants made an ex parte application for a worldwide freezing order against Persons Unknown, for a disclosure order against cryptocurrency exchanges to reveal the identity of the fraudsters under a Bankers Trust order (designed to trace money and property where there are clear-cut cases of fraud or the information could enable stolen property to be located) and for orders relating to service outside the jurisdiction. The court granted all orders. The court held, in the eyes of the law, the location of a crypto asset is the place where its owner is domiciled. The fraud was therefore deemed to have occurred within the court’s jurisdiction.
Creditors will need a forensic blockchain investigator and an asset recovery attorney when trying to recover cryptocurrency. A creditor will need to move quickly to obtain proprietary tracing and disclosure orders, injunctive relief and evidence sealing orders due to the transitory nature of these assets.