Digital assets are increasingly accepted by users around the world. As the number of users continues to grow, so do the types of users, range of use cases, and level of investment.
“It’s not just that investment in retail is growing,” said Johnny Lee, principal of Grant Thornton and head of the forensic technology practice. “All kinds of traditional industries are reviewing their positions on digital assets. Corporate treasuries now add digital assets. Whole new industries have been born to educate, manage custody and trade digital assets.
Businesses have started adopting cryptocurrencies as a hedge against inflation or a long-term store of value, as well as for payments and other uses. In the realm of cryptocurrencies, there is a growing number of investors holding large holdings in common currencies such as Bitcoin and Ethereum.
“It’s not just that retail investment is growing. All sorts of traditional industries are rethinking their positions on digital assets.
“Traditional notions and traditional strategies are being revisited as American businesses consider whether they should be involved in digital assets because they don’t want to be left behind and because it represents a unique store of value,” said Lee. Cryptocurrency has become so mainstream that there are now bespoke insurance products available for retail cryptocurrency investors.
Beyond cryptocurrencies, non-fungible tokens (“NFTs”, which are unique digital assets that are not interchangeable, unlike cryptocurrency assets) offer organizations another valuable use case for the adoption of digital assets. NFTs provide a flexible and innovative way to directly commoditize brand value and programmatically provide rights and/or privileges to the registration holder. Creators and established brands are actively using NFTs to generate revenue and increase audience engagement. “Through the vehicle of NFTs, digital assets offer businesses a unique way to interact with their customer base,” Lee explained. “They can improve the brand and also monetize that improvement, creating powerful network effects.”
Protect the investment
As organizations focus and invest more in digital assets, they logically question security considerations. They want to know the risk of misappropriation, fraud and theft in the digital realm, and how digital assets can be traced or recovered in such cases.
“While tracing and recovering digital assets presents new challenges for investigators, forensic work follows a familiar pattern,” Lee said. At a high level, the basic framework of a financial investigation still applies:
- Identify the suspected target of theft or hijacking
- Gather target information (including people, transactions, and assets associated with that target)
- Establish links between the target and the assets
- follow the money
- Work to recover the same
“This is methodologically indistinguishable from a traditional forensic investigation,” Lee said. “It’s just that digital assets require new tools and techniques.”
In some ways, digital asset tracing methods can be easier than traditional asset tracing, and in other ways, digital asset recovery can be eminently more difficult. Either way, Lee said, “the overall approach is somewhat old and new.”
Call on specialists
The permanent record of cryptocurrency transactions means that there is an immutable record of every transaction. So, in this regard, transaction tracing can be easier (with the right tools and techniques) because you only need to analyze ledger data – instead of obtaining bank records for potentially tens or hundreds different bank accounts.
The difficulty arises in linking this transactional data to the individuals executing the transactions. Since a valid ID is not required to establish a cryptocurrency address (equivalent to bank accounts) and generally records only track addresses, amounts and dates /hours of transaction, the work of identifying the actors behind the transactions can be quite difficult. . This pseudo-anonymity allows some actors to try to obscure their true identity. Therefore, additional context is needed to pierce this veil of anonymity and link individual actors to specific transactions.
Recently, the US Department of Justice arrested two individuals for their role in the theft of approximately US$3.6 billion worth of Bitcoin from the Bitfinex cryptocurrency exchange in 2016. Deputy Attorney General Lisa Monaco noted“In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a maze of cryptocurrency transactions. Thanks to the meticulous work of law enforcement, the department has once again shown how it can and will follow money in whatever form.
“There are already specialists who investigate fraud using traditional asset tracing and recovery technologies, enhanced by their mastery of digital assets.”
Lee said such arrests are both more common in recent years and illustrate that “there are already specialists conducting fraud investigations using traditional asset tracing and recovery technologies, enhanced by their mastery digital assets”. Lee explained that there was no mystery as to the destination of the funds stolen in the 2016 exchange hack; anyone interested in consulting the register would have identified the destination addresses linked to the theft. The question that stymied law enforcement for over five years was the identity of the actor(s) associated with these destination Bitcoin addresses.
These Bitcoin addresses are made up of a string of alphanumeric characters, which forensic specialists can analyze to provide the history and context of interactions related to each address over time. The public nature of the distributed ledgers involved allows for analyzes of transaction flows, even when actors attempt to hide their transaction histories by distributing funds to dozens or hundreds of different accounts.
“It’s basically what you would do in any kind of traditional asset-tracing exercise, from a bank account in one part of the world to another bank account,” Lee said. “Your forensic specialists are able, at some point, to contextualize some of these addresses that were either intermediate addresses or destination addresses along the way.” Ultimately, these players will seek to convert their crypto holdings into fiat currencies, which requires the involvement of what has come to be known as an “exit ramp.” Typically, these exit ramps include cryptocurrency exchanges (which convert crypto to fiat, and vice versa). A growing percentage of these exchanges comply with international financial compliance regimes such as the Know Your Customer provisions of the US Bank Secrecy Act.
This exchange compliance provides forensic teams eventually with their first contextualization of transactional history (from ledger analysis) correlated to an identifiable human being. This contextualization provides traction for the pivot from digital asset tracing to digital asset recovery.
“If it’s a reputable exchange, we can subpoena them for registered account information of cryptocurrency addresses of interest,” Lee said. This scheme requires the close collaboration of forensic specialists and legal counsel to provide the evidence necessary to obtain a subpoena or court order in the appropriate jurisdiction. “Reputable exchanges will cooperate. Many of them have entire departments established for such requests and have devised detailed protocols to ensure that they cooperate with lawful requests for information about their account holders.
“Assuming the issue of the identity of the account holder is resolved at this point, the investigation team now has additional options. Information provided by exchanges generally leads to more asset recovery territory. traditional financial institution, but additional asset tracing may be required before a “freezing order” or injunction can be imposed on a traditional financial institution (for the account holder in question),” Lee mentioned.
The formula is solved
The adoption of digital assets is on track to continue and grow. “The myth that cryptocurrency is nothing more than a playground for criminals is patently false,” Lee said. “Consumer adoption continues unabated, and that adoption takes all sorts of different forms, including digital assets held in corporate treasuries.”
“This formula has been resolved. People are already doing it. But, as with a traditional asset search and recovery exercise, you need to hire specialists. »
“To the extent that there are concerns among those interested in this adoption — particularly about fraud, adopters are not without traditional remedies,” Lee said. Forensic and legal experts have adapted established frameworks for tracing and recovering digital assets, resulting in significant results for organizations victimized by fraud and theft involving digital assets.
“This formula has been resolved. People are already doing it,” Lee said. “But, like a traditional asset search and recovery exercise, you need to bring in specialists.”
Principal and Practice Leader of Forensic Technology
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