Cryptocurrency is seen as “anonymous” because it is possible to move funds without providing any personal information. But that is not entirely true. Bitcoin and most other currencies are “pseudonymous.” That is, they operate under a hashkey or unique identifier that’s not entirely anonymous. Each transaction is registered on the blockchain, which is a public ledger, under a wallet address, so the key is not necessarily following the transaction flows, but linking that address to a real person.
Today there is an increasing amount of data, technology, and expertise available that can identify assets wherever they may be. Technology and blockchain forensics are becoming widely available to track identities and the flow of funds.
And, traditional but powerful civil remedies are available to identify ultimate beneficial owners and to seize and recover assets offshore.
What are the advantages of the civil route?
It offers the victim much greater insight into the investigation and input into a recovery strategy.
Pursuing a criminal prosecution is often a slow process, offering speedy criminals and stolen funds time to get away. It is a quite different timeframe between criminal and civil proceedings. However, most civil, common law courts are readily available to hear applications on an urgent basis.
Getting a favorable judgment also tends to be easier in civil claims, as the standard of proof is the “balance of probabilities,” while for most criminal offenses, it is “beyond reasonable doubt.”
In addition, victims can in some cases seek funding for a civil recovery process, ensuring that justice is not delayed a result of budgetary constraints. Whether that be the public or private purse.
A civil recovery does not preclude a criminal investigation. Both remedies can be taken in parallel and if a criminal investigation is reaching a critical point, an application by the authorities to put a stay on civil proceedings while the criminal one is pursued can be made.
Any evidence gathered can be provided to law enforcement authorities both during and after an investigation or recovery, ensuring that the opportunity for a criminal prosecution is not missed.
Standard civil remedies such as Mareva Injunctions (Freezing Injunctions) Norwich Pharmacal Orders (NP Orders), or Bankers Trust Orders can be utilized to identify fraudsters and destination of funds. This was demonstrated in October 2019 in the case of AA v Persons unknown and others  EWHC 3556, whereby the English High Court granted an application for a proprietary injunction in respect of Bitcoin which had been ransomed from the applicant.
In that case, a hacker bypassed the firewall and anti-virus software of a Canadian insurance company, encrypting its computer systems. The unknown hacker demanded $1.2 million in equivalent Bitcoin in exchange for the decryption software. The applicant paid the ransom by transferring Bitcoin into a wallet. After the decryption of the files, the applicant sought to recover the ransom.
Forensic tools tracing the transaction on the blockchain showed that some Bitcoin had been transferred to certain exchanges, including to a wallet linked to and controlled by Bitfinex, a cryptoexchange operated by two British Virgin Island entities. Various proceedings were issued, including a proprietary injunction over the Bitcoins that had been traced back to the wallet, thus demonstrating the swiftness in dealing with civil remedies.
Another way to deal with corporate entities or shell companies that have been de facto complicit in crypto related fraud is through the use of insolvency or the court appointment of a receiver. This is because in an insolvency situation, you can literally take the rug out from beneath their feet; that is, take away the vehicle they use for fraud, and even better, use it against them as a tool for investigating what happened. Add that to the ability to wind up the company without tipping off the fraudsters by an ex-parte application (that is without the knowledge of the directors or beneficial owners), you have the perfect recipe for taking the fraudsters by surprise and cutting them off at the pass.
Liquidators are afforded wide ranging powers under statute and with the authority of the court, including those of examination, and compelling directors and third parties to respond to requests for information which may identify wrong-doing, and to unwind and trace through the flow of funds.
This means that while directors technically remain in office, they lose their powers, which are then vested with the liquidator, and any actions taken by directors after the appointment of a liquidator will be in breach of the court order. Providing a copy of the order to banks, registered agents and even to the exchanges holding cryptocurrency, should be sufficient in most circumstances to put them on notice to preserve the status quo.
Perhaps critically, once the investigation has been completed the liquidator also has a raft of extraordinary “super-powers” (and here is where I put on my cape) to challenge transactions which have not benefited the ICO or fund, but rather the directors or shareholders themselves, and potentially recover directly against those individuals.
And as noted above, as well as stripping fraudsters of all their gains, the evidence gained can be provided to regulators, and law enforcement agencies, ensuring a criminal prosecution is not missed either. In fact, the evidence gained in an investigation during a liquidation, is sometimes what galvanizes a criminal prosecution to occur at all.
So, in short, cryptocurrency-related frauds can be conquered and money invested in them can be traced and recovered through the use of new technologies and traditional civil remedies.