Since Bitcoin’s inception, governments have seized billions of dollars in cryptocurrencies. For example, in March 2021 in France, the state seized and then put on sale for the first time 611 Bitcoins worth around 28 million euros. But then, how is it possible to confiscate the cryptocurrencies of illicit actors and compensate their victims?
The process for handling suspicious activity on a cryptocurrency platform differs depending on whether it is first identified by the platforms or by private and public sector investigators.
The role of cryptocurrency platforms
Platforms can use cryptocurrency compliance tools to track transactions and comply with regulations. Suspicious activity can be detected by the way transactions are structured or the illicit nature of the sender or receiver. Next, cryptocurrency exchanges can take several actions. First, they can submit a Suspicious Activity Report to FinCEN if they are based in the United States or equivalent documentation if they are not. They can also request justification from the user, cap their transactions and/or temporarily freeze their funds. If a point of no return is reached, platforms can ban the user.
The choice of measures depends on the level of risk associated with the transaction, the user’s response to a request for information, the user’s past activities and the regulatory obligations of the platform.
Tracking transactions and reporting suspicious activity is especially important in the cryptocurrency industry, as platforms often cannot monitor incoming funds. These transactions are processed on the blockchain and can only be verified once the deposit has been made to an address under the control of the platform.
Thus, if they cannot prevent payments from, for example, a terrorist financing campaign, the platforms can prevent these funds from being collected in traditional money or transferred to another address. In addition, platforms that have implemented Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures may report the account holder. To preserve its reputation, a platform must be able to detect and process suspicious transactions.
Solutions Private Investigators Can Provide
Users wishing to recover their cryptocurrencies can turn to private investigators, lawyers or forensic accountants.
Regarding data collection, blockchain analysis and requests for information, the investigation process is similar to that followed by cryptocurrency exchanges. However, many cases have been brought to civil courts, which have issued typical asset preservation orders and pragmatic new approaches to reflect the decentralized and pseudonymous nature of blockchain.
Assets can be identified and secured ahead of trial; however, private sector cryptocurrency recovery cases have only been around since 2018. Additionally, many cases are resolved quickly when there is no dispute, especially when the accused wishes to remain anonymous. .
Actions taken by public sector investigators
When public sector investigators suspect illicit activity, usually after reports from victims or cryptocurrency platforms, they typically proceed in three steps. First, they gather the involved cryptocurrency addresses, transaction details, and counterparties. Then they use blockchain analysis tools to determine the nature, origin and destination of the funds in order to know if they are deposited on identified platforms, if they are linked to illegal activity, and how they are spent and moved.
Finally, they subpoena and request information from identified cryptocurrency companies with which the suspect(s) transacted and where they may have an account.
Investigators can thus determine if the cryptocurrencies come from illegal activities such as the sale of narcotics, ransomware, fraud or scams. They can also find out if they have been mixed with other legitimate sources of cryptocurrencies, or that the cryptocurrency transactions are themselves legitimate but the fiat currency used to purchase them stems from criminal activity.
How does the asset forfeiture process work?
When a case is complete enough to charge and arrest a suspect, investigators work with the company where the cryptocurrencies are placed to freeze them or transfer them to a government-controlled wallet. In some cases, the assets remain in the suspect’s personal wallet; he can then agree to hand over the funds in exchange for a reduced sentence.
Seized cryptocurrencies are generally kept until the court verdict. If the accused is acquitted, the assets are returned to him, if he is found guilty, his assets are confiscated. In the event of a conviction, a separate process is initiated to determine the ownership rights of third parties to the property the government wishes to confiscate.
Once all ownership rights have been determined, the remaining funds are auctioned off in fiat currency and allocated to the organizations that participated in the case. These assets are usually returned to victims or confiscated by public treasuries.
With cryptocurrencies now prevalent, both public and private sector investigators need access to the tools necessary to identify and seize cryptocurrencies with confidence. They need to be able to find evidence of cryptocurrency use on computers, wallets, software applications, or even written notes. Collaboration between cryptocurrency platforms and investigators is all the more essential for training the latter in the security standards necessary for the proper conduct of an investigation.