Dispelling The Crypto Anonymity Myth In Fraud

The impact can be devastating, not just financially, but also to self-esteem. The mental trauma and embarrassment that people suffer can be overwhelming. We’re aware that some victims have even been driven to suicide after fraud.

Meanwhile, fraud is an ever-evolving crime, affecting individuals, companies and governments across the globe. The international landscape of fraud continues to develop due to technological advancements, globalisation, and, increasingly, the sophistication of criminals.

As fraud investigators and asset recovery lawyers, it is imperative to understand these current and emerging trends in order to identify, prevent and recover illicitly acquired assets.

One of the most significant trends is the rise of cybercrime. The increasing reliance on digital platforms for communication, banking, and commerce, has provided criminals with new opportunities to exploit vulnerabilities in systems. According to the 2023 ‘Cost of a Data Breach Report’ by IBM, the average cost of a data breach in the United States was $9.44 million, up 2.6 per cent from the previous year (IBM, 2023).

Cybercrime represents a substantial portion of overall fraud, particularly in the financial sector. A report by the Association of Certified Fraud Examiners (ACFE) found that cybercrime accounted for 30 per cent of all fraud cases in 2022 (ACFE, 2022), a percentage that is expected to rise as criminals seize on the anonymity provided by the internet that enables them to operate across borders.

The cross-border element makes it difficult for investigators to track and prosecute them. More than ever, fraud investigators and asset recovery professionals must become proficient in digital forensics.

Over recent years, we have seen a rapid rise in the use of cryptocurrencies providing decentralised and pseudonymous platforms for financial transactions. While cryptocurrencies offer legitimate benefits, including faster and cheaper cross-border transactions, they have also been exploited for fraudulent activities. Criminals exploit human psychology to manipulate individuals into obtaining crypto wallet payments and/or details.

For every acquisitive crime, there is (usually) subsequent money laundering. Crypto fraud is no different. As investigators, we need to have access to specialists who understand how these digital systems work. It is important to appreciate that we can’t all be experts in every discipline. This is often where investigators fall into a trap of their own making.

Once considered a haven for anonymous transactions, cryptocurrencies have increasingly become a focal point for fraudsters seeking to obscure the origins of illicit funds. As investigators, we must dispel the myth of crypto anonymity and outline strategies for tracing and recovering these assets.

How Victims Are Deceived

There are now a multitude of sophisticated methods utilised by bad actors to deceive and induce victims to voluntarily hand over their crypto holdings.

1. Phishing and social engineering attacks: Fraudsters may pose as legitimate and regulated entities, for example, pretending to be a cryptocurrency exchange, a wallet provider, or an investment platform. This is used to trick victims into divulging sensitive information, such as private keys or login credentials to their accounts. The fraudsters will often utilise fake websites, misleading customer support contacts or fake ‘security updates’ to prompt the victim to transfer their funds to a fraudulent address.
2. Investment scams: Fraudulent investment schemes proliferate within the crypto space. Victims are lured with promises of high returns or exclusive early access to Initial Coin Offerings (ICOs). Once the victim has transferred their funds to the fraudulent wallet address, the fraudster often disappears, leaving no trace and deactivating all methods of communication. Although the transaction itself may seem voluntary on the part of the victim, the deceit employed to secure these transfers constitutes a crime.
3. ‘Rug Pulls’: A variant of the traditional Ponzi scheme, a ‘rug pull’ involves the creation of a seemingly legitimate decentralised finance (DeFi) project, token or liquidity pool. Investors are often enticed to provide liquidity or invest in a token, only for the fraudster to withdraw all funds from the liquidity pool or liquidity provider contract, leaving investors with worthless tokens.
4. Romance scams and fraudulent mining operations: Fraudsters also target victims through romance scams, where they build an online relationship with the victim, often grooming them for a period of weeks, months and even years, before suggesting they invest in crypto. Similarly, fake mining operations, which promise returns from the mining of specific tokens, are designed to induce individuals to transfer crypto into wallets controlled by the fraudster.

Tracing And Recovering Stolen Crypto

A common myth is that cryptocurrencies are entirely anonymous and untraceable, providing a safe route for illicit actors to launder stolen funds. However, cryptocurrencies are far from anonymous.

Blockchain networks offer transparency, enabling forensic teams to trace transactions through the public ledger. With advanced tools and the growing proficiency of law enforcement in tracking blockchain activity, along with stricter regulations on exchanges (in some jurisdictions), the ability to obscure the origins and destinations of stolen crypto is diminishing. As a result, forensic accounting and blockchain analytics are increasingly successful at uncovering perpetrators and recovering stolen assets.

Via sophisticated blockchain analysis tools, forensic accountants can track the flow of stolen assets across the blockchain. By identifying patterns in transaction behaviour, clustering wallet addresses and correlating transaction data with known entities, it is possible to uncover the identity or the network of fraudsters involved in a crypto-related fraud. Transactions involving common addresses (such as exchanges, mixers and tumblers) may help to further link these addresses to fraudulent activity.

By examining the trail of funds from victim to fraudster and tracing the movement of stolen coins from one address to another, experts can make connections across multiple blockchains and platforms. Even if a fraudster uses techniques such as mixing services (to obscure the trail of funds from the point of the theft/fraud), blockchain analysis can often trace the movement of funds through subsequent transactions, especially if they return to regulated platforms that perform KYC checks.

This approach was extensively used in the aftermath of the 2016 hack of the Bitfinex exchange in which 119,000 BTC were stolen. Through extensive blockchain analysis, law enforcement agencies were able to identify addresses linked to the hackers. They were ultimately able to recover approximately a quarter of the stolen funds ($3.6 billion), tracking the movement of funds across multiple wallets and exchanges over several years.

A critical aspect of tracing stolen cryptocurrency is collaboration with cryptocurrency exchanges, custodians, and other intermediaries such as wallet providers. These platforms typically maintain transaction logs that can be obtained as part of legal proceedings, for example under a Norwich Pharmacal Disclosure Order (dependent on the specific facts of the case in question).

Given that most exchanges require KYC compliance, this opens a direct route to identifying the owner of a wallet if stolen assets are transferred to such platforms.

No Longer Able To Hide

In conclusion, while the cryptocurrency landscape presents a unique set of challenges for both investors and regulators, advancements in blockchain forensics are significantly improving the ability to trace and recover stolen assets.

Fraudsters may attempt to exploit the perceived anonymity of cryptocurrencies, but the transparency of blockchain technology, combined with sophisticated forensic tools and growing regulatory frameworks, have made it increasingly difficult for illicit actors to escape detection. There are also increasing possibilities to freeze and return stolen assets to the victims of fraud.

Harley Thomas
Harley joined Martin Kenney & Co (MKS) in July 2022, after graduating from the University of Central Lancashire (UCLan) in 2018 with a First-Class degree in Accounting and Finance, achieving Dean’s List status. Since joining the firm he has qualified as a Certified Anti-Money Laundering Specialist (CAMS) with the Association of Certified Anti-Money Laundering Specialists (ACAMS), and also qualified as a Certified Fraud Examiner (CFE) with the world’s largest anti-fraud organisation, the Association of Certified Fraud Examiners (ACFE).

Tony McClements
Tony McClements leads MKS Law's multi-disciplinary investigations team comprising ex-law enforcement officers, forensic accountants, and other investigative specialists. He manages all civil and criminal investigation work, supporting the lawyers in their litigation and day-to-day tasks and running our Investigations Unit. This unit enables the firm to react dynamically to the ever-changing face of civil and criminal investigations, with the majority of tasks able to be undertaken in-house. Tony can call upon numerous contacts within law enforcement and preferred sub-contractors to assist where appropriate.