This is an opinion editorial Matthew Green and Brian Mondoh, contributors to Bitcoin Magazine.
With all available cryptocurrencies including the anonymity-designed Bytecoin, Monero and Zcash, ransomware attackers continue to demand bitcoin and some reports suggest darknet markets are driven by bitcoin transactions (page 54 of the Chainalysis 2022 Crypto Crime Report). and see 109). Bitcoin appears to be one of the most valuable assets for criminals using blockchain technology, given its relative stability, price, and relevance.
Similarly, in many cases where other cryptocurrencies have been stolen, obscured, or paid for as part of a scam, funds are transferred to bitcoin and then withdrawn as fiat. In August 2021, Liquid Exchange announced that 67 different ERC-20 tokens, along with large amounts of ether and bitcoin, had been transferred by a party acting on behalf of the Democratic People’s Republic of Korea. The attacker swapped several tokens, including ERC-20 tokens, including Ether, and then Bitcoin, before cashing out. As a result, approximately $91.35M was liquidated. Similar transfers were made in the May 2021 Spartan Protocol hack where the attacker was able to steal approximately $30 million from the project.
While massive attacks worth hundreds of millions of dollars are investigated by government bodies designed to fight criminal activity, the same value of bitcoin is extracted from people and businesses daily. Systems now exist to allow private individuals, including corporate entities, to use the court system to trace and aggregate their assets (and their income).
This approach has been used regularly in the English court system and is increasing in other common law jurisdictions, which rely on precedents to match victims back with their money. Below is a summary of the legal and practical journey of how this happened.
When did bitcoin become an asset
In England, prior to December 2019, the question of whether cryptocurrencies were property under the law was still uncertain. Common law dictates that property is either something that is capable of being possessed or enforced by an action (such as a debt), and the law had difficulty classifying bitcoin as such. The “Legal Statement on Crypto Assets and Smart Contracts” prepared by the UK Jurisdiction Taskforce (UKJT) just a month ago “CryptoAssets have all the signs of an asset,” the first sign of recognition of bitcoin as an asset.
The question was finally considered in court in December 2019 (see: AA vs unknown person and others, re bitcoin) A Canadian hospital fell victim to a malware attack, demanding ransom in bitcoins and paying its London insurer. The payment of the ransom resulted in the recovery of the hospital’s data and access to its systems. The insurer, however, sought to ascertain and recover that the ransom can be traced on the blockchain by observing the flow of transactions. The insurer then directed a blockchain analysis firm to assist in tracing the ransom proceeds, which ended up in Bitfinex, an exchange listed in the British Virgin Islands.
Upon learning this the insurer applied to the High Court in England for interim relief to freeze the funds, freeze and disclosure orders worldwide of individuals controlling deposit addresses at Bitfinex. It is not for nothing that the identity of the person controlling the address concerned was not known, so the insurer needed more information before continuing.
In order to obtain these reliefs, the court had to determine whether bitcoin was property, and the judge noted the decision that, “I am satisfied for the purpose of granting an interim injunction in the form of an interim ownership injunction that cryptocurrencies are an asset.” The form of property capable of being the subject of a proprietary injunction.”
As a result, bitcoin and cryptocurrencies in general can be treated as “real property” like any other asset, and (theoretically) frozen, transferred and treated like other assets such as cars, homes or legal money. can be done.
why is it important?
The “AA vs Person Unknown” case saw the first proprietary injunction on bitcoin. This means that payments for bitcoin – or its traceable income, found in Bitfinex in this instance – were frozen and subject to the determination of the English High Courts. The insurer now had its bitcoin ring-fenced. The insurer’s application therefore resulted in the freezing of those funds, identities, including know-your-customer documents held by Bitfinex of the person controlling the deposit address, and a worldwide freezing injunction on their assets. .
There was a precedent to trace, freeze and recover bitcoins now available to private individuals, who could use the courts to exercise their rights as victims of fraud. Importantly, its purpose is to trace and trace the funds, not necessarily the party that committed the fraud in the first place, although the depositor address holder and the initial perpetrator are usually linked, using blockchain analysis, open-source intelligence or has been proven by law enforcement. , It is always advisable to inform the authorities about any offense committed in any event.
There are now a number of cases in England, the US and Singapore where bitcoin and other cryptocurrencies have been frozen to aid in recovery, including enforcing third party loan orders to transfer funds from an address to a victim. Forces an exchange.
challenges to consider
Despite the increasing number of recoveries, it is worth turning to some obstacles.
First, there are commercial considerations, such as how much was lost and whether it is worth instructing investigators and lawyers. Experts are not always cheap and if the amount lost is nominal, it may not be worth pursuing. Second, which jurisdiction is relevant? Taking England as an example, if the victim is either a resident there, the fraudster has been linked or the fraud has taken place in England, the English courts will usually have jurisdiction to consider these cases. Without one of these, the victim may have to pursue her case in another, more relevant area.
Next is to consider tracing reports, which show the flow of funds from where they left the victim or the concerned account to where they are now. Consider where the funds have gone, whether they have arrived at an exchange at this point (live tracing is usually available) and if so, which exchange. From experience, and again using England as an example, exchanges should be seen to be doing the right thing by complying with English court orders, and the risk of breaching them and subsequent negative press is a strong factor. In that regard, in order to obtain critical information from exchanges, applications against those exchanges are necessary and important to be considered.
Once the assets are frozen, the next steps depend on who controls the funds’ addresses. They may want a quick deal, may not respond at all or seek litigation, although typically individuals involved in criminal activities do not want their business to be immortalized in court papers.
If the court agrees that the assets are victims and orders that they must be transferred, then the victims need to consider enforcement, that is, how they get their money back. Third-party debt orders force exchanges to move assets, but where this is not available, other strategies come into play and vary depending on circumstances. It may be persons who have been identified as forward address holders, alleged officers of the fraudulent company or otherwise, and may be subject to insolvency proceedings, especially where conspiracy and joint and multiple liability are available. However settlement, on the basis that they have responded, is always better for all parties involved.
recovery in different areas
While stories of multimillion-dollar decentralized exchange hacks make headlines, it should be remembered that individuals who are victims of romance scams, ransom-paying insurers, usually scam victims and insolvency proceedings involving digital funds, bitcoin investigations. And there are ways to recover and other blockchain-based assets.
Importantly, where victims can club together to form appropriate groups for class action litigation, funding may be available for litigation and the cost of the process may be shared. It can also result in massive recovery, helping those who have lost only a little.
Separately, insurers who continue to pay ransoms in bitcoin on behalf of their customers may be able to recover those ransoms and break the cycle of payments, which fuels the ransomware industry’s continuation. Insurers can be a solution by making their contract with their client good and depriving offenders of their ransom.
There are endless applications for recovery, including bitcoin where appropriate, and as common law precedents continue to grow, best practice measures will continue to be developed. The UK continues to recognize the value of rapid and effective asset recovery measures, and on 22 April 2021 the UKJT published the “Digital Dispute Resolution Rules”, which seeks to facilitate the speedy and cost-effective resolution of commercial disputes. Blockchain. In short, the UK is taking blockchain-related disputes seriously and the inherent flexibility of common law jurisdictions continues to focus on assisting victims and recovering erroneously obtained profits.
This is a guest post by Matthew Green and Brian Mondoh. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.