Asset tracing has traditionally consisted of following the money. Investigators will search individuals' business assets, properties and vehicles; and for deeper investigations, forensic accountants will use bank statements to confirm funds and other transactional information to identify assets. There are many factors that can complicate the process of finding funds, particularly as an investigation relates to fraud and misappropriation. Challenges can range from location of the assets, third-party transfers and wires to sanctioned nations, just to name a few.
Since the mining of digital assets began in 2009, added challenges have arisen in asset tracing. The challenges have come particularly from assets that can now be obtained through blockchains. The increase of digitalization of coins has made investigators think outside of the traditional asset tracing mechanisms. Adding a step to ensure digital assets are not missed in the investigation can help identify stolen or hidden cryptocurrencies.
Depending on the digital asset that is being traced, it is important to know the blockchain where the digital asset came from. Here are the key terms to understand before conducting cryptocurrency asset tracing:
During the pandemic, there was a rise of new digital currencies, such as NFTS and other digital coins. There are two that are the most common and highly traded on the exchanges.
Essentially, asset tracing for cryptocurrencies is not any different than traditional follow the money tracing. When comparing both, the major difference is the technology used to trace the assets. Additionally, digital coins can be traced in less time than traditional asset tracing investigations. If the tools are used correctly, the user is able to adequately find, analyze and graphically display transactions on the blockchain. The software tools are able to efficiently lead to the identification of the individual, or entities, behind the transaction and identify the location of the tokens.
Many of these tools are connected to centralized exchanges that have KYC (Know Your Client) information on their users. This information helps identify the owners of the wallets and the potential assets in question. The wallets get assigned a risk-based score with information on of the transaction, and it helps determine the safeness of the assets. An accumulation of information can help decide the feasibility of finding the owner of the digital asset.
There are setbacks that can take place when tracing cryptocurrencies. Fraudsters are creative in the ways they are able to hide their transactions through the blockchains. Additionally, not all exchanges obtain KYC information or respond to requests for information on the customer, making the investigation more difficult to conduct. Even if the wallet is traced, there is a possibility that that the jurisdiction may have data privacy rules or is unable to supply information of the final location of the asset.
It is also important to note that there are different types of events that will lead into asset recovery in cryptocurrencies. Below are the most common occurrences.
Both instances could be equally difficult to trace, but there is a higher probably that the investigator will be able to show misappropriated funds, due to trails that are left for the purchase of the coins through the blockchain. Law enforcement is continuously learning different ways criminals are illegally obtaining access to the platforms that hold wallets and digital coins and are quicker to respond to requests to freeze funds to avoid further misappropriations.
As more regulations are put in place for digital coins, investigators will be able to better prepare for tracing digital assets and have access to more information on the blockchains. To supply a better view of the potential assets being traced, investigators should consider checking for digital assets across all platforms to see a holistic picture of the individual/entity in question. When looking for an investigative tool, keep in mind that most innovative tools will provide the information as long as the user is appropriately trained.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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