Discover how the crypto industry is combating the increasing threat of asset theft. Learn about the evolving techniques used by online sleuths to trace and recover lost digital assets. Explore the multidisciplinary efforts bringing together blockchain tracers, law enforcement, and other stakeholders to enhance security and build trust in the crypto ecosystem.
Everyone in the crypto space knows it, but no one wants to think about it: However safe and secure your hot wallet, exchange, bridge or DeFi protocol, more digital assets will likely be stolen this year than got swiped last year.
And last year was jaw-dropping, doing little to bolster the credibility of this nascent asset class: some $20 billion in digital assets moved from legitimate addresses to sketchy, illicit addresses in 2022. And when the numbers are tabulated for 2023, there’s a good chance they will dwarf last year’s.
But the picture is not entirely bleak, because the industry is also growing more adept at tracing and recovering lost assets, even as hackers, spammers and thieves get more creative and more brazen.
Thanks to a growing multidisciplinary effort – one bringing together blockchain tracers, forensic accountants, private investigators, law enforcement, blockchain data providers, law firms, the courts, and other stakeholders – more light is now being shone on dark corners of the internet, and more assets are becoming traceable and recoverable.
In my business, we assemble these stakeholders to trace what used to be considered untraceable. Here are some of the top considerations that affect the way online sleuths and trackers do what we do:
Time is of the Essence
A major factor in tracing and recovery is how long digital assets have been missing. The more time a hacker has, the more they can cover their tracks and move their ill-gotten gains to an exchange or other fiat-currency onramp. We need to get to liquidity providers like these as soon as we can so that wallets can be frozen, and legal experts and law enforcement officers can be brought in. For this reason, it’s always best to report stolen assets immediately.
Different Assets Require Different Techniques
In the hunt for lost digital assets, we trace a stolen bitcoin differently than we would a lost ether token or stablecoin. That’s because each asset uses a different blockchain, and some chains are better “mapped” than others. Depending on the sophistication of its blockchain, some cryptocurrencies can be harder to swipe—and to trace—than others. Tracing experts are constantly evaluating which tools will serve for which job, and they often combine tools.
No Crypto is Untraceable
A blockchain is fully transparent. With enough time and detective work, every digital asset is fully traceable. But this doesn’t mean they are simple to recover. Going beyond mere tracing means combining blockchain data with cyber data, and then legally obtaining that information from an exchange or liquidity provider. Every blockchain is different, and so the next step—recovery—varies between one chain and another.
Fewer Places to Hide
Cryptocurrency tracing techniques have become more sophisticated in recent years, enabling the tracking of digital assets even when they pass through mixers, such as Tornado Cash. These mixers, once considered anonymous, are now blacklisted and considered sanctioned entities. The advancements in tracing capabilities have made it increasingly difficult for bad actors to obscure the origin and destination of illicit funds, contributing to a more secure crypto ecosystem.
Hackers and scammers are becoming more brazen, but at the same time, we who trace lost assets are becoming more sophisticated. Blockchain delivers on its claim of transparency, and we have learned to use that to our advantage.
Once stolen assets are traced, the next leg of the journey begins, which leads to recovery and making the rightful owner whole again. This phase is a team effort that requires law enforcement, the courts and other stakeholders. We have found that when it comes to recovering stolen assets, these stakeholders are willing to come together to pursue a common goal.
Furthermore, KYC / AML (KNow your customers and Anti-money laundering) regulations are increasing at a rapid pace, whereby crypto traced to illicit wallets will be blacklisted and be in the target of regulators and law enforcement for those who are aiding in the spread and use of illicit crypto, This is why it’s important to blacklist wallets as soon as possible.
Tracing and recovering lost crypto legally is not simple, but it is doable with the right technology and the right people. This is what it will take to build trust in the crypto ecosystem, and can pave the way for mass adoption.
Written by: Roger Ying | Edited by Arun Shakyawar
Aboout the Author
Roger Ying is a co-founder of Cryptolock.ai, an innovative membership program that enables users to save up to 90% of compliance and recovery expenses in case of a crypto breach. Cryptolock was developed in collaboration with cyber insurers through PolicyDock.com‘s no-code insurance platform, and it simplifies the process of recovering crypto due to any loss event. Roger is an accomplished entrepreneur, having been an early player in China’s fintech scene, where he oversaw market growth from 30M RMB/year to ~$250B/year. He launched NYSE: YRD while at CreditEase and founded his own fintech company, which grew to $300M AUM. Roger attained his engineering degrees from Stanford and UC San Diego respectively.
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