Trusted Ways to Recover Scammed Bitcoin Stolen
Is cryptocurrency use totally private and anonymous? Think again. The Cubits/Dooga case shows just how easy it is to trace bitcoin compared to fiat.
A common misperception is that lost or stolen bitcoin is gone forever. But as blockchain forensics continues to evolve, identifying, tracing and recovering hidden crypto assets may have already become easier than traditional asset recovery.
A court order signed by a U.S. federal bankruptcy judge last month in the Northern District of California granted relief to the liquidators of a three-year old US$32 million cybertheft. The assets stolen from U.K.-based crypto exchange Dooga — then registered as Cubits — were traced through forensics technology to wallets stored in two U.S.-based cryptocurrency exchanges.
“Cubits opened accounts for [those] who turned out to be the wrongdoers,” Kobre & Kim law partner Benjamin Sauter, who represented Dooga, told Forkast.News, adding that the perpetrators bought bitcoin through Cubits before attempting to withdraw. “Cubits was told by its payment processor — who turned out to be part of the fraud — that it had received funds as one end of this transaction.” However, Sauter adds, Cubits never got paid for the bitcoin that left its exchange.
Sauter said that the case set a precedent in recognizing foreign bankruptcy through a procedure to recognize bankruptcy in the United States, as outlined in Chapter 15 of the U.S. Bankruptcy Code. “Essentially, any exchange [and] its holding asset that we could connect to that fraud becomes an asset of the estate.”
Not only does the recent Dooga case set a precedent for recovery of crypto assets in foreign jurisdictions, but also shows how recovery of stolen crypto assets could be swifter than traditional methods.
“In traditional asset recovery matters, you serve subpoenas to a bank, then you learn who was at that bank,” Sauter said. “You take another month and you send a subpoena to another bank, and you unwind a series of transactions to a series of subpoenas that often take you overseas.”
That process can take months or more, Sauter explained. Transactions on the blockchain, however, are displayed in real time for anyone to view.
See related article: How Ethereum Classic’s 51% attacks reveal risks to Bitcoin and Ethereum
For experienced crypto crooks, an often-used method to hide bitcoin transactions is through using bitcoin mixers. Bitcoin mixers are services that allow users to mix their cryptocurrencies in a single pool with many other users and receive the same amount of cryptocurrency in return.
But blockchain forensics has already evolved to a point where crypto mixing may no longer be all that helpful to cyber thieves. “We were able to see through and trace from one wallet to the next where those transactions [in the mixer] went,” Sauter said. “When those wallets send to a known exchange, that will appear in a commonly used forensic software.”
Crypto forensics is also now being used by law enforcement to track the movement of criminal funds. For example, the U.S. Department of Justice — using forensics techniques — was able to follow more than 50 crypto transactions to lay the case for seizing more than US$1 billion worth of bitcoin from a wallet that held funds from Silk Road, the now-defunct online black market that was infamous for selling illegal drugs.
“That’s a very unfortunate scenario, and I think one that happens more often than we like to hear,” Sauter said. “Frankly, those people may be out of luck.”
Watch Sauter’s full interview with Forkast.News Editor-in-Chief Angie Lau to learn more about how Kobre & Kim recovered US$32 million worth of lost crypto assets, the precedent set by Dooga case, and why you should take care to never, ever lose track of the password to your crypto wallet.
- Stolen bitcoin can be traced and recovered: “You’d be surprised how often you’re actually able to trace bitcoin through forensic techniques to exchanges and other points of intersection where KYC is conducted, where assets are exchanged for other types of assets, and when that happens, there actually are opportunities and increasingly well-accepted ways to get assets back.”
- How anonymous are crypto transactions? “Some people who are sophisticated at conducting frauds will run bitcoin through mixers and tumblers and ways to conceal and obfuscate the nature of those transactions… But the state of forensics and blockchain right now is getting so good that you can actually see through quite a bit of that. And we were able to see through and trace from one wallet to the next where those transactions went…. So we were able to see transfer after transfer.”
- Your “private” crypto info is probably already out there: “There are lots of lists and there are companies that sell proprietary software that will tell you who is behind known wallets or clusters of wallets.”
- Crypto recovery is easier than money in bank accounts: “In traditional asset recovery matters, you serve subpoenas to a bank, then you learn who was at that bank. You take another month and you send a subpoena to another bank, and you unwind a series of transactions to a series of subpoenas that often take you overseas. Just that process of learning who’s behind one transfer to the next can take months, if not more. Whereas the blockchain, you can see all of that in real time. And issue one subpoena to the endpoint in the chain, the exchange that received the funds. YOU can click to file for a charge back.