Specialist police officers in the UK have reached out to financial fraud lawyers for help in obtaining justice for victims of small-scale crypto fraud.
“The Criminal Prosecution Service [CPS] in the UK has limited resources and will only prosecute cases which it thinks have a very strong chance of success,” says Vanessa Whitman, a finance disputes lawyer who specialises in crypto at the international law firm CMS.
Police in the UK have the skills to trace down bad actors in crypto crime, she tells Moneyweb, but the problem in obtaining convictions stems from a “resourcing issue.”
SA’s dubious distinction
Many complaints being fielded in the UK are similar to those voiced by members of Mirror Trading International and Africrypt, two South African crypto schemes that lost investors billions of rands after promising outlandish returns.
Law enforcement’s focus on big-ticket crypto scams leaves victims of smaller-scale crypto thefts – such as £1 000 (about R20 000) – without justice or compensation for their stolen funds.
Such amounts don’t make the same headlines that the $620 million heists do, but these crimes are evidently far easier to get away with.
“Victims are [feeling] an increasing sense of frustration, and so are the police,” says Whitman.
In an effort to obtain some degree of justice, victims will often turn to civil lawyers like Whitman for assistance. But the costs of civil prosecution often make any potential victory a pyrrhic one.
“Instructing civil lawyers to go and get court orders to serve on exchanges is very expensive,” says Whitman, “and if you are a victim who has lost a couple of thousand pounds or dollars’ worth of crypto, that’s soon going to be eclipsed by the cost of any legal action.”
How crypto crime is traced
An entire industry of blockchain analytics has grown around tracing cryptocurrency movements. And the same technology can be used to trace dirty crypto.
Every transaction on a blockchain is logged and publicly accessible. The transaction shows how much was transferred, from which wallet address, and to which address.
“The enforcement folks have got really good at working out who people are,” says Charles Kerrigan, a crypto and digital assets lawyer at CMS.
“So you can trace connected addresses. And you can see clues that indicate where the person might be located, or who their affiliates might be, or other projects that they’ve been involved in, both positive and negative.”
Criminals leave a trail of breadcrumbs that inevitably lead to an exchange that requires identification to convert that crypto to fiat currency. And then law enforcement can pounce.
“One of the hard problems, if you’re a criminal that’s using crypto to launder funds, is that you may have a paper net worth of a vast amount, but it’s just inaccessible,” Kerrigan tells Moneyweb.
“There was a very large hack a few years ago and those funds had sat there for four or five years. And it was just publicised that the hackers in New York have been found and arrested. Some of those coins had gone through mixers, and privacy coins, and been through 50 000 transactions. But not even 50 000 transactions put them beyond the reach of the software and surveillance that applies to it.”
Mixers are decentralised crypto services that mix multiple sources of crypto to obscure their source. And privacy coins are cryptocurrencies that attempt to obscure blockchain transactions so that privacy can be maintained.
Some crypto exchanges aren’t helping
The other factor that’s needed to help victims of small-scale crypto crime is “buy-in from exchanges”, Whitman says.
In one case she worked on, she attempted to obtain cooperation from the 20 largest exchanges to block a particular wallet address that she and her team had unequivocally linked to stolen crypto. The range of responses she received was an eye-opener.
Whereas some exchanges were highly cooperative in the interests of preventing fraud within the industry, others ignored the request altogether or simply refused to cooperate in the absence of a court order.
A few exchanges completely misunderstood the meaning of the message.
“The broad range of responses tells us that something must be done to standardise the approach of the exchanges,” she says.
Whitman adds that there is also a lot of “goodwill in the crypto industry” that comes from players really interested in wanting to see the crypto ecosystem succeed. This helps offset the ‘Wild West’ reputation that crypto has acquired.
Unprosecuted small crime hinders greater crypto adoption
“Retail investors sometimes don’t have all the information,” says Kerrigan. Many are relatively inexperienced investors, and that inexperience can end up costing them five or 10 grand. These smaller losses, when aggregated, add up to a tidy sum, but it’s because they’re made up of small amounts that they do not get the attention they deserve.
Losing a few thousand rand is not like losing R5 million or R5 billion, but it does have an impact on crypto adoption. “So you just can’t have things like that happening,” says Kerrigan.
“We need to have tools that are available at a large scale and a small scale. There’s every incentive to chase down the big ones. We also need to ensure that we’ve got the incentives and the tools to chase down the small ones.”
The other problem is that even if law enforcement suddenly had more resources to tackle every case, criminal law is more about punishing the criminal rather than compensating the victim.
This can leave the victim short of their stolen funds, even if justice has been obtained for the crime itself.
Whitman and Kerrigan are working with others in the crypto sector on a proposal that could revolutionise the way crypto crime is prosecuted in the UK and, if accepted, could be exported elsewhere in the world to countries like SA.
The proposal seeks to implement quick access to justice for victims of crypto crime on a “self-management” basis, without the need for costly lawyers. The proposal is still at an early stage, and details are still a little sketchy, but Whitman is hopeful it will offer a much-needed solution for victims of crypto crime.
R Paulo Delgado is a crypto writer with an eye for the bizarre and the human stories behind the always fascinating leaps and stumbles of this new asset class.