Why the World of Crypto Assets is Not a Good Place to Play Hide and Seek

Published: March 01, 2022

Fraudsters, current and potential, planning to conceal their ill-gotten gains in the world of crypto assets are now having a rude awakening. Their actions will almost certainly leave a trail, and aspects of the transparent nature of the underlying blockchain technology often enable ‘hidden’ crypto assets to be both found and seized, much more quickly and easily than one might imagine. UK prosecuting agencies are also now becoming more adept at taking the necessary steps to locate and recover misappropriated assets. This is now, quite rightly, an area that is becoming subject to increasing regulation.

Volatility and notoriety

In February 2022 HM Revenue & Customs (HMRC) was reportedly the first UK law enforcement authority to seize crypto assets in the form of three digital artwork non-fungible tokens (NFTs). Alongside the NFTs, HMRC has reportedly also confiscated other types of crypto assets. These seizures were all part of an investigation into suspected VAT fraud thought to be worth £1.4m.

Interestingly, while the seized non-NFT crypto assets are said to be worth around £5,000, the three digital artwork NFTs are yet to be valued. The crypto market is well known for its volatility and NFTs are notoriously hard to value. As such, this could be an interesting exercise. However, what can be said with certainty is that the global NFT market itself is huge. Indeed, it reportedly surpassed $25bn in 2021. 

This latest seizure comes recently after US officials announced in February 2022 that they had seized more than $3.6m in allegedly stolen Bitcoin linked to an earlier exchange hack.

Following HMRC’s seizure, and piggy-backing on the publicity achieved following the successful operation, the overarching message being reinforced is that criminals cannot hide their illicit hauls in crypto assets. Indeed, Nick Sharp, HMRC’s Deputy Director of Economic Crime, has said: “We constantly adapt to new technology to ensure we keep pace with how criminals look to conceal their assets.”

Blockchain transparency

In the light of this, is the crypto asset space really such a great place for criminals to conceal their rich pickings?  After closer examination, maybe not. One of the novel features of the underlying blockchain technology is its transparency, with each transaction supposedly recorded on a ledger which is itself public. As such, transactions or exchanges of digital assets (i.e., conversion of stolen assets into a crypto asset, the onward transfer of a crypto asset and, the conversion of a crypto asset back to fiat money) should, in theory, all be visible and recorded.

Potentially, this gives investigating agencies more opportunities to track and trace transactions. This would include fraudsters converting their hauls into crypto assets, including NFTs. Indeed, the ex-head of the US Treasury Department’s AML  unit Michael Mosier has recently revealed that some cases can move “exponentially faster” due to transparency of crypto asset transactions. More widely, the benefits could potentially be realised in any fraud investigation where the proceeds have allegedly been transferred to crypto assets.

Increasing scrutiny

This new scenario has also to be considered in an environment of increasing regulatory measures. Therefore as this sector becomes increasingly regulated, including for AML purposes, the increased obligations placed on various gatekeepers will certainly hopefully decrease the chances of fraudsters successfully hiding their profits.  Regulations will require those businesses dealing with the exchange of crypto assets (for example, crypto exchange providers) to register with the Financial Conduct Authority as their AML supervisor and comply with requirements. 

Those businesses having dealings with NFT works of art will additionally potentially have to register with HMRC as their AML supervisor.  However, whether the regulations bite will involve an examination of the specific NFT and the particular role that the business plays.  As such, and when the regulations require, transactions will be monitored and due diligence and KYC requirements will be imposed. All these rules increase the scrutiny under which each transaction takes place, and increases the likelihood that any suspicious behaviour will be both noticed and reported. There is the potential that the fraudster transferring illegal funds to an NFT could be reported to the authorities by the very parties facilitating the transfer.

It is almost certain that there will be other instances of a UK prosecuting authority successfully seizing crypto assets against the backdrop of an investigation. Indeed, various features of the underlying blockchain technology assist both the pursuit, and the confiscation, of crypto assets allegedly bought with the proceeds of crime. And investigating and prosecuting authorities are becoming increasingly adept at utilising these features to their advantage.