How to Trace Crypto in Crypto-Crime & Crypto-Disputes | Overview of Techniques and Tools for Investigating and Prosecuting Cryptocurrency Crimes in Hong Kong and Beyond

By Mr. Joshua Chu, Group Chief Risk Officer at Coinllectibles Marvion and XBE, Senior Consultant & Arbitration Counsel at Prosynergy

Tracing crypto transactions can be complex and challenging due to the decentralized and anonymous nature of the transactions. Proper education and training are crucial for investigators and legal professionals who need to navigate this complex landscape.

Unfortunately, many lawyers lack such education, as these novel topics are rarely covered in depth in law schools (and even less so during training with most law firms still focused on paper-based practices).

Despite the challenges of tracing crypto fraud, there are techniques and tools available that can help investigators and legal professionals trace crypto transactions and identify the parties involved in fraudulent activities. This article will therefore seek to bridge the knowledge-gap.

What is Blockchain Analysis?

One of the key tools in tracing crypto transactions is the blockchain. The blockchain is a decentralized, public ledger that records all crypto transactions. Each transaction is verified by a network of computers, and once verified, it is added to the blockchain.

The blockchain is immutable, meaning that once a transaction is recorded, it cannot be changed or deleted. This makes the blockchain a valuable source of information for tracing crypto transactions.

To trace crypto fraud, investigators typically start by analysing the blockchain to identify the wallet addresses involved in the fraudulent activity. Wallet addresses are unique identifiers that are used to send and receive crypto. By analysing the blockchain, investigators can identify the wallet addresses used to send and receive funds in the fraudulent transactions.

What is Chain Analysis?

Once the wallet addresses are identified, investigators can use various techniques to trace the flow of funds. One technique is called chain analysis, which involves analysing the blockchain to identify the transactions that link the various wallet addresses together. By following the chain of transactions, investigators can trace the flow of funds and identify the parties involved in the fraudulent activity.

To conduct chain analysis, investigators use specialized software that can analyse the blockchain and identify the transactions associated with the wallet addresses involved in the fraudulent activity.

The software can then follow the chain of transactions, identifying other wallet addresses that are linked to the fraudulent activity. This process can be repeated multiple times, allowing investigators to trace the flow of funds through the various wallet addresses involved in the fraudulent activity.

What is Clustering?

Another technique is called clustering, which involves grouping together wallet addresses that are likely owned by the same person or organization. Clustering can help investigators identify the parties involved in the fraudulent activity and track the flow of funds between them.

To conduct clustering, investigators use specialized software that can analyse the blockchain and identify patterns in the transactions associated with the wallet addresses.

The software can then group together wallet addresses that are likely owned by the same person or organization based on these patterns. This process can help investigators identify the parties involved in the fraudulent activity and track the flow of funds between them.

Crypto-Freezing Injunctions in Hong Kong

When it comes to making applications in crypto fraud cases in Hong Kong, there are a number of options available. One option is to make an application to a crypto exchange or trading platform. Many exchanges and platforms have procedures in place for investigating fraudulent activity and freezing accounts associated with such activity. Investigators can make an application to the exchange or platform, providing evidence of the fraudulent activity and requesting that the accounts be frozen. When opting for exchange freeze, do cite relevant provisions and supporting authorities. Just like in Court, it is your duty to assist the exchange, rather than just making a complaint.

Another option is to make an application to a court for a freezing order or injunction. In Hong Kong, courts have the power to issue orders freezing crypto assets associated with fraudulent activity. To obtain such an order, investigators would need to provide evidence of the fraudulent activity and demonstrate that there is a risk that the assets will be dissipated or moved out of the jurisdiction.

For example, in the case of Re Gatecoin Limited [2023] HKCFI 91, the Hong Kong Courts recognized that virtual assets such as cryptocurrencies are properties capable of being held on trust, which in turn further paved the way for proprietary injunctions against virtual assets in crypto-frauds.

Conclusion

Tracing crypto fraud requires a combination of technical expertise, investigative skills, and legal knowledge. Proper education and training are essential for legal professionals who need to navigate this complex landscape.

By analysing the blockchain, using chain analysis, clustering, and other tools and techniques, investigators and legal professionals can trace the flow of funds in crypto transactions and identify the parties involved in fraudulent activity.

In cases where freezing injunctions are necessary, investigators can make an application to the relevant court in Hong Kong, providing evidence of the fraudulent activity and demonstrating the need for a freezing injunction. When handling such cases, always remember:

1. Tracing crypto transactions can be complex and challenging due to the decentralized and anonymous nature of the transactions, BUT,
2. Blockchain analysis, chain analysis, and clustering are common techniques that investigators and lawyers use to trace the flow of funds in crypto transactions.
3. Freezing injunctions are available in Hong Kong to freeze crypto assets associated with fraudulent activity, and parties can make applications to crypto exchanges, trading platforms, or courts for freezing orders or injunctions (in appropriate cases).