When last year the governor of the Bank of England warned crypto investors to be prepared to lose all their money, he was referring to the risks associated with the digital currency's extreme volatility. This will have come as old news for bitcoin's adherents, many if not most of whom are attracted to bitcoin for its volatility and not despite it.
When it comes to risk, sudden and extreme fluctuations in value are just the tip of the iceberg. Investors must also contend with a variety of frauds, including wallet hacks, DeFi rug pulls, fake crypto-mining apps and giveaway scams, to name only a few. This article is not about those scams or how to avoid them.
This is about how to get your bitcoin back once it's gone.
It takes money to chase money
Chasing lost bitcoin does not come cheap. Lawyers, investigators and forensic accountants will need to be instructed. Fees will rack up for court applications, hearings and enforcement action, often in multiple countries. There are no guarantees of success and sound legal advice combined with considered enforcement strategy at the outset are an absolute must.
Not every case of missing bitcoin is criminal. Keys are legitimately lost, hard drives thrown away, websites frozen. It may, however, be difficult to distinguish between a legitimate (however inconvenient) mistake and chicanery. It doesn't help that the very things that make bitcoin attractive to legitimate investors, namely pseudonymity, looser regulation and speed of transmission, are routinely exploited by criminals to avoid detection.
Time is of the essence in any asset tracing exercise and there is often a need to act before all the facts are available. That said, there will be instances - particularly where the value of the lost asset is equal to or near the cost of recovery - when it may simply not be worth it.
Track and trace
Tracing is often the first step in cryptoasset recovery and describes the process of following an asset from a starting point (typically a digital wallet on an exchange) to its current destination which, if you are lucky, will be another exchange.
If you are less lucky, your coin will have moved on, having been sold or swapped for other goods, or put through a "tumbler' and mixed with other cryptocurrency to obscure its origin.
Despite popular belief, bitcoin is not anonymous. Rather it is pseudonymous. This means that it is possible to trace bitcoin transactions back to an IP address or exchange account, but this won't tell you anything about who or what is behind that address.
Tracing is done by specialists who typically hail from established investigative backgrounds. One such specialist, Nick Connon, CEO of London-based Quintel Intelligence, oversees multimillion dollar cryptoasset tracing exercises and explains the challenges of his work:
To successfully trace crypto you need the full picture. A good investigator will explore avenues on and off the blockchain, what we call the 'Real World Rub', analyse data points such as ISP billing details, geo-location meta data, fiat currency account data and other digital breadcrumbs across multiple jurisdictions.
If you do manage to trace your bitcoin to a wallet on an exchange, the next hurdle will be to reveal the identity of the wallet's owner. Exchanges, much like banks, consider this to be confidential information and in Connon's experience, clients cannot expect "even the smallest level of cooperation" from exchanges without a court-issued disclosure order.
Previously, at least in the UK, it was only possible to obtain such an order in relation to physical or "fiat" currency in a traditional bank account. More recently, however, and in line with the UK's relatively progressive attitude toward cryptoassets, the courts have been willing to grant such orders against crypto exchanges, provided there is evidence of fraud.
Yours or mine?
Is it even possible to own a cryptoasset? The answer, at present, depends on where you are. There is no uniform, universal definition of cryptocurrency, or even consensus on regulation, with some countries declaring it legal tender and others banning it outright.
For its part, the UK has declared cryptocurrency legal property, but interestingly, not currency per se. As we shall see, owning something and being able to enforce rights of ownership can make all the difference when it comes to tracing and recovering it.
Freeze!
If you manage to trace your bitcoin to an exchange and uncover the identity of the wallet holder, you might then be able to apply for a freezing order.
Freezing orders are a powerful tool, particularly in cases of suspected fraud, to preserve assets that belong to you but are now in the hands of someone else (a proprietary order), or assets that belong to someone else whom you suspect of wrongdoing (a Mareva injunction).
James Ramsden QC, a leading barrister and co-founder of London law firm Astraea Group, is the go-to counsel for complex, cutting edge crypto disputes. He is credited with obtaining the UK's first proprietary crypto asset freezing orders in 2018.
The first was against an unregulated FX trading platform and led to a record seizure of crypto by UK law enforcement. The second was against a crowd-funded platform operating credit cards collateralised with cold wallet crypto deposits. Here Ramsden obtained a court order compelling the platform to deliver up the cold wallets and access keys to his client.
Ramsden explains that when these disputes arose, the UK had no established guidance on the nature and status of crypto assets. He was effectively operating in uncharted legal territory, which he found exhilarating:
The judges were feeling their way as much as we were. That said, they were guided by a highly developed understanding of the technology which exemplifies why the UK is without question the leading jurisdiction for crypto disputes. Looking back, it was never in doubt that crypto was property and not a non-denominated form of currency.
These cases paved the way for the UK courts' current and claimant-friendly approach to cryptoasset litigation. As Ramsden says, if your crypto is going to get stolen, the UK is probably the best place for that to happen from a recovery point of view.
When it comes to freezing someone else's assets you will need a different type of order, known as a Mareva injunction. This will come in handy if you intend to sue the fraudsters and want to ensure that there's something left to sue them for by the time a hearing rolls around.
In either case, a freezing order does not guarantee asset recovery. Its real power is said to reside in the court's ability to imprison someone who breaches the order, or anyone served with the order who facilitates a breach. For this reason, once an order is obtained and served on banks, it can have a seriously chilling effect on a party's ability to do business.
You should also be aware that if you apply for a freezing order, you must promise the court that if you lose your case, you will compensate the other side for any loss they have suffered as a result of the order.
Weighing up these risks is often more art than science, and another reason why getting solid legal advice at an early stage is essential.
Will the real Ms Black please stand up
Can you sue someone if you don't know who or where they are? Fraudsters open accounts under assumed names and claim to work for companies that don't exist. This is something Duncan Johns leamed the hard way.
Johns was the director of Ion Science Limited, a major British manufacturer of gas detection equipment. In early 2020, Johns was approached by a man claiming to work for a Swiss investment firm who asked if Johns wanted to invest in crypto. Johns didn't, but reluctantly agreed to speak to Marilyn Black, a "senior advisor' with the firm.
Ms Black persuaded Johns to "invest" over a half million pounds worth of bitcoin in what Johns would later learn were sham ICOs. Johns was taken in by a simple but effective confidence trick. The fraudsters let Johns win, at first.
Johns' initial investment was in Ethereum and Dimecoin, legitimate digital currencies. Ms Black convinced Johns to grant her remote access to his computer and he watched in real time as she executed the trade.
The apparent success of this initial investment appears to have cemented Johns' trust in the firm and its purported advisors. So much so that Johns agreed to invest in coin offerings from Uvexo and Oileum, neither of which he'd heard of.
Johns' confidence finally faltered when after paying £250,000 in "commission" to access the Uvexo "profits", Ms Black said he had to pay more. Johns started digging and quickly learned that the firm was not registered and had even been flagged by the Swiss regulator for providing unauthorised services. Ms Black and her associates had used aliases. By this point, Johns' bitcoin was long gone.
Assisted by lawyers and specialist investigators, Johns succeeded in tracing his missing bitcoin to crypto exchanges in the US and the Cayman Islands. With a disclosure order he uncovered the identity of the owners of the wallets on the exchanges. He was also able to freeze the bitcoin on those exchanges along with the fraudsters' assets.
The fact that Johns didn't know anyone's real name was not a problem as in the UK you can obtain court orders against "persons unknown" provided you can describe them (even by way of an alias), and they would recognise themselves from that description.
It is also possible to obtain freezing orders which have effect not just in the UK but potentially anywhere in the world.
Out of sight, out of mind
Once you obtain an order you need to serve it. That is, it must be brought to a party's attention. Things get tricky where the person or company to be served is not (or is unlikely to be) in the UK, or if you don't have a postal address or physical location for them.
Johns needed to serve the order on the fraudsters outside the UK (possibly anywhere in the world) and did not have an address or location for them which would likely mean serving by alternative means. The court's permission would be needed on both counts.
To obtain permission Johns had to convince the court that he had a good case with a strong connection to the UK. He did this by showing that his bank account (which the fraudsters had accessed), his computer and his bitcoin were (or had been) located in England and were instrumental to the fraud.
The court also felt that service by alternative means was justified due to the fact that bitcoin can be moved "at the click of a button". Johns was therefore permitted to serve the order via Twitter, Instagram, WhatsApp, LinkedIn, Facebook, or by uploading it to a website.
Risky-ish business
Taking these steps won't guarantee the return of lost crypto. Court orders can be ignored, governments uncooperative and assets dissipated (for more on this see our article on foreign enforcement of UK judgments). But by not taking these steps, you will almost certainly erode any chance of recovery, however slim.
All this unpleasantness has done little to dampen bitcoin's appeal. According to a recent Gallup poll, 6% of US investors now own bitcoin, up from 2% in 2018. The perception of risk, particularly among younger investors, is changing - less than half of those aged 18 to 49 now consider bitcoin to be "very risky", compared with 71% three years ago.
Whether you are a crypto veteran or novice, do your research - and lots of it. If it looks too good to be true, it probably is. And if despite your best efforts you get burned, help is at hand - but you must act fast. And be prepared to drop some cash.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
