24 Aug 2021

Cryptocurrency and anonymity – why the two do not necessarily go hand in hand

A recent UK case has established the principle that exchanges must help identify fraudsters using their platforms, reports Syed Rahman 

Portrait photograph of Syed Rahmen

Syed Rahman

A regular feature of crypto crime has been the seemingly uphill struggle to establish who took the assets and where they are keeping them. There then follows the challenge of determining the best way to recover them. 

The nature of cryptocurrency can make it much more difficult to trace and recover such assets than it is to regain more tangible assets. The limited amount of information available about those using cryptocurrency and its exchanges have posed obstacles to those who have lost such assets and are looking for a way to acquire them again.

Anonymity

Yet in a case that we are involved in, we have been able to go some way to dispelling the long-held belief that those involved in crypto-related crime can always rely on anonymity to help them avoid identification. Anonymity in the cryptocurrency world has not been as freely available as some may believe. Our case has gone a long way to confirming this.

Fraudsters hacked their way into our client’s cryptocurrency accounts that were held on the Binance exchange. They could not remove the assets from the accounts due to safeguards, so they traded the assets to a third party linked to themselves at a fraction of their true value before then selling those assets at their proper value and taking their illegal gains out of the exchange. This left our client facing losses estimated at over $2.6m.

It is inarguable that both the lack of regulation surrounding cryptocurrency and the rapid rate of its development have ensured that it has become the tool of choice for many looking to make illegal gains. But what could always be argued against was the assumption that those involved in such activity would remain anonymous. 

Making use of the right tools and the correct application of the most appropriate procedures ensure that it is possible to track, locate and recover cryptoassets that have been taken illegally. It is both inaccurate and misleading to assume that people can make legal or illegal use of cryptocurrency without there being any possibility of them being identified. While it is certainly the case that cryptocurrency-related activity can be conducted with no prospect of your identity being known in the immediate future, anyone looking for a permanent guarantee of anonymity will look in vain.

Principle

In our case, Fetch AI Limited, Fetch AI Foundation PTE v Persons Unknown, Binance Holdings and Binance Markets, the High Court in London ordered Binance to both identify those who carried out the hack and freeze their accounts. It is a case that establishes the principle that cryptocurrency exchanges should be doing what they can to identify those who are using their facilities to make illegal gains. 

The $2.6m at stake in this case is in no way huge by the standards of cryptocurrency crime, although it is obviously a very significant amount to our client. But the fact that the court has ordered one of the largest cryptocurrency exchanges in the world to take steps to combat its rogue users and assist those who lost assets on it will be important whenever other such cases of cryptocurrency fraud come to court.

There will be many parties in the future who look to the law to help them locate and recover crypto assets that have been taken from them through illegal means. The challenge of trying to recover assets that are rightfully theirs can be incredibly difficult if there is no way of knowing who has taken them and where they are now held. But the High Court has now made it clear that anonymity is not something that those involved in such wrongdoing can take for granted.

This was a case that showed the highly sophisticated levels of planning that are being employed by those who aim to make illegal gains from cryptocurrency. The way they sought to steal the assets was not a practice that had come to light before, and it emphasises that the nature of such crime is constantly evolving. 

Such a situation creates a need for more intensive oversight from regulators, better communication from crypto exchanges to their users and a willingness to learn from what has happened – or a combination of all three. But this particular case has at least shown that the courts of England and Wales are prepared to do what they can to help those who have lost assets to crypto fraud, while ensuring that those responsible are not protected by a cloak of anonymity.

Syed Rahman is a partner at London financial crime specialists firm Rahman Ravelli

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