Blockchain tracing has become an essential tool in the fight against crypto fraud in the past 2 years, especially when stolen funds are funneled through blockchain networks. The transparency of the blockchain allows experts to track fraudulent transactions, even if they go through multiple addresses or complex routes. This creates legal opportunities to secure the stolen digital assets and crack down on fraudsters.

Detection of exchanges and KYC data.

Blockchaintracing can link specific blockchain addresses to regulated crypto-exchanges that apply Know Your Customer (KYC) procedures. This means that as soon as crypto currency lands on an exchange account, the identity of the account holder is traceable. This does always require a lawsuit, as crypto is transmitted anonymously. Fraudsters usually have no plausible explanation for receiving crypto from fraud in their account, as there was no quid pro quo in return for the receipt. In fact, these are sham transactions to individuals who cannot prove entitlement to the crypto going into their accounts. This lack of legitimacy strengthens the position of victims in legal proceedings. These are not easy, by the way – the cases are almost always international in nature.

Freezing accounts and freezing orders

Virtually all exchanges have in their terms and conditions that they can freeze accounts if fraud or money laundering is suspected. This does not mean that they simply freeze accounts based on the first request from a third party. Engaging a specialized lawyer and a tracing agency with a proven track record is essential. Unfortunately, there are also foreign agencies that are very expensive and promise a lot but deliver nothing. A tracing report from a specialized Dutch agency such as Dataexpert not only shows the route of the stolen crypto, but has been accepted as objective evidence by courts several times. Dutch judges have now issued numerous freezing orders based on such reports, thus securing the value for victims.

Complex money laundering routes and causal relationships

Even with new, sophisticated money laundering routes – such as shredding amounts to stay under the radar of exchanges’ transaction monitoring, swapping crypto into other types (swaps) or using multiple blockchains – experts can demonstrate causal links . For example:

  • Stolen crypto is often divided into smaller portions via intermediate addresses, but eventually comes back together in clusters. It can be inferred that crypto shipments take place within the criminal chain

  • Through analysis of transaction patterns, it appears that these portions can ultimately be traced back to the original fraud or even that there is a scam cluster, to which crypto from other frauds also flows

  • These insights are not always visible to exchanges but are crucial in convincing exchanges to temporarily block accounts.

Risks and limitations

Any kind of investigation is behind the times. A key risk remains that fraudsters quickly resell crypto or channel it through other blockchains. Quick action is therefore essential: as soon as a receiving exchange address is identified, it should be frozen immediately. On the other hand, many victims and investigative agencies do nothing, so fraudsters can also feel safe with an exchange and keep their crypto with an exchange for a longer period of time because they do not consider freezing the account. The chance of being caught is low because most victims do nothing.

Case law and cooperation

Our office cooperates with Data Expert, which uses the most advanced tools from Chainalysis and TRM Labs. This software not only detects transaction routes, but also classifies wallets based on risk profiles. Thanks to this collaboration, case law has emerged in which Dutch judges accept blockchaintracing as reliable evidence. The technology is constantly developing, for example through improved detection of crypto-swaps and mixers and updating identifying information on nested services (hidden exchanges), for example. Proactive and appropriate action – combinations of tracing reports, freezing orders and cooperation with exchanges – is the most effective approach to recovering stolen crypto with an increasing success rate, although it must be said that there are exchanges that do not cooperate well and ignore court orders, or hide behind a complex structure. In those cases, this in turn can lead to another type of lawsuit claiming damages from the exchange for failure to comply with a freezing order. From this, a further disciplining of exchanges can be expected. We are convinced that blockchaintracing is essential to keeping the crypto world clean and fighting abuses.