Tracing cryptoassets and their increasing role in insolvency portfolios


Cryptoassets are often the currency of choice for cyber criminals due to the anonymity, or pseudonymity, that they can offer the fraudster. However, the value of cryptoassets that are being traced and recovered is growing year on year, as law enforcement agencies and asset tracing service providers have become savvy about the ways in which fraudsters seek to evade detection. Cryptoassets are also increasingly forming part of the assets in insolvencies and so Insolvency Practitioners (IPs) are having to get to grips with dealing with them and realising their value for the benefit of creditors.

Ransomware attacks and tracing

Ransomware attacks have unfortunately become increasingly prevalent in recent years. The fraudster will use ransomware to hack into and lock an individual's or company's computer system or database and then demand a large ransom in order for it to be unlocked, often in the form of cryptoassets.

Once the ransom is sent, the fraudster will seek to dissipate the cryptocurrency using a range of sophisticated strategies, in the hope that the monies cannot be traced back to them.

However, each time a cryptoasset is moved, an immutable record is created on a blockchain. This record cannot be changed and will remain on the blockchain forever. Therefore, whilst it still requires sophisticated software and expertise, such cryptoassets are able to be traced and ultimately recovered. This is now occurring in a growing number of cases via the use of specialist investigators and asset-tracing service providers.

Some experts believe that criminals will stop using cryptoassets within the next 4-5 years, precisely because of the ability to trace them in this way.

Regulation as a deterrent

Regulatory instruments such as the EU Fifth Anti-Money Laundering Directive have gone some way to deterring fraudsters, by obliging virtual currency providers and custodian wallet providers to undertake due diligence at the point of exchange of cryptoassets for fiat currency. As such all cryptocurrency exchanges must register with the FCA.

The degree of regulation depends upon the nature of the cryptoasset. Exchange tokens (such as Bitcoin and other cryptocurrencies) are only regulated in the UK for money laundering purposes. Security tokens, on the other hand, fall with the FCA's regulatory perimeter. Expansion of the FCA regulatory perimeter is continually under review to keep pace with this quickly evolving area.

Given that cryptocurrency exchanges and wallet providers are subject to such regulatory obligations, asset-tracing service providers have found that such entities are often more forthcoming with information than traditional financial institutions.

Cryptoassets in insolvency

The popularity of cryptoassets as an investable asset class has risen exponentially in recent years. Often referred to as 'Digital Gold', cryptoassets are increasingly forming part of investors' portfolios, particularly cryptocurrencies and Non-Fungible Tokens ("NFTs").

NFTs are essentially certificates of ownership associated with a digital or physical asset (for example a piece of artwork or music) that sit on a blockchain and so act as a public proof of ownership in relation to the asset. These have become increasingly popular and can generate significant value for those that create or sell them.

Insolvency Practitioners are therefore finding themselves dealing with cryptoassets when appointed as trustees in bankruptcy. They are obliged to maximise the realisations from the bankrupt's assets for the benefit of his/her creditors. Whilst there are challenges for IPs when dealing with cryptoassets (not least the volatility of their value), in fact cryptoassets cannot be lost, stolen or damaged as easily as many traditional physical assets (for example, the bankrupt's home, car or other valuable possessions).

IPs therefore need not be as concerned when dealing with cryptoassets as they once might have been. They are non-perishable, can be traced (via their immutable record on a blockchain) and continue to hold and increase in value, at least for the moment. 


In the past there has been some trepidation towards cryptoassets. However, given their traceability, they may well prove to become less popular with criminals in the medium term. In the context of insolvency, IPs will likely become more comfortable with dealing with cryptoassets as more is known now about their properties and their treatment by the courts and regulators. They will undoubtedly feature more frequently in insolvencies going forwards.

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Some experts believe that criminals will stop using cryptoassets within the next 4-5 years, precisely because of their traceability.

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