Unravelling the Challenges: Legal and Technical Obstacles to Recovering Crypto

Crypto assets are becoming increasingly embedded in commercial activity; not just for digital‑native companies but increasingly across mainstream sectors. As adoption grows, businesses are discovering that recovering stolen or misappropriated cryptoassets can be more complex than traditional asset recovery. The reasons for this are rooted in a combination of technological design, fragmented regulation and the speed at which bad actors can dissipate assets. 

This article explains the unique characteristics of cryptoassets and the blockchain which can complicate recovery on the one hand and the steps and techniques that can be used to aid recovery on the other.

The nature of blockchain 

The immutability of blockchain transactions is both a desired feature and a risk. Once confirmed, a crypto transfer cannot be reversed. Unlike traditional banking transactions, there is no central authority to pull back a payment, freeze an account or intervene to prevent further movement. 

Further most exchanges make clear in their user agreements that they do not accept liability for client losses, including in cases of hacking, and reimbursement is only considered where negligence can be proved. Combined, these factors mean that if funds land in a fraudster’s self‑custody wallet, recovery becomes near‑impossible unless the perpetrator cooperates. 

Anonymity and obfuscation

Crypto transactions are pseudonymous: every movement is visible on the blockchain, but the individuals behind wallet addresses are not. Unmasking the person controlling a wallet often requires formal disclosure orders against exchanges or assistance from law enforcement. Without that cooperation, even the most sophisticated tracing tools cannot map digital fingerprints back to real‑world identities.

Where bad actors deploy obfuscation tools, the problem intensifies. "Mixers"[1] break the link between sender and recipient by pooling multiple transactions; "privacy coins"[2] conceal transaction amounts and wallet identities; decentralised exchanges allow anonymous swaps without KYC obligations; and “chain hopping”[3] erodes transparency with every transfer. In combination, these tools make forensic tracing exceptionally difficult, even for experts.

Jurisdictional complexities

Crypto assets are borderless, and so is crypto crime. A theft may occur in one country, assets may move through wallets held in another and exchanges facilitating the transfers may be based in a third. 

This raises practical questions: which court should hear the dispute, what law applies, and how can orders be enforced across multiple jurisdictions? Even where English courts accept jurisdiction, enforcing orders internationally can be slow, costly, and sometimes ineffective.

Cost and time pressures

Effective recovery typically requires instructing blockchain forensic experts, pursuing injunctions and engaging specialist legal teams. For many victims, especially where losses are modest relative to the cost of recovery, this may not be economically viable. Meanwhile, speed is critical. Assets can move across dozens of wallets and multiple blockchains in seconds; delays erode the chances of recovery exponentially.

How the legal sector is tackling the problem 

Despite these obstacles, all is not lost. Courts have proved increasingly agile and willing to adapt traditional principles to the realities of digital assets. 

Proprietary injunctions have been granted over cryptocurrency; disclosure orders have been made against exchanges worldwide; service by NFT has been permitted; and the courts have accepted that crypto assets constitute property capable of being traced. Recent reforms under the Proceeds of Crime Act (POCA) and the Economic Crime and Corporate Transparency Act (ECCTA) further expand the state’s ability to freeze, seize and manage crypto assets in criminal and civil contexts.

Effective protection and response

Given the complexities involved, what can potential and actual victims do? 

1. Develop knowledge within your organisation. Siloed specialist expertise around crypto can represent a risk to fraud detection – it could even enable a bad actor within the organisation.
2. Don’t assume crypto transactions are untraceable or unrecoverable. Build fraud‑response processes that include crypto.
3. Capture all available information at the outset. Having an effective response plan in place is key and it should set out the steps to be taken to investigate and capture information quickly.
4. Don’t delay getting the experts on board. Blockchain forensic expertise and specialist legal advice is essential to trace assets and use the legal tools available effectively. 

Crypto asset recovery remains a highly complex exercise requiring technical expertise, legal innovation and rapid action. For businesses, the message is clear: prevention, preparation, and early response are critical.