Crypto fraud – sluggish investigative authorities – help through crypto forensics

Crypto fraud has long been part of everyday life for many investors, companies and private individuals. With its numerous opportunities and innovations, the crypto market offers fertile ground for fraudulent activities. Crypto fraud, i.e. fraudulent behaviour in connection with digital currencies, has increased exponentially in recent years. At the same time, many of those affected complain that investigating authorities are often slow and inefficient when dealing with such cases.

We shed light on the reasons for this inertia, analyse the difficulties faced by the authorities and point out possible solutions.

What is crypto fraud?

Crypto fraud encompasses a variety of types of fraud related to digital currencies. These include, among others:

• Fake exchanges and wallets: Operators lure users to fake platforms and steal their deposits.
• Ponzi and pyramid schemes: Scammers promise high returns and pay out old investors with the money of new investors.
• Phishing attacks: Perpetrators try to obtain access data to wallets or trading platforms using fake e-mails or websites.
• Rug pulls: Developers of crypto projects suddenly disappear with the money invested by investors.
• Extortion and ransomware: Attackers demand ransom payments in cryptocurrencies for the release of data.
• Love Scam: Men and women are seduced by an Internet love to make payments for alleged emergencies

The anonymity and decentralised nature of many cryptocurrencies make it easy to conceal criminal activities. Transactions are often not easily traceable and criminals often operate internationally.

The role of the investigating authorities

Investigating authorities such as the police, public prosecutor's office or specialised cybercrime units are responsible for investigating and prosecuting such offences in Germany and Europe. In many cases, however, victims complain that the processing of their reports is slow or that investigations are even stopped altogether.

Exemplary challenges:

• Technical complexity: The way blockchain, DeFi (decentralised finance) and smart contracts work poses enormous challenges for many investigation teams. Specialist knowledge is required to track transactions or analyse wallets.
• Lack of resources: Cybercrime units are often understaffed and confronted with a large number of technologically demanding cases. Training in modern technologies often lags behind developments.
• International dimension: Crypto fraud often crosses national borders. The perpetrators are based abroad, while the victims live in Germany or the EU. Mutual legal assistance proceedings are lengthy and bureaucratic.
• Legal uncertainties: As many legislations are still in a state of flux, authorities often lack clear legal guidelines. The interpretation of existing laws in crypto cases is fraught with uncertainty.
• Lack of standards: There are hardly any standardised procedures for securing and evaluating digital evidence in crypto cases. International cooperation is also poorly coordinated in some cases.

Examples of inert processing

Those affected repeatedly report the following problems:

• Weeks or months of waiting for feedback after the report has been filed.
• Lack of communication and transparency on the part of the investigating authorities.
• The shifting of responsibility between different authorities and competences.
• Frequent discontinuation of proceedings due to lack of prospect of success or "too little damage".
• Insufficient information on the status of the investigation.

Such experiences lead to frustration, loss of trust in the authorities and sometimes also to those affected not making any further reports.

Causes of inertia

Why do investigating authorities so often get bogged down in crypto fraud?

Lack of expertise

Blockchain technology and the rapid development of new crypto products present investigative authorities with major knowledge gaps. Although further training and specialisations are offered, the number of experts is not keeping pace with the growing number of cases.

Overload and prioritisation

Cybercrime is a broad field - from hacking, child pornography and identity theft to crypto fraud. As resources are limited, priority is given to particularly serious or mass offences. Crypto fraud, which is often seen as an "economic risk", frequently slips down the list of priorities.

Lack of international co-operation

As many offenders are based abroad, investigating authorities are dependent on international cooperation. Requests for legal assistance, translations and coordination with other judicial systems take time and often lead to considerable delays.

Technical hurdles

Securing wallets, tracking transactions and analysing blockchain data not only requires specialist knowledge, but also powerful technical tools. Many authorities do not have the necessary equipment or software.

Legal grey areas

Many questions regarding the legal status of cryptocurrencies and the legal framework are still unresolved. This makes prosecution more difficult and leads to uncertainties in dealing with evidence and perpetrators

Consequences for the victims

People who fall victim to crypto fraud often face serious problems:

• High financial losses, often savings or investments.
• Emotional stress, including feelings of despair and guilt.
• difficulties in asserting their own claims under civil law.
• Low probability of ever recovering the stolen money.

Many victims feel left alone and not taken seriously. The inhibition threshold for making a complaint increases.

Possible solutions

How could the situation be improved?

Expansion of expertise and further training

Regular, practical training and the targeted development of crypto expertise within the investigating authorities are essential. The establishment of specialised cybercrime teams with experts in IT, forensics and law could help to process cases more efficiently.

Improve technical equipment

Modern analysis and tracking tools for blockchain transactions must be available across the board. Co-operations with technology partners or service providers from the private sector could create synergies.

Clear legal framework

Modern legislation that takes into account the special features of cryptocurrencies gives investigating authorities more certainty in their actions. Uniform standards for the preservation of evidence and international cooperation would speed up investigations.

Stronger international networking

More bilateral and multilateral agreements and joint task forces could help to prosecute offenders more effectively across borders.

Sensitisation and prevention

Information campaigns, education about risks and protection options as well as low-threshold counselling services for those affected and potentially at risk should be expanded.

Help from external crypto forensics companies

Areas of responsibility of crypto forensics

The work of crypto forensic experts is diverse and ranges from investigating criminal activities to supporting authorities, companies or private individuals. The most important tasks include

• Analysing transaction data and wallet addresses
• Creation of movement profiles (tracing)
• Identification of money laundering and concealment techniques
• Preservation of evidence for court proceedings
• Cooperation with international investigative authorities
• Training and counselling for institutions on risks and prevention

Cryptocurrencies know no national borders - and so crypto forensic experts also have to think internationally.

Co-operation with authorities, IT security companies, exchanges and investigators in other countries is crucial. Platforms such as Europol, Interpol or specialised task forces and working groups facilitate the exchange of knowledge and data.

Companies like the Krypto Investigation GmbH contribute significantly to the investigation of fraud in the cryptocurrency sector. The knowledge they gain enables investigating authorities to offer targeted support to affected victims.

In addition to prosecuting the perpetrators, in many cases it is also possible to secure the lost assets. The prerequisite for this is the willingness of the investigating authorities to co-operate with external service providers.

The expertise specialised companies is appreciated by the authorities and regularly utilised.

Effective cooperation between the public prosecutor's office, police and crypto forensics experts

For victims of crypto fraud, hiring their own crypto forensic expert can represent an additional financial burden in addition to cooperating with law enforcement authorities. Nevertheless, this combination significantly increases the chances of compensating or at least minimising losses.

Serious Crypto forensic experts discuss the cost-benefit ratio in detail with the parties concerned before accepting the order in order to facilitate well-founded decision-making.

FAQs – Frequently Asked Questions about Crypto Fraud