Cryptocurrency in Fraud Investigations


“Cash is king.” Remember that phrase? It helped define how powerful cash could be in any given transaction. It simplifies things. Cash could give you preference over someone paying by check or by credit card.

Cash is also hard to trace, making it easier to hide and difficult to quantify losses in theft, embezzlement and hidden asset cases. However, like all kings, they can be defeated, and the reign of cash could be coming to an end.

The Rise of Cryptocurrency

Cryptocurrency is here. Thanks to blockchain technology, cryptocurrency is a foregone conclusion. There are more than 4,000 cryptocurrencies available and while most hold little to no value, some like Bitcoin and Ethereum are gaining traction as a means to diversify one’s investments. As the U.S. dollar continues to lose value, more and more people are turning to cryptocurrency to fight the effects of inflation.

Blockchain technology uses a decentralized system where information is stored over an encrypted peer-to-peer network. This allows cryptocurrency transactions to occur in a secure environment and in a pseudo-anonymous fashion.

Here’s what you need to know about blockchain technology and its impact to your business.

Why Cryptocurrency Could Be Susceptible to Fraud

Although all transactions on a public blockchain are recorded and openly shared, there is no real personally identifiable information. Combine this with the fact that cryptocurrency is still relatively new and not generally accepted, it can be an attractive option for fraudsters.

Let’s remember why cash has always been so popular with fraudsters, organized crime, and money laundering. Other methods such as check payments, credit cards, electronic transfers, and even money orders all leave a paper trail for investigators to follow.

Enter cryptocurrency. An intangible asset given its value by the people rather than the government. In a decentralized blockchain, there is no bank, no opening of bank accounts, no signature cards, or Federal banking laws and regulations. There is no “know your customer” with cryptocurrency. Since blockchain is not a bank, anyone can make transactions with cryptocurrency on an open blockchain for free, 24 hours a day, seven days a week, all over the world.

Cryptocurrency is not without its faults. If the blockchain is decentralized and not regulated, this means no one is ensuring your digital assets will not be lost. Cryptocurrency is owned by whomever owns the private key (think: super annoyingly difficult password) associated with it. If you lose the private key, you lose the asset. There are plenty of horror stories online of people losing millions of dollars in Bitcoin or Ethereum because they lost their private key. Keeping cryptocurrency in an online wallet can help but can also make it vulnerable to cyberattacks.

Although cash can still be hard to trace, it is also regulated and tangible. Would a person believe it harder to hide $50,000 in cash or a single Bitcoin? They both carry the same general value, but vastly different methods of storage and maintenance.

Consider the following scenarios:

  • A warehouse employee sells inventory for personal gain in exchange for cryptocurrency payments.
  • A spouse decides to hide assets from divorce proceeding by purchasing cryptocurrency and making numerous transactions using the blockchain.
  • An individual maintains cryptocurrency using an online wallet. The wallet is hacked, and they lose their assets.

Each of these scenarios require a different investigative approach than the traditional theft of cash. Evidence such as deposit records, large duffle bags of cash, and transfers to offshore bank accounts may not exist. Since a large value of cryptocurrency can be stored on something as small as a flash drive, digital assets may soon become most fraudsters’ preferred method of doing business.

Fraudsters may also find it convenient to convert cryptocurrency back to cash as it is a relatively simple process. Online exchanges, such as Binance and Coinbase, allow users to sell their cryptocurrency for cash (and a fee, of course).

The downside is that pesky paper trail that fraudsters are trying to avoid. Since the government considers cryptocurrency a security, and any online exchange that is legal to use within the United States is regulated by the Securities and Exchange Commission. However, nothing is stopping someone from selling their crypto assets to other individuals for cash.

How to Protect Yourself Against Fraud When it Comes to Cryptocurrency

There is a silver lining to all of this. Although it sounds complicated, the general methodology is the same. Follow the money.

Forensic accountants and fraud examiners can apply their current knowledge and experience with blockchain and forensic accounting knowledge to continue finding the answers in these examinations. The art of cryptocurrency tracing can help in situations like:

  • Divorce
  • Bankruptcy
  • Asset conversion
  • Fraud and corruption
  • Insurance claims
  • Litigation

Cash may still be king, but one cannot ignore the potential impact cryptocurrency has for the future. It’s best to be prepared.

Having a strong forensic accountant on your side is vital. But it doesn’t have to be costly.

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