Cryptocurrencies are anonymous and untraceable. The cryptocurrency system is decentralized, meaning there is no central server, administrator or manager. It is based on a network distributed across a large number of computers with users completing transactions through applications on smartphones or computers. Therefore, in order for law enforcement officials to freeze and confiscate cryptocurrency, they need to gain control of a user’s cryptocurrency wallet and transfer the criminal proceeds to the law enforcement agency’s own wallet.
National responses to cryptocurrency risks should include the following components:
Understanding: build awareness and a knowledge-base among policymakers, law enforcement and supervisors who understand how cryptocurrencies work
- Investigation: build law enforcement capacity to trace cryptocurrency
- Seizure and Confiscation
- Regulation and Supervision
More in-depth knowledge is available through UNODC’s Cryptocurrency Training
Three magic principles for cryptocurrency investigations
The tracing, seizure, confiscation and regulation of cryptocurrencies is based on “Three Magic Principles”:
This video provides further insight into how these principles work.
Tracing cryptocurrency
Cryptocurrency transactions are anonymous; however, there are ways to trace transactions despite their anonymity. Investigators need to trace the transactions (coins) to the “gatekeeper” (exchange or dealer – further explained here), request information about the identity of the gatekeeper’s clients and then trace along the chain of transactions.
In order to effectively investigate and trace cryptocurrency, government agencies need to:
Obtain specialist investigation software that allows the tracing of cryptocurrency flows
- Train investigators how to trace cryptocurrency
- …and start investigating
Seizure and confiscation
In most cases, the only way to seize and confiscate cryptocurrency coins is to identify a password (known as a “private key”) and transfer the coins to the law enforcement agency’s cryptocurrency wallet.
In order to do so, officers have to look for the “cryptocurrency artifacts”, the material media that contain private keys e.g. twelve words that make a “recovery phrase”. These artifacts are mostly found during the search of cars and premises or the arrest of a suspect.
UNODC Cryptocurrency Training provides information about artifacts, where they may be found and how to use them. It also includes practical exercises with real artifacts and real coins.
