Five Tips for Crypto Funds Recovery from Legal Experts

Cryptocurrency has revolutionized the financial world, offering new opportunities to sophisticated investors and ordinary consumers. However, with its rise, there has also been a concomitant increase in user losses at the hands of crypto frauds, scams, and thefts. Due to the irreversible nature of blockchain transactions, recovering these digital assets is often a daunting task, especially since many victims suffer feelings of shame and stigma after being targeted. In this blog post, we outline five key dos and don’ts to help you improve your chances of recovering your crypto in the unfortunate event you fall victim to these increasingly common schemes.

1.     Immediately report the scheme to the authorities and the crypto platform: Time is truly of the essence when it comes to recovering crypto funds, as they become more difficult to trace with every passing minute. As part of a laundering technique called “chain hopping”, malicious actors often immediately launder the ill-gotten funds through several different cryptocurrency addresses and exchanges in an effort to layer the proceeds into new ecosystems, thereby disguising the true nature, source, control and ownership of the funds. [1] Accordingly, promptly reporting your loss to law enforcement can significantly improve your chances of reclaiming your crypto. Indeed, in April 2023, when the DOJ seized and returned over $112 million in crypto to victims, it emphasized how crucial the early notifications from victims were in facilitating the recovery efforts. [2] (Victims can make reports with the Commodities and Futures Trade Commission, the FBI’s Internet Crime Complaint Center (IC3), and the Federal Trade Commission, as well as with local authorities and on the applicable crypto platforms.)

2.     Consult with a crypto attorney as soon as possible: While it might seem meaningless to speak with counsel about your loss if the true identity of the perpetrator and many of the details behind the scheme are shrouded in anonymity, don’t rule this out. First, a good crypto attorney may be able to work quickly to freeze a perpetrator’s funds before its too late. Beyond the perpetrator, other third parties like cryptocurrency and social media platforms often owe legal duties to their users to protect them from being victimized by scams and could also be held legally responsible for your loss. Dynamis, for example, recently filed a federal lawsuit against Binance and its ex-CEO on behalf of approximately 30 individuals whose $13+ million in stolen crypto funds were laundered on the Binance exchange due to Binance’s lax and federally non-compliant anti-money laundering procedures.

3.     Beware of crypto recovery scams: Don’t be double duped!  Sadly, crypto crime is an extremely lucrative industry—in 2022 alone, criminals raked in over $2.5 billion. [3] This unfortunate reality is exacerbated by the proliferation of shady “crypto recovery” schemes aiming to re-victimize many consumers. One common variant of the scheme involves what is known as “recycling”, where fraudsters reuse or sell their lists of victims of their crypto crimes so that these individuals can be re-targeted for the new schemes.[4] Posing as private recovery companies and very often claiming affiliation with law enforcement, these new scammers promise to trace and/or recover the lost crypto for an upfront fee, only to disappear, continuously demand more money, or produce incomplete or inaccurate tracing reports. [5]  All victims must be vigilant to avoid falling into the trap of these follow-on schemes. Don’t let your eagerness to recover your funds drive you into the arms of another malicious actor—exercise caution and conduct thorough research before retaining any crypto recovery or tracing service.

4.     Collect and preserve all records: As with reports to law enforcement, the collection and preservation of the records related to your loss must be completed as soon as possible after the incident. This includes records in the crypto platform, the relevant cryptocurrency addresses and transaction hashes, any bank account information, and the names, contact information and all correspondence with the perpetrator(s). On the last item, scammers will often block your profile. Many social media platforms do not allow you to access prior correspondence with individuals who have blocked your profile, therefore swift action is essential.

5.     Use social media wisely: Many victims turn to social media platforms like Reddit and Facebook to both seek solace and to spread the word in the aftermath of their loss. This is logical, but it is important to exercise good judgment when posting or otherwise engaging with individuals on these platforms. Many of the crypto recovery schemes mentioned above also target victims who have posted about their ordeals on these platforms. [6] Victims should also be aware that any messages posted or sent on these platforms could be subject to disclosure in any future legal proceedings related to the scheme, so particular attention must be paid to their accuracy.

Recovering lost cryptocurrency is a tedious and emotionally draining process, but it is not impossible. It’s essential to keep a cool head and not let emotions dictate your actions. The process requires patience and deliberate, strategic action. Report incidents promptly, seek legal counsel, and be wary of recovery scams. Most importantly, let your experience serve as a lesson to reinforce your security measures and practices in the future.

[1]           See U.S. Department of Justice, "Cyber Scam Organization Disrupted Through Seizure of Nearly $9M in Crypto", Office of Public Affairs, November 21, 2023. https://www.justice.gov/opa/pr/cyber-scam-organization-disrupted-through-seizure-nearly-9m-crypto (last accessed June 6, 2024).

[2]            See U.S. Department of Justice, "Justice Department Seizes Over $112M in Funds Linked to Cryptocurrency Investment Schemes", Office of Public Affairs, April 3, 2023. https://www.justice.gov/opa/pr/justice-department-seizes-over-112m-funds-linked-cryptocurrency-investment-schemes (last accessed June 6, 2024).

[3]           See Federal Bureau of Investigation, "Public Service Announcement: Cryptocurrency Investment Fraud", Internet Crime Complaint Center (IC3), August 11, 2023. https://www.ic3.gov/Media/Y2023/PSA230811 (last accessed June 6, 2024).

[4]           See Commodity Futures Trading Commission, "Don't be Re-Victimized by Recovery Frauds", Learn & Protect. https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/RecoveryFrauds.html (last accessed June 6, 2024).

[5]           See Federal Bureau of Investigation, "Public Service Announcement: Cryptocurrency Investment Fraud", Internet Crime Complaint Center (IC3), August 11, 2023. https://www.ic3.gov/Media/Y2023/PSA230811 (last accessed June 6, 2024).

[6]           Ibid.