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Understanding Crypto Fraud, Investigations and Asset Tracing part 3

After exploring the diverse landscape of blockchain and cryptocurrency frauds in our first article, and delving into the array of disputes in our second installment, we now turn our attention to legal recourse in blockchain and cryptocurrency disputes. In this final article of our series, we’ll examine strategies to mitigate risks and navigate the legal complexities inherent in this dynamic industry.

Legal Recourse in Blockchain and Cryptocurrency Disputes

In light of the various instances of fraud and dispute in the DeFi space, the law must quickly catch up to the technology. The following are some legal tools used to settle disputes:

  • Technical Expertise. Experts are essential in situations where legal practitioners are unable to handle technical complexities. Experts in cryptocurrency, blockchain technology, and cybersecurity may be asked to share their knowledge and perspectives on the technical aspects of a disagreement. More importantly, lawyers are beginning to specialise in DeFi disputes, allowing them to gain a holistic perspective on both the technical aspects and legal regulations that apply in a dispute.
  • Asset Tracing and Recovery. Recovering assets is one of the main issues in bitcoin disputes. Legal practitioners can use both on-chain and off-chain investigative methods to identify and locate digital assets linked to a dispute by hiring blockchain forensic specialists. Additionally, asset recovery could include getting court orders to repay diverted cash or freezing accounts.
  • Mediation and Arbitration. As an alternative to traditional litigation, mediation and arbitration offer parties a more collaborative means of resolving disputes. Compared to conventional court proceedings, these techniques are quicker and more affordable while preserving confidentiality and flexibility.
  • Litigation. Litigation may be pursued in situations where other dispute resolution methods are ineffective. Recent case law shows that the Singapore High Court has recognised the following possibilities for relief for fraud victims in relation to cryptocurrencies:
    • i. The Court has jurisdiction to grant injunctive relief against persons unknown;
    • ii. A proprietary injunction may be obtained against persons unknown prohibiting them from dealing with, disposing of, or diminishing the value of identified crypto assets;
    • iii. A worldwide freezing injunction against persons unknown with the same prohibitions; and
    • iv. Ancillary disclosure orders, i.e., Banker’s Trust orders, against foreign exchanges to assist in the tracing of stolen crypto assets and identification of these Persons Unknown.

However, given the novelty of these situations (see Part 2 of our note for analysis), we recommend that you seek legal advice and pursue dispute avoidance and management prior to commencing litigation.

Avoiding Blockchain and Cryptocurrency Disputes

Crypto users and retail investors need to approach the DeFi space with caution. The following are ways to guard against potential disputes before they occur:

  • Due Diligence. Conducting thorough research to understand blockchain projects and investment opportunities is essential to avoid falling victim. Investors must remain vigilant, and should carefully examine project whitepapers, check community feedback, and analyse the credentials of developers. Some reputable sources such as CoinDesk, CoinTelegraph, and project forums can help investors avoid illegitimate or poorly managed projects.
  • Trust & Security. To prevent asset loss or theft, maintaining a high level of security is a top priority for investors in the cryptocurrency space. Utilising hardware wallets or credible software wallets is recommended to safeguard digital assets. In addition, enabling two-factor authentication whenever available adds an extra layer of security. Always do your research to ensure the software, app or data you access is trustworthy to guard against fraud.

For DeFi companies, there are strategies and measures that can be put in place to reduce the likelihood of disputes arising from misunderstandings:

  • Smart Contract Audits. Conducting comprehensive audits by reputable third-party firms is crucial to prioritise smart contract security. These audits will provide a range of benefits, including the identification of coding errors or vulnerabilities, not only reducing the risk of disputes stemming from these areas, but also strengthening the security of the system, reinforcing user confidence.
  • Regulatory Compliance. As the blockchain space matures, regulatory scrutiny increases. Businesses should stay informed about regulatory developments and must ensure that they comply with local regulations and laws. Proactive compliance with regulations would not only avoid legal disputes, but would also position the company as a responsible participant in the industry, strengthening the company’s brand and reputation.
  • Read the White Paper & Be Well-advised Cryptocurrencies go through a development process. Locate, access or request for a copy of the White Paper. If it’s a legitimate white paper, it clearly describes the protocols and blockchain, outlines the formulas, and explains how the entire network functions. Fraudulent cryptocurrencies don’t produce thoroughly written and researched white papers. Err on the side of caution, and seek legal/financial advice before making an investment into crypto.

The cryptocurrency and blockchain space is currently saturated with both excitement and caution. It is a polarising new dimension of finance that may attract both irresponsible and forward-thinking actors. Nonetheless, it is a dimension that only seems to be growing. As the technology matures, so too will the law expand to manage the risks and complexities of the technology.

Lawyers have begun to specialise and investigate the intricacies of the DeFi space, while regulators are working to write up policy to govern the technology. The tension between decentralised freedom and necessary regulation is a crucial one to balance, and one the law must and will provide for.

As we conclude our series on blockchain and cryptocurrency, we’ve explored the landscape of frauds, disputes, and legal recourse in this dynamic industry. We hope these insights have provided valuable knowledge and strategies for navigating the complexities of blockchain and cryptocurrency. Should you have any further questions about crypto fraud, investigations, or asset tracing, please don’t hesitate to reach out to us.

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