Newsletters Business Crime & Financial Services 27th Nov 2017

As a $31m Crypto-Currency Heist is Revealed, is there a Wave of Crypto-Crime Litigation on the Horizon?

On 19th November 2017 the company Tether, an online exchange which facilitates trades between crypto-currencies and traditional currencies was subject to a cyber-heist worth nearly $31mUSD.

Undoubtedly, crypto-currency (‘crypto’) has now crossed over into the mainstream. What began nearly ten years ago as a quasi-mythical, anti-establishment underground movement has been brought into the glaring light. Crypto is the subject of celebrity endorsements, extensive (social and traditional) media marketing campaigns, and, increasingly, scrutiny of its opportunities and pitfalls from investors, regulators, and criminals alike. In short, it is something with which business crime and regulatory lawyers will have to get to grips, and soon.

Cryptos provide the opportunity to make money, legitimately or illegitimately, and there can be serious sums involved – Bitcoin, the original and biggest crypto, has a current market capitalisation value of around $137 billion. To put that in context, that is slightly more than the McDonalds Corporation. One year ago, a single Bitcoin was worth approximately $740USD; today, the same Bitcoin is worth approximately $8320USD, representing an increase of more than 1000%. The number of Cryptos is burgeoning, with around 900 now in operation.

What are cryptos? While the mechanics may be complex, at a basic level, they work like any other currency – it is digital money exchanged for goods and services. Cryptos are designed to be secure, anonymous and fast.


The security of the currency is provided by cryptography (hence the name), the practice and study of techniques for secure communication, which is heavily based on mathematical theory and computer science practice. The security of, for example, Bitcoin, derives from a network of peers. Where there is a transaction in which A sends X Bitcoins to B, there is a file created reflecting this transaction. This file is then broadcast across the peer-to-peer network. Every peer has a database of the complete history of all Bitcoin transactions and so also the balance of every account. The intended advantage is that the overall database remains safe, even if specific users are compromised or hacked. One of the consequences of this method of security is that transactions are totally irreversible.


In relation to Bitcoins, neither transactions nor accounts are connected to real-world identities. Bitcoins are received on ‘addresses’, which appears as random chains of around 30 characters. While it may be possible to analyse the transaction flow of Bitcoins between addresses, it is can be difficult to connect the real world identity of users with those addresses.


Transactions are nearly instantaneous, and completely indifferent to a person’s physical location: it is just as fast to sent to a neighbour as it is to, say, Panama.


The initial concerns in relation to cryptos were the opportunities that they afforded to launder the proceeds of crime. Those opportunities persist. Cryptos allow individuals to bypass banks and traditional payment processes – and the attendant scrutiny afforded by such institutions – to pay for goods and services. Moreover, the anonymity of cryptos provides the perfect vehicle for funds to be transferred between individuals involved in criminal activity, including organised crime networks. Cryptos are the de facto currency for darknet transactions on online black markets such as Silk Road, which continue to be the preferred marketplace for online distributors of illegal goods.

However, some cryptos have gained a degree of respectability – you can spend Bitcoins with Virgin and Microsoft – and more importantly, demonstrated exponential gains in value against fiat currency (i.e. currencies established as money by governments). They are now sufficiently advanced to have their own derivative markets. Contracts-for-difference (‘CFDs’), in particular, are increasingly popular in part because the crypto-markets are so volatile which makes them ideal for big wins (or, of course, losses). Crypto CFDs may well be at the forefront of future developments in the UK because firms offering CFDs are regulated by the FCA, which has already offered a number of warnings to investors about the risks of crypto CFDs.

The increased acceptance by the public and business of the respectability of cryptos – with an attendant willingness to invest – means that the real frontier of crypto-crime is fraud.

Despite the claims of crypto being secure, there are real and increasing concerns about the security of cryptos and, in particular, the exchanges in which they are bought, sold and stored. These exchanges have been identified as a weak spot by hackers, and have been subject to a spate of fraudulent activity in recent months. Tether, an online exchange which facilitates trades between cryptos and fiat currencies, was subject to an heist in which, according to the company’s own (now-deleted) announcement nearly $31mUSD “was moved from the Tether Treasury wallet to an unauthorized Bitcoin address”.

That was not an isolated incident. According to a recent article by The Independent, it is estimated that there have been at least 36 heists of crypto exchanges since 2011, with more than 980,000 Bitcoins stolen. At today’s value, that amounts to some $4bnUSD worth . With investor losses of this level potentially attributable to the failures of third party facilitators and exchanges, litigation is almost inevitable.

It’s not just straightforward theft or fraud by high-tech means: Crypto currency exchanges, and nascent cryptos, are particularly ripe for other forms of fraud. Crypto exchanges are effectively unregulated, and unscrupulous traders are taking their cue from traditional 1980s-style market abuse. Initial Coin Offerings (‘ICOs’) – a means of crowd-funding cryptos where a percentage of newly issued cryptocurrency is sold to investors in exchange for legal tender or established cryptos like Bitcoin – are ripe for exploitation. There is strong evidence of traders conspiring together to inflate the price of these new, small crypto start-ups by coordinating large purchases at specific times, attracting other unwitting investors to buy into the price momentum, before selling their own currency; in other words, an old-fashioned, textbook “pump and dump” fraud.

Cryptos are now, for better or worse, a part of modern business and markets. They cannot be ignored. The lack of regulation makes cryptos a Wild West for unscrupulous individuals to make serious money. As regulators and law-enforcement agencies begin to play catch up while addressing the challenges crypto-crime, expect to see a wave of crypto-related litigation wash its way through the courts.

Will Martin

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