London Blockchain Conference 2023: Freezing, seizing lost and stolen digital assets

Getting your Trinity Audio player ready...

In a conference packed with exhibitors and speakers eager to showcase the many applications of scalable blockchains to the hundreds of attendees making their way through the halls of the Queen Elizabeth II Conference Center, the red-hot question of whether lost digital assets can ever be recovered might seem remote—or even irrelevant.

But as distant as the question might seem to an event that has gone out of its way to talk about the many non-financial use cases of blockchain technology, it’s clear that it must be answered if that technology is ever to see mass adoption by governments and enterprises.

Thankfully, the London Blockchain Conference ended up tackling the question head-on. On Day 2 of the event, Britevue CEO and co-founder Connor Murray hosted a panel on “Digital Asset Recovery – Freezing and Seizing Lost Assets.”

He was joined by Marcin Zarakowski, executive committee member of the BSV Blockchain Association, and managing director of Token Recovery; Roman Bieda, head of fraud investigations at Coinfirm; Daniel Payne, founder of the International Congress of Blockchain Legal Advisors and president of Blockade United; Lavinia Osbourne, lawyer and founder of Women in Blockchain Talks; and Brian Sanya Mondoh, barrister and attorney-at-law at BlockchainLex.

The panel accounts for a wide range of experiences with digital asset recovery. Perhaps the most direct of these experiences comes from Osbourne, who had her own digital assets stolen and successfully secured the first-ever court injunction over stolen non-fungible tokens (NFTs). Then there’s Zarakwoski, whose organization, the BSV Blockchain Association, developed the Digital Asset Recovery tool to allow for the implementation of court orders against stolen digital assets on blockchain networks. Beida’s role has him neck-deep in the blockchain investigations necessary to even begin an action in this area, while Payne has extensive experience in securities law. And Mondoh’s BlockchainLex provides specialist legal advice on digital assets, including recovery.

The panel got stuck into a discussion on one of the first questions that need answering before successfully recovering digital assets via the legal system: to the extent that you need to make a legal claim, who do you make it against, particularly when any hacker is almost certainly anonymous.

“There’s always a known party in these transactions,” Mondoh says. “The exchanges. So you have to apply for a disclosure order against them because you know who those parties are because they did the KYC on the customer. The person is unknown, but the known person has to snitch on them.”

Murray pitched this question to Beida, asking him to share his experiences with exchanges, particularly when they’re confronted with legal action.

“It’s a struggle for them,” said Beida, agreeing with the strategy spelled out by Mondoh. “On the other hand, you have their client, who may be a bona fide trader, and freezing millions of dollars of somebody’s isn’t an easy ask.”

“How often does it happen where the exchange is notified that they ignore it?” asked Zarakowski.

“Three years ago, it was a common case,” said Beida. “Nowadays, from jurisdictions that are cooperative—the U.S., EU, parts of Asia—to freeze assets for at least seven days is easy. Sometimes even by contacting them on Telegram, they will freeze it and give us the time to collect the proper evidence.”

Even so, Payne highlights that courts in the U.S. are extraordinarily reluctant to take action in a case where the relevant parties have not been identified.

“It’s very difficult to get a court to understand they can issue against a wallet.”

Perhaps more of a problem is that it’s not always obvious where digital assets and blockchains exist, legally speaking—which can pose challenges to getting a court to accept jurisdiction or may lead to situations where the court finds jurisdiction in cases where it isn’t practically appropriate. Payne refers to a recent case in the U.S. where the court was trying to determine where a certain blockchain exists when it has nodes worldwide. The judge there found that the fact that there was a ‘plurality’ of nodes—not even a majority—in the U.S. was enough for her to find jurisdiction.

“In my view, when a transaction is confirmed on this blockchain, it happens simultaneously across the world. Not in the U.S. Her opinion was that there was a plurality of nodes—not even a majority—in the U.S. which gave her jurisdiction. I completely disagree.”

The panel raised another practical barrier that stands in the way of people using the legal system to recover their rightfully owned assets: cost.

Speaking to the inefficiencies of this process, Zarakowski says that you may “have to go to several courts, and if they’re located in different jurisdictions, it involves expensive and lengthy litigation which stops people from trying to recover their digital asset.”

“Then you need to be lucky. You’re banking on the judge understanding your case. Then when you get your order, you need to go to the exchanges.”

That last part, in particular, is an enormous challenge in itself because even the biggest exchanges in the industry have taken steps to insulate from this kind of control.

“Can anyone tell us where Binance is really registered?” asks Zarakowski.

“It’s a network of entities spread across different jurisdictions. Even if you served on one entity in one jurisdiction, it’s Binance X rather than Binance Y.”

But the reality is that none of these challenges are insurmountable. Indeed, they can’t be considered as such if blockchain is ever to see mass adoption. But the problem is that the digital asset community is divided on this issue—with one very loud corner of the industry resisting any and all attempts to bring it closer in line with the law.

“I think there’s this versus between two groups,” says Osbourne. “Pure blockchain, where if you lose your assets, you lose them, and there’s no recovery. Then there’s the other side -and most people want a way to recover their assets.”

The panel seemed in broad agreement that the latter category of people vastly outnumber those in the former group—even if it might not seem that way from inside the industry.

“If you sit within this crypto bubble, you think everyone thinks alike,” says Zarakowski, referring to the ‘not your keys, not your coins” ethos is a holdover from the industry’s earliest days.

Murray concurs: “I can yell 2+2=3, but it doesn’t make it true. In some ways, there is just one side: the fact that ownership is an established legal process that isn’t new.”

Taking a slightly different approach, Mondoh says that accepting that the courts can intervene to restore access to digital assets is a retreat from what he considers the decentralized ideals of blockchain—and that’s okay.

“Speaking to a few techies yesterday, we are at a place where we agree decentralization as a concept cannot be maintained in its purest form. Blockchain is about custody, removing the middleman. That’s Bitcoin’s origins. But we have to mutate and adapt and see things from the current realities that are… we have to decide what it is we want.”

Watch: Digital Asset Recovery on Bitcoin