As criminals use cryptocurrency more frequently to launder illegal cash, forensic accountants are combining traditional detective methods with challenging blockchain investigations.
Accountants for cryptocurrency and blockchain claim that the industry has to get a firm hold on the increasingly popular virtual currencies and recognise the obvious signs that they are being used to hide criminal funds.
To track cryptocurrency, we’ve devised five different methods for accountants.
Table of contents
- Why is ‘crypto’ so famous?
- How does cryptocurrency work?
- What impact does cryptocurrency have on businesses?
- Five techniques to assist accountants in monitoring cryptocurrency
- What is the future of cryptocurrency?
- Final thoughts
Why is ‘crypto’ so famous?
Some people think that within fifty years, cryptocurrency will replace traditional money.
Some involved in cryptocurrency claim that they would ‘democratise’ money. By avoiding the dependency on banks, The value of a single Bitcoin has increased significantly, making it possible for anyone to become extremely wealthy. On the other hand, anyone with access to a computer (and a decent amount of hardware) can mine bitcoin.
Transactions involving cryptocurrencies are typically handled in a matter of minutes as opposed to days for bank transfers. The participant and the specifics of the transaction remain largely anonymous.
How does cryptocurrency work?
Cryptocurrency is decentralised, which means it is not controlled by a single entity like a government, central bank, or financial institution. Instead, it runs on a peer-to-peer network, with transactions added to a public ledger using blockchain technology.
This enables data to be shared internationally, verifying transactions and preventing the fraudulent double spending of cryptocurrency. If you hold cryptocurrency, you have a key that allows you to transmit information or units of measurement directly between two people without the assistance of a reliable third party.
While transactions are listed on this public ledger, the identities of those who trade cryptocurrencies are not published; this can be one of the blockchain’s features. Although cryptocurrencies and blockchain technologies have been around since 2009, many financial applications are still being developed.
What impact does cryptocurrency have on businesses?
Virtual currency or credit is used in practically all digital transactions nowadays. The fundamental value of how cryptocurrencies have established themselves in this market will become more stable in the upcoming years. Even if cryptos don’t replace the traditional currency, they will retain their value and have a significant market capitalisation, impacting the global economy.
Cryptos have a lot of positive importance for international remittances, allowing for more price and conversion rate possibilities. The financial sector requires a better, more innovative future.
The financial landscape will continue to change due to new technologies, as shown by automation, cryptocurrencies, and blockchain.
Five techniques to assist accountants in monitoring cryptocurrency
Forensic accountants analyse data to find missing funds and possible solutions. In court proceedings, where they commonly appear as expert witnesses, they could also present financial findings reports as evidence.
It is essential in public accounting and consultancy firms, law firms, insurance companies, and law enforcement organisations.
When it comes to cryptocurrencies, even accounting experts face difficulties. We’ve included a list of possible ways for accountants to track cryptocurrency to help them streamline the process.
1. Check the entry and exit points
Many investigations start with a paper trail due to the variety of ways people might buy cryptocurrency.
Bank and credit card statements are a common starting point for investigators. It might indicate that a suspect acquired digital currency from online trade exchanges like Coinbase.
Investigators can then start placing together any bits of evidence they discover to try indicating ownership of the virtual funds using blockchain. This transparent database keeps track of all coin transactions.
It will be challenging to track cryptocurrency if you don’t know where to look, but you can assess the issue and start your investigation if you know the options.
Any company that accepts bitcoin as payment may be ordered to turn over transaction data so that detectives can track down and locate cryptocurrency assets. However, the success of such subpoenas is determined by the jurisdiction.
2. Create a profile of the suspect
For detectives to follow a suspect’s lead and, ideally, find any money they may have hidden away, it is critical to developing a thorough profile of the suspect.
Knowing whether a suspect has experience trading cryptocurrencies or has accounts with reputable exchanges increases the probability that he would turn illegally obtained money into digital currency.
There’s always the chance that a suspect will report virtual currency transactions on their annual tax filings. The blockchain has a lot of valuable publicly available data, but analysing that data requires specialised tools and in-depth contextual knowledge in many cases.
In contrast, traditional investigative work can yield significant helpful information.
Combining blockchain forensics with more specific digital forensics investigation work yields a considerably more effective result.
3. Find the devices and extract the evidence
Computers and mobile phones acquired as part of an ongoing investigation can be a gold mine for discovering proof that a suspect has converted cash into cryptocurrency.
Expert forensic analysis of personal email accounts and electronic devices may show that they have cryptocurrency exchange software installed and are trading online.
They might include virtual currency “addresses” used to receive email payments. It’s also possible that a suspect has hidden inside their device their private “keys,” the particular alphanumeric digits needed to approve transactions.
Additionally, forensic device analysis may provide valuable details on the “wallets” they use to store account and bitcoin key information.
While paper wallets, like those offered by bitcoin ATMs, can be used to store cryptocurrency data, additional options include smartphone wallets, USB-style hardware wallets, and cloud-based web wallets.
4. Drill down into the transactions’ details
Identifying a suspect as having converted cash into virtual currency is just the beginning. The next challenge is combining whatever information is found, such as wallet, address, and critical information, to link transactions to the subject of the investigation.
It can be a challenging, time-consuming task that requires specialised technical skills and access to investigative blockchain software, which only a few accountants have. Accountants are increasingly outsourcing that portion of their research to reputable blockchain forensic companies with the expertise, know-how, and resources to conduct efficient investigations.
When dealing with more extensive volumes of transactions or cases, primarily when people use several personal wallets involving thousands of transactions, which is fairly common, along with some obfuscation techniques, few accounting firms are prepared to carry out that type of investigation.
The current anonymous “privacy currencies” on the market, like Monero, only partially expose important transaction data, making the process more difficult.
But as with bitcoin, researchers can still find “fingerprints” at entry and exit points that could show that an individual has bought or sold Monero, even though you can’t track Monero itself off-exchange between personal wallets.
The availability and liquidity of bitcoin mean it’s still the most popular cryptocurrency to utilise and hold.
5. Get the right talent
When conducting more challenging investigations, forensic accountants enlist the help of compliance, anti-money laundering, and virtual currency experts.
Companies can hire outside forensic experts to help them sort through transactions if they don’t already have the technical know-how or blockchain intelligence software in-house.
While breaking cryptos may be a unique challenge, forensic accountants can still rely on their tried-and-true investigative strategies.
Matching cryptos transactions with traditional transactions and the criminal’s added layer of online conduct will let you trace transactions. It can also offer possibilities for recovering cryptocurrency assets or other value.
What is the future of cryptocurrency?
Any successful organisation needs accountants, and historically, the accounting industry has flourished as money has developed. Although the development of crypto accounting will be challenging and dynamic, the role of technology has created new opportunities for problem-solving in the corporate world.
Since its beginning ten years ago, cryptocurrency has advanced rapidly. Value can be transferred, stored, and spent in various ways through different assets and solutions, while DeFi has pioneered the way for new lending and borrowing avenues.
Some well-known businesses are also interested in blockchain technology and exploring supply chain applications. According to the growth and adoption observed since Nakamoto published the framework for this asset called Bitcoin in 2008, the future of cryptocurrencies and the technology that supports them looks promising.
Cryptocurrency has a bright future ahead of it. In some way or another, cryptocurrencies will replace traditional payment methods as the standard way to conduct business. The best time for companies to develop practical solutions to these growing industrial challenges will be during this transition from the margins to the mainstream.
Cryptocurrencies will continue to grow despite risk and fraud, as their advantages exceed their disadvantages.
Blockchain and cryptocurrency technology is transforming the financial industry. Cryptocurrencies and blockchain represent the future of banking, transactions, and certain types of transactional rails, payment rails, and accounting. There are countless effects it will have on accounting in the future.
The use of cryptocurrencies by criminals to finance their illegal actions will continue. Follow the suggestions above to find possible cryptocurrency thieves and track them.