Tracing and Recovering Cryptocurrency

By Martin von Haller Grønbæk

09-2019

Cryptocurrencies are small pieces of digital information that are recorded on a blockchain ledger and the information is cryptographically secured. In order to access the ledger and transfer ownership, you need to use the password linked with the public or private encryption key that is part of the digital signature associated with that account on the ledger that holds your cryptocurrency. If you have not got the right password you cannot access the ledger. If the encryption standard is based on a secure algorithm with a sufficiently long bit size, your digital signature cannot be hacked.

But someone might simply try to change the entry into the ledger by altering the ledger itself replacing the correct ledger with a new copy that shows an entry where your cryptocurrency has been transferred to another account as though you had authorised the transfer with your digital signature. This is where the security of blockchain technology comes to the rescue. The decentralised decision making process (the consensus mechanism) for validating new copies of the ledger prevents unauthorised copies of the ledger to be accepted by the network validators ("miners").  Hence the use of digital signatures and the consensus mechanism make cryptocurrencies such as bitcoin safe for double spending.

However, someone may steal your password. They may hack your own computer or the servers of the service provider that holds your digital wallet. By using your digital signature the hacker will transfer your cryptocurrency to another account on the ledger and the transaction will be validated on the blockchain. Your cryptocurrency will then be lost, you as if someone had stolen your cash in the analogue world. There is no third party intermediary like a bank or credit card company that you can ask to correct the error. This immutability of the blockchain is the whole point of its security.

If you can find the thief (i.e. if you can find either the person who hacked your account or the person who holds the blockchain account where the cryptocurrency has been transferred to) then you can address your claim against them. Here you might have an advantage that you did not have previously, if it was your analogue cash that had been stolen. On the Internet everybody, including hackers, leave digital traces. New recovery services have emerged that offers to track stolen cryptocurrencies by analysing IP addresses and other types of traffic data that can lead to the hacker. 

However, the best advice to prevent the loss of cryptocurrency is to protect your password and your digital signature as diligently as you protect other valuable confidential information.

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