Bitcoin: Tracking Transactions and Identifying Fraud
Bitcoin more frequently as of late. This article explores forensic accounting challenges related to this new form of virtual exchange.
Digital currency or digital money is an Internet-based medium of exchange distinct from physical currency, such as banknotes and coins, which exhibits properties similar to physical currencies but allows for instantaneous transactions and borderless transfer of ownership. Bitcoin is a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds operating independently of a central bank. Users have “wallets” which are anonymous, unique, account IDs that have associated with them virtual currency amounts. The virtual currency network self-regulates by giving all users a record of every transaction that has occurred between every wallet since inception. This is meant to minimize or eliminate cheating between wallets. It is this ability to screen out “cheaters” that is encouraging global banks to adopt forms of virtual currency logic to improve security around its millions and millions of daily transactions.
Of all the virtual currencies the Bitcoin brand virtual currency presently has the highest market capitalization.
Several steps are typically taken when performing a forensic investigation including, but not limited to, reviewing legal information, financial documents and confirming or refuting allegations. From a forensic investigation standpoint tracing virtual currency transactions can create challenges when applying traditional forensic accounting techniques.
By definition virtual currency is a decentralized currency. Since few banking or credit institutions (currently) deal in this type of currency, it is unlikely that bank or credit card statements exist for virtual currency transactions. A lack of documentation related to who owns the wallets and the purpose of each transaction creates traceability challenges. The existence of an unregulated, unaudited ledger begs the question of how transparent any given observable virtual ledger transaction really is. To investigate a specific transaction or set of transactions the forensic specialist will need to not only have access to transaction information, but also have a way of mapping a wallet to a particular person or institution. Additionally, the investigator will likely require skilled information technology specialists to sift through the reams of data.
Tracing wallet transactions become more like tracing cash movement than like tracing traditional electronic payment systems. In fact, the most reliable measure of virtual currency activity may only be the observed funding of the wallet and any transfers out of the wallet to a traditional currency account.
Another consideration from a forensic accounting perspective is verifying if a transaction happened through a third party. While banks and credit card companies can be subpoenaed when dealing with traditional fiat currencies, the same does not hold true for virtual currencies. In a traditional setting, the forensic specialist can usually hold interviews with parties or subpoena the bank for account holder IDs. With virtual currencies how does one determine if multiple wallets are actually held by non-exist persons or entities?
The reality is that while the proponents of virtual currency laud its open framework, the anonymous nature of wallet transactions and lack of independently audited information makes tracing individual activity a challenge. When the forensic matter involves virtual currency, make sure to align yourself with a firm that has the tools to sift through data, experience in dealing with large cash or other hard-to-identify transactions and an understanding of how virtual currencies work.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals.
