The perceived anonymity offered by cryptocurrency platforms has made some criminals eager to use them for illegal activities, but experts in Hong Kong have said law enforcement still has the ability to trace and disrupt virtual asset transactions.
The Post reached out to three cryptocurrency experts after a recent case in the city in which two kidnappers demand a ransom to be paid in Tether, a stablecoin pegged to the US dollar, to ensure the safe return of a three-year-old boy.
A Post search also found some underground football betting platforms claiming to accept Tether tokens. The Jockey Club is the only licensed betting operator in Hong Kong.
The experts said the city had accumulated law enforcement experience when it came to cryptocurrencies, to a point where authorities could easily trace money-laundering activities that used such virtual assets.
Joshua Chu Kiu-wah, a lawyer specialising in technology disputes and cybersecurity, said the focus should be less on new laws and regulations since the virtual assets were already covered, and the key was “more about knowing how to apply existing rules”.
Veteran cryptocurrency investor Louis Li Sze-chung, who is also an adviser to local tech start-up association 852Web3, addressed the demand for a ransom in cryptocurrency during the thwarted kidnapping earlier this month.
After the boy was snatched from the Tseung Kwan O Plaza shopping centre, his elder sister received a ransom note demanding 660,000 Tether coins worth more than HK$5.1 million.
Li said the stablecoin, also referred to as USDT, could easily be intercepted.
“USDT is issued by a company, which converts US dollars into cryptocurrency. It’s a bit like how Octopus works actually. You put down cash for digital currency,” he said.
“When crimes happen, it’s possible to ask the company to help freeze or even destroy money held in certain accounts.”
Stablecoins are a type of virtual currency that pegs their value to another currency in fiat money or a commodity, which is all operated by a company.
Last November, Tether’s platform voluntarily froze US$225 million worth of USDT coins after the United States Secret Service warned the sum was linked to a human-trafficking syndicate conducting pig-butchering scams, where victims are swindled out of money with promises of romance and financial rewards, in Southeast Asia.
Technology lawyer Chu said freezing a Tether account could be done within one day, while traditional bank accounts could take months as the move required a judge’s approval, unless the case qualified for an urgent court order.
Chu and Li said suspicious account owners could be identified when they opted to convert their virtual assets into cash.
“This process is likely to involve centralised organisations such as exchanges, banks and money changers,” Li said. “Law enforcement can tell these organisations that particular accounts have been involved in crime and ask them to block their accounts when the investments come in.”
Chu added that suspicious cryptocurrency accounts could be flagged on blockchain systems, meaning all related “wallets” and exchanges could be also marked.
“The moment you put a notice peg into the wallet, for which there are technical ways to do it, that defence of not knowing whether certain assets are tainted will no longer be open to you,” he said.
But such options were off the table when it came to cryptocurrencies being traded without middle parties that could halt such transactions, the experts said, adding criminals could also launder their proceeds through multiple exchanges.
Cheung To, founder and director of blockchain security firm UDomain, noted that decentralised cryptocurrency exchanges might sometimes refuse to cooperate with law enforcement agencies and share information on their platform’s users.
“It’s quite likely they will be uncooperative, otherwise, how can they be decentralised?” he said.
Decentralised cryptocurrencies, such as bitcoin and Ethereum, do not involve intermediaries when it comes to transactions, meaning operators are unable to freeze suspicious accounts or destroy any related assets.
Cheung said convoluted money-laundering chains without central operators also posed hurdles in terms of tracing and halting such transactions.
In Hong Kong, regulator the Securities and Futures Commission has only approved two cryptocurrency exchanges, OSL and Hashkey, for licences covering virtual asset trading services to professional and retail investors.
The experts told the Post that Hong Kong needed more proactive law enforcement and civil litigation to consolidate existing rules rather than further regulations if the city aimed to crack down on criminal activities that used cryptocurrencies.
Cheung said effective intervention in the laundering of virtual crime proceeds relied heavily on swift and dedicated action from law enforcement.
“Police will need to contact any exchanges and organisations that had been in contact with the suspicious account very quickly to issue letters or hand them court freezing orders,” he said.
He added that such actions had to be done “within hours” of a case being reported.
“I think this has a lot to do with how proactive law enforcers are, as well as how much resources they have,” Cheung said.
Chu argued that besides Hong Kong authorities accumulating law enforcement experience through investigations, local courts also needed to enforce regulations and build up the city’s reputation.
“Only when prosecutors gain experience proving such cases in court and judicial precedents are accumulated, can you show your jurisdiction has a mature enough regime to tackle new, emerging issues,” he said.
