Cashing Out

One of the biggest concerns about the seizure of cryptocurrency is what to do with the coins once you have control of them. Do you “cash out” and convert the coins into fiat currency or hold them as they are? The issues are significant:

• Secure Storage Unlike traditional currencies where monies can be seized and banked securely, the seized coins remain on the blockchain protected by the new private key or keys. If anyone gains sight of the recovery key or private key string (for example, by taking a photo of it using a smartphone), they could potentially gain access to the funds.
• Insurance Getting an insurance company to insure the assets is extremely difficult because of value fluctuation. What are they insuring and for what value? This is almost impossible to answer with the significant value changes that could exist throughout the duration of an investigation.
• Valuation Fluctuations Investigations and possibly subsequent court cases can last several years. In just over one year, Bitcoin increased from a value of $1000 to around $20,000. Imagine a situation where coins are seized with a value of $20,000, and by the time the suspect is found not guilty, the value has plummeted to $500. Is there a possibility of a lawsuit for the lost value? Who takes responsibility for that?

In some cases, investigators have asked a judge to rule on the question of whether to convert coins to a fiat currency. Perhaps the suspect can be asked if he wants the coins to be cashed out at the current value and placed in a bank account, or just transferred to a cryptocurrency address controlled by the investigator and held until the end of the case. Suspects may distance themselves from the coins, alleging that they have nothing to do with them. This may be true or the suspect may just wish to separate himself from what may be determined to be crime. In this instance, the investigator can decide what action to take without fear of any recourse. Of course, a suspect's story can change as the case progresses.

Some investigation teams have suggested that the best course of action is to cash out coins at the point of seizure as it is possible that copies of a suspects private key may be held by others. This could be done during a live response at a suspect's premises or later in the lab, but either way, preparation and processes are needed. If this is to be done live on a suspect's computer, care needs to be taken to ensure that other evidence on the computer or device is not overwritten.

Cashing out either live on-premises or later in the process requires significant preparation. This preparation should include the following:

• Determining which exchange you will use—The investigation team should set up a relationship with a trusted exchange that knows they are dealing with coins involved in an investigation and will expedite the transaction and perhaps agree to lower fees.
• Understanding the exchange's process for cashing out—The investigation team should have authentication on hand and/or addresses to transfer the coins to.
• Setting up a bank account for the exchange of funds—A bank account needs to be in place to receive the funds from the exchange. Some banks are showing resistance to working with some exchanges, and although this is primarily related to purchasing cryptocurrency, the bank needs to understand the needs of the investigator. As soon as the coins are cashed out, this is now a normal situation for an FI, and the retention and management of the funds can be carried out as usual.

Setting Up a Storage Wallet

To provide an example as to how you would apply the previous instructions, I'll walk you through the process using the Electrum Wallet software for Bitcoin. Electrum is a thin client and does not require the downloading of the full Bitcoin blockchain, so it can be set up quickly. It is also fairly straightforward to create multisig addresses:

1. First, create the storage wallet that will receive the suspect's keys.
2. Download Electrum from http://bit.ly/2EKtxXI. Run the software and select New/Restore from the File menu. The software will ask you to name the wallet, and it's logical to use the case number or a similar identifier.
3. The next screen will ask what type of wallet should be created (see Figure 14-1). Select the Multi-signature Wallet option, and then choose how many cosigners you require.

   

4. On the next screen, select the Create A New Seed option, which will generate the 12-word recovery mnemonic code. Electrum then forces you to rekey the code. You cannot copy or paste it here or into any other document—you must manually type it in.

   As you can see in Figure 14-2, these steps will generate a Master Public Key that you can give to your cosigners if needed.

   

5. Next, enter the public keys of the cosigners to the address. This will then generate addresses that begin with 3 to indicate that they are a multisig address (see Figure 14-3).

Once these steps are completed, you have an address ready to receive seized coins.

Importing a Suspect's Private Key

You have two ways to move the coins from a suspect's wallet into your new multisig address. The first is very easy using Electrum. From your multisig wallet, select Wallet Private Keys Sweep. From this window, you can enter the private key or keys of the suspect, and all the funds managed by the suspect will be moved into your new multisig address (see Figure 14-4).

This method is quick and efficient but only works if you have been able to acquire the raw private key from the suspect or by dumping it from his wallet. If you have a recovery seed, then a different approach is needed.

You can use the Electrum software wallet again to simply set up a new wallet based on a recovered or seized private key seed from a suspect. It is very important that wallets are kept separate for the obvious reasons of keeping evidence separated so as to avoid any contamination of the evidence or, even worse, assigning coins to the wrong investigation. Electrum can manage multiple wallets, but it is vital to ensure that they are named well to prevent confusion.

Set up another wallet, but this time, choose the I Already Have A Seed option. You will be prompted to enter the recovery words, and the wallet will then complete its set up, contact the blockchain, and provide you with the balance and used addresses. Next, send the entire wallet to your multisig address using the Max button as shown in Figure 14-5. Remember to double-check the address you are sending to and have it checked by another person on the investigative team.

It is worth remembering that any transaction on the Bitcoin network can take a while to complete. Each block takes around 10 minutes, and to a fair extent, the fee will control the next block that the transaction will be included in. The Fee slider bar can help you decide how much to pay and provides the following options for the transaction blocks to be included:

• Within 25 blocks
• Within 10 blocks
• Within 5 blocks
• Within 2 blocks
• The next block

If you are doing a cash-out at the suspect's computer, you will want to wait until the transaction has confirmed at least one block before leaving. In this case, it may be worth paying the extra fee to have the transaction included in the next block. However, there will be a cost for this that may have to be repaid to the suspect in the event that the assets are returned.

Storage and Security

Assuming that you have decided not to cash out to a fiat currency and allow a bank to care for the funds, you now have to decide how best to secure the storage of the funds. Of course, you cannot actually store cryptocurrency coins because they exist only on the blockchain, but the secure storage of the private key that controls the coins is absolutely paramount. Here are some best practices to follow:

• Each signatory to the multisig address should export the recovery seed by copying the words to a file. Do not save the file.

  Remember that the computer you use should be secure because the document could be recovered forensically at a later date. Not saving the document helps, but the temporary file could still be cached to disk or in computer memory.

• Print the document twice.

  The printer should be in a secure location because the printed document could be recovered from most modern printers.

• Each document should be stored in a separate safe in different locations.
• Do not store the keys from all multisig accounts together.

To create a backup recovery seed with Electrum, select Seed from the Wallet menu, copy the values, and secure them as described previously (see Figure 14-6).

Alternatively, you can electronically store the seed in a file by copying the seed to a document, saving the document, writing to two encrypted hard drives, and storing them separately. I am not a fan of this method, because the saved file can be recovered easily from the computer, even if it's deleted, and hard drives have a horrible tendency of failing just when you need them. In addition, many computers have live snapshots or real-time backups, so even if the file containing the seed was deleted from the primary computer, there is the risk that it will be available on backups. You may feel that this level of security in a police station or secure lab is not needed; however, the lure of easy access to perhaps millions of dollars of hard-to-trace cryptocurrency may be a significant temptation to some.

It is also possible to export the raw private keys, although again, these are written to a file, so I would not recommend this approach for the reasons previously detailed. To export the keys in Electrum select Seed from the Wallet menu, and you can then save each key pair to a CSV file for storage (see Figure 14-7).

Again, I do not recommend using stored electronic media to retain these seeds or keys. Cold storage, on paper, stored in several locations is a much better solution. Remember this saying as it pertains to backups: “Two is one and one is none!”

The last thing you should do to maximize security is delete the wallet from the computer you have been using. Of course, you should not delete the suspect's wallet from his computer or any forensic image—which is considered evidence tampering and changing data—instead, you delete the storage wallets you just made. In my “Cryptocurency for Investigators” class, I've had students who were really worried about this step. Deleting anything is generally a bad idea in an investigation, but if the wallets remain on computers, then the possibility exists that someone could exploit that weakness and transfer the coins. However, the students have a good reason to be hesitant—an investigator never wants to lose control of the keys, so double-checking everything first is vital.

The principles are the same for the seizure of other currencies using different software wallets. Although not all of them support seed code words, most enable the dumping of the private key, so you can follow the same basic steps and end up with cold storage of the private keys or backup seeds.

Seizure from an Online Wallet

Many companies offer online wallets, including specialist high-security storage companies and exchanges that offer wallet services. The blockchain.info site that has been referred to a significant amount of times in this book is one of these companies.

Seizure of funds can be achieved in the following ways:

• Make a legal approach to the company requesting either the release of cryptocurrency funds or access to the suspect's account. Some companies say that they have no way of accessing an account, and the only solution is to go through a password-recovery process. However, a password-recovery process usually includes an e-mail verification step, and you should have access to the suspect's e-mail in many cases. This may also involve security questions, but my experience is that the exchanges often store the answers in the clear on their customer databases. Either way, access should be achievable.
• Locate the user name and password for the account. This can be easier than you may think. Here are some possible ways to get this information:
  • Ask the suspect for his password. (This actually works sometimes.)
  • Carry out a forensic analysis on the suspect's computer, looking for passwords to other resources. If you find one of the suspect's passwords, try derivatives of it to gain access elsewhere. Most people use variations of just three base passwords or phrases.

Once you have access to the online account, just transfer the funds to your storage wallet as previously outlined, and store it appropriately.