This is a transcript of the podcast Harley Thomas on digital assets and asset recovery, a discussion between GRIP’s commissioning editor Jean Hurley, and Harley Thomas, a forensic accountant and senior investigator at Martin Kenney & Co.
[INTRO]
Jean Hurley: Hello listeners, I’m Jean Hurley, Commissioning Editor at GRIP. Today on the GRIP Podcast, we are joined by Harley Thomas, a forensic accountant and senior investigator at Martin, Kenny and Co. to discuss the current US crypto lawsuit ‘Ripple’, digital assets in the UK and asset tracing.
Welcome Harley. I’m delighted you could join us. Please introduce yourself and give our listeners a brief overview of what you do and your expertise.
Harley Thomas: Well, it’s a pleasure to come on here. My name is Harley Thomas. I work in the Investigations Unit at Martin, Kenny and Co as Jean said. Our work is founded in major fraud and asset recovery, including the likes of Ponzi schemes, crypto frauds and much more.
Jean Hurley: Thank you. So we’re going to start with the Ripple case. This lawsuit began in December 2020 and has been described as the defining case for the entire cryptocurrency industry in the US. Now you wrote about this for GRIP. Can you please explain what the case is about?
Harley Thomas: Yeah. So to explain what the case is about initially, it’s good to understand what XRP is, which is the cryptocurrency created by Ripple. Effectively, XRP is a cryptocurrency used by major banks for fast and cheap international transfers of money, mainly because the transactions are quick in nature and have low transaction fees.
Now moving on to the actual Ripple case versus the SEC, the case centers around the fact that the SEC claimed that XRP is a security, which means that they believe it’s similar to the issuing of a stock or a bond. And being such, it should follow strict laws to protect investors in XRP.
Ripple, when it issued XRP, didn’t register it as a security under the SEC, but sold, as you quite rightly know, a lot of it to make money, which is why the SEC argues that it broke this law. The case centers around an item called the Howey test, which is a test in the USA which determines whether a transaction qualifies as an investment contract, which thus classifies it as a security.
Jean Hurley: Thank you. So there was an appeal, wasn’t there by the SEC because they were not very happy with the original decision. Why was that?
Harley Thomas: So the appeal stemmed from both sides, disputed portions of the earlier ruling July 2023, which regards what is referred to as the programmatic sales, which is sales through the open market or sales to the general public through digital asset exchanges. Under the programmatic sales, the SEC claimed that XRP received $757 mil.
However, the judge concluded that the buyers of XRP on these exchanges didn’t have a reasonable expectation of making any profit based solely on the work of Ripple because they were unaware if they were buying from Ripple or from another seller.
Jean Hurley: Right. So can you explain why the outcome of this case is so important to the future of cryptocurrency regulation in the US?
Harley Thomas: So it helps to provide the regulatory clarity on digital assets regulation in determining how crypto currencies are classified as it determines that not all cryptocurrency transactions are securities.
Now, some argue that the appeal again supports Ripple. This may make it more difficult for the SEC to regulate crypto currencies as securities, which one could argue actually damages cryptocurrency in terms of its legitimacy. However, it helps to set the precedent that some crypto currencies and their sales on exchanges might not fall under strict securities laws, which helps acquiring such assets, such as retail buyers, to be more likely regulated and therefore encourage retail investors to invest in certain crypto assets, which kind of leads into it has a huge impact on investor confidence. But the lack of a uniform framework may impact some investors in still being wary of investing in crypto currency.
Jean Hurley: So are there any similar cases that are going to the US courts?
Harley Thomas: There’s few going through the courts. Two of the major cases currently is the case of the SEC v Terraform Labs, in which effectively the system with TerraUSD is referred to as UST was a stablecoin, which was meant to maintain a value of one dollar at all times, so effectively pegged to the US dollar. And a cryptocurrency called LUNA, which was also tied to UST was launched, which helped to keep the stablecoins value stable. Effectively, that coin was supposed to work that if UST lost value, users could swap the UST for the LUNA cryptocurrency and vice versa, which supposedly in theory was supposed to stabilize UST’s price.
In that case, Terraform Labs claimed this was reliable and safe. However, as we saw back in 2022, this completely collapsed, wiping out over 40 billion in investor funds in market value. And LUNA’s value effectively plummeted to, it is today, virtually nothing.
This case is slightly different in ruling to SEC v Ripple case, in that the SEC found no distinction between institutional and retail sales, which is contrary to the Ripple case, in that federal courts may still be divided on the criteria for what constitutes securities in securities regulation in crypto.
There’s also a further case which is referred to as the SEC versus, it’s called LBRY Inc, but it’s pronounced as “library” Inc. Which, it was a platform LBRY, or Library, issued a cryptocurrency called LBC, which was effectively supposed to pay creators or unlock content on a digital platform where other creators sold digital content.
In that case, SEC did clarify that LBC was a security because other people were buying it with the expectation that its value would go up if the library platform became popular. So it’s clear from some cases that there is a disparity in certain rulings and there’s still that real grey area in digital asset regulation, especially in the United States.
Jean Hurley: Listeners, we have an update for you. Donald Trump has nominated cryptocurrency advocate, Paul Atkins, to chair the SEC. It’s widely thought that he may end the SEC’s appeal against its rulings in the Ripple case and similar lawsuits. Stay tuned to GRIP for further news.
Right, Harley, we’re going to go back to the UK. So crypto remains largely unregulated in the UK. However, the government have introduced a new Digital Assets Bill. Can you please tell us about this and how it will shape the ownership of crypto tokens in the UK?
Harley Thomas: Yeah, so the digital assets bill is quite a development in the UK, which is really going hopefully going to help in the regulation. A couple of the key reasons why I think it’s important and hopefully going to shape or impact the sector is that it firstly, the legal classification over digital assets in that the bill will formally categorize digital assets, which includes crypto currencies, and it categorizes them as a form of personal property.
It provides a more defined legal status for key, you know, the big crypto currencies such as bitcoin and NFT and helps to reduce uncertainties around ownership rights, which will help in certain legal remedies taken to effectively freeze and recover stolen digital assets.
Which kind of feeds into second key point why I think it’s very crucial is it provides enhanced protection over these digital assets for the owners. So digital asset owners will now get stronger legal protections against things like fraud or death or other sorts of disputes as it officially recognizes these assets.
Courts are now more readily able to and have better knowledge of how to handle these cases more effectively, such as in instances of fraud. The framework of the bill helps to provide some legal clarity over the regulation of the digital asset.
Jean Hurley: Great, thank you. And the other recent update that we should tell our listeners is that the FCA have recently announced its roadmap to fully regulate crypto assets by 2026 and the plans are to align crypto firms with traditional financial standards. So it’ll be interesting to see how that’s received by the industry.
Harley Thomas: I think my initial views are that I think 2026 is a very aggressive timeline for the regulation but I think it’s helpful that the FCA are looking into providing that roadmap forward.
Jean Hurley: Thank you. Harley, so you work in asset recovery. Would you say that cryptocurrency asset tracing is more complicated than tracking and recovering assets from a regular bank account?
Harley Thomas: There are certain parts of tracing cryptocurrency which make it more complex. Now the misnomer is that the actual tracing of crypto is or recovering and freezing crypto is virtually impossible, which actually isn’t a correct assertion.
So whilst it can be generally more complicated, there are certain legal remedies that can be taken to freeze and recover digital assets. However, some of the more difficult areas of tracing cryptocurrency is partially what makes cryptocurrency so attractive to some people.
The privacy nature of cryptocurrency is that many cryptocurrencies use pseudonymous addresses, don’t directly link to a specific person, where as a bank account would. It would lead to the owner of the bank account.
Now some coins such as zcash or monero are specifically designed as privacy-focused coins to obscure transaction details even further, which makes it virtually impossible to trace, once the stolen crypto is converted into crypto such as those. Now although everything recorded on the blockchain is public and can be traced, the identification of the people behind each wallet is one of the biggest challenges which we face in the asset recovery space in cryptocurrency.
Now whilst work can be done in connecting things like IP addresses or transaction patterns to individuals, it’s much more complex than getting account holder details from a traditional financial institution such as a major bank. Another key aspect is, with a traditional bank account, in our work we can work with banks or institutions to freeze or recover funds, which works in tandem with the legal regulation in whichever jurisdiction. Now the issue with major cryptocurrencies is the lack of central authority, the decentralized nature of the cryptocurrency means that there isn’t a central institution which has control over these funds which makes recovery challenging unless of course you have the cooperation of the wallet holder. Now in most instances of fraud you won’t have that cooperation.
Other key issues that we face are that the nature of cryptocurrency makes it very easy to transfer value across multiple jurisdictions, so multiple cross-border transactions which means it requires cooperation between multiple law firms in multiple jurisdictions or law enforcement agencies in order to effectively monitor and liquidate and freeze the asset. And often in major fraud cases relating to cryptocurrency, the fraudsters in a bid to obscure the stolen funds will use services such as mixers or tumblers which effectively split and mix funds from multiple users which makes it very difficult to trace the original source of the assets because you can’t kind of match up as you would in a bank account, funds coming in versus funds going out.
Jean Hurley: Is that a bit like washing?
Harley Thomas: Yes, you could match it to effectively a similar mechanism.
Jean Hurley: All right thank you. So we read a lot of news about how cryptocurrency is used as a tool by criminals and terrorists to launder money. Can you explain why it’s so popular in the world of illicit finance?
Harley Thomas: Now as I raised earlier one of the difficulties is the privacy of the coins in that you don’t know the individual behind a certain wallet address unless that wallet-holder reveals himself. Now obviously in illicit activities, for example terrorist financing, that is one of the key components of effectively money laundering to fund terrorist activities is that you will not … the key thing is to keep the anonymity aspect of whose funds does this belong to?
The other key aspect, again many of these terrorist organizations or large scale organized crime gangs operate in multiple countries across multiple jurisdictions, so it’s much easier to transfer value across borders than it would be to send traditional fiat currency between multiple European countries or from Europe to Asia.
Jean Hurley: Thank you. You may have answered this but what are the unique challenges law enforcement agencies face when tracking and recovering crypto assets?
Harley Thomas: I think one of the key things in cryptocurrency is that I would say it’s still very much in its infancy. So the sector is still developing. The technology is still developing and with that, the transfer of knowledge of ‘how do we effectively freeze and liquidate assets or how do we trace assets’ is still evolving. There are key analytic companies that you are able to use such as Chainalysis or Elliptic or TRM Labs, however they are few and far between in terms of software capabilities of law enforcement to effectively trace assets. Digital assets.
Jean Hurley: So what is the role of banks in this, if there is one?
Harley Thomas: I mean the key role of the banks – and this may become less and less of a central role – is that often fraudsters or money laundering gangs or organized crime gangs will effectively steal or otherwise get hold of digital assets or cryptocurrency that doesn’t otherwise belong to them and in order to make use of that cryptocurrency you have to what’s called off-ramp this cryptocurrency into, you know, effectively a form of asset that you can acquire assets with or pay for services with so the role of banks is crucial in that when you transfer the, or convert the cryptocurrency into fiat currency, that fiat currency has to leave the exchange into normally a traditional bank account.
Now this has been central to cryptocurrency but going forward we are seeing more and more major organizations accept cryptocurrency as a form of payment. I know, for example, firms out here in the BVI use cryptocurrency, albeit stable coins such as USDT to pay service providers or, for example, the luxury supercar manufacturer Ferrari accept payments for purchases in bitcoin, ethereum and USDC.
Jean Hurley: That’s really interesting. Do you have any examples of use cases in various illicit schemes?
Harley Thomas: So this isn’t by any means an exhaustive list because cryptocurrency can play a part in nearly all realms of illicit schemes. But some of the big ones which you may or may not have heard of which made the news. For example the Bitconnect which took place around 2016 to 2018. Effectively in that case Bitconnect attempted to lure investors, or did lure investors with false promises of high returns through its lending program. Now this turned out to be a Ponzi scheme. This resulted in I think just over two billion in losses to investors when the platform collapsed. Now, Ponzi schemes use cryptocurrency quite frequently. We are seeing huge spates of that in some of our work including a couple of cases which we are currently working on now.
It’s very easy to use in schemes such as Ponzi schemes but it’s also used in other aspects such as the dark web marketplaces. Often cryptocurrency is used as the primary payment method for the purchase of illegal goods or services on the dark webs. This can vary but it can include, you know, the sale of narcotics, weapons and even stolen or hacked data from third-party sources. Now you may or may not have heard of this case but this is probably the biggest case in terms of the dark web is the dark web marketplace referred to or known as Silk Road which is used to facilitate the sale of illegal drugs and other illicit goods which used bitcoin as its currency for the sale and purchase of goods and services through that marketplace.
As I mentioned previously another key aspect of the use of cryptocurrency is to fund the ongoing works of terrorist organizations. So one of the key ones which has been relevant in recent times is of course the conflict in Israel in that the terrorist organization Hamas was found through various sources to be soliciting donations to its ongoing terrorist activities, through social media and other websites. It was soliciting donations in bitcoin but although you are able to trace via the blockchain where the transactions ultimately end up, as I raised previously the decentralized nature of cryptocurrency made it extremely difficult for law enforcement.
Jean Hurley: Can you explain a bit more about blockchain and tracing tools and forensic methods?
Harley Thomas: Yeah, so as I raised previously, there are key service providers which offer key software which allows you to enter a wallet address and within seconds or minutes bring up all related transactions to that wallet, or where ultimately the tracing of all funds related to that wallet. Key service providers, as I raised previously, such as Chain Analysis or TRM labs. Our work in particular, we work alongside other advisory firms in the BVI which have licenses for this software which, to trace and recover any digital asset is ultimately crucial. It’s very very difficult to do so without such a software especially in these major fraud cases.
Jean Hurley: So looking ahead to advancements in AI and machine learning, do you think they will be an asset to asset tracing?
Harley Thomas: I think there is certainly parts of the asset tracing which can be helped by the, you know, the implementation or advancement of artificial intelligence. But conversely, whilst there is in advancement for the tracing tools, so too does the advancement of the artificial intelligence used by the fraudsters or the crooks in each of our cases.
But I do think the advancements in AI certainly equip us better in the tracing of assets for several reasons. One of which is it allows us in our work to analyze huge and vast data sets very quickly and it allows us to uncover patterns or trends or connections between individuals, companies across the multiple different financial systems, so from the traditional fiat banking system to digital assets which otherwise traditionally, you know, manual review of these items, you just wouldn’t pick up on these hidden patterns.
It also is much … effectively it can be very very forward looking whereas traditionally we are very much backward looking in that we’re always catching up based on outdated information whereas the advancements in AI allow us to do, you know, real-time monitoring which allows us to, in real time, track transactions or movement of funds or other sorts of assets.
Jean Hurley: Oh, that must be quite exciting to see that happening in front of you and so you can see what’s going to happen next. Do you work quite closely with law enforcement if you see something like that happening, do you…?
Harley Thomas: We do work alongside various law enforcement agencies. Many of our cases are civil cases, so we don’t have a huge, you know, not every case involves liaising with law enforcement but we’ve had several cases in different jurisdictions where we’ve worked with law enforcement agencies in the likes of Switzerland or in Germany which, they have access to, you know, the best tools in terms of AI.
Jean Hurley: Thank you so much Harley. I’ve just got a final question. As we approach 2025 what is your New Year’s wish around compliance regulation?
Harley Thomas: My new year’s wish is one of the key things I’ve found particularly in cryptocurrency and the compliance is the attitude that “it’s not my issue, it’s nothing to do with me”. As we saw in the Binance case, effectively it was run and I think this is in quotes “a Wild West model.” My key wish is for these cryptocurrencies or these digital asset exchanges to be more stringently and very highly regulated because, you know, cases such as the imprisonment of Changpeng Zhao or the huge case of FTX, it brings an air of illegitimacy to digital assets where really digital assets are going to be the future.
Jean Hurley: Harley, it’s been great having you on the GRIP podcast. Thank you for your time and sharing your insight on the Ripple lawsuit, digital assets in the UK and crypto asset recovery. And finally, thank you to our listeners. If you’re hearing this you probably know about us but please tell your friends about GRIP. You can find us at grip.globalrelay.com and you can follow us on LinkedIn. Until our next podcast or article, farewell.
