A recent technical report published in China has shed light on how public authorities track and confiscate cryptocurrencies. The paper, written by current public security officials from the Wenzhou Public Security Bureau and Zhejiang Public Security Agency's criminal investigation unit, details the process of investigating illegal virtual assets.
The Chinese government banned cryptocurrency use as a currency in 2021 and expanded its crackdown to include stablecoins and real-estate tokenization earlier this year. However, cryptocurrencies remain frequently used for fraud, gambling, and money laundering crimes due to their ability to hide identities during transactions and transfer funds without central authority approval.
The report outlines three stages of investigation: finding the 'wallet key', tracking the movement of funds, and confiscating assets. In the first stage, investigators search devices for mnemonic phrases or private keys used to access wallets. This process is automated using dedicated software that scans storage spaces and filters out irrelevant data.
The second stage involves tracing the flow of funds through transaction records. If a wallet's structure is complex, involving offline devices like 'Cold Wallets' or 'Watch Wallets', investigators must find additional devices containing the actual remittance authority. Even if this information isn't found on the device, they can analyze fund flows and identity clues to track the path of funds.
The third stage involves confiscating assets through methods like replacing private keys with new ones after transferring cryptocurrency suspected of being criminal proceeds to a multi-signature wallet controlled by the police. Assets kept on exchanges can be frozen using an account freeze method, which allows for up to six months of freezing and extension if necessary.