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Lost in the Blockchain:

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Practical Legal Strategies for Tracing and Recovering Digital Assets

or

Digital Assets as Property: Tracing, Freezing, and Enforcing in a Borderless Economy

Digital assets have emerged as a distinct class of property, combining technological, commercial, and legal characteristics that differentiate them from conventional banked or tangible assets. They exist in electronic form, recorded on distributed ledgers or comparable systems, and are capable of being controlled, transferred, and often traced on-chain, albeit with significant legal limitations in relation to enforcement and recovery.

The growing adoption of digital assets in commerce and finance brings substantial benefits, such as fractional ownership, increased liquidity, and rapid settlement. At the same time, it introduces operational and legal challenges that arise from their identity hidden nature, technological complexity, and cross-border mobility. These challenges are particularly acute in contexts involving fraud, insolvency, or enforcement, where control and recoverability may depend on access to private keys, cooperation from intermediaries, and the ability to trace value across multiple platforms.

This article analyses digital assets from two complementary perspectives:

  • first, the commercial and operational mechanisms that enable their creation, transfer, and utilisation; and
  • second, the legal and enforcement considerations that inform tracing, securing, and recovering such assets.

1. Definition of Digital Assets

A digital asset is a nonphysical asset that exists in electronic form. It is made up of digital information or data that can be identified, controlled, owned, and transferred. Its value comes from that control, or from rights connected to it.

In simple terms, a digital asset is an electronic record that can be controlled by one person at a time, usually through encryption keys (private cryptographic keys). It is often recorded on a blockchain or another distributed ledger system. Whoever controls the private key generally controls the asset, including the ability to transfer it and prevent others from using it.

Digital assets may represent either:

  • value in themselves, such as cryptocurrencies used for payment or investment; or
  • rights or interests in an underlying asset, whether tangible (such as real estate, commodities, or artwork) or intangible (such as equity, debt claims, intellectual property, or contractual rights).

Many digital assets take the form of “tokens” created through tokenisation, which means representing an asset or right digitally. Tokenisation can allow things like fractional ownership, easier transfer, and increased liquidity.

However, not every electronic record is a digital asset. The key feature is exclusive control, normally through private keys. Also, information linked to a digital asset (such as metadata, images, or content) may be separate from the asset itself and may still be governed by other laws, including intellectual property law. Due to the fact that blockchain systems use wallet addresses rather than real names, digital assets are often identity-hidden. This can make enforcement and recovery more challenging, even where the transactions can be traced on the chain.

 

2. Types of Digital Assets

Digital assets may be classified according to their function, underlying value, and regulatory treatment into:

  • Crypto-assets, which are digital stores of value or mediums of exchange recorded on blockchain or other distributed ledger, and typically used for investment, payments, or project funding.
  • Stablecoins, which are designed to maintain price stability by linking their value to fiat currencies, commodities, or other crypto-assets, and are commonly used for payments and cross-border transfers.
  • Non-Fungible Tokens, which are unique, non-interchangeable tokens representing control or ownership of specific digital or tokenised items, and are used for identity verification, access control, supply chain tracking, and ownership of virtual assets.
  • Utility Tokens, which grant access to services or functionalities within a digital platform and derive value from use rather than investment.
  • Central Bank Digital Currencies, which are state-issued digital representations of fiat currency used for domestic and cross-border payments.
  • Security Tokens, which are digital representations of regulated financial instruments such as equity, debt, or tokenised real-world assets, and are subject to securities laws.

3. How Digital Assets Operate in Practice

Digital assets operate through a combination of blockchain technology, cryptographic keys, and digital wallets, forming a secure and decentralized ecosystem for ownership, transfer, and use.

A digital asset is created or “minted” when new information is added to a blockchain, effectively recording the existence of the asset on a public, shared ledger. This ledger functions as a secure and permanent record of all digital assets and their ownership history, ensuring that every transaction can be verified without relying on a central authority. Once minted, a digital asset exists digitally and can be controlled, transferred, or exchanged by the holder of the corresponding private cryptographic key, which acts as proof of ownership and authorization to make transactions.

Control over a digital asset is maintained through these cryptographic keys, which are typically stored securely in digital wallets. The private key allows the owner to sign transactions that move or transfer the asset, while the public key serves as a unique identifier on the blockchain, allowing anyone to verify ownership without compromising security. This system ensures that the asset can be securely exchanged or used in applications without the risk of unauthorized access, as the blockchain automatically validates every transaction according to its protocol rules. Transfers are recorded immediately on the blockchain, providing a transparent history that prevents double-spending or fraudulent claims of ownership.

In practice, digital assets are not only stored and exchanged but can also be used across a wide ecosystem of applications. Users can interact with their assets through apps, marketplaces, decentralized finance (“DeFi”) platforms, games, and other decentralized applications.

This functionality is organized in layers; the underlying blockchain (Layer 1) maintains the ledger and transaction rules, Layer 2 solutions improve transaction speed and reduce costs, and the functional layer provides tools and applications that enable viewing, trading, spending, or utilizing the assets. Through these layers, digital assets can power financial operations like automated lending or insurance, enable access and ownership verification in virtual and physical spaces, and facilitate exchanges in both digital and real-world marketplaces.

4. Tracing Digital Assets

Tracing digital assets poses distinct legal and technical difficulties arising from the hidden identity, borderless, and decentralised nature of blockchain systems. Although blockchain transactions are transparent and permanently recorded, turning that data into court tracing evidence is often difficult and is materially different from tracing traditional assets.

4.1. Tracing Methodologies

Digital asset tracing usually starts with one simple exercise: following the money on the blockchain.

Investigators review blockchain transaction records to understand how value moved from one wallet to another. In practice, they often use specialist blockchain analytics tools that map wallets and transactions visually (as a network). These tools also apply practical indicators to assess whether multiple wallet addresses may be controlled by the same person. This helps investigators group related wallets and track the likely flow of funds.

Where crypto has been mixed or pooled with other funds, tracing becomes more complicated. Different tracing approaches may be used depending on the facts. A useful example is the English High Court’s 2024 decision in D’Aloia v Persons Unknown. The court made it clear that experts must identify the tracing method they rely on and apply it consistently. In that case, the expert said they were using FIFO (First In, First Out- a tracing approach that assumes the earliest funds deposited are the first funds withdrawn), but then applied it inconsistently. This weakened the tracing evidence and ultimately undermined the claim.

Tracing also depends on the type of digital asset involved. Some tokens keep a clear identity as they move between wallets, which makes them easier to follow. Others are designed so that tokens are “burned” and recreated during transfers, meaning you can only trace value, not the exact token itself.

In D’Aloia, the court also confirmed that stablecoins such as USDT can amount to property capable of being held on trust and traced. However, where stablecoins have been mixed with other funds, recovery often depends on equitable tracing principles and remedies.

4.2. Key Challenges in Digital Asset Tracing

Several obstacles complicate enforcement efforts and effective tracing. For example, mixing services and tumblers deliberately break the link between incoming and outgoing transactions by pooling and redistributing funds. Following major sanctions against high-profile mixers, sophisticated operators increasingly use cross-chain bridges to transfer funds between unrelated blockchain networks, severing continuity of on-chain tracing.

Moreover, privacy-enhanced cryptocurrencies use techniques including ring signatures and zero-knowledge proofs to obscure transaction details. Identifying fund movements within such systems often becomes speculative. Courts have therefore required investigators to terminate tracing at the point assets enter privacy tools or to explicitly qualify any further analysis as uncertain.

DeFi also makes tracing harder. In many DeFi platforms, assets are pooled together and traded automatically, so funds from many users get mixed. Even though transactions are visible on-chain, it can still be difficult to link the funds to a specific wallet or user. This becomes even more complex when funds move across different blockchains.

Centralised exchanges create similar issues. They often hold customer funds in shared wallets. As a result, even if you can trace funds to an exchange wallet on-chain, confirming which customer account received the funds usually requires the exchange’s internal records, which are typically only available through cooperation or court orders.

Identity attribution remains a fundamental obstacle. Blockchain addresses are identity hidden and linking them to real individuals requires Know Your Client data, exchange disclosures, IP analysis, or behavioural intelligence.

Courts have responded by broadening available remedies. Singaporean courts, for instance, have issued proprietary injunctions, worldwide freezing orders, and disclosure orders against unknown persons, recognising the ease with which assets can be moved. In Cheong Jun Yoong v Three Arrows Capital Ltd, the Singapore High Court held that a cryptoasset’s “location” is the place of residence of the private key controller. In Fantom Foundation Ltd v Multichain Foundation Ltd, the court accepted flexible valuation approaches due to cryptocurrency volatility.

 

5. Enforcement Strategies against Digital Assets

5.1. Applying Traditional Enforcement Frameworks to Digital Assets

One of the main strategies for enforcement against digital assets is to rely on existing general enforcement laws as the primary framework. Specific enforcement measures should be introduced only in limited cases, for particular subclasses of digital assets, where the standard procedures are insufficient to address the unique characteristics of the assets. This approach ensures that enforcement remains consistent, effective, and aligned with established legal principles, while allowing for targeted adaptations when necessary.

5.2. Leveraging Debtor and Third-Party Cooperation for Effective Enforcement

Securing the cooperation of debtors in disclosing information is key enforcement strategy for digital assets. It is necessary to identify, locate, and access their assets. Debtors should be compelled to provide all relevant details, including facilitating access to devices, accounts, or systems, to enable the seizure, transfer, or disposition of assets.

Where the technological complexity of the assets exceeds ordinary capabilities, enforcement authorities should engage technical experts to ensure full compliance with disclosure obligations.

5.3. Cross-Border Coordination in Digital Asset Enforcement

An effective enforcement strategy is to recognise and adapt to the diverse and international nature of digital assets. Given their broad spectrum, each asset type possesses unique operational features, which requires enforcement approaches to take into account these distinctions. Enforcement efforts should prioritise cross-border coordination, including the recognition of foreign orders and collaboration with international authorities. By integrating knowledge of foreign legal frameworks and harmonising procedures where possible, authorities can ensure that enforcement actions are effective, efficient, and legally enforceable across jurisdictions.

 

5.4. Securing Effective Access and Control Over Digital Assets

Ensuring that enforcement authorities are legally empowered to obtain effective access to the assets is critical in digital asset proceedings. Such access should be reserved exclusively for enforcement agents authorised under national law and exercised only for the execution of valid and legally recognised enforcement instruments. Enforcement must adapt to the manner in which digital assets are held, enabling authorities to obtain necessary information from debtors and, where required, compel asset transfers.

 

6. Conclusion

Digital assets sit at the crossroads of technology, business, and law. Their decentralised structure and reliance on encryption allow new ways to own and transfer value, but they also create real challenges when it comes to tracing and enforcement. Recovering digital assets usually requires a coordinated approach, combining strong forensic tracing, cooperation from the debtor and relevant intermediaries, and legal tools that are tailored to the type of asset involved.

Courts in a number of jurisdictions have accepted that existing enforcement rules can also be used against digital assets. However, success often depends on getting the tracing right, showing clearly who controls the asset, and dealing with the technology and cross-border issues involved. As digital assets continue to develop, businesses and lawyers need to stay alert to the risks and keep up with new tools and best practices, so that these assets can be identified, recovered, and enforced through the courts.

Sources:

Authors:

Nouran Abdou

Reem Elshazly

Farah Bassem

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