Understanding a new breed of financial chaos

As digital assets become ever-present in our lives, unique challenges lie ahead for corporate institutions as they adapt to the use of virtual assets. Company directors must be prepared to encounter new and modern-day threats, such as digital asset fraud. With digital assets on the rise, so are the risks to corporates, therefore, it’s paramount for company directors to understand the intricacies of digital assets and the connected dangers to avoid potential insolvency, writes Chris Bristow, a corporate insolvency adviser at UK Liquidators.

Blockchain technology has carved out its place in the corporate world, with more businesses investing in cryptoassets due to their innovative nature and robust security. As cryptocurrency and blockchain technology continue to gain popularity, businesses are under increased pressure to adopt digital assets and subsequently expand their digital capabilities.

While opportunities for businesses to invest in cryptoassets are abundant, the associated risks must be calculated and the business shielded against illicit activity. From digital asset fraud to crypto scams, company directors must protect high-value digital assets, maintain the integrity of investment portfolios, and actively manage risk exposure.

Although the value of cryptoassets is volatile, the returns can be lucrative when the fluctuations are in your favour. While a high-risk, high-return mindset must be embraced to succeed, the risk must be meticulously measured and consistently regulated. From investigating digital assets and their footprint, to engaging in due diligence to regulate risk, substantial financial losses can be prevented by taking precautions, such as:

–          Tracing and monitoring digital assets

–          Investigating suspected digital asset fraud 

–          Tracking the movement of crypto assets and exchanges 

–          Recovering digital assets lost to fraud 

–          Conducting digital asset due diligence 

The security and transparency obtained by investigating digital assets must not be underestimated, as this provides a window into the complex journey of digital assets as they are transferred through wallets, exchanges, and decentralised finance platforms.

Illicit activity is well-reported in the world of digital assets and is becoming prevalent in corporate circles, as seen in ongoing insolvency cases. More companies seeking insolvency advice are finding themselves the victims of organised cryptocurrency fraud, duped by fraudulent crypto schemes, compromised supply chains, and complex illicit digital financial activity.

Digital asset fraud can fuel insolvency risk due to the severe financial losses incurred, the collapse of investment portfolios, and reputational damage. To combat digital asset fraud, starts in the boardroom by engaging in collective learning to remain diligent and risk-aware.

According to the City of London police, investment fraud continues to be a key focus area after £649m was lost last year as a result. While the number of reports decreased by 7 per cent compared to 2023, the total financial loss increased by 13 per cent, which indicates potentially larger scams. 

Reports issued by Action Fraud, the UK’s national reporting centre for fraud and cybercrime, showed that cryptocurrency and trading alone made up 75 per cent of all commodity types. This shows that digital asset fraud is overtaking traditional scams, such as those related to foreign exchange or real estate.

As digital asset fraudsters upgrade the complexity of investment scams to deceive and defraud companies, companies must seek immediate advice to minimise financial loss. From dedicated digital asset recovery teams to leading blockchain intelligence software, the risks and solutions are well established in the digital asset field as the pain point becomes mainstream.