On Friday, Binance stated that after a potential security vulnerability was discovered on the exchange, approximately $3 billion in cryptocurrency assets were frozen, but recovering these funds may be more complicated.
Several crypto companies, including stablecoin issuers Circle and Tether, took action on Thursday to freeze funds related to this suspected incident; at the same time, Binance stated that it will bear all losses and temporarily suspend deposits and withdrawals during the investigation period.
However, compensating customers and recovering stolen assets are two different processes.
When asked whether the frozen crypto assets could be recovered and returned to their legitimate owners, CNBC, the global policy director of blockchain intelligence firm TRM Labs, former U.S. federal prosecutor, and former Treasury Department official Ari Redbord stated: "Freezing will stop the flow of funds, while recovery must be accomplished through legal procedures."
Redbord says that law enforcement agencies usually obtain a court order or seizure warrant first, and then cooperate with stablecoin issuers to release or reissue the assets and return them to their legitimate owners.
“Stablecoins are the most recoverable asset class in the crypto space because the issuer controls the token contract,” said Redbord. “Tether and Circle can be frozen, destroyed, and reissued, which allows the frozen USDT and USDC to be returned to the victims.”
However, the process of releasing the frozen funds may be more time-consuming.
“It only takes a few minutes to freeze the funds. It will take longer to return the money, but the process is feasible,” he added.
Redbord indicates that recovering cryptocurrencies such as Bitcoin and Ethereum faces greater challenges, as there is no issuer that can directly freeze assets.
On the contrary, investigators must track the flow of funds between exchanges, cross-chain bridges, and other crypto services. In these areas, suspicious transactions may be flagged and have the opportunity to be intercepted.
"Cross-chain bridges, exchange services, exchanges, and over-the-counter trading desks will all become interception points," said Redbord.
Redbord indicates that approximately $2.4 billion in USDT and USDC has been frozen, while it is estimated that another $2.4 billion in Bitcoin and Ethereum is still under the control of the attackers, beyond the direct reach of the stablecoin issuers.
"Frozen funds are the first step in reducing losses," he said, "and once the frozen assets are returned to their legitimate owners, the losses will decrease, and that step comes after the freezing process."
Redbord added that investigators must track the flow of funds between exchanges, cross-chain bridges, and other crypto services. In these areas, suspicious transactions may be flagged and have the opportunity to be intercepted.
On the other hand, blockchain analytics firm Chainalysis estimates that approximately $5.91 billion was stolen at the time of this suspected vulnerability.
Chainalysis, the research supervisor, stated that freezing assets can prevent further transfers, while investigators can track the funds. However, returning the assets requires coordination among law enforcement agencies, exchanges, and token issuers.
"There is no standardized timeline for recovery. A technical freeze could occur quite quickly, while the return of funds may take months or even years," Jardine told CNBC.
Jardine added that although Bitcoin and Ethereum cannot be frozen by the issuers, they can still be traced and may be recovered. Investigators can track the funds on the public blockchain and intervene when they reach cooperating exchanges or other centralized platforms, he said.
Affected by news of potential security vulnerabilities at Binance, Bitcoin fell more than 4% on Friday, dropping below $78,000 and putting pressure on the cryptocurrency market.
