Though cryptos (cryptocurrencies) remain a bit strange and elusive to many people, when attempting to uncover crypto assets, they can be dealt with in the same manner as any other major financial stake.
Often thought of as a way to hide capital or conceal transactions, cryptocurrency searches by an assets investigator are conducted much in the same way as we perform bank locates and searches. Instead of processing information through the banking structures, we work through crypto platforms. Proceedings and records for crypto assets should be sought in a similar fashion by attorneys as to how a lawyer would request assets like bank statements or stock market investments- by making a formal request through any and all cryptocurrency platforms being used. Hopefully, this information will engender a peace of mind knowing that there is a way to determine the existence of cryptocurrency even in the absence of official documentation to that effect.
One of the main issues attorneys face in determining assets valuation with cryptos is that they are not static as, for example, cash or real estate. Bitcoin and Ethereum, for example, have seen quite drastic changes in a short period of time — on the order of five to ten thousand dollars in a single month. As with stocks and bonds, this can make the actual value of an estate all but impossible to know with certainty from one month to the next. The best advice is to do your due diligence, be aware that the value of these assets can experience wild fluctuations and, repeat the valuation process immediately prior to any settlement or division of estate assets.
All assets should be listed on the financial affidavit. The financial affidavit does not include a field to declare cryptocurrencies like Bitcoin, but there is a section for “Cash or Cash equivalents.”
“Bitcoin clearly qualifies as “money” or “funds”…Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014)
Cryptocurrencies must be disclosed on the financial affidavit. Failure to do so may result in sanctions.
The question then becomes – how would one verify cryptocurrency holdings? Would you secure a screen grab from the crypto online platforms or would you go through the cryptocurrencies themselves? Would your client simply provide their soon-to-be ex the keys to all of their crypto accounts? (I’ll be referencing a divorce case in this article but clearly crypto searches occur in other types of matters, such as a partnership split.)
Some U.S. based coin exchanges such as Coinbase and Kraken will issue a 1099-K each year if there have been $20,000 or more in exchanges of cryptocurrency.
If the opposing party will not fully disclose their cryptocurrency holdings, you will have to turn to third parties to uncover those holdings.
Subpoenaing Cryptocurrency Exchanges
The most popular cryptocurrency exchange, Coinbase, allows themselves to be subpoenaed.
Coinbase and other exchanges do not hold cryptocurrency. They merely effect the transaction. So, a subpoena to Coinbase will be like subpoenaing a bank and asking not “what’s in your accounts?” but rather “what checks have your clients issued.”
Then there are sites like Localbitcoins.com which allow anonymous transactions of bitcoins. These sites don’t take any information from their users and merely connect a cryptocurrency seller with a cryptocurrency buyer. These sites don’t have terms of service. These sites don’t issue 1099s. Nor could they as the sites don’t even know who is using them. Informally (meaning there is no crime committed by allowing this exchange, yet), these sites can be viewed as facilitating money laundering via cryptocurrency.
Where Are Cryptos Kept?
A crypto is a string of digital signatures, which can be accessed/sent through the use of addresses. One address is a private address used to send cryptos and the other is a public address used to receive cryptos.
While these addresses can be stored anywhere – on paper, online, etc., once this information is lost, the crypto is gone forever. Because of this risk, many crypto holders have a crypto wallet. There are companies that issue these wallets and, they create a backup. Helpfully, a lost wallet has a recovery seed which allows the owner to retrieve the cryptocurrency addresses.
Of course, if you are able to obtain the private key, you can examine all of the crypto transactions. But, just when that appears to be the most effective solution – along comes the much more sophisticated methods of “crypto-mixing”. Companies who offer this service allow a crypto owner to break the link between addresses by either creating temporary addresses or swapping coins with other addresses of the same value.
Furthermore, some of the newer, emerging crypto companies offer “private coins”; the identities of users and the origins of their transactions are completely protected.
Searching The Crypto Holder’s Computer For Cryptocurrency
Due to al of these methods of masking crypto holdings, you might have to search through the holder’s phone or computer (the only way to buy, sell and trade cryptocurrency).
A holder can object to having their phone or computer searched; the basis of such an objection might be that the search would be so overly broad as to reveal all or other private information contained on the computer or phone. Perhaps simply limiting the scope of the search for words such as crypto, cryptocurrency, Bitcoin or wallet might work in allowing for reasonable discovery while preserving the holder’s privacy.
(Let me repeat for the record that we do not dispense legal advice, are not lawyers, do not promote or advertise for lawyers or law firms. We are simply sharing experience in the field of digital investigative information.)
New currencies are not a fad so it pays to keep an eye on the emerging digital economy and, to develop the skills and gather knowledge to better understand its values and methods of discovery of these currencies.
BNI Operatives: Situationally aware.
As always, stay safe.