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May 06, 2024 Feature

Cryptocurrency—An Expert’s View

Interview with forensic cryptocurrency expert Dorothy Haraminac

Richard D. West and Dorothy Haraminac

What are the different types of cryptocurrencies and why should I care?

There are three high-level types: market-tradeable tokens, decentralized finance (defi) tokens, and nonfungible tokens (NFTs). They’re all just generated by code on the internet with some set of properties and attributes.

It matters because people are using dollars to buy crypto, they are accepting dollars in exchange for crypto, they are accepting crypto as payment for goods and services, and they are using it to represent a wide variety of rights to earn, sell later, attend an event, and many other things. It probably has a market value, and it is certainly property subject to division that can also be used as a basis for support demands.

What are the main differences between these three types: market-tradeable tokens, defi tokens, and NFTs?

Market-tradeable tokens are the ones you’ve probably heard about: bitcoin, ether, dogecoin, litecoin, bitcoin cash, and thousands of others. These are easy to buy and sell in an active, liquid market; they can be sold easily, and no permission is required for the holder to liquidate it. The holder may need to move it from a wallet to an exchange, but otherwise, if they push the sell button, that asset is selling.

Defi tokens are a little more complex. Those are ones that aren’t generally listed on a centralized exchange but may be tradeable peer to peer, used as collateral, or tradeable on a decentralized exchange. This category would also contain liquidity pool pairs, wrapped tokens, staked positions, that kind of thing. When you’re tracing and you see interactions with smart contracts, that may be a defi transaction; it’s a more complex transaction, and it’s an indication that the account holder is the only one who has records related to that transaction.

We’ve seen NFTs mostly as art products, but there are some other attempts out there trying to use them for a wide variety of things, like granting access to a special event, earning a royalty over time, granting ownership to other assets, and other functions. The main difference between other tokens and an NFTs is that each NFT is different. With bitcoin, if you have 5 bitcoins (and because it’s tradeable in an active, liquid market), I can get a market price and multiply it by 5 to get a market value. If you have five NFTs and you know one just sold for 17 ether tokens, you still don’t know much about the value of the other four. Valuing an NFT is more closely akin to a business valuation for each one, and it can get complicated quickly.

OK, it sounds like this can get pretty complex, so let’s get some basics. I’ve had clients with devices that they say store crypto. Where is cryptocurrency stored?

I hear that, too, and it’s usually paired with claims of loss, “I had it all stored on a hardware wallet, and I lost it so it’s all gone and I owe my spouse nothing.” (1) that’s not how loss works in a divorce, and (2) that’s not how crypto works either. Cryptocurrency is not stored anywhere except addresses on a blockchain. A blockchain is a list of transactions between addresses, which are like storage locations. There are about 30 different main blockchains, each with their own native token and each with their own special characteristics. For instance, Ethereum and some other blockchains have an extra capability where not only can you store tokens at an address, but you can also run software code stored at an address; that extra capability is what allows thousands of other tokens to be transferred on Ethereum. It allows defi and NFT transactions, and it makes it very easy to create your own token to use in transactions or however you like.

A wallet is the software that connects to a blockchain, creates those addresses (those storage locations) for you, and allows you to access whatever is stored at those addresses.

What is the difference between the different wallets? Software, hardware, mobile, and paper.

The technical definition of wallet is a group of addresses all accessed by the same private key. A wallet is created by downloading software to your computer (that’s a software wallet), or to your mobile device (a mobile wallet is the same thing just a different platform), or creating one online by going to a website (that’s web-based so there’s nothing installed and you probably have a login or a browser plug-in), or buying a device from a company that comes with software on it (that’s a hardware wallet), or writing down the private key that was generated by software and then deleting the software (that’s a paper wallet).

All of them are software, just running on different platforms, and all of them use a list of words (called seed words) to create your private key; that’s your access to your storage locations. When you need a new storage location, you generate it with the wallet software, and a new address gets listed on a blockchain that you access with your wallet. All those different platforms don’t actually matter—when you set up a wallet, regardless of the platform, it displays seed words to you, instructs you to write them down, and instructs you to protect them (store them in a secure location like a locked drawer, a fire safe, or a safety deposit box). If you lose the computer, hardware device, or phone, you can recreate that wallet on any other platform using those seed words. This claim of loss that I see all the time is usually garbage. If a person lost their platform (device, computer, whatever) and doesn’t have the seed words, then they have failed in a very big way to protect community assets, and we can calculate a reimbursement for that.

How can you tell if someone has cryptocurrency?

Really, there isn’t a way to tell. Crypto isn’t limited to people who look rich, act rich, or are rich, so being high net worth is not a good measure. And the idea that crypto is limited to tech nerds is a bad one, too. The origin stories of bitcoin are rooted in privacy and protection from corrupt governments, so really, if you’re a rural attorney with an active militia client, you should be asking about crypto just as much as if you’re in Silicon Valley. If you’ve got a single-income couple where one spouse stays at home, you should be asking about it. If you’ve got someone who exhibits a little distrust in the government or in banks, you should be asking about it. In fact, I can’t think of a case where you can look at two people and think, “I don’t need to ask about this potential asset.” You wouldn’t make that presumption for any other asset. Your client intake form asks about bank accounts, investment accounts, cars, boats, and more. Crypto is one more thing you should ask about on the intake form in as few as two questions: (1) Do you hold, or have you held, any cryptocurrency? If yes, please describe. (2) Does your spouse hold, or have they held, any cryptocurrency? If yes, please describe. If you get a maybe on those, now you know you need to ask for more account records.

What discovery requests should I make?

I get that question often; these records should have been provided as part of the initial disclosures. Crypto is a financial thing; exchange accounts are financial accounts.

For exchanges, ask for complete records for any centralized exchange account (Binance US, Binance, Kraken, Gemini, Coinbase, Kucoin, and hundreds more). Sometimes those are provided as more than one document: purchases and sales, deposits and withdrawals, leveraged positions, advanced trading transactions, and others. They are usually available to the account holder as .csv files and .pdf files. Screenshots do not suffice for records from an exchange.

For wallets, ask for a list of all addresses associated with that wallet, including on which blockchains those addresses exist, and a balance of any assets stored there. This is public information, so with just a list, I can derive the assets held there; but this increases the cost. The crypto spouse has readily available access to that information. Only providing a list of addresses is equivalent to a person stating only that they have an account at XYZ Bank and then requiring the nonaccount holder to request records from that bank—the account holder has readily available access to that information. For all lists of addresses provided, verify that the list is complete; it’s not enough to just type out a list. Proof that it’s complete must also be provided.

For complex transactions like defi, the account holder must provide the transaction details from that defi service provider (Uniswap, Compound, Dark Forest, Rarible, Gitcoin, 1inch, and many more). Generally, when the crypto spouse has engaged with defi services, only that person has access to the details of defi transactions. The transactions may be visible on a blockchain, but the details may not be.

How can I be sure of completeness, asset tracing, and characterization?

Be wary of relying on your client telling you, “That’s all there is.” Screenshots alone are not sufficient. Centralized exchanges provide records in a variety of ways so the first thing you can do, without an expert, is research “ABC Exchange how to download transaction history.” Those search results will tell you the variety of documents available and how the account holder can get them.

Attorneys verify completeness of bank records with dates and with beginning and ending balances. Crypto records are not as obvious because there aren’t usually dated statements, and you need to calculate running balances for each asset. You still need the same basic information: a beginning balance for each asset (dollars and each crypto), an ending balance for each asset, and a complete transaction history.

The records issue is where the bulk of my time as an expert is spent, and it’s tedious to argue over completeness. Because courts are still learning about crypto, attorneys will have multiple letters back and forth about records, hearings about records, arguments over whether what was provided is sufficient, or affidavits from the crypto-spouse addressing findings in my report as though that’s appropriate (it isn’t—a client should not be serving as their own expert). Records arguments are more difficult because judges aren’t generally keen on removing one party’s expert so early in a case, so you can end up with people who have no qualifications whatsoever providing information to the court where they’d otherwise be excluded from providing testimony such as when information is largely based on their client’s contention, is altogether misguided, or is demonstrably false. It’s frustrating because parties will spend tens of thousands of dollars, if not more, just arguing over the completeness of records. If I’m involved early, I try to head that off and provide enough information to the attorney about standards of records so they can make sure the judge knows records are incomplete and insufficient as soon as possible.

How do I know if the cost of discovery is worthwhile?

If a bank statement shows $350 going out to a crypto exchange, how many people will spend time pursuing the disposition of $350? What’s important about that transaction is not just the dollar value; it’s also the timing and the fact that you now know another account exists. If that $350 bought ether in 2016, it’s worth about $50,000 now. If you saw $350 going out to another bank account, you’d ask for records for that account, and you’d look for more deposits from other sources and more withdrawals out to other places. You need to do that with crypto as well. Don’t use the value at the time of a transaction to determine whether something is worth pursuit; ask for the records and conduct a preliminary tracing.

If the parties are amicable, and there haven’t been non-disclosure issues, you may not need an expert. If you’ve got simple bank account transactions showing withdrawals to a U.S.-based exchange, complete records for that exchange account, and those records don’t show withdrawals or receipts to or from an unknown source, you may not need a forensic expert with a crypto specialty; the forensic expert you know and love can learn what they need to handle that situation.

That’s a long list of qualifiers. How do I find a cryptocurrency expert to assist me?

It sounds like a long list, but I think some crypto divorce cases fall into that simpler category. Crypto is more common now, so traditional financial forensic experts are trying to learn more. I know because I teach them. It can get complex quickly, and if it’s a contentious divorce, you’re going to want a financial expert with specialized crypto expertise. That sounds more expensive, but it can be less expensive overall because you won’t have someone spending time trying to understand things that are beyond their scope of expertise. The financial expert with specialized crypto expertise should have foundational financial forensic expertise, so they can handle the rest of the financial issues in the case as well.

The earlier a good expert is involved, the cheaper it can be because your first pass at discovery is thorough even when the assets are complex. I can tell you in a short amount of time whether what was provided is sufficient because I’m an experienced expert.

When you have crypto in a case, you need to hire someone with financial forensics skills. That’s the basic skillset a person needs to offer an opinion in court about a financial matter. That expert then needs supplemental crypto knowledge, which can be conveyed through experience or through additional credentials. What you shouldn’t do is hire someone who just has crypto knowledge—that’s like hiring a doctor to conduct a medical clinic valuation. Those skillsets are not a substitute for financial forensics. You also shouldn’t hire someone with digital forensics expertise—that’s a different field altogether.

What if the spouse is a miner, are there other documents I need to request?

Yes, additional information related to mining should be requested. Ask for the addresses that received mining rewards over time, records related to mining (e.g., electricity costs, cryptocurrencies mined during which periods, and a list of equipment used). With that information you’ll be able to check whether they received the amount of mining rewards expected for the power of their equipment. If the spouse is mining through a pool or grouped mining service, also ask for those third-party account records.

Are there any pitfalls that you’ve seen in settlement offers that I should avoid?

Yes! Frequently, after a case has concluded and a party has been awarded some portion of cryptocurrency, there’s a new claim of loss, and one party is not getting what they’re owed. Sometimes, after a person has agreed to take a portion of cryptocurrency, the crypto spouse transfers it to a U.S.-based exchange, and suddenly, the recipient account is frozen because the exchange determined those assets to be high risk.

To prevent these scenarios, build in protections like a time limit for the completion of transfers and/or a disproportionate award of a seizable asset as a penalty. Build in an alternative value to be transferred if the crypto transfer isn’t completed by a certain time. If the crypto spouse balks at the penalty or the alternative, that may be an indication they aren’t planning to transfer the assets as agreed and you should consider negotiating for cash values instead.

What would you do if one party was awarded a vehicle, but the other party wrecked it before turning it over? That’s how you have to think about cryptocurrency as well: it’s another asset with a value to divide; just because one party lost it doesn’t necessarily mean the other party isn’t owed a portion of that value.

Cryptocurrency is not like a bank account based in the United States that can be frozen or seized. It’s not generally possible to seize an address; addresses are located on blockchains, and no single company controls them. A lack of central control is the whole point of most blockchains. It’s also not generally possible to freeze assets held in a wallet.

U.S.-based exchanges might cooperate in some cases, but those companies are getting arrogant in their responses to discovery requests. A bank would not generally respond with objections to a request for records in a matrimonial dispute; they are a third-party account provider, and a subpoena is a court order to produce records. Crypto exchanges, though, seem to forget their role sometimes and may offer objections as though they are a party to the case. In that scenario, a simple reminder about what enjoining is and their role as a third-party can assist in adjusting their behavior.

You’ve mentioned a discovery request template. How can I get that, and do you have more resources?

You can request it on my website, www.ybr.solutions/contact. I don’t engage in email marketing because it’s awful, but I do want to know who is making the request. I also have templates for sending a subpoena to an exchange, requesting cryptocurrency records from an employer, and requesting information from message forums. You can also use that contact form to ask questions or just call me.

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Richard D. West

West Family Law Group in Orlando

Richard D. West, founder of West Family Law Group in Orlando, Florida, is a fellow and former president of the Florida Chapter of the American Academy of Matrimonial Lawyers and a fellow of the International Academy of Family Lawyers. He is also a diplomate of the American College of Family Trial Lawyers and serves on the Board of Directors of the AAML Foundation and the AAML Law Office Management & Technology Committee.

Dorothy Haraminac

Houston Christian University

Dorothy Haraminac is a financial forensics expert with expertise in cryptocurrency tracing and valuation. She has provided testimony and consultation in disputes where cryptocurrency is at issue in civil and family matters and has consulted in criminal and regulatory matters. Ms. Haraminac holds a Master Analyst in Financial Forensics credential, a Certified Fraud Examiner credential, and has a master’s degree in Decision and Information Science, as well as being a licensed private investigator. She is an adjunct professor at Houston Christian University, where she teaches Software Engineering, Cybersecurity, and Digital Forensics courses.