You’re working on a run-of-the-mill contract dispute when you learn that your opponent invests and trades heavily in Dash, an anonymized cryptocurrency. You can’t obtain standard financial records for the business’s bank accounts, because most of its business is traded on an encrypted exchange. How can you request, access, and decipher discoverable data about the business’s finances?
If you’re like most lawyers, you may not really understand cryptocurrency — either what it is or how it works. You know that it’s regularly in the news, often controversial, and intermittently volatile, but you haven’t thought through its implications for ediscovery. While cryptocurrency is still making its way onto the ediscovery scene, here are the basic facts you need to know.
Starting From Scratch: Definitions
First, cryptocurrency is a category of currencies, not itself a specific form of payment. As of January 2018, over 1,300 different cryptocurrencies were available [see sidebar for a list of the most popular]. That said, the key features of cryptocurrencies are that they are:
- peer to peer, and
- decentralized forms of money.
In short, this means that cryptocurrencies allow users to digitally exchange money securely without using an intermediary like a centralized bank. Most, but not all, cryptocurrencies use anonymizing features to mask users’ identities. Most, but not all, rely on blockchain technology to track transactions.
- Bitcoin Cash
Some cryptocurrencies incorporate smart contracts; Ethereum is the most popular example. These allow users to embed legal conditions and terms in the transaction. Once the conditions are met, payment occurs automatically. For example, a smart contract used in a crowdfunding campaign might only transfer funds when the funding minimum is met.
Pros and Cons: Why Cryptocurrencies Are Popular — And Problematic
Cryptocurrencies are popular for both legitimate and dubious reasons. First, as noted, they generally use anonymizing features to mask the identity of the participants. They’re designed to provide personal financial security without reliance on banks, although some have already been hacked. They’re mostly unregulated — at least for now — and decentralized, rather than dependent on banks. They’re transparent, with public ledgers that are always visible. They’re fast and entirely global, simplifying cross-border transactions without foreign exchange fees or delays.
These same traits are what make cryptocurrencies problematic: their relative anonymity, frequent lack of traceability, and lack of regulation make them ideally suited for illicit or discreditable purchases, criminal enterprises, money laundering, and tax fraud. The speed of cryptocurrency transfers, as well as the speed with which new cryptocurrencies are created and abandoned, can make it difficult to keep up with transactions. This rapid pace of innovation also stymies governments in their efforts to interpose rules and regulations.
With no geographic component to a cryptocurrency’s use, the ease of cross-border transfers makes it even easier to evade what regulations do exist. Globally, cryptocurrencies run the gamut in how they are viewed. While the U.S. hasn’t yet settled on a regulatory approach, Japan regulates bitcoin as a currency. Estonia is planning to launch its own cryptocurrency; Venezuela already has.
One universal downside to cryptocurrencies is their market volatility. Bitcoin has famously experienced unprecedented spikes and dizzying plummets in its value. The lack of an intrinsic value underlying most cryptocurrencies may be problematic, but then, most forms of physical currency are also based on a societal willingness to value otherwise meaningless strips of paper.
But enough about everyone else: what do cryptocurrencies mean for ediscovery?
Cryptocurrency Implications for Ediscovery
The central problem with cryptocurrency when it comes to ediscovery is its masking of user identities. How can users be identified as the individuals involved in litigation? And then how can lawyers succinctly and comprehensibly explain that identification process in court? The IRS has had some success — though not unfettered — using “John Doe” summonses to investigate cryptocurrency exchanges and transactions.
Even once a user identification can be linked to a specific individual, how are transactions established? Blockchain evidence — a conglomeration of out-of-court statements offered for the truth of the matter that those transactions occurred — is likely inadmissible hearsay.
The most promising approach to ediscovery of cryptocurrency transactions, for now, is through traditional digital forensics: imaging a hard drive and accessing the user’s wallet files and transaction history directly. Alternatively, some ediscovery professionals have subpoenaed users’ master keys. Whether users will be able to evade even this accountability by establishing multiple cryptocurrency accounts or by switching cryptocurrencies remains to be seen.
Whether you’re ready to invest in cryptocurrency or are digging another hole in the backyard to bury some good old cash for safekeeping, these new forms of money aren’t going away. As ediscovery professionals, it’s time to figure out how we’re going to deal with them.