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Are you crypto-friendly, or if not, at least crypto-aware?

Bitcoin is on a rollercoaster – zooming up and down in value. Who can predict which way or by how much? Are you one of the early adopters, adroitly enjoying the financial thrills and spills of a Bitcoin punt, despite allegations of ‘crypto whales’ manipulating the market for their own devious gain?

Facebook has plans for Libra digital currency that so worry the regulators they are seriously considering trying to stop it happening; but it may already be too late. Facebook recently reported that it now has 2.4bn monthly users across its various apps – Messenger, WhatsApp, Instagram and Facebook – with users on at least one of these apps every day.

As the Chinese cryptocurrency czar Changchun Mu has pointed out, “the most a central bank could do to prevent Libra from entering a country would be to ask all of their payment institutions and commercial banks not to process any transactions which are related to Libra”.

Are you longing to pitch into Libra and get your Facebook profile endorsed with gushing ‘likes’? Investors yearning for a profitable crypto unicorn future (as a company valued at $1bn plus) are anticipating the imminent arrival of the long-evangelised crypto economy.

Does that include you?

What, it doesn’t? Perhaps you realise that crypto assets are largely unregulated, with few innocent investor protections? Or maybe you have noted that over $2bn of detected criminal cryptocurrency theft and scams have occurred so far globally during this year alone?

Reason and rationality

But all hail Lady Justice, with her blindfold, scales and sword. What does she represent?

• The blindfold (justice is ‘blind’ – objective and without bias): Whether strong or weak; rich or poor; righteous or wicked: all are treated equally. The blindfold lady does not judge based on appearances but with reason and rationality.
• The balance (scales of justice): Justice fairly takes into account both sides of the story, from the accuser and the accused; or from the parties with opposing claims. It symbolises objectivity. Justice hands out a verdict assessing the relevance, sufficiency and ‘weight’ of the evidence presented for or against a claim.
• The sword (the symbol of power): Lady Justice’s sword symbolises the power of reason rather than any real physical power. This power manifests as the law and those authorised to enforce it.

For justice to be carried out and the law enforced, as citizens we give the law its physical power. We have agreed as a society that the rule of law is what we desire; translated into physical power in the form of law enforcers.

Standing before Lady Justice, it’s all about the evidence – both objectively and subjectively. So how is the digital evidence of crypto assets and associated transactions likely to feature or fair before her?

Enter the dragon

Your clients may encounter, or need to wield or be shielded from the sword of justice when they become embroiled in crypto disputes and investigations; or wish to pursue claims and counterclaims in relation to crypto assets.

So listen up: the crypto menagerie of whales and unicorns is about be joined by flame spitting crypto dragons. The dragon is a legendary powerful, sinister creature and a guardian of treasure. Killing it is the conflict between light and darkness, slaying the forces of evil.

The Dragon breathes fire from the sky as it swoops,

 and it catches your eye.

 Don’t try to avoid it.

(Most lawyers enjoy its appearance – new clients! Oh my!).

Yes, look out for these swooping crypto dragons – the many, varied financial disputes over crypto assets, potentially bringing a whole new raft of crypto-clients urgently needing crypto-savvy lawyers.

Complaints, disagreements and conflicts leading to both civil and criminal claims, are set to increase – driven by the growth in crypto scams, thefts, losses and investigations.

As a lawyer, will you know how to slay a crypto dragon when your clients and their financial affairs are assailed by one? Is a crypto entity an asset class, a currency, information, an intellectual property right – or what?

When a crypto dragon swoops, any claim in which you may become involved, whether for the claimant or the defendant, is for what, exactly? Can a record about something in a digitally-recorded ledger be considered a certain contract for money, property, an asset – or for anything? Has there been any court judgment qualifying or defining a crypto?

And if a client’s crypto assets are somehow tied up with arrangements or transactions involving a so-called smart contract, can you be sure that contract law applies; and, if so, to what extent? Where are the practical legal differences and appropriate forensic approaches applicable – and what are they?

The Smart Contracts Alliance (SCA) points out that “although the term ‘smart contract’ immediately pushes lawyers to questions of contract law, the reality is that smart contracts may be neither particularly smart, nor automatically intended to be used as a contract, in the legal sense of the word”.

In the SCA’s view a smart contract (in the context of blockchain technology and crypto assets) can be defined as: “Computer code that, upon the occurrence of a specified condition or conditions, is capable of running automatically according to prespecified functions.

The code can be stored and processed on a distributed ledger and would write any resulting change into the distributed ledger. Critical to this definition is the recognition that a smart contract is not necessarily a legal contract. Instead, a smart contract is essentially an advanced form of a conditional ‘if-then’ statement written in computer code”.

Ok, got that? You’re happy to advise your clients as to the legal reliability of and procedures for disclosure of supposed immutable blockchain computer code, with all those fancy ‘if then’ statements, are you? Whose code is it and whose obligation is it to retain and keep safe the record of changes ‘into the distributed ledger’ – where those changes are critical to tracing and valuing crypto assets in which your client is mighty interested?

A contract not legally smart is hardly a good term of art. Is it really a bargain, or just mindless arguin’ ’bout how you can take it apart?

The internet belongs to no one

The internet is not a sue-able party. It has no intrinsic financial value and belongs to no one. A crypto asset fundamentally consists of zeros and ones scratched on an internet-accessed blockchain; and changes stored and processed, and written into a distributed ledger.

So it seems futile – arguably even legally meaningless – to ascribe a tangible value to a decentralised blockchain without any substantive, sue-able trusted third party responsible for, or standing behind its integrity and security.

So are crypto asset holdings and dealings beyond legal protection and regulatory reach? Computer says “No”!

For when a crypto dragon strikes, the identification, location and financial valuation of any crypto asset; and access to it, holdings of it and dealings and trading in it will be critical.

And here’s the key point: although a crypto asset may essentially be ‘decentralised digital vapour’, a court of law can make a binding order to get forensic traction on it because of the well-established obligation of disclosure.

It’s all about disclosure

This obligation applies to digital crypto assets just as it does to computer-held digital materials and documents relevant to any forensic investigation, whether for a civil dispute or criminal prosecution.

Disclosure and valuation of digital assets – including crypto assets – is a significant issue arising in financial and technology legal actions (civil or criminal). During years of expert witness work, I have routinely assisted solicitors and senior counsel in framing appropriate technical requests for disclosure.

At the request of attorneys, I recently drafted a checklist giving practical, generally applicable wording for an effective digital asset disclosure exercise. Litigation lawyers, assisted by experts, should find the suggested checklist wording (see Figure 1)

The checklist should assist in financial audits, tax assessments, fraud and theft enquiries, fintech due diligence, investment exchange issues and listings, mergers and acquisitions projects, corporate risk assessments, divorce proceedings, intellectual property conflicts and smart contract audit forensic investigations.

This Checklist: a good aide memoire.

Rehearse it when driving your car,

 or court litigation, all over the nation.

It’ll make you a crypto law star!

Fig 1: Digital asset disclosure wording checklist

1. Disclosable digital asset

• Disclose each and every entity including but not limited to:
• Cash, currencies and any holdings or contracts denominated in all or any fiat currencies; and cryptocurrencies including Bitcoin, Ethereum and Litecoin;
• Dematerialised data having ascribable financial and or tradeable value; l Physical digital storage media and devices holding value;
• Banking and accounting records including account numbers and names.

2. Access methodologies

• Disclose all data, techniques and materials to identify, access, buy, sell, maintain and report on every such disclosable digital asset, including:
• Bank accounts, wallets, user IDs, passwords, PIN codes, signing protocols, twofactor authentication protocols;
• All relevant trading, storage and or other exchanges information;
• Software records and audits as to its reliability and security and correctness;
• Anything signed by or requiring signature by a digital signature or other verification means.

3. Means of repository and access

• Disclose and confirm if any such access methodologies are held by one or more trusted third parties and, if so, disclose all details thereof;
• If not held by one or more trusted third parties: (i) immediately deliver up the details to [named attorney], without alteration, redaction, in complete and functional form; and (ii) provide a detailed schedule of all things so delivered-up.

4. Assessments and valuations of digital assets

• Disclose existing assessments, valuations and or demands for taxes, carried out by any tax state or regulatory authorities including:
• In the UK, HMRC;
• In the USA, the IRS;
• Any law enforcement agency or entity.

The dragon has swooped

You may be wondering whether there has been any court judgment qualifying or defining a crypto. There has: in August 2019 (in what is believed to be the first decision of its kind), Stewarts secured an asset preservation order (APO) over £1m worth of Bitcoin which had been stolen by fraudsters.

In this case, the High Court considered the most important unresolved legal issue about Bitcoin – is it legal property as opposed to mere data or information; and, if so, what kind of property is it? In an interim ruling, the court made its first move in recognising the crypto currency as legal property.

Elsewhere, Devonshires was recently instructed by a private investor scammed by a Financial Conduct Authority-regulated FX trader during the sale of £1m of Bitcoin. The firm has since obtained what is believed to be the first Bitcoin freezing injunction in the English courts.

CastellGhostWriteBot is conceived, nourished and supported by award-winning independent computer technology and expert witness Stephen Castell

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