The increasing need for expert witness opinions in cryptocurrency litigation

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Cryptocurrency is an increasingly popular alternative currency. Since it is a virtual currency, the laws that govern it differ from those which govern standard (or ‘fiat’) currency. The nature of crimes and unfair dealings that relate to cryptocurrencies also differ and will require the opinions of appropriate specialists. Historically, most litigation for cryptocurrency have involved breach of contract, insolvency, loss, theft, or fraud. For this reason, the insights of technology, finance and law experts are needed to settle crucial matters and provide a fair assessment for all parties involved.

In this article we will give a brief background of cryptocurrency, explore Australian cryptocurrency law, look at the inherent vulnerabilities of cryptocurrency, and explain why expert opinions will be required in future litigation cases.

What Is Cryptocurrency?

Cryptocurrencies are a form of virtual currency which act as an alternative to fiat currency. All cryptocurrencies rely on varying forms of blockchain technology. Blockchain is a digital registry that records all transactions in the form of a ledger, which is updated, shared, stored and accessible on computers all over the world. This is where the unique ‘decentralised’ aspect of blockchain technology stems from, as individuals who engage in a transaction will need confirmation from hundreds of other computers as to whether the transaction is legitimate. Upon this confirmation, the transaction will be recorded on the ledger.

Every piece of cryptocurrency has a private key, which is intended to protect a user from theft and unauthorised access to funds. Private keys are used to unlock digital credits and are stored in a digital wallet. These keys are what allow individuals to make transactions and spend their cryptocurrency. Public keys are the ‘address’ to which funds are sent. The public key must be known by the sender. Most cases of cryptocurrency theft arise from the mishandling of private keys, sometimes through the fault of an individual revealing their private key to another party, or due to a breach in the network leading to large-scale theft.

Regulating Cryptocurrency

The difficulties in legislating and regulating this new market stems from the anonymity of users and transactions. Although all transactions between wallets are available on the public ledger, it can be difficult to determine the real identity of users. The cryptocurrency exchanges themselves likewise make control of this new market difficult, due to the exchanges being unregulated, uninsured and numerous.

Australia, unlike countries such as England, has implemented a single authority to handle the regulations and enforcement of digital currency exchange: The Australian Transactions and Reports Analysis Centre (AUSTRAC). [2] This authority, in combination with the Australian Tax Office have recently taken steps to increase the regulation of the industry. [1] These steps include:

– Since 3 April 2018, AUSTRAC has required business to meet Anti-Money Laundering (AML) and Counter-Terrorism Financing (CT) obligations. Businesses are obligated to: 1. Adopt and maintain an AML/CTF program to identify, mitigate and manage money laundering and terrorism financing risks. 2. Identify and verify the identities of their customers reporting to AUSTRAC suspicious matters, and transactions involving physical currency of $10,000 or more, and keeping certain records for seven years.

– From 1 July 2017, Australia’s budget summary indicates that digital currency will no longer be double taxed. For the purposes of GST, cryptocurrency is currently treated just like money.

– Furthermore, a recent AML and CTF Amendment Bill [3] which passed both houses of parliament on December of 2017, broadened the government’s ability to monitor the volume of digital currency traded on registered exchanges in Australia, no longer allowing digital currency exchanges to provide services if they are unregistered. In broader terms, there has been an expansion of regulatory offences for which the Chief Executive Officer of AUSTRAC is able to issue infringement notices.

Notable Thefts from Cryptocurrency Exchanges:

With the rise of cybercrime, and with criminals becoming more tech savvy, laws need to be enforced to protect owners of cryptocurrency against theft. Some notable cases of large-scale cryptocurrency theft through hacking cryptocurrency exchanges are outlined below:

Coincheck Exchange

January 2018.

Amount: (USD) $534,800,000 (523,000,000 NEM)

BitGrail Exchange

February 2018.

Amount: (USD)  $195,000,000 (17,000,000 NANO)

Nicehash Exchange

December 2017.

Amount: (USD $60,000,000 (4,000 BTC)

Bitfinex Exchange

August 2016.

Amount: (USD) $72,000,000 (120,000 BTC)

MtGox Exchange

March 2014.

Amount: (USD) $700,000,000 (850,000 BTC)

It is difficult for stolen cryptocurrencies to be recovered, and equally as hard for the thieves to be identified as, due to the decentralised nature of the blockchain, it can be difficult to identify who is behind any specific transaction. Likewise, there are numerous strategies that can be used to ‘wash’ a cryptocurrency and make it impossible to identify. In addition to this, in many law enforcement agencies around the world there remains confusion as to whether or not bitcoin even constitutes money, and whether stealing digital currency even constitutes a crime. At this point, no stolen cryptocurrency has ever been recovered and very few people have been arrested for cryptocurrency theft.

The Rising Need for Cryptocurrency Experts

Due to blockchain being a rapidly emerging technology, we are able to view elements of the industry that operate in a legal grey area unfolding in real time.

The cryptocurrency industry often draws their expert witnesses from both the tech and financial worlds, and these experts’ assessments are crucial in high-profile court cases, due to the fact that, as mentioned above, digital currencies are susceptible to theft and hacking attacks. In fact, one of the world’s largest cryptocurrency hacks happened in January 2018. Japanese company Coincheck’s network was breached in a theft amounting more than $650 million dollars [4]. Coincheck is currently facing a class action lawsuit, filed by lawyers representing victims of the theft.

The main questions to consider are:

– Who is legally culpable?

– What form of financial compensation are the victims are entitled to?

Legislation regarding digital currencies is still in its infancy and there are many aspects which are not common knowledge. Subsequently, the need for experts within the cryptocurrency space is always growing, due to ever-increasing developments in the industry and adoption by mainstream sectors such as finance and banking. Furthermore, due to this growth, there exists not only a regulatory gap but also a knowledge gap, as the technology seems to outpace the regulatory action.

For a standard judge and jury, the crime itself may elude them without the proper clarification from a well-versed expert. Considering that the cryptocurrency space encompasses the fields of economics, finance, information technology, computer science, and new fields such as ‘crypto-economics’ (a combination of cryptography and economics), the proper expert witness is crucial in providing a legitimate interpretation and summary for the court.

Lastly, due to all transactions being permanently recorded on the blockchain ledger, a decentralised system that means identifying the people behind any given transaction can be difficult, the anonymity of bad actors currently operating within the cryptocurrency industry may be safe today. However, in the imminent future, this permanent recording of every transaction  has the potential to aid future litigation of cryptocurrency exchanges/users, as well as law enforcement agencies investigating nefarious activities The prospect of this may result in a backlog of future criminal/civil cases within the industry.

Thus, there is a developing need for cryptocurrency experts, because of a widespread lack of understanding regarding the technology used in cryptocurrency and the potential for court cases pertaining to cryptocurrencies to become common, due to both the growing popularity of, and unlawful activity associated with, the technology.

References

[1] Australian Transaction and Reports Analysis Centre 2018, ‘Digital currency exchange providers’. Viewed 16th March 2018. http://www.austrac.gov.au/digital-currency-exchange-providers

[2] Australian Taxation Office 2018, ‘tax treatment of cryptocurrencies’. Viewed 16 March 2018 https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia—specifically-bitcoin/

[3] Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017. <http://parlinfo.aph.gov.au/parlInfo/download/legislation/bills/r5952_aspassed/toc_pdf/17177b01.pdf;fileType=application%2Fpdf>

[4] Sturmer, Jake. ‘Victims of cryptocurrency hack suing Coincheck for $650 million theft’. ABC News.http://www.abc.net.au/news/2018-02-16/victims-of-cryptocurrency-hack-sue-coincheck/9452560 (Retrieved 15 May 2018).

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