This article is limited to transactions on exchanges only.  The next entry will address remainder addresses in non-exchange scenarios.

For a better understanding what cryptocurrencies are, please read the first article in this series, available here:

Everyone in the world can see when cryptocurrencies are transferred.  Public addresses are wallets, and generally remain the same, and private addresses are similar to coins, and change upon transfer. When a private address (coin) moves from one public address (wallet) to another (from seller to buyer), one could simply follow the coin’s movement from public address to public address, by following the amount of cryptocurrency transferred between public addresses, similar to tracing cash amounts from bank account to bank account.

However, tracing assets is not as simple as following a trail, as the trail is in a constant state of transition, and it is difficult to determine who the buyer/recipient is. As discussed in the previous article, private addresses always change when transferred.  Public addresses generally stay the same.  However, while sales/transfers from a seller’s transmitting public addresses don’t change the transmitting public address, when only a portion of the cryptocurrency held in a transmitting public address is transferred to a single recipient, a third public address is created where the seller holds their remaining funds.  A seller would then have the old public address where the seller could still receive funds, and a new one where the seller could keep the funds or enact a secondary transfer.  Below is an example of how public addresses can be traced, and demonstrates how a remainder address is created.

Subdivisions would appear as follows:


         (1.0 BTC)

      ↓                  ↓

   3Uk               1Ru

(0.75 BTC)   (0.25 BTC)

Buyer           Unknown

Seller (1uS) transfers a portion of her Bitcoin holdings (0.75 BTC) to Buyer (3Uk).  Remember, the sale is a transmission of a private address, however, for purposes of this demonstration that private address (coin) is not shown, only the amount transferred is shown, as we are demonstrating how public addresses change in this example.  That private address is transmitted and converted in secret. 3Uk receives 0.75 Bitcoin from Seller’s 1uS wallet, and it appears that Seller keeps the remaining 0.25 Bitcoin. However, that remaining 0.25 Bitcoin does not stay in Seller’s original, transmitting 1uS public address. Instead, it generates a new public address for Seller, called a remainder address, designated as 1Ru.  Seller’s old public address (1uS) remains but has a zero balance. Seller can still receive funds and replenish the 1uS public address (wallet). Without access to exchange records, the remainder address, 1Ru, creates tracing issues, as a tracer would not know whether the remainder address (1Ru) is a second buyer (for example, if Seller put all 1.0 BTC up for sale, and the exchange sent 0.75 BTC to 3Uk and 0.25 BTC to a second buyer at 1Ru), or Seller’s remainder address (Seller only sold 0.75 BTC and kept 0.25 BTC in the newly created 1Ru remainder). It only appears as a new address in the blockchain, without clarification. A tracing party would know a transmission occurred, but they would not know to who, and unless it was a complete transfer, they would not know how much was retained.  

Tracers need to pay attention when exchanges are used to sell cryptocurrency.  In some cases the value of 1Ru could be a combination of multiple remainders and could appear to be a transfer larger than the original account balance, for example, 10 BTC.  This could lead the tracer to believe that an error occurred, or the Seller had hidden funds.  This 10 BTC scenario would occur when a second buyer puts in a buy order for 10 BTC, but no seller has 10 BTC to sell.  The exchange then combines multiple remainder addresses to fill the order.  Seller, unknowingly becomes part of this, and while Seller put 1.0 BTC up for sale, 0.25 BTC of that was combined with numerous other sell orders into one large 10 BTC sale order to the second buyer. Luckily for a tracer, if this were to occur, it would be clear that Seller sold both the entire share of 0.75 BTC from the 1uS public address, and the remaining 0.25 BTC (part of the large combination 1Ru public address).  When no combination (i.e. combining multiple remainders to 10 BTC) occurs, the owner of the 0.25 Bitcoin in 1Ru is unknown. It could have been a second buyer who only wanted to purchase 0.25 BTC, or it could be Seller’s remainder address. To discover the holder of the 1Ru public address, Seller would need to subpoena the exchange.  If no exchange was used, or the exchange is outside the reach of a subpoena (many are), the owner of 1Ru is truly anonymous.  The best hope a tracer would have would be access exchange balance and transaction statements, but these may be impossible to obtain.

Exchanges are not the only time remainder addresses pose problems, and are not the only mechanism to sell cryptocurrency.  Part three of this series will address cash-escrow services and privates sales, both of which compound the problems created for tracers by remainder addresses.

*Remainder addresses are also referred to as “change” addresses.

Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Michelle O'Neil Michelle O'Neil

Michelle May O’Neil has 30+ years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes…

Michelle May O’Neil has 30+ years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes genuine compassion for her client’s difficulties, yet she can be relentless when in pursuit of a client’s goals. One judge said of Ms. O’Neil, “She cannot be out-gunned, out-briefed, or out-lawyered!”

Family Law Specialist

Ms. O’Neil became a board-certified family law specialist by the Texas Board of Legal Specialization in 1997 and has maintained her certification since that time. While representing clients in litigation before the trial court is an important part of her practice, Ms. O’Neil also handles appellate matters in the trial court, courts of appeals and Texas Supreme Court. Lawyers frequently consult with Ms. O’Neil on their litigation cases about specialized legal issues requiring particularized attention both at the trial court and appellate levels. This gives her a unique perspective and depth of perception that benefits both her litigation and appellate clients.

Top Lawyers in Texas and America

Ms. O’Neil has been named to the list of Texas SuperLawyers for many years, a peer-voted honor given to only about 5% of the lawyers in the state of Texas. Ms. O’Neil received the special honor of being named by Texas SuperLawyers as one of the Top 50 Women Lawyers in Texas, Top 100 Lawyers in Texas, and Top 100 Lawyers in DFW for multiple years. She was named one of the Best Lawyers in America and received an “A-V” peer review rating by Martindale-Hubbell Legal Directories for the highest quality legal ability and ethical standards.

Author and Speaker

A noted author, Ms. O’Neil released her second book Basics of Texas Divorce Law in November 2010, with a second edition released in 2013, and a third edition expected in 2015.  Her first book, All About Texas Law and Kids, was published in September 2009 by Texas Lawyer Press. In 2012, Ms. O’Neil co-authored the booklets What You Need To Know About Common Law Marriage In Texas and Social Study Evaluations.  The State Bar of Texas and other providers of continuing education for attorneys frequently enlist Ms. O’Neil to provide instruction to attorneys on topics of her expertise in the family law arena.