When an exchange is not used, a tracer would not be able to determine the market rate the cryptocurrency was sold for (dollars per Bitcoin), as market rates very based on whether a cryptocurrency is sold on an exchange, a cash-escrow website, or in person. Exchanges have the lowest market rates, and are generally the most cost-effective, but offer the least privacy. If a tracer can obtain the transaction statements from an exchange, the tracer is in the best possible position to trace assets. Cash-escrow websites or services offer cryptocurrency in exchange for cash deposits at banks, wire transfers, and even cashier’s checks, money orders, and cash by mail. However, the market rate for cash-escrow services can be 20-30% higher than exchange market rates, and determining whether such a cash-escrow website was used as opposed to a personal sale is extremely difficult. Personal sales literally involve handing of cryptocurrencey over for other items of value (including cash and other cryptocurrencies), and would have no record as to the dollar per Bitcoin rate applied to the transaction. These disparities make distinguishing the transfer and holder of the remainder address very difficult. Below is are three examples demonstrating how the method of transfer clouds the value Seller retains. First is a classic exchange sale, second is the cash-escrow sale, and third is the personal sale.
- Exchange: The market rate on the exchange for 1.0 BTC is $5,000.00. Seller transferred 0.75 BTC, to an unknown address (3Uk), and 0.25 BTC to another address (1Ru). On that date, Seller received $3,750.00, which was wired into Seller’s bank account from the exchange. There is an online index of the market rate for BTC over time. It is highly likely that the remainder address is Seller’s, and not a second buyer, because 75% of $5,000.00 is $3,750.00. If the exchange transaction records are available, they would establish whether seller sold 0.75 BTC or 1.0 BTC, and the remaining account balance, removing uncertainty. However, exchanges can also transfer funds out to a sellers backup or secondary public accounts that are not in an exchange (such as 3fR in the next example), and all transfers made from that account would not be available through exchange records, leading to problems similar to those set forth below.
- Cash-Escrow: The market rate on the cash-escrow website for 1.0 BTC is between $6,000.00 – $8,000.00 (this is determined on a buyer by buyer basis and varies greatly from sale to sale). On the date of sale, Seller transferred 0.75 BTC, to an unknown address (3Uk), and the 0.25 BTC in 1Ru to an unknown third public address (3fR). 3fR could truly be a second buyer, or it could be a secondary or backup public address belonging to Seller.
(0.75 BTC) (0.25 BTC)
Buyer 1 ↓
Buyer 2 (or perhaps Seller?)
Seven money orders made out to cash were received by Seller, each for $999.99 each (dodging ID requirements by $0.01), for a total of $6,999.93, but Seller cashed all of them at random check cashing locations, and only deposited $5,000.00 into his bank account (pocketing $1,999.93). There is no record of the cash amounts or movement. Seller claims to have sold 1.0 BTC in two sales, one for 0.75 BTC to 3Uk and one for 0.25 BTC to 3fR, at the previously used “exchange” market rate for $5,000.00 per Bitcoin. In this scenario, Seller claims 1Ru’s balance belongs to another, 3fR, when in reality 3fR belongs to Seller.
- Private Sale: There is no market rate. On the date of sale, Seller transfers 0.75 BTC, to an unknown address (3Uk), and the 0.25 BTC balance in 1Ru to another unknown address, 3fR. In reality Seller traded 0.75 BTC for 18 ETH into an secret Ethereum public address (wallet), and kept 0.25 BTC in Seller’s 3fR account. Ethereum is another cryptocurrency, and for this example has a value similar to 0.75 BTC, or $3,750.00, with BTC’s exchange market rate at $5,000.00. The next day Ethereum jumps 34% in price, and Seller sells all 18 ETH in person for cash for $5,000.00 to a stranger, depositing this amount in the bank immediately. Seller still retains the 0.25 BTC in 3fR, but claims to have sold 1.0 BTC for $5,000.00, defrauding the estate. Nobody can prove 3fR belongs to Seller, all they can show is Seller deposited the market rate for Bitcoin, $5,000.00, into the bank account one day after the transfer.
Given the difficulties in distinguishing the nature of the remainder address and subsequent transfers, for all Seller knows, the owner of the 1Ru and 3fR public addresses could be their next door neighbor, or someone on the other side of the globe. The remainder address problem is not the only issue cryptocurrencies raise in family law cases. The third article in this series will address additional methods of hiding cryptocurrencies, hiding gains, and additional dangers they pose in divorce cases.
*Remainder addresses are also commonly referred to as “change addresses.”
**Paper wallets and other hardware wallets compound this problem, as no screenshots or records would be available.