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.

  1. 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.
  2. 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.

            1uS

        (1.0 BTC)

     ↓             ↓

  3Uk               1Ru

(0.75 BTC)   (0.25 BTC)

Buyer 1              ↓

3fR

(0.25 BTC)

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.

  1. 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.

 

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Photo of Michelle O'Neil Michelle O'Neil

Michelle May O’Neil has 27 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 27 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, 2011-2018, a peer-voted honor given to only about 5% of the lawyers in the state of Texas. In 2014-2018, 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. She was named one of the Best Lawyers in America for 2016 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.