Category: Blockchain

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Cryptocurrency and Forensic Accounting of Marital Assets

What are divorcing couples to do with digital property? How does one party even locate these assets? How do you know if the other party is hiding community property in cryptocurrency? Once located, how do you divide it?

Cryptocurrency is a hot topic in the news, particularly on a slow news day. The financial media especially loves to discuss cryptocurrency at two specific times: 1) when the price of Bitcoin is skyrocketing; 2) when the price of Bitcoin is crashing.

It is certainly of greater interest to those of us who pay attention to advances in technology. I was a little late to the game as I started learning about crypto in 2015. This was earlier than many, but far later than early adopters. When I look at historical charts, it would have been nice to have invested in 2015. Alas, I did nothing of the sort. Luckily, I didn’t invest when it went crazy in 2017. When armchair pundits started saying “it’s still cheap,” I had flashbacks of the dot-com bubble when people would say things like “normal economic principles no longer apply.” Turns out, normal economic principles did apply in both scenarios.

When Bitcoin increased in value to nearly $20,000 per coin in late 2017, it became a household name. Many folks jumped in to cryptocurrency investing in the hopes of striking it rich quick. Some succeeded. Others did not. As of this writing, Bitcoin is priced at $3,415.00 according to Coinbase (chart linked so you can see how it has changed by the time you read this post).

Even off of its highest values, Bitcoin, Ethereum, Litecoin, and other cryptocurrencies still have value. They are an investment vehicle like many others, although they have experienced some tremendous volatility.

For purposes of this article, we’re looking at them as an investment to be divided upon divorce. Or, as an investment intended to hide assets from a spouse.

What is Cryptocurrency?

Don’t worry, this is not a detailed explanation of cryptocurrency. There are about a million other articles online where you can find detailed analysis of the Blockchain (on which cryptocurrency is built). In fact, one of our internet technology experts wrote an article last year that provides some interesting insights on the Blockchain.

I’ll try for a quick description before I get into the analysis needed by forensic accounting expert witnesses.

According to Investopedia, in relevant part, “A cryptocurrency is a digital or virtual currency that uses cryptography for security. Many cryptocurrencies are decentralized systems based on blockchain technology, a distributed ledger enforced by a disparate network of computers.” The ledger is kept on various different computers around the world, so that there is no centralized computing system. Also, cryptocurrency is not (at least not yet) currency issued by a central government.

As such, cryptocurrencies like Bitcoin, were used to hide money from tax authorities and participate in illegal transactions online. Especially in the early days of the currency, before it was more commonly understood.

Although hiding from the tax man and participating in illegal activity is still occurring, many users are now investing in cryptocurrency as though it is any other security. However, because it is not kept in a standard bank, but rather a digital wallet, some are using the currency to try and hide assets from their spouse (or soon-to-be ex).

What to look for as a forensic accountant?

This article from the New York State Society of Certified Public Accountants (NYSSCPA), provides some excellent advice from an accounting perspective when having to find cryptocurrency in divorce litigation.

Most importantly, the NYSSCPA provides seven questions to ask the client in the client intake interview. The questions are as follows:

1. Is the spouse very tech savvy?
2. Has the spouse ever owned cryptocurrency?
3. If so, did he or she buy and sell on an exchange, or did he or she receive cryptocurrency for goods and services?
4. If so, how did the spouse store and transact in cryptocurrency?
5. Did the spouse use cryptocurrency as part of their trade or business?
6. Where does the spouse keep their important records? Does the client have access to them?
7. What electronic devices does the spouse own?
8. Does the client still have physical access to his or her spouse’s electronic devices, such as computers, phones, and tablets?

This is incredibly important for a forensic accounting expert. You are going to want to identify all the possible records and other forms of documentation that might lead you to assets hidden in cryptocurrency.

If the spouse is tech savvy, they may do a really good job of hiding their use of cryptocurrency exchanges, software wallets, and keys to access funds.

The NYSSCPA also points out other information gathering options for the forensic accountant. You are going to need access to bank statements, tax returns, the public Blockchain, a physical inspection of the marital home, and the spouses electronic devices.

The article also points out you may have to subpoena records from cryptocurrency exchanges. Many of them are not located in the United States and may not be helpful. The exchange mentioned above with the chart, Coinbase, is the most popular and is located in the United States. If the spouse is extra savvy, they may look for exchanges located offshore.

To get further insights on this topic, I normally bring in an expert witness. Today, however, I wanted to provide the readers with some insights from a practicing family law attorney.

Erin Levine, Esq. – Family Law Attorney and Legal Technology Entrepreneur

Erin Levine is a certified family law specialist with more than 14 yeas of experience practicing family law in the East Bay. She has her own law firm, Levine Family Law Group, where she offers full-scope representation, limited-scope representation, mediation, and more.

Additionally, Erin is the founder of Hello Divorce. Hello Divorce is a service that empowers you to conveniently manage the divorce process online with easy to follow, step-by-step guidance and affordable access to our top-notch lawyers. They break down the extremely complicated California divorce process into discrete, manageable steps. Hello Divorce is helping spouses to uncouple without the outrageous costs of the classic contested divorce.

Here are my questions to Erin and her responses:

Nick: As a family law lawyer, when do you employ a forensic accountant?

Erin: We use forensic accountants in about 10% of our divorce cases. Usually we hire a forensic expert to assist with valuing an asset(s), analyzing financials that the other party has provided, determining the separate or community interest in an asset such as a house or business, sorting out complex financial information, and/or determining “income available for support.”

Nick: Have you had the issue of a spouse hiding assets in cryptocurrency?

Erin: Kind of. We’ve had a couple people fail to provide information in the initial disclosure documents evidencing cryptocurrency. We have fortunately (so far) always been able to obtain that information in discovery or a request for further disclosures. What’s made it easier on me is that my client was aware that cryptocurrency existed and in the two cases where the other spouse didn’t initially disclose – we were aware that he had received crypto as part of his compensation package so it was possible to subpoena documentation. In another case, my forensic accountant determined by looking at joint tax returns that there was a significant asset not yet disclosed. That “asset” was determined to be cryptocurrency later in the divorce.

Nick: What usually indicates, to you and your forensic accountant, to start looking for hidden cryptocurrency assets?

Erin: Well the biggest change we’ve made to our in-house process is that we’ve added cryptocurrency to our financial intake process. In other words, we explain to our clients what it is and ask questions designed to help them determine whether or not their spouse has cryptocurrency in one form or another. There are certain professions and/or lifestyles that definitely put us on high alert and require us to look a little closer at a given case to see if there might be something more there. Fortunately, we haven’t had to hard of a time yet.

Nick: What steps can you take to account for the cryptocurrency (marital property)?

Erin: Well, if you are the “out” spouse – meaning, you do not have access to all of the property, debt and/or asset information that your spouse has, you should ask for it. In California, spouse’s owe each other a fiduciary duty to disclose all assets/debts and a duty of the highest good faith and fair dealing. In other words, if one spouse is hiding an asset from the other, and it is later found, the aggrieved spouse has a strong legal claim to recover 100% (not just half) of that asset. I believe many other states have similar laws. Whether you are in a marriage or currently dissolving it, you should make sure you have a copy of all estate planning documents including the initial intake form. I find that when spouse’s are not in “war,” they are much more candid about what they own. By taking the time to look through that early intake form or your previous tax returns, you may be able to discover cryptocurrency. If it’s not immediately apparent, follow the investment/cash. As an example, maybe your spouse sold stock in 2017. Trace those funds. Where did they go? Were they used to purchase a new home? Did they disappear? If so, you have a right to request information and/or subpoena documents to determine where that cash went.


 

A special thanks to my friend, Erin Levine, for her insights on this topic. Also, I want to thank Allen Rodriguez of ONE400 who gave me the idea for this blog post. This is just an entry into the cryptocurrency issue for divorce. We may be writing about this subject in the future.

 

 

 

 

BlockchainComputer SecurityExpert Witnesslegaltech

Blockchain Voting Election 2018: Expert Analysis of West Virginia’s Plan

This November, West Virginians deployed overseas will have the opportunity to vote via smart phone through a Blockchain-based application. Given the existing concerns of election integrity, I couldn’t help but reach out for expert analysis.

Hey, did you know that election integrity is kind of big deal? Have you been watching any number of news stations in the last few years? Our country has not stopped talking about election meddling, voter fraud, electronic voting, and wide variety of related topics, for two or more years, give or take.

If you are not aware of these concerns, you must be living under a rock. Please make room under the rock as I’d like to join you. I do my best to ignore the talking heads because I’ve found they add no value to my life (anyone else feel that way about the twenty-four hour television news cycle?).

Before I digress entirely, my point is election integrity and vote verification are legitimate concerns and imperative for the success of our democracy. As such, broadcast news covers the subject extensively.

Rarely, however, do these broadcasters address the micro-issues. This is why I choose to get my news from a variety of different publications, most of which I read online. That’s how I found this article: Experts Criticize West Virginia’s Plan for Smartphone Voting, from Ars Technica. Many of my regular readers know I appreciate the legal and policy analysis from Ars Technica. Routinely, I use it as a jumping off point for further research. The publication often acts as a catalyst for blog posts. In this case, I’d been waiting for the opportunity to discuss the Blockchain topic and get insights from expert witnesses on the subject.

The issue of a Blockchain-based application being used, to allow soldiers stationed abroad, the opportunity to vote through their smart phone was the perfect topic. Bitcoin (a Blockchain-based crytocurrency) is already being written and discussed extensively. Voting, through a Blockchain application, is getting less coverage and is therefore more interesting to me.

Much of what I’ve read about the Blockchain is hyperbolic. I’ve read on more than one occasion that “the Blockchain cannot be hacked.” On its face, that statement appears illegitimate. There is no such thing as 100% secure. So, how do we plan on safely using a smart phone app to conduct one of our country’s most sensitive civic processes?

According to the Ars Technica article, West Virginia did a limited run of the system (Voatz is the name of the app) for the primary election in May. The article further provided, “West Virginia’s secretary of state told CNN that the pilot worked well and that the system passed four audits of various parts of the system. So this November, the state is planning to offer the system more broadly to West Virginians deployed overseas.”

Naturally, I have a lot of questions about the security and reliability of the voting application offered by Voatz. So I reached out to one of our computer science experts who has studied the Blockchain and recently published articles on the topic.

Computer Science and Systems Expert Witness – Dr. Stephen Castell

Dr. Stephen Castell is a computer science and systems expert witness with over 30 years of experience. As an expert witness, Dr. Castell has acted in over 100 major cases including the largest and longest computer software actions to have come to trial in the English High Court. Most recently, Dr. Castell contributed to the 200th issue of Computer Law and Security Review (CLSR), with his paper titled, “The Future Decisions of RoboJudge HHJ Arthur Ian Blockchain: Dread, Delight or Derision?Find out more about Dr. Castell by visiting his website: www.castellconsulting.com.

I’ve been working with Dr. Castell for more than eight years. We always have delightful conversations and “geek out” together over emerging technologies. Our recent conversations have, of course, covered the rapidly changing legal technology space.

Here are the questions I posed and the answers provided by Dr. Castell:

Nick: Can you describe Blockchain technology for the lay reader?

Dr. Castell: In its elemental form, a Blockchain is simply a decentralized database system – digital ledgers that store transaction data, distributed across many nodes.  It has a linked list data structure, with each block (an aggregated set of data) containing a ‘hash’ of the previous block.  Each block is formed by a ‘proof-of-work algorithm’, through which consensus of this distributed system is obtained via the longest possible chain.  A ‘traded’ cryptocurrency Blockchain (e.g. Bitcoin) is a shared public chain: in principle everyone has access to the chain, not only to read the information on the chain, but also to append new blocks on the chain.  This is known as an unpermissioned chain.  The West Virginia voting application is likely to be a permissioned chain, where, through public key cryptography, access control can be implemented during setting up of the chain so that differentiated access can apply – both voters and those managing and controlling the voting process can differentially record, and/or interrogate, votes and voting data added to its Blockchain.

Nick: Is a Blockchain-based voting system secure?

Dr. Castell: The Blockchain in and of itself provides strong cryptographic security.  However, ICT expert professionals bear in mind that not only are there no finalised international standards for Blockchain (eight  standards are in development under ISO/TC 307), but also there is far more to specifying, designing, developing, testing, deploying and maintaining an appropriate complete QA’d application than just the Blockchain element.  The security of the complete system needs to be addressed and designed-in from the start, irrespective of the use case for the Blockchain.  And whether to use a Blockchain as a component at all for a given business requirement such as public elections is a critical initial feasibility exercise that the expert knows is essential, as much from a security perspective as any other.

Nick: We know that electronic voting systems are vulnerable to hacking. Can Blockchain-based voting systems also be hacked?

Dr. Castell: Anything can be hacked, and electronic voting systems are no different.  Back in the late 1980s, I carried out a major definitive study, commissioned by the British H M Treasury, on the admissibility of computer evidence in court and the legal reliability/security of IT systems (The APPEAL Report, 1990, May, Eclipse Publications, ISBN 1-870771-03-6).  This concluded with what became known as my ‘First Dictum’:  “You cannot secure an ontologically unreliable technology by use of an ontologically unreliable technology”.  Nothing has changed.  Commercial computer hardware and operating systems, including smartphones, remain essentially ‘open’, and ontologically unreliable.

Nick: Is it the Blockchain that could be compromised or is it more likely a voter’s smartphone would be compromised by a hacker?

Dr. Castell: A well-engineered and implemented Blockchain distributed voting ledger should itself be as immune to compromise as its cryptography can provide.  But the voter’s smart phone security, and the overall voting application, are only as sound as whatever has been designed-in to the whole system – and we know that smartphones have for sure in the past been hacked.  It is not clear that the proposed West Virginia smartphone application would be any more (or less) hackable than anything else hitherto.

Nick: What sort of checks and balances would you expect for a Blockchain-based voting system before implementation?

Dr. Castell: It would seem an obvious (constitutional?) requirement that votes must always be manually-countable in any US election, in the event of suspected error or lack of trust in the reported result, whether through suspected deliberate tampering or compromise, accident or incident, random system malfunction, or whatever else, and particularly if the result is legally challenged in court.  Any smart phone app voting system must therefore always be designed so that its operation, and the voting data recorded, are auditable for integrity, accuracy and reliability ‘by hand’ – that is surely the most basic check and balance.

Lawyer Jonathan Bolls is a Magistrate, and Chief Election Officer, in Fairfax County, Virginia, who had personal experience of the consequences of unreliable computer systems, as a past victim of technical problems saving Bar Exam essays using suspect software provided by the Virginia Board of Bar Examiners (I provided expert opinion on his behalf – see http://jonathanbolls.blogspot.com/).  He notes that US citizens are passionate about the integrity of elections:  “For Blockchain technology, where someone is voting on their phone from overseas, they would want to consider that in doing so they potentially waive their rights to have their vote counted should a re-count be necessary.  We have actually gone the other way: removed our high-tech touchscreen voting systems and returned to the paper ballot.  If ever we need to check voting numbers we hand count”.

Aside from manual auditability, before implementation it is vital that ‘Proof of Concept’ projects be thoroughly executed, carefully trialing any proposed smartphone public voting system, prior to actual ‘go live’ for real.  Such Pilot Trials or Proving Systems are essential, with their scale, planning, operation, data and results, and assessment thereof, monitored and carried out by independent experts.

Nick: In your expert opinion, would you trust a Blockchain-based voting system to accurately register votes?

Dr. Castell: Deliberate hacking or compromise apart, there is no reason why a well-engineered and implemented Blockchain-based voting system, with careful professional expert involvement in its design and trialing before go-live, should not accurately register votes.  However, I do not consider that a so-called ‘trustless’ Blockchain-based voting system removes the need for a Trusted Third Party legally responsible for its operation and security.  ‘Who you gonna sue when it goes wrong?’ is still an essential consideration, and the Blockchain itself, nothing magical, ‘just another computer system’, cannot be sued.

See:

  • https://authors.elsevier.com/a/1XSpq_654J6Hkp  ‘The future decisions of RoboJudge HHJ Arthur Ian Blockchain: Dread, delight or derision?’, Stephen Castell, Computer Law & Security Review, Volume 34, Issue 4, August 2018, Pages 739-753.
  • Commission of the European Community. Green paper on the security of information systems, ver. 4.2.1, 1994.
  • S. Castell, Code of practice and management guidelines for trusted third party services, INFOSEC Project Report S2101/02, 1993.

Conclusion:

What are your thoughts? Would you trust a smart phone, Blockchain-based voting application? Please share your comments below!

UPDATE (08/16/2018):

Our friends over at the Robinette Legal Group, located in Morgantown, West Virginia, wrote a complementary piece to this blog. The author of the piece, Terri Robinette, did an exceptional job elaborating on prior “uses” of Blockchain in Sierra Leone and describing how West Virginia is legitimately the first to truly test this technology. She further described election security and fraud in West Virginia. Take a look at her article below:

Smartphone Voting App for Deployed West Virginia Military