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Bitcoin and civil fraud

20 June 2016


Imagine that you have been fraudulently deprived of bitcoins. What do you do? You could inform law enforcement, but nothing may come of it or progress may only occur at a glacial speed. Another option is less obvious: bringing your own civil fraud claim. Dr Tatiana Cutts has argued that private property principles may be inappropriate for civil litigants in cases involving bitcoins. We take the view that, if the evidential challenges posed by tracking and pseudonymity can be overcome, existing civil remedies for fraud are sufficiently flexible and better suited than other private law actions to the task of remedying loss caused by the fraudulent deprivation of bitcoins.

The tracking challenge

A victim of fraud needs to track down lost assets with urgency. When doing so, the principles of following and tracing are the rules of evidence in English law that must be adhered to. A person “follows” an asset in unchanged form from one person to another and “traces” the value of an asset into a substitute asset. In order to avoid confusion, we refer to tracking as a neutral term covering both following and tracing, but where we refer to tracing we are being specific.

In many ways, for legal purposes, bitcoins are easier to track than conventional currency. Cash poses the obvious challenge of being both anonymous and without record; whereas inter-bank payments, although creating records, pose a number of challenges to the application of the legal principles of tracing. The difficulty with tracking inter-bank payments arises because when a person transfers money from one bank account to another, no asset is actually transferred. Rather, one debt is extinguished and a new debt is created (creating a substitute asset to which value can be traced). This system of credit gives rise to a number of problems when tracing bank transfers in fraud; for example, when money is transferred into an overdrawn account, credit is extinguished and tracing is, on the face of it, impossible for lack of a substitute asset (for interested readers, the rule and the exception can be found here).

Bitcoin does not give rise to the same issue. The supply of bitcoins is fixed in quantity in a way in which the supply of credit is not. The effect of value persisting is that, in theory, it can always be tracked under legal principles, although the accompanying technical challenge is not to be underestimated. Units of bitcoin do not possess individual character and, except in unusually simplistic circumstances, a definitive history cannot be ascribed to bitcoins. Nevertheless, because bitcoins exist as a chain of publicly visible transactions, there is always a record for use in tracking. Where a definitive technical answer is not possible, a resolution based on legal principles may still be possible. It is worth noting that a claimant in English proceedings only needs to prove a civil claim on the balance of probabilities (as opposed to beyond reasonable doubt, the standard in criminal cases). A probable, rather than definitive, history is therefore enough for the purposes of successfully bringing a civil claim.

The real obstacle presented is perhaps not in the application of evidential legal principles to bitcoins, but rather in the technical evidential challenge of analysing the bitcoin blockchain and then linking an address with an actual person. Without overcoming this challenge, the court cannot ascertain an appropriate person on whom to bring its powers to bear.

The pseudonymity challenge

Lawyers and law enforcement have been tackling the evidential challenge of pseudonymity in the criminal sphere through traditional investigative work and by partnering with forensics experts knowledgeable about blockchain technologies.

The most well-known example is from the Silk Road trial of Ross “Dread Pirate Roberts” Ulbricht, which saw a collaborative approach between law enforcement and technical experts. In this case, FBI special agents and cybersecurity experts obtained evidence to support allegations against Ulbricht concerning his involvement with Silk Road. One allegation in particular was that he was a recipient of bitcoins paid to Silk Road. At trial, it was revealed that the FBI had identified Ulbricht after they noticed his anonymous comments on internet forums. Ulbricht used common pseudonyms and supplied information which ultimately led the FBI to a Gmail address tied to his real name. Once he had been arrested, FBI cybersecurity experts were able to find the bitcoin wallet on Ulbricht’s computer. This was the smoking gun linking Ulbricht to the Silk Road transactions; the FBI could see on the bitcoin blockchain that funds were flowing between the Silk Road bitcoin wallet and Ulbricht’s personal bitcoin wallet.

More recently, London-based Elliptic has emerged to provide sophisticated blockchain forensics. Elliptic uses specialised technology to analyse bitcoin transactions and has become a key weapon used by US and European law enforcement agencies to link real-world identity with bitcoin activity. A recent case involves an individual using bitcoins to purchase items illegally on the dark web. Elliptic analysed the bitcoin blockchain and was able to link successfully the individual's bitcoin transactions to his real-world activity. This could be one of the first European criminal cases that uses information from the bitcoin blockchain as key evidence.

Similar techniques can be applied to civil fraud involving bitcoins. Technical experts could be instructed by or alongside civil fraud lawyers to address the evidential and legal issues together. Once the people behind the addresses involved in the fraud are identified, the court could act as appropriate to provide relief.

Thoughts for the future

Civil fraud law is highly adaptive and well-equipped to cope with technological advancements. However, challenges will be faced by lawyers attempting to guide the courts through the complicated facts that will arise in fraud involving bitcoins, and to articulate the evidence clearly. Accordingly, the future of successfully advising in this area will be defined by the ability of lawyers to work alongside skilled technicians capable of constructing admissible and robust evidence from blockchain. By doing so, fraud lawyers will be able to access the powers of the court, including useful remedies such as without notice search and freezing orders, to ensure that the victims of bitcoin fraud can find relief.

David Henderson

David Henderson

Senior Associate (New Zealand Qualified)

David advises on financial services disputes and regulation and also works closely with startups in the FinTech sector.

View profile

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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