Facing blockchain disputes? Our South Carolina attorneys provide the support and expertise required to manage complex digital currency litigation.
Blockchain litigation is an emerging area of the law stemming from the creation and proliferation of blockchain technology, such as Bitcoin and Ethereum. As these two blockchains have grown in popularity, business ecosystems have grown within their architecture. Inevitably, disputes arise between businesses and individuals operating on the blockchain, necessitating the intervention of the judicial system.
What kind of blockchain litigation is taking place?
A wide variety of blockchain litigation has developed in recent years. Here are a few examples.
Private key theft
One of the most common disputes on the blockchain is the misappropriation of one party’s private key and the subsequent theft of cryptocurrency assets. The adage “not your keys, not your coins” can be all too true as thousands of individuals have seen digital assets flee their accounts into the hands of hackers or other bad actors. Litigation stemming from these actions seeks the return of the stolen funds.
The rapid rise of Bitcoin’s value has attracted both excited investors and devious fraudsters. Scams such as “rug-pulls” and “pump-and-dumps” proliferate, and millions of dollars of digital assets have been lost seemingly overnight. Lawsuits arising from these types of fraudulent schemes seek to recover the lost assets and punish the bad actors.
Sale of unregistered securities
Many investment vehicles on the blockchain are viewed as “securities” under American law. As such, the sellers of these investments are required to file registration statements with the federal government to inform investors of the key characteristics of the digital assets they consider for purchase. When these unregistered securities lose value (as many do), the sellers are liable for the purchasers’ losses.
Negligent code design
Blockchain technology is as complex as it is promising. As new projects emerge in the digital ecosystem, those designing the code underlying the projects have a duty to use care in the code development.
Mistakes made during the development phase pose foreseeable risks to those using the technology, ranging from security weaknesses to the digital product simply not working. Lawsuits pertaining to negligent code design seek to hold developers responsible for the financial losses that their mistakes have caused.
But isn’t the blockchain anonymous? How do you prove the case?
The anonymity of blockchain transactions is one of the greatest misconceptions of blockchain technology. It is more accurate to describe its activity on a blockchain as pseudonymous rather than completely anonymous.
Below are a few key points to consider.
Transactions on a blockchain are tied to public keys (which act like pseudonyms) rather than real-world identities. When you make a transaction, it’s associated with a long string of characters (your public key), not your actual name.
However, if someone can link your real-world identity to your public key, they can view all transactions associated with that key because all transactions are recorded publicly on the blockchain. Furthermore, the immutable nature of the blockchain’s distributed ledger prohibits anyone from deleting or otherwise changing those transactions at a later date.
In essence, one’s activity on the blockchain leaves behind fingerprints that can never be wiped away.
All transactions on a blockchain are recorded on a public ledger and are visible to anyone who wants to see them. This means that while the identities of the parties are obscured, the details of the transactions are not. This level of transparency can provide clues that could potentially be used to identify the parties involved in a transaction.
Because all transactions are permanently recorded on the blockchain, they can be traced back in time. If someone can link your real-world identity to a public key, they can see every transaction ever made with that key.
In some high-profile cases, law enforcement has been able to track illegal activity on blockchains by following the money trail. Civil attorneys do the same thing with the same information.
There are increasingly sophisticated blockchain analysis techniques and tools being developed that aim to de-anonymize blockchain activities. These tools analyze patterns in the data to make educated guesses about who owns which keys.
Some cryptocurrencies, known as privacy coins (Monero and Zcash, for example), have additional features to enhance privacy and make transactions more difficult to trace. However, even these are not completely anonymous and are subject to potential analysis and de-anonymization.
Some users use mixing services to increase their level of privacy. These services mix a user’s coins with others’ to obscure the trail of transactions. However, these services are often associated with illicit activity and using them can attract unwanted attention from law enforcement.
So while blockchain technology offers a level of pseudonymity that can protect users’ identities, it’s not completely anonymous.
Privacy on the blockchain is a complex issue, with the level of anonymity varying depending on how the technology is used.
How does blockchain tracing work?
Blockchain tracing, also known as blockchain analysis, is a technique used by investigators, law enforcement agencies and private companies to track transactions on a blockchain. The goal is to identify illegal or suspicious activities and trace these activities back to identifiable individuals or organizations.
Here’s how it generally works.
Each transaction on the blockchain is publicly recorded and permanently stored. This means that anyone can see the transaction history of any public key (a long string of numbers and letters associated with a wallet) on the blockchain. If a particular key is involved in an illicit activity, that transaction will be part of the permanent record.
Analysts use sophisticated software to detect patterns in blockchain data. For example, they might look for patterns that suggest money laundering, such as frequent, small transactions that might be used to evade detection.
Connecting to real-world identities
The real challenge is connecting public keys to real-world identities. Some methods include:
- Analysis of exchange activity. When users buy or sell cryptocurrencies for fiat money, they usually have to go through an exchange, which typically requires some form of identity verification. If a public key is linked to an exchange account, law enforcement can subpoena the exchange for the user’s identity information. In civil litigation, attorneys also possess subpoena power and can identify the identities of wrongdoers in a similar fashion.
- IP address tracking. While challenging, it’s sometimes possible to associate transactions with specific IP addresses, which can provide clues about a user’s identity or location.
- Blockchain forensics firms. There are companies specializing in blockchain analysis that use a variety of techniques to link public keys with real-world identities. They often use a combination of publicly available information and proprietary methods to make these connections. These firms can provide their services to law enforcement or other interested parties.
Seizure and legal action
Once a public key is linked to a real-world identity, and if there’s evidence of illegal activity, law enforcement can take appropriate action. This might include freezing or seizing assets, making arrests, or pursuing legal action.
In civil litigation, court orders can demand that funds be frozen or transferred from a wrongdoer’s account back to those who rightfully own the assets.
It’s important to note that while blockchain tracing is a powerful tool, it’s not infallible. Certain cryptocurrencies, like Monero and Zcash, offer enhanced privacy features that make transactions much more difficult to trace. Plus, bad actors can use techniques like coin mixing or VPNs to further obscure their activities. Nonetheless, many high-profile cases have shown that blockchain tracing can be an effective way to track illegal activities on a distributed ledger.
Contact the experienced blockchain litigation attorneys at Chappell, Chappell & Newman
Blockchain litigation requires a unique blend of legal knowledge and technical understanding. At Chappell, Chappell & Newman, our attorneys have extensive experience in blockchain technology and the legal intricacies surrounding it, so you can rest assured you’ll have the top-notch representation necessary to get the compensation and justice you deserve.
Contact us today for a free consultation of your case.