Cryptocurrency and Family Law: The Basics (Part 1)
Cryptocurrencies like Bitcoin and Ethereum are not going away any time soon. Both have been sanctioned by the United States government, and millions of people within our country utilize these electronic currencies every day in a variety of ways. Some use them as vehicles for investment, some use them to trade goods and services, and others use them as sources of income. This article is the first of an in depth series, which will explain: (1) what cryptocurrencies are, (2) how they can be traced or discovered, and (3) how they can be used to hide assets in a divorce or child support case.
What is a Cryptocurrency?
In the most basic terms, a cryptocurrency unit consists of two-character lines of code (“addresses”) (usually 26-35 characters long for Bitcoin). One address to send and one address to receive. The public address is the receiving code, and acts like a wallet. The private address is the sending code, and acts like a coin. The coin is moved from one wallet to another, and when it is received in the new wallet, it transforms, gaining a new private address, similar to providing it with a password so the sender can’t reverse the charge. An example of this transmission is as follows:
The seller starts with 0.5 Bitcoin, with the private address (coin) of 1xIXXX, held within his public address (wallet) 3FKXXX. Everyone in the world can see that seller has 0.5 Bitcoin in his public address, but nobody besides seller knows the private address. Buyer, whose public address (wallet) is 1ThXXX, seeks to purchase 0.5 Bitcoin. Buyer puts fiat currency (such as the United States Dollar) into an exchange that holds his fiat in escrow. Buyer then submits a purchase request on the exchange (or privately). Seller, seeing the purchase order, places his private address (coin) into that same escrow account on the exchange, and the exchange transfers the private address from seller to buyer, and the fiat from buyer to seller. However, now that the seller and buyer both know the private address, the cryptocurrency system (blockchain) converts the old private address to a new private address. If the address stayed the same, the seller could technically rescind the sale, and take the 0.5 bitcoin back, and keep the fiat. For this reason, private addresses are strictly confidential. Once a person has it, they can take it from you and you cannot get it back because when it lands in the thief’s public address, it has a brand new private address. A party should not disclose the private address under any circumstances. An example of a theft would be when a thief visually see’s a victim’s private address, writes it down, enters it into a transfer program manually, and sends the code to the thief’s public address (wallet). The private address is then converted into a new code, unknown to victim, and victim has no idea who the owner of the public address the coin was transferred to (the anonymous thief). How the thief cashes out is a topic for another article.
As demonstrated above, a public address is used to receive funds from anyone. It stays the same after funds are transferred. You can always send funds to any public addresses, they are not deleted, and can always receive funds. Sometimes they transform, which will be discussed in part two of this series, which addresses the complexities inherit to tracing cryptocurrencies.