IQ Legal TrainingBerkeley Lifford Hall Accountancy ServicesAlphabiolabsHousing Law Week

Home > Articles > 2015 archive

Bitcoins and the dark net: a virtual reality that every divorce practitioner should know about

Byron James, barrister, Fourteen considers the possible significance of the dark net and bitcoins in financial remedies cases

Byron James, barrister, Fourteen 

Some of us embrace technology as a demonstration of willingness to move with the times. However, the trouble being is that the zeitgeist of both technology and times moves so fast that one soon gets to the point where one cannot help but sound old. For example, recently someone told me they were off to see 'Years and Years' and I expressed the hope that they would enjoy "the play." Of course, I insisted I had been joking, but to no avail - some things simply cannot be styled out.

Those who are not themselves tech-savvy, or working "in tech", may embrace technology with excitement but also with a degree of caution if not, downright suspicion. We never know when it might suddenly turn on us. For example, on one occasion in the now distant dark 1990's I got into a world of trouble for leaving the (dial-up) internet on overnight by mistake - try explaining that to a teenager now!

In this modern technological age one can only take on divorce work if one is willing to accept and understand techno-societal shifts because failure to do so will inevitably result in being left behind. It is one thing to lose "cool points" over not knowing a band, it is quite another to only be able to offer silence when a judge asked what the 'Silk Road' is.

I was involved in a case recently where we were effectively required to learn a second language; terms such as 'bitcoin', 'darknet', 'Tor' and 'Dark0de' became commonplace and we found ourselves engaged in an extraordinarily complicated process of discovery and asset valuation.

This article is intended to highlight some of the things we learned about an area of cyberspace that is, not surprisingly, wholly unfamiliar to many legal practitioners and which is always evolving, frequently ducking for cover from security services and where websites are closed down regularly and arrests are made.  This alien world is an insatiable virtu-reality that transacts and retains billions of pounds. It is the epitome of de-regulation where many purchases and sales are undertaken tax-free and with complete anonymity and where, seemingly, any service or product can be bought or sold from anyone, anywhere in the world.

This is something that divorce practitioners operating in this modern world need to know about and yet something that many of us would never come across unless we looked very hard indeed.   

The dark net
The first thing is that you will never find the dark net through Google or other conventional search engines. Also known as the 'deep web', 'deep net', 'invisible web' or 'hidden web' (all accepted nomenclature) the size of it is impossible to measure given its lack of regulation but it has been estimated that it contains content some 500 times larger than the 'surface web'.

The content of the dark net comprises content which is not registered, whether deliberately or otherwise, with mainstream search engines.  To find it, specific software is required, although there are more mainstream attempts being made to find tools capable of returning dark search results. Specialist software passes Internet traffic through thousands of relays so as to enable a user to remain anonymous and whilst it is not impossible to trace activity through this software back to a specific computer or location, it is extremely difficult. There are various vehicles through which one can access the dark net and also other types of software enables 'friend to friend' file sharing. 

The purpose and use of the dark net is, by its nature, controversial. Studies have been completed into the uses of "entry points" such as Tor (see Dr Gareth Owen's "Tor: Hidden Services and Deanonymisation') and by far the largest use at present is for the trade of drugs. Other illegal activity including gun trading, gambling, frauds, hacking, and the offering of 'specialised services' are, it seems, also regularly undertaken each day.

The point of conducting activity on the dark net is to operate under cover in order to avoid sanction or exposure. There are some, however, who champion the need for a dark net, justifying its existence through its other uses, such as whistleblowing, protecting dissidents from controlling political regimes and providing a vehicle for those wishing to protect their own privacy from the constant surveillance of modern society. The extent to which we are observed online and in our daily lives is now extreme.

A market place can only exist where there is a currency with which to trade and the most commonly used is 'bitcoin', a system of currency without a centralised reserve unlike any of the other nation-linked forms of currency that exist.

It exists online in digital form and is managed through the 'block chain' public ledger. The block chain is a mechanism that provides the currency with its value by tracking the ownership of every bitcoin. Every 10 minutes (or so) a new group of transactions is accepted and recorded on the ledger and added to the block chain; thereby preventing bitcoins being spent twice. It is also this process that determines the value of one bitcoin unit. As of 9th November 2015, one bitcoin is equal to £255.76, although historically there have been dramatic rises and falls in value, as one might expect with a decentralised currency.

The bitcoins themselves can only be owned through the use of a 'private key' specific to each bitcoin and without which they have no value. It is as a result of this that some claim to have lost millions of bitcoins through laptops crashing or hard drives being destroyed. The bitcoins are held within digital 'wallets' which are software that store the credentials needed for one to deal in bitcoins. 

The bitcoin ledger relies on bitcoin 'miners' who justify the block chain's consistency, tying a newly created block (as created every 10 minutes) with the previous block. This is a complicated process and presents both computer science and maths based problems to be resolved, this is a deliberate mechanism as a tool against hacking. Miners are then rewarded in bitcoins for the resolution of each block.

The Husband in the case in which we were involved was a bitcoin miner, and the costs of his operation were staggering: he spent over £100,000 in electricity each year such is the processing power required to justify the block chain, giving something of an insight into the potential profitability of the online bitcoin mining world if the practicalities of such can be overcome.

Bitcoins and the dark net in divorce
Any case involving the dark net and possession of bitcoins has the potential for complexity. It needs to be handled appropriately from the start and failure to do so could lead to severe consequences for your client.

A good starting point is to look for ownership of bitcoins but this in itself is not straightforward.  The usual procedures for discovery pertain to the traditional means of holding money through banks and in bank accounts (or other such identifiable investment vehicles). One could identify a bitcoin holding by tracing back conversions of other currencies into bitcoin holdings that might appear as a transaction in a bank account. This starting point is likely to exist for all bitcoin holdings, unless someone has an online vehicle that obtains bitcoins for them independent of other currency such as buying and selling on the dark net or through working as a bit coin "miner".

Bitcoins are intrinsically linked to the private key and the digital wallet and without the private key they are worthless and without the wallet one does not know the extent of the ownership. It is only by obtaining the software on which the wallet exists that one can both discover and secure the bitcoin holding. This is where the element of surprise may be necessary, including a combination of Anton Piller orders and orders for delivery up, with the latter pertaining to the relevant computer hardware and software.

It would be extremely easy for an owner of bitcoins to claim that their holding has been rendered worthless because the private key has been 'lost'. If true, this is impossible to rectify because without the private key, the bitcoins are literally worthless. So, if someone asserts that a hard-drive containing such a private key has been destroyed or lost, whilst in the interim transferring such wallet/private key to a different computer, there may be no way of tracing such movement and the asset is in a different, unknown location.  Such an explanation may be almost impossible to refute and so surprise seizure may be the only way to be sure of securing a bitcoin holding.

It is also for this reason that a freezing order may actually prove somewhat toothless, given that there is no centralised institution that controls the bitcoin holding. If one were to obtain a freezing order against a bank account, the said bank could be joined into the litigation process and subject to suitable orders, could result in making access to the money in that account impossible. However, where such freezing pertains to bitcoins, one can only prove movement of the bitcoins through accessing the wallet and the wallet itself is only accessible through the hardware on which it exists. There is, therefore, huge potential for transactions, especially those in the unregulated world of the dark net, to continue irrespective of any freezing orders purporting to prevent the same.

The dark net itself poses difficult issues too in relation to financial remedies cases. The Proceeds of Crime Act 2002 may well be engaged by virtue of online profits made through criminal activity. Of course, this could have a very significant impact on the parties' ability to deal with or share the same. Furthermore, what of assets which themselves which are of an undefined illegality but have potentially significant online value, such as certain reading material or information? The parties would/should obtain information about the legality of the asset prior to determining its value but this has the potential to be difficult and fraught with conflict issues, especially if the information itself is state sensitive and it is from an office of the state from which you seek to obtain an opinion.

The provision of setting aside transactions (in accordance with section 37(2)(b) MCA 1973) is also likely to be difficult to engage in practice in circumstances where the other party to the transaction is entirely anonymous and potentially based anywhere in the world.

The extent of online currency is only likely to increase and, as a consequence, play a greater role in the finances of individuals. The money itself is far harder to track and as a consequence is becoming an increasingly common form of tax evasion.

Inherent in the currency itself is a certain instability of value, but this is something that improves with increased usage. There is not yet a reported case involving bitcoins and the surrounding industries and markets in which the same are relevant but it must be simply a matter of time.

One could be faced any day by a case in which these issues are relevant so that not  being armed with even a basic knowledge of the subject could leave you (and your clients) entirely helpless, especially in a case involving a sophisticated party or legal opponent. Assets and opportunities could be lost forever, if the correct action is not taken early. 

19 November 2015