Examining the use of digital currencies as a means of hiding assets

Posted on: June 9th, 2014

PCB Litigation’s Senior Partner, Steven Philippsohn, has been quoted in the Financial Times in an article examining the use of digital currencies as a means of hiding assets. The article is written in the context of matrimonial proceedings, however Mr Philippsohn envisages that English courts will inevitably begin to require defendants and third parties to disclose holdings of digital currencies in asset disclosure orders across all types of commercial litigation. Indeed, it is believed that ordinary disclosure orders will now routinely extend to communications made over social media such as Facebook or Twitter. Such a move would be in step with the courts of other jurisdictions such as California who are already issuing search and discovery orders over digital currencies.

One of the reasons that digital currencies have found favour is that they enable their users to transact with a high degree of anonymity. As such, they have become crucial to individuals wishing to engage in fraudulent or illegal activity. By way of example, a founder of a bitcoin exchange was recently arrested on charges including money laundering whilst the website Silk Road (which only accepted bitcoins) is said to have been shut down for its links to illegal drugs.

The increasing use of digital currencies will demand close attention from the civil courts too, especially in fraud cases. Digital currencies are at present unregulated, and therefore can be used to bypass the money laundering and counter-terrorist financing checks ordinarily performed by traditional currency holding institutions such as banks. Moreover, they can be switched between jurisdictions and “e-wallets” at the touch of a button, leaving a trail that will inevitably be far harder to track and trace due to disparities in legal frameworks and infrastructures (such as the data retention and disclosure obligations of internet service providers) in different countries.

The utilisation of the English court’s present powers, for example the ability to order delivery up of computers or the imaging of hard-drives, provides an interesting potential solution to this situation. Given that few (if any) digital currency exchanges are thought to be located in the English jurisdiction, there may also need to be novel consideration of how third party disclosure orders against such exchanges might best be sought.

This will all be coupled with more traditional and well-trodden methods of asset recovery, not least the increasing reliance upon social media, a subject on which Mr Philippsohn was also recently quoted in the Daily Telegraph.”

Copyright Note

The FT publication can be found online here: http://www.ft.com/cms/s/0/d1131630-9005-11e3-8029-00144feab7de.html?siteedition=uk#axzz33ZHmeT1f . Copyright in this article belongs to The Financial Times Limited 2014.

The Daily Telegraph Article can be found here: http://www.telegraph.co.uk/technology/social-media/10874787/Facebook-and-Twitter-used-to-track-hidden-wealth-in-divorce-cases.html#disqus_thread . Copyright in this article belongs to Telegraph Media Group Limited 2014.