Wednesday, February 24, 2016

It’s hard to imagine where to begin with this: proving the transfer of items that do not physically exist. Bitcoins have value because they can be used to purchase goods and services. What if you needed to prove a purchase made with bitcoins? It’s not like a receipt prints out from your computer after each transaction. Sure, it’s logged somewhere. Everything on the internet is. But, even if you find it ─ this magic record of transactions ─ would it be admissible or hearsay?

Okay, it’s not magic entirely. But, unlike typical bank records there is something very interesting about bitcoin ledgers, known as blockchain receipts. They are transparent - 100% visible to anyone on the internet. It’s like a huge bank of glass safety deposit boxes. Anyone can see how many bitcoins you have inside your box at any time, but only you hold the key that can unlock it in order to take coins out or put coins in. In addition, the blockchain receipts that are produced as a result of every bitcoin transaction are also publicly auditable. Meaning, anyone can see where coins in your box came from and where you send them. But, just because the record is visible does not immediately mean it is admissible. Think of it like a Google Earth snapshot. It is a computer-generated record that makes an assertion. While that Google Earth photo is a depiction of a specific place at a certain date and time, a blockchain receipt asserts a transfer of a certain number of bitcoins from one “box” (a bitcoin address) to another.

We previously published an article on the admissibility of Google Earth records when the issue was raised before the Ninth Circuit in U.S. v. Paciano Lizarraga-Tirado, 2015 WL 3772772 (9th Cir. 2015). There, the court determined if the assertion is made by a machine, as opposed to a human, it is admissible. The court did note a potential authentication issue, however, if the evidence was challenged in the form of a contention that the machine malfunctioned or was tampered with. So, if Google is creating the maps, who’s creating the blockchain ledger?

The receipts are generated automatically as a digital file every time a transaction is completed. Some companies see a future in this - the creation of an algorithm that produces an accurate, secure, publicly-accessible ledger of all bitcoin transactions. Having everything on the internet, always there and accessible, is good, but it doesn’t hold near as much value to you, until you can “Google it.” In the world of monetary transactions, however, the most important part about the information is not necessarily finding it. Rather, it is the ability to prove it, primarily in litigation. Hence, a platform that enables the user to not only search bitcoin transactions easily, but also to produce bitcoin receipts that are admissible in court, would be highly profitable. Cue Digital Asset Holdings, their $54M war chest and recent announcement to make the blockchain ledger more useful in this regard.

It will be interesting to see if the new-and-improved blockchain receipts will be admissible in court. It is not entirely clear whether they will be treated as a “machine statement” and admitted under the Lizarraga-Tirado theory or whether they will be attacked on authenticity grounds and have to be proven up like a typical business record. Perhaps this is the future Digital Asset Holdings sees: an army of bitcoin records custodians ready to take the stand to prove up transactions. Or, the court could just take judicial notice of the program’s reliability and admit all bitcoin receipts, but where’s the fun in that? As lawyers, we like to argue. If things keep trending the way they have, though, bitcoin transactions will soon be the subject of many litigious debates.