Craig Wright, the self-declared inventor of bitcoin, arrives at federal court in West Palm Beach on June 28, 2019. Photo: Saul Martinez/Bloomberg

Craig Wright has entered settlement talks with the estate of his former collaborator Dave Kleiman, less than a month after a federal judge issued a sanctions order that may have cost him billions in bitcoin.

U.S. District Judge Beth Bloom granted a joint motion from Wright and Kleiman's estate in part on Sept. 17, approving their request for an extension of discovery and case deadlines. According to the order, "the parties have been engaged in extensive settlement negotiations and have reached a non-binding agreement in principle to settle this matter."

"Reaching a final binding settlement agreement is in the best interests of both parties, and a 30-day extension of all case deadlines … would enable both parties to devote their full efforts to that goal," the motion said.

The settlement proceedings follow the Aug. 27 order by U.S. Magistrate Judge Bruce Reinhart, which found Wright should be sanctioned for acting in bad faith before the court and willfully obstructing discovery orders. Reinhart's ruling ordered the Australian businessman and self-proclaimed creator of bitcoin to award half of the intellectual property and bitcoin he mined with Kleiman to the plaintiff.

The lawsuit was filed by Ira Kleiman, the brother of Wright's former associate. The complaint contended Wright had more than $11.4 billion in bitcoin in his possession as a result of his work with the plaintiff's brother.

As noted in the motion, Wright's opposition to Reinhart's sanctions order would have been due on Tuesday.

The attorneys representing the plaintiff — Vel Freedman of Roche Freedman and Boies Schiller Flexner partner Andrew Brenner — declined to comment on the settlement proceedings. Wright's legal team at the Rivero Mestre law firm did not respond to press inquiries by deadline.

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Read the joint motion:

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News of the possible settlement preempts what many attorneys say would have been a challenging part of the litigation, namely, collecting on the bitcoin purportedly owned by Wright. Markowitz Ringel Trusty + Hartog attorney Alan Rosenberg said there are a number of inherent challenges to seizing cryptocurrency.

"If the only way to collect on a judgment is through cryptocurrency, there are going to be significant hurdles in doing so," he said. Speaking of Wright's case, Rosenberg noted the defendant claimed it was impossible to hand over the bitcoin he'd originally mined with Kleiman due to a complex encryption scheme that he did not possess all the necessary resources to unlock.

"It's almost like proving a negative," Rosenberg said. "Dr. Wright is saying 'I don't have access, I cannot give you access.' So how are you supposed to prove that's not true? From an evidentiary standpoint it's really tough."

Rosenberg added that cryptocurrency assets that have been privately mined — the term used to refer to the process of creating bitcoin through computer calculations and user verification — are far harder to trace than digital currency that's been purchased through more traditional means.

"If I see your bank statement and I see it tied to some kind of cryptocurrency exchange, then I know where your money is," the attorney said, adding the bitcoin sought by the Kleiman estate was mined.

Valerie Pennacchio, a New Jersey-based insurance lawyer with Saul Ewing Arnstein & Lehr, is responsible for monitoring cryptocurrency-related litigation and developments for the firm. Echoing Rosenberg, she said the decentralized peer-to-peer exchanges that define cryptocurrency trading makes it difficult for authorities and prevailing parties to collect on theoretical awards.

"Normally a winning plaintiff in a court order could go to a bank," she said, adding the use of liens or law enforcement can also be used to pursue the return of stolen property or place pressure on an individual following a ruling.

But without an intermediary for centralized exchange, the answer as to what to do in litigation over bitcoin and the ensuing awards remains elusive.

"I feel like because litigation has just started, there haven't been too many decisions on cryptocurrency on the merits," Pennacchio said. "Right now we're really in the issue-spotting phase. I think like the technology itself, it's going to be ever-changing."

Pennacchio also noted the constantly in flux value of bitcoin may pose a challenge for awards and collection.

"Because it's so volatile, it'd have to be a specific date of evaluation," she said, noting rulings may need to specify time periods when converting bitcoin to U.S. dollar value.

Although she's seen the law's lack of clarity around bitcoin firsthand, Pennacchio said caution ought to be exercised in litigation and legislation concerning the technology.

"I do think that to overregulate a fairly emerging technology may prevent that technology from fully developing," she said. "There's definitely a dance between regulation and cryptocurrency, although we're seeing it more as the different issues, such as collection, arise."

Joseph Englander, the head of Fowler White's intellectual property group, compared the legal realm's growing pains in addressing bitcoin to similar issues presented by recent technological advancements.

"I'm reminded of early cases with domain names, where courts had to become educated with those," he said. "Bitcoin and cyber currency may not be the same asset as cash or a bank account, but I think people are becoming more sophisticated with working with them."

A grasp of the technology underpinning cryptocurrency may soon become an even more desired trait in the legal field as it becomes more commonplace. Florida Gov. Ron DeSantis announced on Friday that he had made several appointments to head the state's Blockchain Task Force. The group, which is housed within the Florida Department of Financial Services, will "study if and how Florida's state, county and municipal governments can benefit from a transition to blockchain-based systems for recordkeeping, data security, financial transactions and service delivery," according to a press release. Likewise, it was reported by bitcoin-oriented news site CoinDesk on Tuesday that the U.S. Securities and Exchange Commission is evaluating whether to permit a bitcoin exchange-traded fund.

Englander said he has faith law firms and litigators will be able to adopt bitcoin into their respective practices successfully.

"It's like anything else," he said. "There have been technical advances since [using] pens instead of quills …personal computers, word processor. Technical advantages have marched right along with the legal profession."

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