Fortunes have been made and lost in cryptocurrency speculation. Nevertheless, cases are rare that involve the nascent legal issues involved in cryptocurrency litigation. One thorny issue in these cases is the admission of so-called “blockchain” evidence, a necessary part of proving a purchase or sale of cryptocurrency. A blockchain is a digital ledger in which each transaction is stored with others in a unit of data called a block and those blocks are securely linked to one another, forming a chain of records going back to the very beginning of the ledger. This article will address whether and under what circumstances blockchain evidence is admissible in a New York state court.

The Blockchain Protocols

The process of adding blocks to the ledger may be done through a variety of methods known as “consensus protocols”, by which the protocol determines whether a given block and the transactions in it are legitimate before it is added to the chain. Each block added to the chain digitally references the block immediately preceding it. Therefore, any attempt to alter or erase a transaction in a block already added to the chain would alter the character of every subsequent block and generate a ledger inconsistent with every other copy of the ledger that has been distributed across the network.

Hypothetical

Let us approach the admissibility of blockchain evidence by analyzing a hypothetical, fictional investigation: Peter Paco has accumulated an immense amount of wealth through his involvement in an illicit narcotics trafficking enterprise in New York City. In order to conceal some of his illicit wealth, he has purchased about 266 bitcoins, a type of cryptocurrency, for in excess of $2 million at about $7,500 a coin. Information concerning his initial purchase of the cryptocurrency was obtained by a reliable informant who is now unavailable. We must link Paco to his purchase of the bitcoins through ostensibly the only known record of it, the blockchain, in order to substantiate “probable cause” to charge him with money laundering under New York State Penal Law Article 470.

Digital Coins or Cryptocurrency

Digital “coins” or “tokens”, sometimes also referred to as bitcoin or ether are commonly exchanged for consideration. See, e.g., State v. Espinoza, 264 So.3d 1055 (Ct. Of App., Fla. 2019). The coins are issued and distributed on a “blockchain” or cryptographically-secured ledger on a peer-to-peer communications network involving thousands of computers which maintain the integrity of the bitcoin network. See, e.g., Alibaba Grp. Holding Ltd. v. Alibabacoin Found., 2018 U.S. Dist. LEXIS 72282, n.1 (S.D.N.Y. 2018). For the blockchain to track cryptocurrency transactions, the transactions must be verified by independent blockchain participators, blockchain verifiers, also known as cryptocurrency miners, who verify cryptocurrency transactions by solving complicated mathematical problems. See, e.g., Blocktree Props. v. Pub. Utility Dist. No. 2 of Grant Cty. Wash, 2019 U.S. Dist. LEXIS 54423 (E.D. Wash. 2019).

The coins are often also listed and traded on online platforms, typically called virtual currency exchanges, and they usually trade for other digital assets or fiat currencies. Often, the coins are listed and tradable immediately after they are issued. See In the Matter of Munchee, Securities Act Release No. 10445, 2017 WL 10605969 (Dec. 11, 2017); Balestra v. ATBCOIN, 2019 U.S. Dist. LEXIS 55972 (2019).

Bitcoins themselves are simply computer files generated through a ledger system that operates on the blockchain technology. The bitcoin system operates as a self-regulated online ledger of transactions. These transactions are currently denoted by the change of ownership in the coins. This ledger, also referred to as the blockchain, has certain built-in mechanisms that eradicate the risk of double spending or tampering with the master record of all transactions. “Like marbles, Beanie Babies, or Pokémon trading cards, bitcoins have value exclusively to the extent that people at any given time choose privately to assign them value. No governmental mechanisms assist with valuation or price stabilization, which likely explains why bitcoin value fluctuates much more than that of the typical government-backed fiat currency and is highly volatile.” United States v. Petix, 2016 U.S. Dist. LEXIS 165955, *18-19.

For purposes of a money laundering prosecution, virtual currencies are “funds” or “money” because they can be accepted as payment for goods and services. More specifically, these virtual currencies function as pecuniary resources, and a means of payment, that can be easily purchased in exchange for ordinary currency. See, e.g., United States v. Ulbricht, 31 F. Supp. 3d 540, 570 (S.D.N.Y. 2014) aff'd 858 F.3d 71 (2d Cir. 2017).

Bitcoins are stored in “digital wallets” similar to virtual bank accounts that allow users to send or receive bitcoins. See Symphony FS, Ltd. v. Thompson, 2018 U.S. Dist. LEXIS 21461 n.1 (Dec. 20, 2018). A bitcoin wallet keeps a secret piece of data called a private key or seed, which is used to sign transactions. The signature both prevents the transactions from being altered once it has occurred and allows the transaction parties to remain anonymous, as only the signatures are recorded in the public log.

Bitcoins address function as accounts and have no names or other customer identification attached, and the system has no central server or service provider. The bitcoin protocol does not require or provide identification and verification of participants or generate historical records of transactions that are necessarily associated with real world identity. Authorities may target individual exchanges for client information that the exchange may collect. State v. Espinoza, 264 So.3d 1055 n.5.

Another challenge presented by the blockchain is that the whole system is established with security and anonymity being paramount.

Authenticity

Must we and how do we authenticate Paco's blockchain transaction? Basic evidence law provides that the proponent of evidence must demonstrate the “authenticity” of it for admissibility purposes unless the evidence falls within an exception to this rule such as that the evidence proffered is being submitted for a limited purpose such as impeachment. See, e.g., United States v. Vayner, 769 F.3d 125 (2d Cir. 2014) (profile page from Russian social networking site akin to Facebook was erroneously admitted at trial as not having been properly authenticated as per Fed. R. Evid. 901); People v. Pierre, 41 A.D.3d 289, 291 (1st Dept. 2007), lv. den. 9 N.Y.3d 880 (2007) (the trial court properly admitted an Internet message authenticated by circumstantial evidence, that inculpated the defendant sender in the murder). In People v. Pierre, the court stated that, “[a]uthenticity is established by proof that the offered evidence is genuine and that there has been no tampering with it,” and “[t]he foundation necessary to establish these elements may differ according to the nature of the evidence sought to be admitted.” See also People v. Price, 29 N.Y.3d 1 (2017). In Commonwealth v. Mangel, 2018 Pa. Super. LEXIS 225 (March 15, 2018), the court stated that the “[t]he proponent of social media evidence must present direct or circumstantial evidence that tends to corroborate the identity of the author of the communication in question, such as testimony from the person who sent or received the communication, or contextual clues in the communication tending to reveal the identity of the sender.” See also United States v. Culberson, 2007 U.S. Dist. LEXIS 31044 (E.D. Mich. April 27, 2007) (threatening text messages were admitted at trial based on the victim testifying to the peculiar details of the message, and significant linked surrounding circumstances).

If Paco's purchase was done through his computer, or we can link him through the use of some computer he used, we may be able to link his computer to his digital wallet and the blockchain through an expert familiar with digital file transfers, bitcoin protocols and blockchain methodology. The standard required to satisfy authentication of evidence is minimal. See, e.g., People v. Pierre, 41 A.D.3d 289, 291 (1st Dept. 2007); United States v. Gagliardi, 506 F.3d 140 (2d Cir. 2007); United States v. Echostar, 2004 U.S. Dist. LEXIS 20845 (N.D. Ill. 2004). The proponent's proffer of authentication of certain evidence is a decision for the properly exercised discretion of the trial court. It is for the jury (or factfinder) to determine the weight to be accorded the evidence.

Moreover, judicially imposed authentication requirements of new technologies have evolved in response to integration and acceptance of these new technologies into society. See, e.g., People v. Price, 29 N.Y.3d 1 (2017); Boyarsky v. G.A. Zimmerman, 240 A.D. 361 (1st Dep't 1934).

Business Records Exception

Perhaps if Paco purchased his bitcoins through an exchange, the New York business records exception to the hearsay rule, CPLR 4518(a), would permit the admission into evidence of the exchange's business records if the court finds that, through the testimony of the proper custodian of records, the record was made in the regular course of the business and that it was the regular course of such business to make it, at the time of the act, transaction, occurrence or event or within a reasonable time thereafter. See, e.g., People v. Guidice, 83 N.Y.2d 630 (1994); Farrell, Prince, Richardson on Evidence, §8-303 (11th ed.).

Vermont has made the admission of blockchain evidence less of a challenge. A recent Vermont law provides that a digital record registered on a blockchain is both admissible and authentic under the Vermont Rules of Evidence, 12 V.S.A. §1913, which provides, in pertinent part:

(b) Authentication, admissibility, and presumptions.

(1) A digital record electronically registered in a blockchain shall be self-authenticating pursuant to Vermont Rule of Evidence 902, if it is accompanied by a written declaration of a qualified person, made under oath, stating the qualification of the person to make the certification and:

(A) the date and time the record entered the blockchain;

(B) the date and time the record was received from the blockchain;

(C) that the record was maintained in the blockchain as a regular conducted activity; and

(D) that the record was made by the regularly conducted activity as a regular practice.

Conclusion

The invention of cryptocurrency has sprouted many businesses as well as many potential legal issues in the admission of the underlying blockchain evidence critical to the creation and use of cryptocurrency. A litigator must be able to explain to a judge and jury what blockchain records are and why they are reliable and authentic. Do blockchain records satisfy the business records exception? Can they be linked to a target's identity or computer? The question of the admissibility at trial of blockchain evidence will, in the end, be within the properly exercised discretion of the trial court considering evolving rules of authentication applied to new technology.

Peter A. Crusco is executive assistant district attorney, investigations division, Office of the Queens County District Attorney. The views expressed herein are the author's, and do not necessarily reflect the policies or views of the office.