Tales from the Crypto Webinar Part 1: The Nature of Cryptocurrency

Michelle O’Neil:


Hi, this is Michelle O'Neil with O'Neil Wysocki. Today we're bringing you tales from the crypto. We're going to talk about cryptocurrency. This session is called the nature of cryptocurrency and we're going to focus on what cryptocurrency is, how it compares to traditional assets, how it's stored, found, used, and valued. Joining me for this is Andrew spear, who is one of the attorneys at my firm and he has written and been interviewed nationally on this topic of cryptocurrency. So here we go. Alright. Let's start with kind of the basics for people like me that aren't very technological. I know you're into technology, but you know I'm not so much, so let's educate. Let's start with what is a Bitcoin?

Andrew spear:


Bitcoin is the big dog in the world of cryptocurrency, right? It's easiest. Don't think of all of them as Bitcoin. Bitcoin is just like a stock or a United States dollar compared to a Euro compared to the yen compared to

Michelle O’Neil:

McDonald's fries versus Burger King fries.

Andrew spear:

Sure. It's just a different brand. Yes, it's the biggest one. It's the most important one. It's the McDonald's of fast food, but it's the Bitcoin of cryptocurrency.

Michelle O’Neil:


So what are the other types of crypto? What are other brands?


Andrew spear:


There's going to be Etherium is the second biggest one. Then there's one called Ripple, which actually goes by tag XRP. There's one called Dog coin. It's spelled like dog, it's kind of fun. Dash, Tron and Light coin are some of the bigger ones in Minero. There's some that are called privacy coins and those are very complicated and we're not going to touch those today. There's this thing called rings and it is a whole mess.

Michelle O’Neil:


Excellent. Well, I'm glad you know about them. So what is a cryptocurrency? Tell everybody what that is

Andrew spear:


All an attorney needs to really know is that a cryptocurrency or a unit there of is two lines of text. It's characters, numbers, typically numbers and letters in long strings, maybe 35, 55 characters long. There's two sets. There's one that's called a private key and one that's called a public key. They're also called a private addresses in public addresses, they’re the same thing. A private key is actually the store of value. It's what makes cryptocurrency worth something. There's only one private key for any unit of cryptocurrency in the world at any one time. And when I transfer that to someone, it disappears and changes into a new private key. So every single transfer of a private key is one way. On the other end of this is the public key. The public key is where I send the private key to. So you tell me your public key, I can then transfer my private key to you, that creates opportunities and problems in and of itself. But the beauty of the public key is anyone can see it in the world. You can log online and you can check and see who's sent money to that public key. You can't see the actual identity of the person. You can see a public key to public key transfer and what they're transferring is that private key. If you recall there was that one scam every time they tried to do these scams via email, send us your Bitcoin. That's actually kind of fun with those, cause you can go check and see if anyone's actually paid the ransom in and most cases….

Michelle O’Neil:


Oh, we got one of those one time didn't and you went in and checked on it.

Andrew Speer:


No one pays those and they don't realize how easy it is to check that, but the public key is essentially how you can view it and how you can store it, one aspect of it.

Michelle O’Neil:


So are there an unlimited number of Bitcoins?

Andrew Speer:

Not with Bitcoins. Eventually I believe Bitcoin maxes out at 21 million units, it's some gigantic number. And so there's a finite supply of Bitcoin. Etherium there is no finite supply. It keeps growing and growing and growing, that leads to inflation problems and sometimes drives down the price when they change certain aspects. Bitcoin, once it reaches that 21 million mark, that's all there is. And so people will start trading smaller divisions of it. And then some aspects you'll make money on that by a transaction fee, right?

Michelle O’Neil:


So Bitcoin can go up in value then if there's a finite number.

Andrew Speer:

Yes, Bitcoin is the big dog primarily because of that. It was first and there's only going to be so much. They have smaller units, they call them Satoshis or something like that. I think it's the Satoshis. It's smaller and smaller and smaller that you can go back 8 decimal points.

Michelle O’Neil:

So it's not like a traditional currency where you go down to the fed and the fed gets their printers going and prints more money.

Andrew Speer:


Well, almost. So there's Bitcoin is a proof of work algorithm, which we'll talk about a little bit later, but there's miners, right? There's these people who own these certain machines.



Michelle O’Neil:


Miners, M. I. N. E. R. S.?

Andrew Speer:

I never thought about it that way.

Michelle O’Neil:

Kinda like working in the coal mine.

Andrew Speer:

You got your pick and you're going in there and you're looking for gold, right? Looking for Bitcoin, yes. And I'm with that right now on some of them you're paid every single confirmation you make, but eventually that will run out and that's where the transaction fee will come in.

Michelle O’Neil:


Makes perfect sense.

Andrew Speer:

There's a middle man confirming every transaction is the best way to think of it.

Michelle O’Neil:

So how do you own a cryptocurrency or a Bitcoin? Like if I own a quarter, I physically hold the quarter in my hand, but with these you don't own them. You don't hold them in your hand.

Andrew Speer:

Not in that way. There’s four way.

Michelle O’Neil:

So even with stock, you have a physical stock piece of paper.

Andrew Speer:

You can do that, but it's the worst way to do it. So that's called paper wallet. It's one of the four ways, you literally print out your private key and your public key on a piece of paper or sometimes they etch them or engrave them into metal, wood or plastic. And it actually creates some problems for litigators because if I put it all on this metal card and I go hide it somewhere in my house, you might not ever find it. That would be a big problem for people who owned cryptocurrency starting a few years back when there was no actual ID process on purchasing, but that's the first way, a paper wallet. And you have to remember about the paper wallet, if you're an attorney, do not disclose that private key because if you do that, I can enter it into this and I can steal it. Okay? Right there. I can take all of your money and remember they're all one way. There's nothing you can do about it.



Michelle O’Neil:


So you don't want to list your private key on an inventory.

Andrew Speer:

Never. At most list, if you have access to your private key only, maybe the first five numbers, maybe the first three. Bitcoin private keys I believe, start with five or S and so if you see a long string of numbers with that, just be careful. But I will also say you should never really see your private key unless you're printing out a paper wallet, which a lot of people do to store it offline because the other way of holding it, it's called a hot wallet, which is what I just showed you. It's an application, right? It’s either a phone, app, computer app. It’s basically any type of software that you can move it between different phones if you wanted, that's a complicated process, but it's possible. Anyone can get on your phone. What's the problem with that though, right? Your phone can get hacked. So then there's something called a cold wallet, which is, I have one right here. This is called a ledger and it's like a little USB key. And they store the private key on there and I never see it from that point forward.

Michelle O’Neil:


Couldn't somebody steal that also?

Andrew Speer:

Glad you asked. They could, but it has these little buttons on the top and I get to enter my password and if you get it wrong three times, it wipes. Then there's the question, did I just lose it?

Michelle O’Neil:

Let's show that a little closer to the camera just in case, so they can see the little buttons on top.

Andrew Speer:

There's a little screen, let me give you a little angle there. Right? And you have to confirm everything and it's a whole process. It's actually really clever, but what happens if someone steals it right? Or they wipe it?



Michelle O’Neil:

It's all on there. So if they steal it just cease. If they can't break into it, it ceases to exist.

Andrew Speer:

Except for something called a seed key. A seed key is a list of 24 words that you get whenever you initialize one of these and program it for the first time and you'll actually get it on the hot wallet as well and those 24 words are in a specific order and if I go buy a new replacement one and I enter those 24 words in a specific order, it'll regenerate it. And so a lot of people have it's called a cryptosteal. It's a piece of metal where you can slide in little chiclets and numbers and you can write down your seed key that way and you store it in a safe. And so if I get robbed or if I lose this, you buy a new one and you can reprogram it. It's called a determinative wallet but the seed key is another item, just like a private key. You never want to show in discovery or as an exhibit. You never want to show anyone that. If you do, I would redact the entire word because it would not be that hard to find a computer program that can crack it. Cause only the first four letters of the word matter and 24 words, four letters, 26 letters in the alphabet, there'll be able to crack it eventually.

Michelle O’Neil:


So if somebody asked for your seed key in discovery, you want to object to that.

Andrew Speer:

Because then anyone can steal it. If you're in the courtroom and there's a private, someone puts a paper wallet on the screen. Do you own Bitcoin? Exhibit A. Here it is, I wouldn't say the bailiff, but let's say the intern right? Could take a picture of it on their phone right there, take it all right now in the middle of court and you'd never know who did it.

Michelle O’Neil:

So the hot wallet is what's on your phone? The cold wallet is the USB looking thing. And then what's an exchange wallet?

Andrew Speer:


An exchange wallet is probably what most people will start using and that's just like, it's almost like fidelity or TD Ameritrade or anything like that. You log in, you have to show them your ID, you have to do the whole like verification process. And this is typically how you fund an account to actually start buying cryptocurrency. And so it's just an exchange, right? It connects to your bank account. And so that's one of the major ways of actually finding out if someone has cryptocurrency, the money going in and out of an exchange. But in exchange you can actually have a public address where you can send to an exchange and the exchange will actually, sometimes when you withdraw money show up on public records.

Michelle O’Neil:


You don't mean like my home address. You mean like a digital address?

Andrew Speer:


And then sometimes exchanges will actually say the name of the exchange or it'll be easily identifiable.


Michelle O’Neil:


So if you're going to start buying Bitcoin, you would get one of these exchange wallets and fund it with some money from your bank account. And then that's where you can start creating, moving those to the other wallets. So if somebody were looking for cryptocurrency, that would be the first little clue that there might be some cryptocurrency.

Andrew Speer:

Money in and out of the bank account into this exchange.

Michelle O’Neil:

So what would that look like on a bank statement?


Andrew Speer:


It'll say Coinbase. Coinbase is the biggest one, there are a few of them. There's like Gemini exchange. In actually the description of it in a bank account statement, I've checked, it'll say Coinbase than a long series of letters and numbers, which I assume is a transaction ID. But it'll actually show up fairly easily if they're using a popular one, but then there's other issues with purchasing cryptocurrency is that I can just buy it from anyone. I can give you cash and I can send it from my little cold wallet to your cold wallet and no one will ever know until you try to cash out somewhere else down the road if you try or if you go to a different country, you go to different country and cash out, there's not going to be any ID requirements. And some of them, there's even Bitcoin ATM now, they charge a pretty hefty fee. But if you go find a foreign one, they won't require your ID. The new ones require IDs in the states.



Michelle O’Neil:


So to start the process though, to fund that first exchange wallet, does it have to come from a bank account or can somebody give them cash?



Andrew Speer:


No, you can't give them cash. Those are getting regulated.



Michelle O’Neil:


Could you take some cash, get a money order, and then give the money order to the exchange wallet?

Andrew Speer:

No. It's all going to come out of the bank account but what you can do, there's two types of exchanges. There's the one we've been talking about, which is called a crypto Fiat exchange. Fiat is just paper money, regular old money. Then there's a crypto crypto exchange. These ones don't require anything. It's the wild west.

Michelle O’Neil:


But to very first start out, you've got to somehow get money into the exchanges and so it's got to come from a bank account

Andrew Speer:

In most cases, unless you're mining, we'll talk about that later.

Michelle O’Neil:


All right, more to come. That'll be later. So if you're in the middle of divorce litigation and somebody, a spouse says, I think my spouse has cryptocurrency. So one of the places, one of the needles in the haystack, I guess that you could look for, would be a transaction from a bank account into a Coinbase or some kind of exchange like that. Coinbase or Gemini would be the main ones.

Andrew Speer:

There's one called Crackin.

Michelle O’Neil:

So if you see a transfer to Coinbase, then that's your first red flag that there is some Bitcoin out there.

Andrew Speer:

Or they’re just parking money out there, but odds are if you're moving money into Coinbase, you're buying Bitcoin or Ethereum or some other.

Michelle O’Neil:

And then from there you can start the…

Andrew Speer:

Oh, I can make it disappear, but there’s a trail.

Michelle O’Neil:

Right. But I mean, that would be the first clue.

Andrew Speer:

And sometimes that creates an issue, right? Because you know bought it at this price on this day, and if I move it anywhere else after that, you don't know what I sold it for.

Michelle O’Neil:

And there’s no transaction history.

Andrew Speer:

You can see it moving, but you don't know who it moved to. You could assume it's me.

Michelle O’Neil:

Or how much?

Andrew Speer:

You can see how much, it'll show how much, it'll show this random public address, this random public address. And sometimes what people really need to look out for it's called a change address. Let's say you break a dollar, right? You get quarters, if I only send someone half a Bitcoin, where's the other half go? It creates a new address and it looks like I sent half a Bitcoin to two people, but I really kept half.



Michelle O’Neil:


It sounds to me like this is one of these things that it gives you an ability to hide assets without very much ability to trace it.

Andrew Speer:


The trace will end if you move it in enough times.



Michelle O’Neil:


I mean, it's not like they get a bank account statement, right?

Andrew Speer:


You could download a statement but the problem is it ends after one link, right? It left Coinbase. I don't know who that person was and there's nothing you can really do about it after that.

Michelle O’Neil:


So you and I started down this road of learning about cryptocurrency when we had a client or a potential client that kind of raised this issue of I think he owns Bitcoin and it was like, how do we know? And so talk about how you started learning this process. Like whenever I said to you like, hey we've got this issue, you know anything about it and then you did what?

Andrew Speer:


Well, I tried to figure out first how to buy Bitcoin normally, which was not that difficult. So I checked out how a Bitcoin ATM work. I didn't actually buy any from there, but they make you put your ID in there and then sometimes make you text, they text you a confirmation. So I was trying to find out how to buy it with no one knowing and it takes a lot of work but you have to, I believe the best way to do it is almost with gift cards. So what I did is I set these up and then I didn't want to go through with it and so they got really mad at me when I said, “Oh okay. I was just seeing how this work.” But it looks like you buy a gift card, you can sell it to someone and they'll send you Bitcoin. It seems kind of risky, but there's exchanges for it, right? So there's essentially an escrow account and it seems pretty shady but it's possible. If you see, what I would look for in a bank account would be if this person's always going to Target and buying these gift cards frequently and we don't know where that money's going. That could be an indicator that they're purchasing it, but the values would probably be pretty low. But that's how it started was figuring out how to do it so that they can't trace it. And that's one way of doing it and then another way is the change address, right? So I buy it legally, I think actually both ways are legal, which is kind of scary. I buy it legally and then I do the change addresses and send half here and half here and they're both me, but it looks like I sent it to two different people. You don't know what happens then.

Michelle O’Neil:


So what are the risks of cryptocurrency as compared with traditional assets?

Andrew Speer:


So a lot of exchanges are insured, a traditional exchange, right? Or TD Ameritrade, if one of their servers go down, I don't lose everything, right? With cryptocurrency, these exchanges get hacked all the time. They go out of business, they disappear. Someone will die and go to India or they'll die in India, sorry. That's what one of the most recent one was. And suddenly all of these private keys disappear and no one knows what happened, right? There's a lot of fraud going on and so you want to normally stick to the bigger named ones as they have started to insure themselves. Binance as one, they actually got hacked but had a rainy day fund and were able to pay people back, but that's very rare. Most of the times you're exposed and that's why you want to move it off an exchange. If you steal cryptocurrency, you can't get it back. You don't even know who stole it, it's very hard to steal a stock, unless I have the physical share, but that's rare.

Michelle O’Neil:


it sounds like this is like the wild wild west with cowboys and indians and robbers and train robbers.


Andrew Speer:


They’ll hack your phone. In the Binance one, what they did is they hacked into the email accounts and then they hacked into the backup email accounts and I don't know if they went into text messages, but they faked the whole thing all the way through and millions of dollars were lost and it was a big deal. But they actually, for the first time, I think ever they had a rainy day fund that they had to pay out from.

Michelle O’Neil:


So I take it because this is so kind of international, there's not really a regulating agency. I mean like in America, if you put money in a bank, it's regulated by the FDIC and there's some oversight and insurance.

Andrew Speer:

They've started. So New York now hands out it's a Bitcoin or a crypto license for traders. New York and London. London I think has some regulations in England too, but for the most part they can be anywhere. You might not ever know



Michelle O’Neil:


How is that enforced? Is that not just gratuitous by somebody in New York certifying somebody and that's kind of a gratuitous certification?

Andrew Speer:


Sometimes what they'll do is they'll keep following it along the chain and see where it lands. And the problem is how are we going to figure out who owns that? You have to connect it to a bank account, so you have to have a suspicion to start with. But they can just steal it from you and you'd never know. It could be someone in the Philippines, the exact other side of the earth.


Michelle O’Neil:


So risks would be like if you lose the address.

Andrew Speer:


Right if you lose your password, right?



Michelle O’Neil:


You forget. See, that's going to happen. That's going to be what would happen to me because I can never remember my passwords.

Andrew Speer:

You lose your passwords. These exchanges are very finicky. They love to block people and freeze funds and freeze accounts and so you lose your password you can be locked out for a long time. They might not ever give it back to you. There's hundreds, probably thousands of stories where people are just complaining like, this exchange stole my money and there's no one to go to. If it's state side, you might be able to eventually sue them, but it's an uncharted territory almost. There's also a physical theft, right? If I lose my my seed key, it's gone. What if I just typed the wrong public address? This is my greatest fear because you've just sent it to someone and made their day or you sent it to just a random account that was used once, right and no one's monitoring and it's just sitting out there. So what I suggested in one of my other webinars is that if you're trying to divide these assets, you set up a public key where all the assets must be put in so they can be constantly monitored. And then in your divorce decree, you have to make sure you type that out exactly how it's listed and you could divvy them up like that, but you gotta be very careful with that because one typo and you can lose thousands of dollars and you still owe the other person money.

Michelle O’Neil:

I have trouble typing a VIN number on a car and I take it these are a lot longer.

Andrew Speer:

You want to do a lot of copying and pasting, a lot of copying and pasting and paranoid double checking. When I started the mining process, I accidentally missed one letter in my address to send the funds to and I was sitting there going, what's going on? I've been sitting here for days and nothing's happening. And then I figured it out. Finally getting really close to the screen and reading up and down, up and down. I was like, Oh, I missed an A or something.

Michelle O’Neil:


So did you lose that?

Andrew Speer:

Like it never existed.

Michelle O’Neil:

So how do you value, how do we know how much a Bitcoin is worth? Cause it doesn't the value go up and down like a stock market does?

Andrew Speer:


There's an exchange. You're going to have a market price, right? You can do a limit order, a stop loss order, things like that. It’s just if you're doing a private sale, it's literally what the other person will pay you. There are some local exchanges where you can actually deposit money into their bank account and you show the receipt and then the third party, the escrow companies, sends you the Bitcoin. Those tend to be a higher market price, right? And so there's some websites, one of them is called Coin Market Cap. It kind of averages multiple exchanges and will give you a general market price and that market price is what sets the value on any given day and the best part about it is you can know the value of that
Bitcoin at the time it was purchased, down to almost the minute going back years. There's different websites. I think Coin Desk is one of them where you can trace it. If I know he bought Bitcoin on this day, it was worth this much at that time. I don't know what he did that with it afterwards, but I know it was at least that much. And if he bought that dollar amount, he probably bought this many units of it. It's just an algebra of figuring out what X is. And now that I know he has that many units, it's 10 years later, how many units is it worth? How much is that worth? Now it's grown exponentially. So you can show essentially a capital gain, right? 0.5 Bitcoins was worth 50 cents back then. Now it's worth $6,000. That is not the creation of anything new, it’s just the growth in value. That's something people need to be scared of if you bought it early on.

Michelle O’Neil:


And so if people are honest, I mean that would sound like it'd be subject to capital gains too.

Andrew Speer:

Yes, tax wise, I would think so. I always just report it.

Michelle O’Neil:

Well good, since we're on camera, right.

Andrew Speer:

I try to be safe about it.

Michelle O’Neil:

But I mean it sounds like there's not much of a way that the IRS would know if you didn't report it.

Andrew Speer:

They've got some new software, but once again, it has to link to a bank account or else it's just a whole bunch of anonymous people sending data back and forth.



Michelle O’Neil:


So again, a tax return, if you're in litigation and a divorce, a tax return might be a place where it would show the Bitcoin ownership or sales or capital gains or something if people are honest.

Yeah, so I know exactly where that goes.

Michelle O’Neil:

Well I assume that there's no like a forensic CPA out there who can value a Bitcoin. Who would you call if you wanted to value a Bitcoin?



Andrew Speer:


What would I do? I would first you need to check and see if it moved. If it didn't move you literally would want to see the exchange they use, which you might be able to determine by going back one link in the chain and just look at the market price, but you don't know if they bought it at a market price.

Michelle O’Neil:


If we're in the middle of a divorce litigation and we're filling out an inventory and we've identified that there really are some Bitcoins and we want to know how to value those for purposes of dividing the asset in the divorce or giving it to him and her getting something else. Who do you call? Like who are you going to call? There is no Ghostbusters for Bitcoin. I mean, is there or?

Andrew Speer:


well you just have to go to that website or check that’s your best bet.


Michelle O’Neil:


Is there a valuation expert I can call besides Andrew Speer?



Andrew Speer:


I would just go with the website. But what a good way to do it would be to actually just divide the coin. You get 0.5, you get 0.5 that'll stop the problem there and if someone really doesn't want it you can give the entire amount to the other person.

Michelle O’Neil:


So if somebody had this problem in a divorce, if there were some lawyers out there watching this CLE and they have this problem in a divorce and they find out that there's some Bitcoin involved in a case that they have, would this be a place where somebody could call and hire you as an expert witness to testify about the process, the ownership and the value?

Andrew Speer:


Yeah, I can show who owns it as long as you can get me that bank account.



Michelle O’Neil:


And then would this also be something where the attorneys could hire you as co-counsel to litigate that issue?

Andrew Speer:


Absolutely and one of the more important things you can do is you can find out the monetary value on each transfer, so each link in that chain, if at some point you lose the chain, you can go check the exact price it was worth on that day. At least at market price, which is probably what they use and it's just difficult to figure out if you don't know what you're looking for, is really the trick there.

Michelle O’Neil:


Alright. Well we have the end of this first segment of our cryptocurrency, Tales From the Crypto segment. So we're gonna take a real quick break and we'll be back shortly for the next segment on cryptocurrency as income. We'll be right back. But this is a webinar that's aimed at attorneys. This is for continuing legal education. If you're out there watching this webinar and you're not an attorney, we welcome you to watch it. But remember that we are not giving you any specific legal advice. We cannot comment on any specific case or situation without knowing all the facts. So if you need legal advice, this webinar is not a substitute for legal advice. Please, please seek the advice of a lawyer as to your specific situation and get specific advice to that. Because if you rely on just what we're talking about here, we're being general, we're talking about general legal principles that may not actually apply to your situation. This is for continuing legal education only and we cannot create an attorney client relationship just through the video camera. Okay, thanks.