In latest edition of The Wright Toolbox:

• Is Cryptocurrency Kryptonite for Judgment Creditors?  Not So Fast!

Is Cryptocurrency Kryptonite for Judgment Creditors?  Not So Fast!

By Thomas Moran

If you’ve ever been involved in, or even considered, litigation against a private person or a small company, you may be familiar with the frustration that comes with collecting on a judgment.  “Sure, you can get a judgment, but good luck collecting!”  I’ve heard this from judges, and I’ve even said it to clients.  Having your legal rights validated is great, but it’s not worth much to you if the judgment debtor doesn’t have assets that you can proceed against.  And even debtors who do have assets often rely on attorneys who specialize in “judgment proofing” their clients to avoid traditional judgment execution methods such as garnishment of bank accounts or levying on tangible assets.

The exploding popularity of cryptocurrency seems to have added another formidable weapon to the arsenal of those who want to avoid their court-ordered obligations.  After all, the most attractive feature of crypto is its anonymity: digital currency transactions are only recorded according to digital signatures and aren’t traceable to individuals.  Moreover, virtual coins can be stored by the means of a digital key and kept in a location known to and accessible by the debtor only.

While the nature of crypto certainly presents challenges for a creditor seeking to enforce a judgment against a debtor with a digital portfolio, all is not lost.  While the transfer of digital coins such as Bitcoin may not be directly traceable, the initial purchase using traditional currency can be traced via bank records your attorney summons as part of post-judgment discovery.  The debtor may have secured the digital key in an “off-the-grid” physical location making it nearly impossible to reach it, but more likely the key is secured with a third-party service such as Coinbase, which makes crypto much easier to exchange and far less prone to catastrophic loss.

A third-party crypto servicer, much like a bank or brokerage, is a company that provides a financial service to a customer.  As such, its records should be susceptible to summons just like more traditional financial institutions, and the assets it holds for customers should be subject to enforcement procedures such as garnishment.  Specifically in the case of Coinbase, which is based in California, judgments rendered by foreign courts can be domesticated and, ideally, enforced by a writ of garnishment once an account is identified.

Government regulation of crypto is still in its early infancy, and there is little to no case law addressing these issues yet.  In the coming months and years, legislation will likely circumscribe the relationship between creditors and debtors with respect to digital assets.  In the meantime, if you are have a judgment you are struggling to enforce, feel free to contact Tom Moran in the Richmond office of Wright, Constable & Skeen at (804) 362-9434 or tmoran@wcslaw.com.