27 Jun’22

Expert Blog: How to Identify and Track Blockchain Digital Assets

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In our work as valuation and damages experts in legal disputes, we at Foresight Valuation Group are often engaged in cases that require the identification and valuation of intangible assets held by an individual (for example: a spouse in a divorce) or by a corporation (for example: the patent portfolio of a business) that need to be valued. Some of these intangible assets, like patents, are identifiable through the review of publicly available data sources (i.e., USPTO database) based on known names or corporate identities. However, in recent years we are seeing new classes of intangibles emerge, such as blockchain-based digital assets like cryptocurrency and NFTs, which are held anonymously and thus may be difficult, if not impossible, to identify and trace by a valuation or forensic expert.

Blockchain Digital Assets, for the most part, are held in wallets controlled by the individual or entity. These wallets typically contain a pair of public and private keys that are unique to the individual wallet. The public and private keys contain an alpha-numeric code (varying in length but typically between 25 and 42 characters) that effectively serves as an address (public key) stored on the blockchain to associate the wallet related to any given transaction, as well as a private key that gives the user access to control the public address and execute said transactions. While the blockchain is publicly available for review, be it Bitcoin, Ethereum, Binance or any number of others, such review is based on the public address or key. If you have the pubic address or key, you can easily find all transactions associated with that wallet, what it holds, when it bought and sold a particular cryptocurrency or NFT, and other information. Connecting that public address to the individual or entity is nearly impossible, especially if it is a decentralized finance (DeFi) wallet. A DeFi wallet is traditionally associated with entirely anonymous Digital Asset transactions as opposed to a wallet provided to a user from a centralized exchange such as crypto.com or Robinhood. In order to get a wallet from a centralized exchange, one would typically need to provide personal information through what is known as KYC (Know Your Client/Customer) to confirm one’s identity. In that regard, a centralized exchange is not dissimilar to a bank account where your ID is associated with an account and routing number, but in this case it is associated with a public and private wallet address.

The ability to identify the existence of digital assets at the personal or corporate level depends on the level of familiarity with blockchain-based digital assets.  Recently published studies indicate that the familiarity with blockchain-based digital assets at the personal investor level is largely a function of age demographics, gender and the level of net worth.  Adoption of cryptocurrencies and other blockchain-based digital assets is growing, and by the end of 2021 the overall market value of cryptocurrencies was $2.3 trillion, up from $760 billion in 2020 and less than $200 billion in 2019 (according to CoinMarketCap). While only 16% of U.S. adults have invested in, traded or otherwise used cryptocurrencies, there is far more adoption in the 18-29 year old demographic, particularly men, with 43% of men and 19% of women aged 18-29 have used or traded cryptocurrencies. When focusing on another demographic, high-net-worth individuals, 68% of high-net-worth individuals in the U.S. invest in cryptocurrencies. When it comes to high-net-worth millennials, studies have shown that 83% of millennial millionaires own and plan to buy more cryptocurrencies.

At the corporate level, a recent study was conducted by Diligent Institute which looked at Blockchain Digital Assets (i.e., cryptocurrencies and NFTs) and how directors at corporations were thinking about them in their roles and responsibilities in the boardroom. In this study, directors of both private and public companies were surveyed in May of 2022. The analysis highlighted that, while only 24% of the directors disagree that the ability to understand and incorporate these assets will be important to their global competitiveness, survey respondents also believe that their boards’ current understanding of blockchain-based digital assets was only a 4 out of 10 (with 1 indicating that the board does not understand them at all and 10 mending they understand them completely).

In conclusion, the key to properly including blockchain-based digital assets in a valuation analysis lies in understanding what these assets are, why they are difficult to identify, and whether the client (individual or corporation) is likely to be in a group that understands these assets.  This type of ‘triage’ will help the valuation expert better identify, value and trace these assets.  While the construct of wallets does not always allow public access to assets or transactions on the blockchain, the valuation expert should at least know that there are assets that might exist, and be able to obtain information to access these assets through interrogatories or discovery.

 

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