The estate looks empty, how do I substantiate as an insolvency practitioner that there were crypto assets?

How do you substantiate that there were crypto assets?

You substantiate that with traces of crypto assets that lie outside the wallet, and Paucitas works from the records towards the chain instead of the other way round. A wallet you do not have cannot be opened; a bank movement to a trading platform is there, and that movement points to an account, a period and often to an address.

Four categories yield the most in practice. First, payments from the bank account to a trading platform, including small ones, because a first deposit is often small. Second, receipts from such a platform, which show that crypto assets have been sold. Third, email: confirmations of registration, verification or withdrawal stay in a mailbox for a long time. Fourth, devices and backups, which may contain a wallet file, a browser extension or a note.

What those four have in common is that they exist without the cooperation of the debtor. That makes them usable in a file in which the declaration of crypto assets itself is incomplete.

There is also an order to it. Start with the bank movements, because they are the most complete and mark out a period. Then use that period to search the mailbox in a targeted way, instead of running through everything on keywords. Only after that do the devices follow, because there the yield varies most and the effort is greatest. That order saves time and, more importantly, makes it traceable afterwards why the search was stopped at a certain point.

The method behind this work is set out on the pillar page blockchain investigation explained.

Why finding nothing differs from establishing that there is nothing

Finding nothing is not a determination; establishing that there is nothing is a result in itself, and Paucitas therefore describes those two outcomes in different wording. In the first case a search was carried out and nothing was found, without it being fixed how far that search reached. In the second case it is recorded where the search for crypto assets took place, with which data, over which period, and what that search could and could not cover.

For an insolvency practitioner that distinction is practical. A report that describes which sources were consulted and what outcome that produced is usable towards the supervisory judge and towards creditors, even where the outcome is negative. A single statement that nothing was found mainly raises follow up questions.

That insolvency proceedings differ per country and that the national information can be consulted per member state is described by the European e justice portal of the European Commission (e justice portal, insolvency). That is relevant as soon as the traces in a file point across the border, for example to a provider in another member state.

How a chain is factually reconstructed is explained briefly in the glossary under chain reconstruction.

The reference date record, the step that is often skipped

A reference date record is a snapshot in which, per address, the balance and the transaction history visible at that moment are recorded, and Paucitas makes that record at the start of the investigation instead of at the end. The reason is simple: a balance can move. Whoever records only after weeks records a different reality from the reality on the day the investigation began.

The record contains the address, the network, the time in an explicit time zone, the balance, the number of transactions and the last transaction with its hash. That is a short list, and precisely for that reason it is so hard to reproduce afterwards: the data change over time, while the report makes a statement about a moment.

Paucitas uses no automated analysis software, in any role. The investigation is carried out by hand on the basis of publicly accessible block explorers. Every transaction and every transaction hash is verified one by one before it is included in a report.

What is involved in tracing and substantiating crypto assets in a bankruptcy is set out on the question page about crypto holdings in a bankruptcy.

Case, an empty estate with four bank movements

Case. In the bankruptcy of a sole trader the insolvency practitioner found no trace at all of crypto assets. The declaration mentioned nothing and the records were fragmentary. What there was, were four bank movements over eighteen months to the same trading platform, together a few thousand euros, and one refund from that platform of roughly half of that.

The investigation first recorded the reference date and then described what the four movements factually establish: there has been an account for crypto assets at a provider, money was paid in, and there was one payout. What the movements do not establish is which balance still stood on the date of the bankruptcy, because that depends on the records of the provider.

The report described those two layers separately: the established facts and the question that can only be answered by the provider. That gave the insolvency practitioner a document with which he could ask targeted questions instead of having to search broadly.

The limit. Paucitas makes no commitment about the outcome of an investigation; an outcome can also be that the available data do not establish crypto assets on the reference date.

For insolvency practitioners and lawyers the working method is described on the page for lawyers and insolvency practitioners.

What a report contains and how long it takes

A report by Paucitas follows a fixed structure: reason and description of the assignment, the questions, the scope, the starting points, the data supplied, the sources consulted, the method in outline, verification and quality assurance, reservations and limitations, findings per part, a chronological overview, analysis and coherence, conclusion, statement of independence and appendices. Not every report contains all parts, and the structure is matched to the purpose.

The scope section does the most work in this type of file. It states which sources were consulted and which were deliberately left out of consideration, so that a negative outcome acquires a recorded meaning instead of remaining an empty statement.

A Paucitas investigation takes between one working day and two weeks, depending on the size of the file and the urgency. An urgent report can be delivered within one working day and in exceptional cases the same day. A regular investigation is usually ready within three working days. For files with many transactions, several wallets or missing history, the lead time rises to around two weeks. A surcharge applies to urgent assignments.

The European framework within which providers investigate their clients and assess unusual patterns is described by the EBA (EBA on anti money laundering). That framework is the reason providers hold data on crypto assets that can be relevant to an estate.

The tracing itself was described earlier in the related blog crypto in bankruptcy. If you want a document that is usable for the supervisory judge and the creditors, Paucitas will draw it up: see expert report or contact Paucitas.