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Digital Asset Recovery - how much will it cost me and what is the threshold for pursuing a legal case?

This question comes up sometimes from my clients. Not surprisingly they want to know that even if we can recover their assets, which is a challenging process at this pioneering stage, how much will it cost them in the end. And naturally, will there be anything left over for them!

At a very early stage we inform our clients if their case will reach a 'recovery threshold'. This estimates if after fees and costs there will be anything left over for the client. And if so, does the client  and do we still want to proceed. On the face of it, its pretty easy to work out a rough estimate:

If fees + likely costs + variable_client_factors are less than total_asset_value, then proceed.

As a general rule the greater the total_asset_value, the more likely a case is worth pursuing. As legal costs have a fairly predictable cap, once that is exceeded by asset value it becomes more attractive and less risky to go after. Yes, our business is about risk and if we will actually win the case this time! 

So its almost certain that small total_asset_value cases rarely reach the recovery threshold. Because legal costs will very likely overtake total_asset_value. Its early days though and this is a moving target- there have not been enough successful cases yet to give a reliable average. 

At this time I would say the total_asset_value has to be at least in the low 6 figures range ($100,000+) before we will pursue a case. But we still make consideration for much lower value cases on the chance its possible.

Once we know that we can clear fees and costs its falls on the client asset owner to then decide if there is enough remaining in it for them to be worth it. And one client will have more appetite for this kind of thing than others so this is also a wide open variable, which is for them to decide once we've told them our estimated costs expectations. 

Of course, given that until Tohonesty turned up it was a total loss for clients anyway, even a penny left over after costs is better than nothing. You get the point though, and some people will place a higher cost than others to go after their property for a number of different personal reasons. Such as any stress they feel they will need to absorb while waiting or the possibility their privacy has to be exposed in court and so on.

I don't need to tell you that the proceeds of crime, fraud, tax evasion, alimony hiding and all the rest which are foolishly stored on chain, have an infinite price here. Its quite a sad indictment of society that so much asset value that has been lost or stolen is in this category and is likely to remain there forever. So called 'owners' won't be calling us for help, nor will they want to expose themselves in court or reveal these assets to the tax man. If you think about it the proceeds of crime - which have been lost or stolen on chain -  are to all intents and purposes 'locked tokens'. So there is an 'out' for these characters if they want to make use of them still using say the current Ordinals mania. This is not a recommendation nor financial advice. And these characters will still bear liability. I'm just saying if they do a risk analysis they might feel they can 'spend' these tokens if they remain on chain, notwithstanding the law now being able to follow and trace them, if moved, which is also a big risk for them.

Speaking of which, we do not give financial advice in any shape or form. Our job is to project manage the recovery of your assets, using eternal legal agents mostly, such as solicitors, lawyers, bailiffs and sometimes software developers. Financial advice does not come into it. You either want to recover your property using our services, or not. 

Tohonesty is following all the regulations on client privacy and storage of their personal data. So much so that we try not to store any at all unless given explicit permission by clients once they agree to proceed with a case. And even then we will try to avoid it. We are working with developers on a self custody process where client data is stored locally on a personal device so that GDPR and PII are obviated legally, keeping our clients safe and in full control of their own privacy.

Back to small clients of whom many have already contacted us, we are looking into a possible class action (representative action in the UK). Where many small clients can join forces as a single entity for recovery for economies of scale. Early days here as its not yet clear if it will be cost effective anyway given the large number of moving variables. But its a possibility. And we reckon this class of owners is one of the largest in number and maybe even value, made up of hundreds of thousands, maybe millions of stores of family life savings as possible class of clients. We have no accurate idea of the total asset value of this class yet and it will be in the $billions.

One client came up with a good question recently - "What drives the costs threshold? ". To answer we've started to build an FAQ entry as follows. A lot will depend on the miners as it is they who will be ordered to sign over the assets to a clients new address:

  • Which blockchain - some chains already have software running on nodes for program efficiencies (i.e. BSV). But to be fair other chains if they don't have the automated processes already can be ordered by a judge to patch their mining node code in the morning anyway else expect a visit from the bailiff
  • Frequency of cases: the first will be ultra costly. Once all soaked in its likely to become cheap. And all iterations in between on the way. This bullet is worth a deeper dive. There is a possibility that even one or a few successful recovery cases will cause a systemic shock in the crypto markets due to loss of confidence. Because until now, the crypto and fintech world have been informed by a false narrative that says digital property is 'special' and recovery is impossible by the law. This shock cold send crypto toward zero overnight and if so would likely cause second order effects. (See below)
  • Crime - if the property was stolen will the authorities step in to catch the criminal too, delaying the action?
  • Timing - political activity, general elections, desire to enforce regulations, systemic economic shocks can all add or remove risk from the equation
  • Inter-jurisdiction - Yes, there are ~170 international regulatory agreements in place already to speed up conversion of court orders across borders. But these can be variable moving targets and can only add to time frame and costs.
  • Miner location - ex juris court orders are more difficult, especially when miner communities flip location 
  • Political - likewise for miner location, which jurisdictions are currently most attractive for miners? Kazakhstan used to be popular 2 years ago but they turned off the power to save the planet politically. Today the US and Russia have 25% of the hash power - will they harmonise court orders? China too? Africa is touted as the new cheap electricity continent but surely that will not pass a stability risk assessment?
  • Second order effects - this is really a political factor. Will the authorities act 'under the table' if an action especially a very large one, impacts the stability of markets, political actors and large corporations like banks? We know this is true for global banking already. Some see this as a crime, most don't know it happens. We are ambivalent politically but just don't want it to happen due to the additional risk and it's totally outside our control. We want stability
  • Regulatory - how strongly are the regs being enforced on miners and exchanges? More than 50% of hash is currently owned by a single corporate entity masquerading as many. Will it be easier to order this misbehaving corporation because it is centralised or harder because they have the power to resist? Sadly, regulators and policy makers have a tendency to make work for themselves as a priority before protecting the nation. This will not be easy hearing for most, we're not making a political statement, it is simply observed.
  • Global economy - where are we in the current business cycle? If in recession it might be easier if the authorities see solving crime and fraud will boost the economy and raise spirits. Will more clients emerge from the woodwork during hard times?
  • Media event conditioning - again this is really political. There are several huge legal cases under way which might determine a large shift in power over how miners operate, what rules they follow and who they take orders from. Likewise for the crypto exchanges and now commercial banks too who are trading ETF's. This could swing either way risk wise depending on the extent of the transfer of power. A lot will depend on how the media are incentivised to report and what exactly they report and the subsequent feedback generated by the people onto the authorities 
  • Innovation - Central banks are very keen on Distributed Ledger Technology as the core ledger for CBDC's, an enormous source of transactions. They are smart and know it will deliver innovation for the early adopter nation. They also know the crypto and fintech world have failed to deliver on better privacy, transparency and security all at very high scale. But they do not know there actually is a protocol that can deliver on all challenges, having been blinded commercially by fintech above. CBDC's could be dead in the water thanks to fintech. But is that a permanent situation? Similarly for the commercial banks and tokenised deposits. Which way will both swing eventually? If onto DLT this absolutely will reduce our risk because now our program is backed by the state on a massive scale
  • The current state of common law - how much has the law gained in its understanding of digital assets up to this point? This is not to discount the law and its operatives who we respect highly. It is to say it takes time for legal precedent to flow through gracefully on difficult matters as they're put to the test in court. Once that happens though, it is always set in concrete from then on. Right now it is early days so it adds risk to our estimates of costs
  • Much more and the unknown unknowns, this is a pioneering program, where innovation about risk must lead

Many of these are moving targets at this early stage as the network grows and the technology develops. And most of all I think, when the law catches up based on precedent of prior cases, a positive feedback of improvements will help us to assess risk more confidently and we'll wonder what all the fuss was about back in the beginning. 

Fortunately most cost factors will converge over time to become cheaper, quicker and less risky.