Litigators think in terms of liability and damages and, ultimately, the collectability of judgments. Lawyers are trained to use discovery tools to “follow the money.” Pre-trial interrogatories, document requests, subpoenas, fact depositions and post-judgment discovery require us to assemble a detailed understanding of litigants’ finances and accounts and includes a review of personal and business transactions. The internet has indelibly changed the way we pay for goods and services and has created new currencies. Bank and credit card statements are an increasingly incomplete view of liquid assets and spending. With an expanded understanding of digital wallets and new currencies, litigators are equipped to follow the money into the next century.
What’s in Your Wallet?
Coins and paper money have existed for thousands of years, some forms dating back to 500 BC. Dating back to only 1775, the United States dollar bill is a relative currency newcomer. Credit cards debuted in the early1950s, starting in the petrol and hotel sectors, followed by the more generally accepted Diner’s Club and American Express cards. Bank-issued credit cards, which permitted customers to pay less than the total amount due, evolved in the 1960s followed by debit cards that directly withdrew the purchase amount from your checking or savings account, and a national system of ATMs grew in the 1980s.
Peer-to-Peer Centralized Payment Systems
Fast forward 10 years, public commercial use of the internet takes off, and buyers begin making online purchases. With the 1995 launch of eBay, online sellers, often individuals, needed a fast and easy way to accept payment from online buyers. Enter PayPal. PayPal and other peer-to-peer payment platforms piggy-back on conventional currency, credit cards and bank accounts. Linked to your credit or debit card or bank account, PayPal provides its 227 million international users with a quick way to make/receive digital payments to individuals and businesses. In 2017, PayPal processed 7.6 billion transactions, 2.7 billion through mobile devices.
Many PayPal purchases/payments to people or businesses appear on an individual’s debit or credit card or bank account statement as a payment to PayPal with the corresponding purchase/payment amount, without referencing the recipient or business payee. A litigator reviewing a business or personal bank or credit card statement will be unable to determine what was purchased and from whom. A credit card or bank account statement that reflects payments to PayPal should prompt the litigator to request a PayPal account statement, which likely will reflect more detailed payee information. In addition, litigators should be aware that a PayPal user can hold money received through PayPal within the PayPal account and those funds will not appear on the user’s bank statement until (if) the user transfers the funds to the linked bank account. The funds in the PayPal account can remain there indefinitely and be used to make purchases/payments that will only appear on the PayPal account statement. The way that PayPal works should prompt litigators to modify their document requests to include “statements for any mobile payment service, online money transfer service, digital payment processing system and/or peer-to-peer payment platforms, including, but not limited to, PayPal, Google Wallet, Venmo and/or Square Cash.”
Venmo is another mobile payment service and a favorite among moms and millennials alike. Available across the United States, Venmo seamlessly allows users to split a bill or cab fare without exchanging cash. Venmo users identify each other by searching a name or mobile phone number and make a payment at the click of a mobile phone button. Like its owner PayPal, Venmo requires a linked debit or credit card or bank account and holds your Venmo funds in a reservoir account until you transfer the funds to your linked account. Venmo limits your weekly payments to $299.00, and transfers to your bank account are limited to $999.99, until you verify your identity. Once you verify your identity, your weekly transfer limit increases to $2,999.00 and $19,999.99, respectively.
Similar to PayPal, your Venmo account is linked to a conventional credit or debit card or bank account, and payments through Venmo are reflected as funds paid to Venmo rather than the ultimate payee. Statements are only available through the Venmo website. In Q4 2017, Venmo processed $10.4 billion of payment volume, which represented an 86 percent year-over-year increase. Litigators are well advised to understand the lack of identity verification Venmo affords its users and, in addition to requesting statements for the payment services, consider requesting the identification of:
[A]ny mobile payment service, online money transfer service, digital payment processing system and/or peer-to-peer payment platform payments you used in the last x months, including, but not limited to, PayPal, Google Wallet, Venmo and/or Square Cash, the number of accounts held, and indicate if you verified your identity to use the service, i.e., you provided the last four digits of your social security number, your zip code and/or birthdate. If you elected to use the service without verifying your identity, state the facts and circumstances surrounding this decision.
Also worthy of discussion is the peer-to-peer payment service Square Cash, which offers its users a level of anonymity. You select a Square Cash $Cashtag, such as Lucky777 that allows you to anonymously send and receive money from your debit card. Even people without a Square Cash account can download the app, enter their credit or debit card number, enter the payment amount, select a $Cashtag, and make a payment. Another payment platform offered by Square Inc. is designed for small or start-up merchants and service providers, namely a one-inch plastic square that attaches to a mobile device and operates as a credit card processing service. The magnetic strip reader is free and transactions cost the seller a fee of 2.75 percent. Purchases for food delivery, ride services or farmers’ market purchases and the like appear on the buyer’s side as payments to Square. Litigators that rely on tallying receipts from traditional credit card processing systems are at an informational disadvantage. With regard to Square innovations, litigators are well advised to add to their standard discovery requests, “identify any handle, pseudonym, $Cashtag or equivalent you have established or transacted with for the last x months. Identify the person/people associated with the handle, pseudonym or $Cashtag (indicate if unknown) and the date, amount and purpose of the payment(s).” As for the Square card reader, it is critical that litigators know to request “any and all documents/information that relate to mobile or traditional credit card processing” rather than continuing to request and rely on traditional merchant services account statements, ledgers and/or register receipts.
PayPal, Venmo, Square and similar payment systems are dependent on our traditional currency and bank infrastructure. Bitcoin is a new and alternative currency and payment system that is powered by its users with no central authority or middlemen. Users can purchase Bitcoin with conventional currency through exchanges or Bitcoin teller machines. The Bitcoin network shares a public ledger called the “block chain” which contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. From Bitcoin.com:
The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control over sending bitcoins from their own Bitcoin addresses. In addition, anyone can process transactions using the computing power of specialized hardware and earn a reward in bitcoins for this service. This is often called “mining.”
As of Q1 2018, Bitcoin users have created 2.1 million wallets to utilize this international peer-to-peer system that does not rely on or maintain traditional banking systems.
What does this mean to litigators? Are alternative currencies akin to traditional currency, property or something else? The Internal Revenue Service has issued basic guidance stating that virtual currencies are property. IRS Notice 2014-21, 2014-16 IRB 938, 03/25/2014, and IRC Section 1001 address the sale or exchange of convertible virtual currency and its use in economic transactions. In broad strokes: (1) wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes; (2) payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply; normally, payers must issue Form 1099; (3) the character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer; and (4) a payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
A litigant may (correctly) assert that discovery demands that seek documents and information related to bank or brokerage accounts do not require the production of information related to Bitcoin purchases or transactions. As litigators, we need to grapple with Bitcoin and similar alternative currencies and request information and documents concerning litigants’ use of alternative currencies, identification of digital wallets used to store, send or receive payments; the number of transactions in the last x months; identification of the numerical addresses used to transact using alternative currency; and copies of tax reporting information disclosing alternative currency transactions.
Discovery of traditional banking documents are a woefully incomplete view of information age currency, payments and spending, even when coupled with skilled deposition questioning. Although lawyers are often not e-savvy and are quick to dismiss apps and emerging technologies as millennial fads, our continued ability to follow the money requires a general understanding of peer-to-peer payment services, decentralized payment systems and alternative currencies. Ignorance will cost you.
Usatine is a member of the Litigation Department at Cole Schotz in Hackensack.