Bitcoin Litigation Hold

Litigation Hold and Blockchain Data Preservation

This memo is published by CustodyStress, an independent Bitcoin custody stress test that produces reference documents for individuals, families, and professionals.

Record Location Identification Problems

A company receives notice of potential litigation involving bitcoin transactions. Legal counsel issues a litigation hold requiring preservation of relevant documents and data. Traditional litigation hold procedures assume centralized record systems. Email servers, file shares, and database backups receive preservation instructions. Bitcoin litigation hold obligations encounter distributed record challenges when transaction documentation exists across hardware wallets, exchange accounts, blockchain explorers, personal devices, and third-party custody providers.

Litigation hold notices describe categories of documents to preserve. For traditional business records, employees know where files live and how to stop deletion. Bitcoin transaction records fragment across systems without clear ownership or centralized location. The hold notice says preserve bitcoin-related documents. Personnel receiving the notice cannot identify all relevant record locations. Bitcoin litigation hold compliance faces gaps between preservation intent and record distribution reality.

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Record Location Identification Problems

Traditional litigation holds identify record custodians. Department heads receive preservation notices for their areas. Bitcoin records do not align with organizational structure. Transaction records exist on devices belonging to multiple people. Exchange account logins may be shared or undocumented. Hardware wallets sit in personal possession. The litigation hold coordinator cannot map bitcoin records to specific custodians because custody arrangements evolved informally outside documented procedures.

Some bitcoin records exist only on personal devices. An employee conducted company bitcoin transactions using their personal laptop. The litigation hold reaches company systems but not personal devices unless specifically included. The employee may not realize their personal device contains litigation-relevant records. Company bitcoin litigation hold notices that assume business-only record systems miss personal device storage when bitcoin custody practices blurred personal and business boundaries.

Third-party custody creates preservation notice gaps. A company used external custody service for bitcoin holdings. Transaction records exist at the custodian. The litigation hold notice goes to company employees but the relevant records live outside company systems. Preserving third-party records requires identifying custodians, understanding what records they maintain, and issuing hold notices to external parties who may not cooperate absent formal process.

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Blockchain Data Preservation Uncertainty

Blockchain records exist permanently on distributed networks. Transaction history for any address remains accessible indefinitely. Does this eliminate preservation obligations for blockchain data? Litigation hold coordinators face questions about whether publicly accessible blockchain data requires active preservation. The data cannot be deleted but the ability to associate specific addresses with the company may depend on documentation the company controls.

Some companies rely on blockchain permanence without preserving address lists. They assume relevant transactions can be identified later using blockchain analysis. This works if the company can later prove which addresses belonged to them. Without preserved documentation linking addresses to company ownership, blockchain data becomes practically inaccessible despite technical permanence. Bitcoin litigation hold obligations require preserving address ownership documentation even when blockchain records themselves are permanent.

Blockchain explorers provide transaction viewing interfaces. Companies use these services to monitor bitcoin holdings. Explorer account history and saved searches may constitute discoverable records. The litigation hold notice may not mention blockchain explorer accounts. Personnel assume explorer data is public and not subject to preservation. But company-specific saved searches, annotations, or analysis within explorer accounts may contain unique litigation-relevant information requiring preservation.

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Hardware Wallet Preservation Challenges

Hardware wallets store private keys and transaction history. When litigation hold issues, personnel must preserve hardware wallet contents. This requires identifying all hardware wallets, ensuring they remain accessible, and preventing data deletion. Hardware devices in employee possession create custody uncertainty. An employee with a hardware wallet leaves the company. Did they return the device? Is it in a desk drawer? Home storage? The litigation hold coordinator lacks visibility into hardware wallet locations.

Some hardware wallets contain company and personal bitcoin. An employee used one device for both. The litigation hold notice applies to company records. Segregating company transactions from personal transactions on the same device proves difficult. The employee cannot selectively preserve only company-related data when all transactions share the same device storage. Bitcoin litigation hold compliance encounters privacy concerns when preservation requirements affect personal financial records commingled with business records.

Firmware updates on hardware wallets can delete transaction history. Normal device maintenance conflicts with preservation obligations. An employee receives litigation hold notice. Their hardware wallet prompts for firmware update. Updating may clear stored transaction metadata. Declining updates leaves device vulnerable to security issues. The employee faces conflicting pressures between security maintenance and litigation preservation that traditional document holds do not create.

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Exchange Account Record Retention

Companies hold bitcoin at exchanges. Exchange platforms maintain transaction records. When litigation hold issues, the company must preserve exchange records. This requires downloading transaction history and preserving it independently because exchange record retention policies may not align with litigation timelines. Exchanges delete old records after certain periods. The litigation hold notice arrives but personnel do not realize exchange records need separate preservation before platform deletion occurs.

Multiple employees may access single exchange accounts. The litigation hold coordinator notifies relevant departments. Each assumes others handled exchange record preservation. No one actually downloads and preserves the data. Shared account access creates diffuse responsibility where preservation falls through coordination gaps. Bitcoin litigation hold procedures must explicitly assign exchange record preservation tasks when multiple people access the same accounts.

Some exchanges require specific preservation request procedures. They do not honor informal requests. Legal hold notices from company counsel may not constitute sufficient instruction for the exchange to halt record deletion. The exchange continues normal retention practices deleting old data despite the company's litigation hold. Preserving records requires understanding each exchange's formal preservation process and following it correctly within litigation hold timeframes.

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Wallet Software Transaction Logs

Desktop and mobile wallet software maintains local transaction history. This data supplements blockchain records with metadata like transaction labels, recipient names, and purpose notes. Wallet software logs contain litigation-relevant information not recorded on blockchain. Litigation hold notices that focus on blockchain transactions may not mention wallet software logs. Personnel preserve blockchain data without realizing their wallet software contains additional discoverable information.

Software updates or device replacements can delete wallet transaction history. An employee replaces their computer after receiving litigation hold notice. They reinstall wallet software but transaction metadata from the old installation does not transfer. The underlying bitcoin remains accessible via seed phrase but the historical transaction context is lost. Bitcoin litigation hold obligations require preserving wallet software data files before hardware changes occur.

Some companies used multiple wallet software products over time. Early transactions used one application. Later transactions used another. Transaction history fragments across old software installations some of which may no longer be installed or accessible. Litigation hold coordinators must identify which wallet software versions were used historically to preserve complete records. This requires documented knowledge about past bitcoin custody practices that may not be documented.

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Communication Record Preservation Scope

Litigation holds cover relevant communications. For bitcoin matters, this includes discussions about transactions, custody decisions, and wallet access. These communications may occur via email, messaging apps, or informal channels outside corporate systems. Personnel preserve corporate email but not Signal messages or Telegram chats where bitcoin coordination actually occurred. Bitcoin litigation hold scope must extend to communication channels employees used for bitcoin-related discussions.

Some bitcoin communications happen verbally leaving no documentary record. Litigation hold cannot preserve conversations that were never recorded. But meeting notes, calendar entries, and follow-up emails referencing verbal bitcoin discussions are discoverable. Personnel may delete calendar entries or meeting notes believing the verbal discussions were unrecorded. Bitcoin litigation hold training must explain that documentation of verbal bitcoin discussions requires preservation even when the discussions themselves were not recorded.

Shared spreadsheets tracking bitcoin holdings constitute discoverable records. Employees maintain Google Sheets or Excel files documenting transaction history, custody arrangements, or price tracking. These files live outside formal record systems. The litigation hold notice reaches email and corporate drives but not personal cloud storage where bitcoin tracking spreadsheets reside. Bitcoin litigation hold obligations require identifying informal record-keeping systems employees created outside official channels.

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Seed Phrase Documentation Preservation

Companies document seed phrases in various ways. Written notes, password managers, sealed envelopes, and safe deposit boxes all contain seed phrase records. Litigation hold requires preserving these materials. But their locations and formats vary. The litigation hold coordinator knows email must be preserved but may not know seed phrase documentation exists or where it is stored. Bitcoin litigation hold procedures must specifically address seed phrase preservation when documentation methods are non-standard.

Some companies split seed phrases across multiple locations. Shamir backup splits shares among different custodians. The litigation hold notice reaches some custodians but not others. Partial preservation defeats the purpose. All seed phrase components require preservation. Coordination across multiple custodians becomes necessary. Bitcoin litigation hold compliance depends on identifying distributed custody arrangements and preserving all components.

Encrypted seed phrase backups create access complications. A company stored seed phrases encrypted with a password only the former CFO knew. Litigation hold preserves the encrypted file but the decryption password is lost when the CFO departed. The preserved record is technically intact but operationally useless. Bitcoin litigation hold procedures must address password and key preservation alongside the encrypted materials themselves.

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Preservation Timing Versus Deletion Schedule Conflicts

Companies have document retention policies. Email deletes after certain periods. Old files purge from archives. Litigation hold overrides normal deletion. But automated systems may continue deletion unless specifically stopped. A company receives litigation hold notice. IT implements preservation for identified custodians. But automated exchange record deletion continues because the exchange is external to company systems. Bitcoin litigation hold timing requires immediate action to stop external deletions that may occur before preservation procedures complete.

Some bitcoin records delete automatically by design. Privacy-focused wallet software deletes transaction metadata after specified periods. This feature operates locally on employee devices outside IT control. Litigation hold notice goes out but wallet software continues automatic deletion. The employee does not realize their wallet settings conflict with preservation obligations. Bitcoin litigation hold compliance requires checking software-level deletion settings on devices used for bitcoin transactions.

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Multisignature Cosigner Record Obligations

Multisignature arrangements involve multiple parties. Each cosigner maintains records of proposed and signed transactions. When litigation hold affects one party, their portion of multisig records requires preservation. But complete transaction history may depend on accessing other cosigners' records. The litigation hold applies to the company but relevant records exist with third parties not subject to the hold. Bitcoin litigation hold completeness faces gaps when multisig arrangements distribute records across parties outside the hold's reach.

Some multisig arrangements include individuals as cosigners. A company uses two-of-three multisig with two company officers and one outside advisor. The advisor is not company employee and not subject to company litigation hold. Their multisig transaction records may differ from company records if they added annotations or metadata. Preserving complete multisig history requires coordinating with third parties who have no obligation to comply with company hold notices.

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Tax Record Intersection With Litigation Hold

Companies report bitcoin transactions for tax purposes. Tax records and litigation hold scope overlap. Tax preparers maintain bitcoin transaction documentation used for return preparation. When litigation hold issues, tax preparer files constitute relevant records. But tax preparers are external professionals not subject to company hold notices. The company must request preservation from tax preparers separately. Bitcoin litigation hold obligations extend beyond company boundaries to include professional service providers holding transaction documentation.

Some tax records aggregate bitcoin transactions in ways different from operational records. Tax software categorizes transactions by type. Operational records organize by date or counterparty. Both perspectives may be relevant to litigation. Preserving only operational records without tax categorization records creates incomplete preservation. Bitcoin litigation hold scope must include both transaction recording systems and tax reporting aggregations of the same underlying transactions.

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Backup System Preservation Decisions

Companies maintain backup systems. Nightly backups capture file states. When litigation hold issues, backup preservation becomes relevant. But backups containing bitcoin records may exist across multiple generations. Current backups, weekly incrementals, and monthly archives all potentially contain discoverable bitcoin records. Litigation hold coordinators must decide which backup generations to preserve creating storage and cost considerations traditional document holds rarely face at similar scale.

Some backups capture wallet software states. A backup from six months ago contains wallet software installation with transaction history. Current system no longer has that software installed. The backup constitutes the only preserved record of that period's transaction metadata. But backup restoration to access specific files is technically complex. Preserved backups may be unusable for discovery if the company lacks capability to selectively restore bitcoin wallet data from old backup files.

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Lightning Network Transaction Preservation

Lightning Network transactions occur off-chain. Channel states and transaction history exist in local node databases. Lightning transaction records are not permanently recorded on blockchain. When litigation hold issues, Lightning transaction history requires active preservation because it will not survive node software reinstallation or data loss. Personnel familiar with Bitcoin blockchain permanence may assume all bitcoin transactions persist. This assumption fails for Lightning creating preservation gaps.

Lightning channel closures post final state to blockchain but not intermediate transaction history. A company operated Lightning channels for two years then closed them. Blockchain shows channel opening and closing but not the hundreds of intermediate payments. That history existed only in node software. If litigation hold issued after channels closed but before intermediate transaction data was preserved, the history may be unrecoverable. Bitcoin litigation hold procedures must address Lightning transaction preservation before channel closures eliminate local records.

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Vendor Coordination For Preservation

Companies use bitcoin software and service vendors. Payment processors, custody providers, and tax software companies all maintain records derived from company bitcoin activity. Litigation hold requires preserving vendor-held records. This means identifying all relevant vendors and issuing preservation requests to each. Companies may not maintain comprehensive vendor lists for bitcoin-related services creating preservation gaps when some vendors are overlooked.

Some vendors have formal preservation request procedures requiring legal process. Informal hold notices do not trigger preservation. The company issues hold notice to vendor expecting compliance. The vendor's procedures require subpoena or court order. Records delete on normal schedule because informal request was insufficient. Bitcoin litigation hold compliance requires understanding each vendor's preservation procedures and meeting their specific requirements.

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Mobile Device Preservation Complications

Employees use mobile wallets for company bitcoin transactions. Phones containing wallet apps are personal property. Litigation hold requires preserving wallet data but accessing employee personal devices creates privacy concerns. Some employees refuse preservation requests affecting personal phones. Company litigation hold authority may not extend to personal devices even when they contain company bitcoin records. Bitcoin litigation hold procedures encounter privacy barriers when custody practices relied on personal device usage.

Mobile wallet apps update automatically. Updates can delete local transaction history or restructure data storage. An employee receives litigation hold notice requiring preservation of mobile wallet data. The app updates overnight. Transaction metadata from old app version does not carry forward. Automatic updates defeated preservation before the employee could act. Bitcoin litigation hold compliance requires disabling automatic updates on devices holding litigation-relevant bitcoin records.

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Discovery Production From Preserved Records

Litigation hold preserves records. Discovery requests later demand production. For bitcoin records, production requires technical capability to extract data from preserved materials. Hardware wallets, backup files, and encrypted containers require specialized knowledge to produce in discoverable format. Preservation succeeded but production capability is absent. The company preserved hardware wallets but cannot extract transaction histories for attorney review. Bitcoin litigation hold must consider not just preservation but eventual production requirements.

Some preserved bitcoin records require explanation to be useful in litigation. Raw blockchain transaction data means nothing without context about which addresses belonged to the company and what each transaction represented. Metadata providing this context may exist separately from blockchain data. Producing blockchain records without contextual metadata creates incomplete discovery responses. Bitcoin litigation hold preservation must capture both transaction records and interpretive documentation together.

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Summary

Bitcoin litigation hold problems emerge when preservation obligations meet distributed record realities. Record location identification fails when bitcoin documentation fragments across personal devices, exchange accounts, hardware wallets, and third-party systems without clear custodian mapping. Blockchain data permanence creates uncertainty about whether actively preserving publicly accessible transaction records is necessary. Hardware wallet preservation faces custody visibility problems and firmware update conflicts.

Exchange account records require separate preservation before platform deletion occurs. Wallet software transaction logs contain metadata not captured on blockchain. Communication records scatter across informal channels outside corporate systems. Seed phrase documentation in non-standard formats and locations requires specific preservation attention. Automated deletion schedules continue unless actively stopped. Multisignature cosigner records exist beyond hold scope.

Tax preparer files intersect with hold obligations. Backup system preservation involves multiple generations creating storage complexity. Lightning Network transaction history requires active preservation before channel closures. Vendor coordination for records preservation depends on identifying all service providers and meeting their specific procedures. Mobile device preservation encounters privacy barriers. Production from preserved records requires technical capability to extract and contextualize bitcoin data. Understanding these gaps explains why bitcoin litigation hold obligations designed for centralized document systems prove difficult when transaction records distribute across systems without clear preservation pathways.

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