Divorce can be a complicated process. The recent introduction of cryptocurrency has added an extra layer of complications to the divorce process.
Family law attorneys indicate that there is a growing trend among high-net-value divorces. In most cases, the higher net-value spouse has used digital currency (cryptocurrency) to conceal their actual wealth from the other spouse. With previous cases, it was easy to hide assets in offshore accounts; the process was arduous; but with instantaneous transfers using digital wallets, spouses and their law firms are having a difficult time finding traces of secret assets.
The Modern Offshore Account
For many years, spouses attempting to withhold their marital assets from their partners were able to do so through clandestine (and frequently offshore) banking facilities. Digital currencies like Bitcoin and Ethereum present a more viable solution. The decentralized nature of digital currencies means that they do not exist within the traditional banking system. Money can be moved across international borders in a matter of seconds without detection or the regulatory protections that traditional banks have in place to prevent this type of activity. While there will not be monthly paper statements delivered to the spouses’ residence, there will also be no central authority that can easily freeze an account. For a spouse that is trying to discreetly take money from the marital estate, the pseudonymous nature of cryptocurrencies is a very tempting way out.
The “Lost Password” Ploy
Storing cryptocurrency can pose a significant challenge to attorneys. Typically, money is stored offline in a hardware wallet or protected by a private key, which is often complicated. As part of divorce litigation, one spouse may claim they lost or forgot their private key or password in order to avoid claiming an asset. Because crypto cannot be recovered by calling a customer service hotline, courts are often left grappling with how to treat a supposedly “lost” digital fortune.
Following the Digital Breadcrumbs
Despite the stealthy reputation of cryptocurrency, it is rarely entirely untraceable. Attorneys are increasingly partnering with forensic accountants to follow the digital money. Typically, the investigations will begin within the established banking system, looking for wire transfers and credit card payments to well-known exchanges such as Coinbase and Binance. Investigators may also track the digital footprints left by customers through web browsing data or by checking smartphone apps that indicate whether the customer has traded cryptocurrency and when that trading took place, as well as reviewing customer tax returns since the tax authority requires customers to report crypto-related transactions. Investigators can also trace funds through anonymous wallet addresses, as all transactions using that wallet address leave an irreversible public record of that transaction on the blockchain, giving skilled investigators an accurate picture of how funds have traveled through the system.
The Nightmare of Volatility
Finding the hidden cryptocurrency is only half the battle; dividing it fairly presents a completely different nightmare. Cryptocurrencies are notoriously volatile. A digital portfolio worth $100,000 at the time of separation could drastically change in value by the time the divorce goes to trial. The large swings in value of this asset create contentious disputes for lawyers and judges as to when the value of the asset should be determined, making it a very high-stakes risk regarding how to share the proceeds of value with each spouse, thereby impacting the ultimate amount of money a spouse could receive.
The legal consequences of deceit, trying to conceal property during dividing up in a divorce is illegal, as long as the funds are in a checking account or a digital Bitcoin account. The courts expect all parties to be fully disclosed financially.If a judge discovers that a spouse has intentionally concealed cryptocurrency, the penalties can be severe. Judges have the authority to award the entirety of the discovered digital assets to the wronged spouse or impose heavy financial sanctions. Some people have gone to jail for committing perjury or being in contempt of court. Since the blockchain is unalterable, it is possible that any lies told under oath today could be verified as false through a forensic audit at a later date and time. Furthermore, if hidden crypto is discovered after the paperwork is signed, the injured party can often petition to reopen the entire divorce case.
