Finding and Dividing Hidden Crypto Assets in a Divorce

4 months, 2 weeks ago - May 16, 2022
Finding and Dividing Hidden Crypto Assets in a Divorce
Cryptocurrency may prove more challenging to track and prove ownership of than more tangible assets.

For many people across the country, cryptocurrency has progressed from being a niche interest to becoming a substantial financial asset. As the value of crypto assets, such as bitcoin and Ethereum, have skyrocketed, many investors have become extremely wealthy, particularly those who entered the crypto market in its early stages. However, as with any valuable asset, crypto introduces new complexities into a divorce, particularly when it comes to the division of assets between high-net-worth divorcing couples.

In contrast to concealed bank accounts, bonds, stocks and income that most divorce lawyers and financial experts are familiar with during divorce procedures, cryptocurrency may prove more challenging to track and prove ownership of than more tangible assets. Crypto cannot be confiscated in the same way that other assets can.

However, given the legal ramifications of engaging in serious financial fraud during divorce proceedings, it is significantly less frequent for one spouse to consciously and willingly participate in such behavior. But should this happen, cryptocurrency is an excellent asset for a spouse to use if they want to be spiteful and conceal assets during a divorce case.

Understanding Cryptocurrencies

Cryptocurrencies are digital or virtual currencies protected by encryption, making it nearly impossible to counterfeit or double spend. As a result of their decentralized structure, they can exist independently of governments and other central authorities.

Due to their soaring value, cryptocurrencies have become increasingly popular as trading instruments. According to coinmarketcap.com, more than 15,000 cryptocurrencies are currently in circulation, with more being added daily. However, there are many different types of cryptocurrencies, out of which the most important ones are:

  • Coins, which might include Bitcoin and other cryptocurrencies (altcoins); and
  • Tokens, which are programmable assets stored within a particular platform's blockchain, are another type of asset.

The blockchain is the platform that brings together the two main categories of cryptocurrencies mentioned above. Blockchains store information in blocks that are subsequently linked together using cryptography. Different data can be maintained on a blockchain, but the most popular application has been a transaction ledger, which has been the most widely adopted.

When used in combination with a coin, the blockchain is decentralized, meaning that no single person or group maintains ownership over the cryptocurrency; instead, all users collectively retain control. Decentralized blockchains are immutable, meaning that the data submitted cannot be changed after being recorded. In the case of Bitcoin, transactions are permanently recorded and are accessible to anybody who wishes to view them.

Hidden cryptocurrency in a high-net-worth divorce

Bitcoin is a highly liquid asset class, making it an excellent investment choice. Funds may be moved swiftly and easily, and they can be traded in large quantities. Millions of dollars can be sold, laundered, or liquidated in minutes. In terms of technicality and sophistication, cryptocurrency is a high-end product that renders it very difficult to understand.

A source of concern has developed in high-net-worth divorces in which bitcoin is involved. In particular, this concern holds ground when only one spouse is actively participating in the cryptocurrency market. The other spouse might also have minimal expertise or comprehension of the financial and technical aspects of cryptocurrency investment.

Because bitcoin is challenging to trace, many people are turning to it. It is not the same as making a cash deposit into a bank account or writing a check. Cryptocurrency anonymity, such as Bitcoin, makes it a particularly effective technique for concealing riches in high-net divorce cases. A person's portfolio of crypto assets records cannot be collected from any institution or by any court order because cryptocurrency is a pseudonymous asset. Therefore, standard methods make it impossible to obtain an overview of cryptocurrency holdings.

Control of a cryptographic asset is exercised by whoever has possession of the private key. This key, which functions similarly to a hard disk, serves as a security pass that grants access to information about the assets kept. One of the difficulties with cryptocurrency is that it can swiftly change hands and see significant value fluctuations. With no physical presence or central register of ownership, it is challenging to comprehend what the currency represents and how much money has been amassed in its possession.

There is no centralized authority to which a court order can be addressed. Competent experts can follow cryptocurrency. Tracking it without the appropriate expertise and tools is difficult and time-consuming (if not completely unfeasible). Even if crypto assets are discovered, they cannot be seized by any court order, regardless of how significant the discovery is.

Identifying and dividing cryptocurrency in a high-net divorce

The first stage is to determine whether or not a spouse currently has or has previously held cryptocurrency. If so, the next step is to obtain confirmation of the precise wallet address used to store the cryptocurrency. This should allow the forensic experts to track transactions from the moment of purchase through as many wallet addresses as necessary, recording the value of each transaction and any attribution data on the counterparties that participated in the transactions. This enables following the money trail and revealing the truth about what has been happening behind the scenes of cryptocurrency transactions.

Suppose a wallet address cannot be obtained. In that case, the spouse's bank statements or credit card statements can be investigated to see if any transfers have taken place or if any deposits have been made into exchanges. Tracking entries associated with a cryptocurrency exchange (used for exchanging coins) or a cryptocurrency ATM (which converts money into cryptocurrency) is also possible.

It's possible that previous tax returns had records of cryptocurrency income. As a result, the investigators may have enough information to comb through the entire blockchain and locate transactions, including the times/ dates and values associated with each transaction.

Spouses should carefully consider the costs and benefits before embarking on a cryptocurrency search. However, in cases where significant amounts of money are suspected of having been invested in cryptocurrency assets, and there is a risk that the assets may be hidden, it is worthwhile to conduct the search.

If there is the need to hunt down cryptocurrencies, a blockchain forensics expert or business is likely necessary by this stage. The spouse may have transferred funds out of the exchange and purchased or traded cryptocurrency on other exchanges. Without both subject matter expertise and advanced blockchain forensics tools, and extensive experience conducting investigations and using such tools, it's unlikely to uncover much, if anything, in this field.

In this case, a couple of scenarios can be used to identify and divide cryptocurrency. There are various methods of obtaining assets besides coercion and/ or the negative repercussions of contempt, perjury, and fraud that need to be considered. For starters, any bitcoin detected on an exchange can be blocked and eventually seized by a court or police authorities. The simplest scenario for all parties concerned, and the least expensive one by far, is to convince the spouse to admit to holding cryptocurrency and negotiating a settlement.

Most people retain money on exchanges. Unexchanged funds can be searched for their private keys and seed phrases using search warrants. If needed, device forensics can be performed.

A bitcoin wallet is similar to a bank account, retirement fund, or traditional investment account with stocks and bonds in terms of property division. Of course, just like other assets, crypto holdings can be divided in several ways. Bitcoin holdings could be liquidated and split equally between spouses, or one spouse could give up cryptocurrency holdings in return for a more significant portion of other marital property.

However, dividing crypto holdings in a divorce can be complicated. Even the most popular cryptocurrencies like bitcoin and Ethereum have high volatility. So, before finalizing the asset partition, both parties' legal and financial experts may need to agree that the worth of the crypto assets is to be reevaluated.

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