Ownership of Bitcoin and cryptocurrency has risen drastically since 2017. The semi-anonymous nature of cryptocurrency makes it a potential tool for spouses attempting to hide assets during the divorce process. There are many reasons why divorce attorneys should be losing sleep over this development. However, there is always a silver lining if you know where to look.
Blockchain transactions contain no information on participants.
Threat: All Bitcoin transactions are permanently recorded on a public ledger called the Blockchain. Although all of these transactions are visible to the public, each transaction provides only an account number, and no user data.
Silver Lining: A spouse’s cryptocurrency address (or addresses) can potentially be determined through other investigative procedures, such as a forensic computer examination, subpoenas of cryptocurrency exchanges, and the discovery process.
An individual can own an unlimited number of Bitcoin addresses.
Threat: Although a spouse may have disclosed a cryptocurrency address or addresses, it is impossible to determine if that address or addresses represent the entirety of that individual’s Bitcoin holdings.
Silver Lining: Once an investigator knows at least one address for an individual, they can often deduce additional addresses controlled by the same individual from publicly available Blockchain data through a process known as clustering.
Bitcoin can be purchased for cash or received in return for a sale of goods or services.
Threat: Websites, such as www.localbitcoins.com, and Bitcoin ATMs allow individuals to purchase Bitcoin with cash. Additionally, Bitcoin can be exchanged “peer to peer” by any two individuals having the necessary phone or computer applications.
Silver Lining: Cash must have a source. Cash removed from a marital bank account will appear as ATM or bank withdrawals. If unreported cash or cryptocurrency is accepted by a spouse’s business as payment for goods/services, it can potentially be uncovered by traditional forensic accounting techniques such as gross margin testing or a detailed review of the company’s books and records.
Large quantities of Bitcoin can be stored with no paper trail.
Threat: Bitcoin can be held in several different types of “wallets”- a paper wallet, software wallet, or a hardware wallet. A “paper wallet” is represented by 12, 15, 18, 21, or 24 random words written down on a physical piece of paper. A “software wallet” is simply an app on a phone or computer. A “hardware wallet” is an electronic device approximately the size of a USB stick. There is no limit to the amount of bitcoin that can be held in a single wallet.
Silver Lining: Truly erasing electronic data is very difficult. Setting up a Bitcoin wallet or the purchase of Bitcoin can leave evidence on a spouse’s computer that can be uncovered by a skilled forensic computer analyst through the analysis of metadata.
Many cryptocurrency exchanges are not US-based.
Threat: There are many cryptocurrency exchanges out there, a number of which are very difficult or impossible to subpoena. For example, the headquarters of a very popular digital asset exchange, Binance, is said to be located in Malta, however, a publicly known address has never been provided. There are also “decentralized exchanges”, such as Changelly, which are merely computer software that allow individuals to exchange Bitcoin and other cryptocurrencies.
Silver Lining: International and decentralized exchanges generally do not allow for transactions in US dollars. Spouses need an “on-ramp” onto one of these exchanges that typically involve a US-based exchange, such as Coinbase, that is legally required to respond to subpoenas.
Bitcoin cannot be seized or garnished, and transactions are irreversible.
Threat: If a spouse refuses to pay a settlement or judgement, Bitcoin cannot be taken from their account without that spouse’s seed or private keys.
Silver Lining: A skilled forensic accountant or computer forensic analyst can help uncover, quantify, and value a spouse’s Bitcoin holdings. Assuming that spouse has other assets, attorneys can attempt to collect other assets that are within the reach of the court and the traditional financial system, such as bank accounts, property deeds, and other assets.
The above listed statements specifically apply to Bitcoin, the most popular cryptocurrency. Other cryptocurrencies may or may not have the same attributes.
Bitcoin and other cryptocurrencies create new issues that divorce attorneys should not ignore. Attorneys should discuss this risk with their clients and consider hiring a forensic accountant and/or a computer forensic expert early in the process of the divorce litigation.