Divorcing with cryptocurrency - Boodle Hatfield

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04 Jun 2021

Divorcing with cryptocurrency

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It is an increasingly common dilemma of the digital age; the intentionally anonymous nature of cryptocurrencies make them notoriously difficult to deal with in the context of divorce proceedings.

Parties to divorce proceedings in England and Wales are required to make full and frank disclosure of all of their assets. This includes cryptocurrencies such as Bitcoin. Family courts then have wide-ranging powers to deal with such assets, including orders for sale or transfer of cryptocurrency holdings.

There are two main issues that emerge from the perspective of a party to divorce proceedings who suspects that his/her spouse owns cryptocurrencies; first, how to prove that he/she even owns such assets and secondly, how to deal with the vastly fluctuating valuations.

Digging for cryptocurrency

Cryptocurrencies, of which Bitcoin is the most well-known, are designed to facilitate anonymity. They are held in digital wallets which create ‘addresses’ for transactions, none of which are logged to individual names.

Thus, if your spouse refuses to declare their cryptocurrency holdings there is no easy way of ascertaining these holdings as there is (by design) no central authority through which one can put names to assets. Instead, a more considered approach is required. The key is to find a thread to pull at which allows you to ascertain the point of entry into or exit out of cryptocurrencies by your spouse; the initial transaction.

The blockchain (a decentralised shared public ledger) records all transactions of Bitcoin including which addresses it came from and went to. Thus, if you can find a transaction that includes a Bitcoin address, or even better the digital wallet which can be linked to your spouse, then it is possible to trace their transactions through the blockchain ledger (though even here mixing services can be used to muddy the trail).

The best way to accomplish this is an analysis of his bank accounts as Bitcoin is typically purchased using normal currency (though it can be ‘mined’). You should therefore look for transactions with crypto-exchanges and, increasingly, legitimate trading apps (Robin Hood) or payment companies such as PayPal. Increasingly, non-financial companies, such as Tesla, are accepting Bitcoin as payment and such physical asset purchases invariably link the cryptocurrency to a name and an address.

However, if a new Tesla has not mysteriously appeared in your spouse’s driveway then the next step is looking to their tax returns for evidence of cashing crypto holdings into ‘real’ money. Sales of Bitcoin should be recorded as a capital gain/loss and therefore taxable. Specialist forensic accountants can play a crucial role in getting to the bottom of these issues.

It can understandably be tempting for spouses in this situation to turn cyber-sleuth and do some detective work of their own in an effort to uncover a secret stash. But beware the trigger-happy computer mouse finger. Parties to divorce proceedings may not access their spouse’s computer or phone without authorisation; doing so could get you into hot water with the family courts, and possibly also in the criminal courts.

Even if it is not possible to find documentary evidence that your spouse owns cryptocurrency holdings, if you can satisfy the court on the evidence available that they do, (e.g. historic text messages or emails from your spouse referring to Bitcoin) the court can draw inferences or make orders that other assets should be transferred to you in their stead.

The key is to make the non-disclosing party aware that it is not likely to be worth his while to attempt to hide cryptocurrency in this way; penalties imposed by the court for non-disclosure in divorce proceedings can be severe and include imprisonment (or, more commonly, findings of dishonesty which lead to a lack in credibility, adverse inferences being drawn and more being paid to the other party by way of compensation).

If getting to the bottom of whether/how much Bitcoin is held turns out to be a forlorn hope, rest assured that courts have the power to re-open divorce settlements years afterwards if it can be proven that either party failed to disclose all of his/her assets. For instance, if you find out 5 years down the line that your ex-husband or wife has purchased a Tesla from unknown funds, it just might be possible to uncover the truth and re-open a previous divorce settlement so as to take these assets into account.

Valuation issues

The complexities, unfortunately, do not stop with establishing ownership of cryptocurrency. Cryptocurrencies are famously volatile, that is to say they are subject to huge swings in valuation. Over the past two year period, Bitcoin has increased more than sevenfold in value, though over just seven days in February this year it lost a quarter of its value, before making it back up in March. This presents enormous difficulties for the court when determining the appropriate division of assets on divorce.

The most reliable method of dealing with such volatility would simply be for the court to make an order for transfer of a percentage of the holding from one spouse to the other; however, that may not be particularly palatable for the inexperienced. A more common approach, where there are sufficient assets available, would therefore simply be for the value to be determined in accordance with the market price at a set date and for the equivalent value of tangible or liquid assets to be transferred in their place.

With the emergence of Bitcoin and other cryptocurrencies it is crucial to deploy a skilled lawyer who can not only spot the signs where necessary but also identify the appropriate forensic expert in order to get to the bottom of the amount and/or value of the currency held.

Cryptocurrencies are becoming increasingly mainstream and these issues are therefore becoming more common in the family courts. Interestingly, China’s central bank is developing its own government-regulated form of cryptocurrency, while an increasing number of mainstream companies accept cryptocurrency as payment. The more mainstream cryptocurrencies become, the harder it will get for them to remain anonymous and avoid generating a digital paper trail. The wide-ranging powers of the English divorce courts, and the canny lawyers who work in them, are now proving more than a match for would-be wealth hoarders.

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