How cryptocurrency assets are becoming a new battleground in divorce disputes

By Kelly Anne Smith

Fighting over money is one thing; dealing with bitcoin and other types of cryptocurrency in a divorce is an entirely different story.

As cryptocurrency has surged in popularity, it’s become much more common for investors to carry shares in the largely unregulated market. For married couples looking to part ways, this means dealing with cryptocurrency as an asset could make for a difficult and lengthy divorce process.

Considering regulations and standards on digital currencies such as bitcoin are still being weighed by governments and financial regulators across the world, could the future of hiding assets during a nasty divorce be lying in its hands?

The role cryptocurrency is beginning to play in divorces

Cryptocurrency is virtual currency; it lives online and is traded on a blockchain, an encrypted ledger detailing transactions. Since each transaction is associated with a public and private key, it’s possible for each transaction to be traced back to a single individual.

Cryptocurrency has been around for about a decade, but it became more mainstream around 2017 when bitcoin skyrocketed to a price of $20,000 per coin and caught the public eye, before giving back much of its value in the time since.

In 2018, only 5 percent of the American population held cryptocurrency, according to a survey by the Global Blockchain Business Council. An additional 21 percent of respondents, however, said they were considering adding it to their portfolio.

As cryptocurrency grows in popularity, lawyers all over the world are beginning to face divorce cases with high-value disputes over these digital assets.

Jacqueline Newman, a New York-based matrimonial law attorney, represents all different types of clients, including those divorcing with cryptocurrency. She asks all of her clients to fill out a statement of net worth — a comprehensive document detailing income, assets and debt of each party. She says her forms now ask parties to include cryptocurrency, too.

“It hasn’t gotten to the point where the court forms include it yet, but we have asked on ours and people list it under their general assets,” Newman says.

Hiding assets: Is cryptocurrency a new way to do it?

Since bitcoin and other cryptocurrencies are largely unregulated and encrypted, some might think it’s a perfect place to anonymously stash away funds.

But that’s not necessarily the case.

Mark DiMichael, CPA, certified Financial Forensics accountant and fraud examiner, specializes in cryptocurrency. In one recent case, a husband didn’t report $100,000-plus in cryptocurrency assets on his statement of net worth. During the discovery process, DiMichael closely analyzed his bank statements and was able to trace the crypto transactions through a crypto-trading platform.

DiMichael warns, however, that cases can get more complicated. The more knowledgeable someone is in crypto, the bigger the threat they pose to successfully hiding the assets.

Although he hasn’t worked on a large number of cases involving cryptocurrency so far, DiMichael gives the example of a cybersecurity expert exchanging cash for bitcoin as payment. By conducting the transaction in person, there would be no “proof” of the transaction occurring — making the asset-hiding much more difficult to reveal to the court.

“It’s really hard to trace if the individual knows what they’re doing,” DiMichael says. “An expert is going to know not to leave any evidence on their computer, and it can be much more difficult to subpoena.”

The future of spouses hiding money in crypto should be seen as a threat

Edward Davis, a Miami-based asset-recovery attorney and founding shareholder of Sequor Law, says cases of financial infidelity involving crypto are only going to become more frequent in the coming years.

In 15 to 20 years, Davis expects people with large sums of money to turn toward cryptocurrency as a way to hide their assets.

“It’s a real threat,” Davis says. “It’s not going to come up in the average divorce of Joe versus Mary where they both have regular jobs and are a middle class family. But the wealthy and uber-wealthy who have access to this are going to use it to hide their value.”

Matrimonial attorneys interviewed for this story say there aren’t currently any specific laws regarding cryptocurrency protection during a divorce process. Davis says these laws to protect consumers from fraudulent crypto activity are likely coming, but they will be slow to implement.

“The legal infrastructure and regulatory infrastructure for this stuff is way behind,” Davis says. “If you look at some of the people sitting in Congress — some of them are in their 70s and 80s — they have no idea what this is. They don’t even know what Snapchat is. You’re talking about a generational change [that] is going to [have to] happen before people are confronting this kind of issue.”

Another issue for getting a hand on regulating crypto, Davis says, is that there’s a wide misunderstanding of how blockchain technology works.

“Whenever something new comes along, everyone tends to minimize it,” Davis says. “Predicting technology is a very hard thing. People who are intimidated or scared or don’t understand technology tend to minimize it.”

How the financial and divorce industries are adjusting to this rising trend

As interest and commonality surrounding crypto continues to increase, experts in the legal field are having to quickly educate themselves on the asset to keep up. Some experts say there isn’t enough being done to inform and train legal counsel on the inner workings of the asset.

Most of what DiMichael knows about crypto is self-taught. In 2018, DiMichael published “A Forensic Guide to Finding Cryptocurrency in Divorce Litigation.” He created the guide after his own research found there weren’t many resources available on the matter.

“I’ve seen some courses for it, but I think there should be more training,” DiMichael says. “Uncovering crypto is fairly complicated, and that can be even harder for someone not trained in crypto.”

Most accountants don’t understand cryptocurrency, DiMichael adds. More complicated divorce cases involving cryptocurrency can be a lengthy and complicated process — and for an accountant learning everything on the fly, this can mean longer hours and a higher bill for the client. DiMichael says that he currently charges $435 per hour.

Davis hasn’t worked directly on a case recovering cryptocurrency assets yet, but he has noticed an upswing in industry-related conversations in the past two years. Lawyers, who he says aren’t technology-savvy by nature, should pay close attention to cryptocurrency and educate themselves on how to manage it in court cases.

“The main concern about crypto is how little we understand it and how dangerous it is because it’s an unregulated, untethered currency,” Davis says. “This is a real threat and one we have to think about.”