Crypto a growing problem in divorce cases

There are few business transactions as potentially divisive as dividing up assets after a divorce, as Jeff Bezos is in the process of learning. And while Binance CEO Changpeng Zhao’s recent prediction that Amazon will have no choice but to launch a cryptocurrency of its own got a lot of attention last month, that does not mean splitting crypto holdings will necessarily feature in Jeff and MacKenzie’s asset split. Nonetheless, cryptocurrency is becoming a big topic in the family law world.

“Cryptocurrencies have been with us since 2009 when Bitcoin was launched but have only recently become an issue for separating couples as awareness, values and media interest have soared,” said Mark Phillips, a partner in the British law firm Royds Withy King, which has litigated at least three divorces in which high-net-worth individuals have cryptocurrency holdings to divide.

“These are the first cases we have seen, and we expect to see many more,” Phillips noted in a blog post last year.

That’s a problem, because few family law firms have much experience with or understanding of cryptocurrencies, according to a recent article by financial advice website Bankrate.com, which said that dealing with cryptocurrency assets “could make for a difficulty and lengthy divorce process.”

There are two reasons for this, both fairly obvious: the difficulty of valuing an asset in which prices fluctuate rapidly, and the relative ease with which cryptocurrency assets can be hidden.

Crypto as the new offshore account

“Cryptocurrencies have seen some individuals accumulate considerable wealth from a small investment, and the nature of these currencies make it very easy for one party to hide assets,” said Phillips, who called them “a traceability nightmare.”

Tracing undisclosed cryptocurrencies “could be enormously time-consuming and expensive,” he added. That’s not to say that it’s impossible, particularly if the crypto assets were purchased through online exchanges.

Mark DiMichael, a CPA and a certified financial forensics accountant and fraud examiner, told Bankrate this month that he found a $100,000 investment that the husband in a divorcing couple did not list on his statement of net worth by carefully examining bank statements.

When cryptocurrencies have been purchased through an online exchange, tracing them can actually be relatively straightforward, according to a column attorney Bari Weinberger wrote for the New Jersey Law Journal in October 2018.

But, “[w]hen cryptocurrency is purchased directly and moved offline, it becomes almost impossible to trace,” Phillips said.

DiMichael agreed, saying, “[i]t’s really hard to trace if the individual knows what they’re doing. An expert is going to know not to leave any evidence on their computer.”

Noting that it’s an area few lawyers or accountants are experienced in, DiMichael published a fairly basic guide on tracing cryptocurrency assets for the New York State Society of CPAs.

Still, hiding assets during a divorce as a dangerous game, as the penalties range from the other spouse getting a larger share to jail time for contempt of court.

What’s it worth?

The second big difficulty in dealing with dividing cryptocurrency assets in a divorce is determining their worth.

Phillips noted that in one of his firm’s cases, cryptocurrency assets bought for £80,000 in November 2016 rose to £1 million before dropping to £600,000 in February 2018. Calling the rapid fluctuation a “real challenge,” Phillips said [v]aluations will have to be carried out a number of times during the divorce process as the case progresses.”

In New Jersey, Weinberger says, asset values are traditionally set at the date the divorce complaint is filed. “However, there is evolving recognition that another date, such as the date of distribution, may be more appropriate,” she said. “This is particularly true in the case of a passive asset (such as a cryptocurrency) whose value fluctuates exclusively—and sometimes wildly—due to market conditions.”

Finally, there’s the question of protecting the cryptocurrency assets during the divorce process. In a February 2019 article, Bloomberg Law compared dealing with cryptocurrency assets to the difficulties caused by artwork. Recommending that a digital forensics expert be used, it noted that it is “important that throughout discovery, the private key remains protected and confidential to avoid any funds being inadvertently misappropriated.”