Cryptocurrency can be an ideal way to hide marital assets because an experienced family lawyer may not know enough to suspect its existence in a divorce case. A little bit of education on cryptocurrency can go a long way to protect the client’s interests – and the lawyer’s license.
By Kelly L. Burris, Family Lawyer
Although cryptocurrency was once a prevalent topic of discussion in financial arenas, many thought that it might be a flash in the pan as its popularity had seemed to fade. Nevertheless, Bitcoin and other cryptocurrencies have once again been making headlines.
Tesla recently purchased $1.5 billion in Bitcoin, which, among other factors, caused the value of the cryptocurrency to spike to $50,000. The news of the increase has triggered renewed interest in cryptocurrency among the general public as a possible investment strategy and an option to make secure and instant transactions around the globe.
This increasing popularity means that the identification, valuation, and division of cryptocurrency as an asset in divorce cases will become more and more commonplace. Still, it is a trend for which most divorce attorneys are unprepared.
Cryptocurrency Can be an Ideal Way to Hide Marital Assets
The novelty of cryptocurrency and the nature of how it functions can make it an ideal method for a knowledgeable but dishonest spouse to hide marital assets. Investments in cryptocurrency can mystify even family attorneys with extensive experience in property division. For these reasons, it is crucial for divorce attorneys to have a working knowledge of cryptocurrency.
Cryptocurrency and Divorce: How Does Cryptocurrency Work?
So, what is cryptocurrency, and how exactly does it work as a medium of exchange? Cryptocurrency is essentially an algorithm that relies on cryptography to dictate how a unit of currency is produced and regulated. A cryptocurrency unit, known as a “coin” or “token,” is simply a number on a database that records the transfers of that number from one user to another.
The database that records the transfers is called a “blockchain,” and the number assigned to the coin or token is called the “public key.” The blockchain records every transaction of a cryptocurrency unit ever made, and they are publicly accessible to anyone with an internet connection. Cryptocurrency is not tied to any government or third-party bank or brokerage firm.
This means that cryptocurrency transfers are almost totally free of international regulations, third-party interference, or fees. Instead of a bank or financial institution regulating the transactions, cryptocurrency is verified by a process known as “mining.”
An individual can earn cryptocurrency from mining the blockchain, and a person can purchase it from an exchange that sells the currency. Cryptocurrency can also be received as a gift or purchased peer-to-peer using cryptocurrency ATMs or websites that act as a marketplace.
Linking Cryptocurrency to Its Owner Requires a Private Key
Initially, it might sound easy to investigate cryptocurrency transactions because everything is listed on the blockchain for anyone to see. However, the numbers on the blockchain cannot be traced to a particular individual or owner of the currency without the “private key.” It is the private key that makes cryptocurrency so anonymous. The private key is the password held by the cryptocurrency unit’s owner and allows them to spend or trade the units on the blockchain.
The only way to link a person to the public key and track the transactions on the blockchain is to know the private key. With this in mind, as some businesses now accept cryptocurrency as payment for goods or services, just like cash, it may be necessary to watch out for undeclared payments if a spouse owns a business.
Possibly the most practical method of finding the private keys to any cryptocurrency holdings is to find the “wallet” where those keys are held. A “wallet” is anything that the holder of the currency uses to keep track of the private key. Wallets are typically an app, other software, or hardware used to hold or keep track of the numbers. However, a simple piece of paper where the holder writes down the number can also be a wallet. Many owners of cryptocurrency use a third-party service known as an exchange to hold the private keys.
Cryptocurrency and Divorce: Determining the Value of Cryptocurrency Holdings
When determining the value of an individual’s cryptocurrency holdings, making detailed discovery requests may be the best option to obtain the needed information. There is no real bank or financial institution that can be subpoenaed for records of the private keys. If the cryptocurrency owner uses an exchange, it may be possible to subpoena some information from the third party. However, an individual anticipating divorce can easily transfer the private keys from the exchange to another type of wallet – making it more difficult to track. All of this means records obtained from a subpoena will be largely unhelpful other than possibly documenting that a person had holdings at one time.
If an attorney cannot obtain useful records of the cryptocurrency’s value from an exchange, all hope is not lost. Because the private key’s loss would result in a total loss of the asset, most cryptocurrency owners keep more than one wallet, making the private keys easier to locate. In most cases, a preservation of records or spoliation notice should be sent by the attorney, and this is doubly important in cases involving cryptocurrency.
Most cryptocurrency transactions are made using an individual’s electronic devices. Consequently, a quality tech expert should be able to pull information, and possibly even private keys, from the forensic analysis of an electronic device. The trick is to secure the device for analysis before it can be scrubbed of any useful data, so it is crucial to act fast.
Financial Statements May Provide Evidence of Cryptocurrency Transfers
It is essential to review financial accounts and statements even though personal financial records may not hold the private keys to the cryptocurrency. This documentation may hold clues on whether cryptocurrency has been purchased or sold and for how much. Unexplained transfers, investments, or other questionable spending on financial statements can all be evidence of cryptocurrency transfers. If a client is unaware of whether cryptocurrency holdings exist and if the opposing party would likely attempt to hide assets, financial records may be the best bet in determining whether further investigation is needed.
Know When to Hire a Forensic Financial Expert Familiar with Cryptocurrency
Attorneys should know how to spot issues related to cryptocurrency – and they should also know when it is time to call in the expert. Obtaining the information necessary to track cryptocurrency holdings is the job of the attorney; however, it is usually wise to retain a forensic accounting expert familiar with cryptocurrencies to trace the holdings. Tracking cryptocurrency transfers and translating those transactions into dollars can be very complicated and time-consuming.
An expert can also be helpful when valuing and dividing cryptocurrency holdings. Most people are somewhat familiar with Bitcoin. Bitcoin was the first and is probably one of the more stable types of cryptocurrency. But, there are thousands of others. Each type varies significantly in stability and value. Only an expert familiar with the market would likely be able to provide any reliable assessment of the long-term risk and value of a cryptocurrency investment. It is vital to ensure that any expert that is hired has significant experience with cryptocurrency. A client’s personal accountant is probably not the best expert to retain in these types of cases.
Cryptocurrency is a Taxable Asset
The transfer of the asset is relatively simple once the cryptocurrency holdings have been divided in a divorce. Cryptocurrency is a taxable asset and is subject to the same tax laws as any other type of asset; therefore, it is crucial to have specific language regarding how that transfer will occur to avoid any enforcement or tax issues. With that said, tax evasion is rampant with cryptocurrency because of how difficult it is to track transactions to individual users. Be sure to advise a client on how capital gains taxes should be declared and include language as to how those would be paid if there is any cash out of cryptocurrency in the property division of the divorce.
The topic of cryptocurrency is relatively new and very complex. It is an asset truly unlike any other, making it difficult for an attorney to locate and assess. That is especially true if the attorney has little to no working knowledge of cryptocurrency. A little bit of education on cryptocurrency can go a long way in protecting the client’s interests and the attorney’s license.
Kelly L. Burris is a litigation partner with the family law firm Cordell & Cordell in Austin, Texas. Board Certified in Family Law by the Texas Board of Legal Specialization, she has litigated complex property cases involving multi-million dollar estates. www.cordellcordell.com.
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