Discovering and Seizing Non-Disclosed Cryptocurrency Assets in a Divorce

Settling on a fair distribution of assets is no doubt one of the most arduous aspects of going through a divorce. Things become exponentially more difficult in the event one of the parties is not truthfully disclosing all of their assets. While most divorce lawyers have plenty of experience dealing with undisclosed bank accounts, bonds, stocks, or income, cryptocurrency is a new asset class lawyers are starting to confront during divorce proceedings. However, cryptocurrency can prove to be more difficult to track and prove ownership of than other assets. Furthermore, cryptocurrency can be difficult to discover and even more difficult to seize when an individual elects to not be truthful during divorce proceedings.

Financial Deception

It’s not uncommon for people to be financially deceptive with their significant other.  A poll commissioned by NEFE suggested that 31% of people have been deceptive with their partner about money. However, it is far less common for a spouse to knowingly and willfully engage in significant financial deception during divorce proceedings given legal repercussions. It does indeed happen though, and cryptocurrency is an ideal asset class a spouse could utilize if they want to be malicious and hide wealth during divorce proceedings.

Cryptocurrency – An Ideal Asset Class

A malicious spouse may elect not to disclose cryptocurrency assets already held, or they may elect to be even more malicious by selling some of their traditional assets and acquiring cryptocurrency during or prior to divorce proceedings. Cryptocurrency is an ideal asset class to attempt to hide wealth because:

  1. Cryptocurrency cannot be requisitioned by traditional means. There is no central authority to send a court order to.
  2. Cryptocurrency assets can prove to quite difficult and occasionally impossible to find or fully track.
  3. It’s highly technical and sophisticated. It’s likely that the judge, the non-malicious spouse, and lawyers on both sides will have little or no knowledge or expertise regarding cryptocurrency. The malicious spouse can be confident that he or she knows far more about cryptocurrency than all other parties involved.
  4. Wallet addresses (akin to accounts) do not directly have any identification information linking ownership of a wallet to a specific individual or group.
  5. It’s highly liquid, even for large amounts in the millions of dollars.
Discovery Process

Before even attempting to seize any assets, the first step is to confirm if the spouse actually does have any cryptocurrency holdings. If confirmed, the next step is to confirm where those assets are located, whether in private wallets or on cryptocurrency exchanges and what exchanges if applicable. Furthermore, it will need to be determined which cryptocurrency assets the malicious spouse owns since they may own cryptocurrencies other than Bitcoin such as Ethereum, Litecoin, or Stellar. Lawyers and their clients will likely need to seek the help of a digital forensics expert for these matters unless they happen to possess the expertise themselves.

In some instances, individuals may attempt to mask ownership of funds in an attempt to prevent digital forensics and analytics companies from tracking them. These techniques work to varying degrees of success, with a few being highly effective. Fortunately, the vast majority of cryptocurrency owners don’t make any attempts to mask ownership or anonymize themselves at all for a variety of reasons. Many are not knowledgeable enough to know how to do so properly, so don’t bother trying.

Seizure of Assets

After cryptocurrency funds are found, asset recovery or seizure can be attempted. Seizure of cryptocurrency can end up being anywhere from extremely easy to impossible, or anywhere in between depending on the situation.

Option 1: Get Spouse to Confess to Undeclared Cryptocurrency Asset Holdings

This is the ideal scenario and by far the simplest, quickest, and least expensive for all parties involved. Even if the malicious spouse has denied holding or hiding undeclared cryptocurrency assets up until this point, it is likely that they will confess at this juncture when presented with some evidence of ownership and wallet addresses. Most cases end up concluding here without needing to progress to other options indicated below. This is because the spouse has committed an illegal act by signing a financial affidavit declaring they have truthfully disclosed all assets. If the spouse does not confess and negotiate a settlement, they risk far more serious consequences, including potentially criminal fraud or perjury.

Option 2: Order repossession from exchanges

Any funds that have not been withdrawn from cryptocurrency exchanges can be repossessed by court order. Most exchanges are happy to comply with such orders; at least in Canada and the US. The reason this is possible is because the individual never really owns the cryptocurrency when it is left on exchange. The exchange technically still owns it, somewhat akin to a bank account. Just like with fiat currency held in a bank, cryptocurrency held on an exchange is effectively an IOU that can be revoked. Fortunately, a good portion of people leave their cryptocurrency ‘on exchange’ simply because they’re too lazy to withdraw it or aren’t quite sure how things work technically.

Option 3: Seizing Funds ‘Off-Exchange’

The next option, if necessary is attempting to seize funds that have been withdrawn ‘off-exchange’ to private wallet addresses owned by the individual. There is no central authority to go to in order to seize funds from these wallets. This ‘off-exchange’ cryptocurrency will be impossible to repossess unless the individual is coerced into doing so or unless you happen to be able to find the necessary ‘private keys’ (akin to passwords). If a search warrant can be issued, common locations that people store their private keys can be searched e.g. computer, safety deposit box.

Option 4: Civil Action

If the above steps have all proven to be unsuccessful then there may be enough evidence to warrant proceeding with civil action. A judge may end up ordering the freezing or forfeiture of other assets in lieu of cryptocurrency. However, this is largely untested in court.

Option 5: Criminal Action

Attempting to recommend criminal action, perhaps for criminal fraud or perjury is a method of last resort, and again is largely untested in court. Many cases likely will not overcome the necessary burden of proof necessary for a criminal conviction. Ownership of specific wallets will likely not be able to be proven beyond a reasonable doubt in most cases. Furthermore, even if ownership of a wallet by a specific individual is proven, the malicious individual could always claim that the wallet is theirs but they no longer have access to the funds because they “lost” the private key. However, the mere threat of criminal action may prove to be an effective deterrent leading to a settlement.

Rate of Occurrence

It is very difficult to determine how often spouses are electing to use cryptocurrency as a way of hiding assets during divorce. However, given the technical nature of cryptocurrency, low adoption rates, and lack of legal precedent, it is difficult to say just how frequently this occurs.

It would be safe to say that at this time it’s rare for there to be a significant amount of non-disclosed cryptocurrency holdings. But this is likely to rise as younger more crypto-savvy generations become older, particularly if adoption increases.

Market Conditions

Cryptocurrency prices plunged throughout 2018, most declining 80-90% in value relative to the US dollar. This has led to reduced interest in cryptocurrencies from the general public. This has likely led to fewer people seeing cryptocurrency as a method of hiding assets when going through a divorce. But there is still reason for concern. Most experts do expect the price to recover at some point, although are not sure when. Interest and knowledge regarding cryptocurrency are likely to increase should prices recover.

Stablecoins

Even if cryptocurrency prices never recover, and instead continue to decline or even go “straight to zero” as some critics suggest, cryptocurrency can still be a novel way of hiding assets. There is subset of cryptocurrencies know as ‘stablecoins’ which have values pegged to an underlying asset, most often (but not always) the US dollar. USD Coin (USDC) is an example of this. Its value has consistently hovered around $1 USD throughout its entire existence. Even the most vocal of critics would have good reason to believe its value will likely remain around $1 USD.

Conclusion

Many divorce lawyers have not yet had the need to discover or seize cryptocurrency assets yet as it isn’t a common way of hiding assets during a divorce. Non-disclosure of cryptocurrency during divorce remains largely untested legally in most jurisdictions. However, it is likely to become a far more common issue in the coming years.

Note: Nothing in this article is to be construed as legal, financial, or tax advice.

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