In this era of the digital age, we are seeing an increase in cryptocurrency assets forming part of the matrimonial pot. Most of us will be familiar with the term “Bitcoin” – the cryptocurrency with the largest market value – but with this, there are no visible assets, such as a bank account detailing exactly what is held. This is because all cryptocurrencies are held digitally, whether in an online account, via a third-party platform, or on a physical storage device, such as a USB. For these reasons, they can be difficult to find with crypto currency originally seen as the perfect method for illegal activity transactions because of its untraceable nature.
In this era of the digital age, we are seeing an increase in cryptocurrency assets forming part of the matrimonial pot. Most of us will be familiar with the term “Bitcoin” – the cryptocurrency with the largest market value – but with this, there are no visible assets, such as a bank account detailing exactly what is held. This is because all cryptocurrencies are held digitally, whether in an online account, via a third-party platform, or on a physical storage device, such as a USB. For these reasons, they can be difficult to find with crypto currency originally seen as the perfect method for illegal activity transactions because of its untraceable nature.
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Investing in cryptocurrency has now become commonplace as people make an alternative investment choice. But in such situations, particularly in the context of family law, care needs to be taken. What are the implications of not declaring cryptocurrency, and can it be hidden? If so, can it still be traced? We look at all this and more.
Can cryptocurrency be hidden?
It is extremely common for spouses who hold cryptocurrency to fail to provide adequate or proper disclosure of their holdings. Often they will simply provide a figure valuation for what they have without giving full details regarding the type and amount of the cryptocurrency they actually hold. The nature of the asset means it can be held offline as a series of code which can be written on scraps of paper. In addition, there is no central regulation authority, or government control to regulate them in the way there is with banks and building societies.
As people become wiser to the use of crypto to hide cash, others are getting craftier by making lots of small deposits into crypto accounts over time to hide them from their spouse. There are also “mixers” and “tumblers” who are third parties that take lots of crypto transactions, mix them together to conceal their origins, then pass them on to their destination. This makes tracing such assets even harder.
The reality of crypto assets means they are easier to hide than traditional assets. They are difficult to track down because they are held anonymously on the blockchain and hidden in online wallets that can be almost impossible to get into. It is rare to link a given wallet to an individual without corroborating evidence. In addition, the lack of middle-men in crypto transactions, unlike cash, which always involves banks, also means a lack of paper trail. They only exist in electronic form and any paper data generally provided amounts to pages of nonsensical information, full of strings, letters, and numbers, instead of names.
But people are not being as clever as they think. In one case, a husband denied having any cryptocurrency, but it was found that he used his own name as his username in various coin chatrooms, proving otherwise. In another case, undisclosed transfers to a crypto exchange were found by looking through bank statements.
What can be done about hidden crypto assets?
In the UK, divorcing couples are expected to disclose all of their assets at the beginning of proceedings, but because many judges do not properly understand crypto, it is easy to confuse them. Laws about how crypto owners must disclose their holdings are not yet in place, which adds to the confusion.
The courts are hugely busy and typically judges are not overly fond of fishing expeditions based on one party taking a few lavish holidays but not having the disclosed income to support such a lifestyle. Requests for extra documents or investigations where the court does not believe there is sufficient evidence or time to go looking for, are unlikely to be supported.
If you have previously denied having any crypto asset holdings, then your ex can ask a specialist accountant to carry out a forensic investigation of your accounts. Often, as described above, there are historic signs in bank accounts.
Even with experts on hand, tracking down crypto assets can be akin to finding a needle in a haystack, and there is increasing pressure from the court to ensure that any costs involved in tracing them is proportionate to the value of what is claimed is hidden.
However, the court has the power to infer that there are hidden assets if there are irregularities that cannot be explained. The judge can make an adjustment for this when making their final settlement order.
Is hiding crypto assets in a divorce worth the potential lesser risk of being caught?
In reality, the consequences for improper disclosure during divorce are extremely low, with those who get caught expecting the newly discovered assets to be simply added into the matrimonial pot for sharing. It is extremely rare for anyone to be severely punished.
That said, attempting to hide any asset during a divorce is risky and can result in the non-disclosing party being in contempt of court and liable for costs penalties. Even without having concrete evidence of one party having hidden cryptocurrency, a judge could make inferences regarding their existence, and potential value, and factor this in to their overall judgment together with any related financial orders. Although digital currencies may be harder to value than more traditional assets, such as stocks and shares, this does not prevent the judge from determining a valuation for the purposes of imposing a financial settlement.
One potential outcome could be the non-hiding spouse being awarded all the tangible assets such as the family home, money in bank accounts, pensions, or other investments. Here, the non-disclosing spouse will be left with the risk-laden or non-disclosed, but inferred, assets, such as their cryptocurrency holdings.
The rapid rise in the popularity of cryptocurrency means digital currencies are likely to become a frequent and significant feature in divorce. The court retains extensive powers to order full disclosure and penalise non-disclosure, but these are likely to be tested in the coming years for the reasons discussed in this article.
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