Cryptocurrency Assets In Divorce Financial Settlements
The first and most crucial step is to establish that cryptocurrency exists.
Most blockchain enthusiasts are far from being discrete.
The specialized area of forensics dealing with blockchain and cryptocurrencies is called “on-chain analysis”.
The Implications of Bitcoin on Financial Settlements
Blockchain technology has revolutionized much more than just the world of sending and receiving monetary transactions. They estimated hundreds of millions of people around the world to own some form of cryptocurrency. But even if you don’t own any crypto, blockchain can have a significant impact on your life.
Cryptocurrency has increasingly become a factor in divorce settlements in recent times. Bitcoin, Ethereum, and other types of cryptocurrency continue to gain mainstream acceptance. Many people now use cryptocurrency as a form of exchange, a store of value, and an asset class. The value of the cryptocurrency market surpassed a record $2 trillion in April.
What if the spouse you’re divorcing holds crypto assets?
Just as with cash in the bank or property, cryptocurrency is an asset that will have to be accounted within the separation and divorce settlement. Divorce laws in Canada require that all debts and assets, personal or joint-owned, to be accounted for and potentially equalized. This means that the identification, valuation, and division of cryptocurrency as an asset in divorce cases will become more and more commonplace.
The Crypto Knowledge Gap
The problem, however, is that, except for a few, most people, including family lawyers, know very little about cryptocurrency. Some people assume it is unnecessary to disclose your crypto assets in a divorce proceeding.
Some even advise that you invest in crypto assets if you intend to hide assets from your spouse. These assumptions are misplaced in the context of laws and existing realities. If you are a spouse with cryptocurrency assets, you should acquaint yourself with the correct positions.
If you are a spouse without crypto assets, you also need to have a working knowledge of what to look for when divorcing a spouse who may have a cryptocurrency investment. Don’t think for a moment having a lawyer investigate and uncover the crypto assets is the right approach. The financial cost and damage to your parenting relationships will be extensive.
Bitcoin & Divorce: Why Should You Care About Crypto
The greatest mistake you can make while divorcing a crypto enthusiast is underestimating the power of blockchain. Bitcoin is no longer a piece of fringe technology with no real-life value: it’s a multi-billion industry popular among investment companies, banking giants, financial moguls and celebrities.
The other biggest mistake you can make is assuming that if your spouse owns it, that they are hiding it.
The concept of cryptocurrency was created in 2009, when an anonymous person or group of people using the pseudonym “Satoshi Nakamoto” launched Bitcoin – a decentralized financial network allowing anyone, anywhere in the world, to securely send and receive monetary transactions.
Cryptocurrencies operate on a peer-to-peer basis, which means that the users of Bitcoin and other digital currencies can exchange their assets directly between each other, without having to rely on centralized intermediaries like banks. Suffice to say, this can pose many problems if a dishonest spouse doesn’t intend to disclose their crypto portfolio during the divorce.
What is cryptocurrency?
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. 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. Or third-party interference or fees. Instead of a bank or financial institution regulating the transactions, cryptocurrency is verified by a process known as “mining.”
You can earn cryptocurrency from mining the Blockchain. Or you can purchase it from an exchange that sells the currency or from another owner. You can also receive cryptocurrency as a gift.
When It Comes to Cryptocurrency and Divorce, Always Be Honest
The laws require that you must disclose every holding within a divorce proceeding. You and your spouse are under a duty to provide full and frank disclosure of all your assets and liabilities at the outset of the divorce and ongoing.
Suppose you are a spouse holding the cryptocurrency. In that case, it is always advisable to be honest, and disclose relevant and necessary information related to the amount and value of the holdings when requested. For as long as there have been divorces, there have been parties who try to hide assets.
It is easy to track non-crypto assets used to purchase cryptocurrency to establish that cryptocurrency ownership exists.
Once the court is convinced that you are dishonest about disclosing assets, the damage that is done to your case as a whole is significant. The courts will order a full investigation. The dishonesty will also count against you in determining how the marital estate will be divided. The judge is also likely to doubt any of your testimony related to any other aspect of the case.
The bottom line is that you will have to face the consequences once there is solid, actionable evidence against you. And the potential consequences of non-compliance might put you in a position of needing to settle very quickly.
Can Your Spouse Hide Their Crypto From You?
In Canada, all debts and assets either personally or jointly-owned are legally required to be shared/equalized during the divorce financial settlement. Money held on bank accounts or traditional assets such as stocks don’t usually pose any problems, but what if your spouse is an avid blockchain enthusiast, heavily invested in Bitcoin or other cryptocurrencies?
Many cryptocurrencies market themselves as being anonymous, private, and impossible to track. Fortunately, that is not actually the case. All of the popular cryptocurrencies such as Bitcoin and Ethereum are fully transparent. While tracking crypto assets might be expensive due to the novelty of blockchain technology, it is far from impossible.
The specialized area of forensics dealing with blockchain and cryptocurrencies is called “on-chain analysis”. Employing services of companies specializing in this field can cost you a few thousand dollars, but if your spouse is holding assets worth millions, it can very well be worth it.
However, the situation becomes much worse if your spouse happens to own a certain type of cryptocurrencies known as “privacy coins” such as Monero (XMR), Zcash (ZEC) or Dash (DASH). Due to extremely advanced cryptographic technology, privacy coins are extremely hard to track even by law enforcement agencies, and in most cases, it’s impossible to prove someone’s ownership of privacy-focused digital assets.
Why is privacy coins challenging to track?
The primary reason cryptocurrency can be so problematic in a divorce is that one cannot trace the numbers on the Blockchain to a particular individual or owner of the currency without the “private key.” The private key is the password held by the individual owner of the cryptocurrency unit that allows them to spend or trade the coins on the Blockchain.
If the private key is not known or is lost, it is impossible to access the cryptocurrency or trace it back to an individual. Consequently, when confirming whether someone has cryptocurrency, you must know the private key.
The private keys are kept in a virtual “wallet,” which is whatever method you choose to keep track of the private key. The wallet can be a piece of paper where you write down the number. Or an app or some other software designed to hold the numbers. Or some hardware not connected to the internet.
To make a full and complete disclosure of your crypto assets, all you need to do is provide your private keys. Once the private keys are known, it is easy to track all transactions related to that public key. The blockchain logs all and every detail of every transaction.
Hiding Bitcoin During a Divorce:
How to Learn If Your Spouse Owns Cryptocurrency?
Fortunately, most blockchain enthusiasts are far from being discrete. Have you ever heard your spouse talking about Bitcoin, blockchain or crypto? In that case, the likeliness of them owning some form of cryptocurrency is more likely than you think.
However, most retail crypto investors only own very little cryptocurrency. Perhaps your spouse has only invested a few hundred dollars in digital assets – in that case, trying to track the assets might be futile as the cost of on-chain analysis will likely surpass the total value of the digital assets in question.
But what if your spouse talked about Bitcoin and crypto a lot, and then started to buy luxury goods such as expensive cars or jewelry? In that case, you can be almost 100% sure that they made a fortune with blockchain technology, and employing the services of a specialized on-chain analysis company might be worth the effort.
Of course, there’s another possibility which is much more likely: your spouse might be obsessed with blockchain and crypto, but made bad decisions and invested in wrong cryptocurrencies along the way. Remember that most crypto enthusiasts are not millionaires, and they only dream of becoming millionaires one day.
What if your former partner is hiding their crypto?
The first most crucial step is to establish that cryptocurrency exists. If there is enough concrete evidence, all is well and good. However, cryptocurrency, by its very nature, is pseudo-anonymous. This makes things difficult.
The court might require reasonable suspicion of ownership to order further investigation. You could find circumstantial evidence like prior references, unexplained transfers, investments, or another spending on financial statements.
If the cryptocurrency owner uses an exchange, it may be possible to subpoena some information from a third party. If the funds are not on an exchange, search warrants can be conducted to find the wallet’s private keys and seed phrases. Device forensics can be performed as well if needed.
A judge may end up ordering the freezing or forfeiture of other assets in place of cryptocurrency. However, this is largely untested in courts.
How to Legally Do a Full and Complete Disclosure of Your Crypto Assets?
But what if the situation is reversed, and you personally own some digital assets that you want to fully and completely disclose during the divorce financial settlement to avoid any legal trouble?
Fortunately, disclosing your cryptocurrency in a divorce is not problematic. Crypto is no longer a fringe technology, and it can be effectively subjected to legal proceedings.
In most jurisdictions, cryptocurrencies such as Bitcoin are legally considered commodities which need to be disclosed for the purposes of taxation. Because of that, Bitcoin divorces are much easier than they used to be, since revealing your crypto assets to your spouse is not that different from legally disclosing them to the government.
The easiest way to fully and completely disclose your cryptocurrency in divorce is by using your crypto exchange’s account statement feature. Nowadays, all major crypto exchanges such as Binance or Coinbase are subjected to very similar regulations as those applying to traditional banks. Because of that, getting a full statement of your crypto assets is as easy as getting a bank statement for your fiat currency account.
The cryptocurrency exchange you’re using keeps the entire record of all your transactions. In order to fully and completely disclose all your cryptocurrency in divorce you can simply provide a statement from your crypto exchange – all major exchanges such as Binance, Coinbase and others feature the function of allowing you to review and export the full history of your cryptocurrency transactions without any effort.
How do you deal with Cryptocurrency volatility?
One of the tricky aspects of cryptocurrency is nailing down the value. Cryptocurrency worth $100,000 may drop to $10,000 or rise to $1,000,000 during the . If you are to accept coins in your settlement, you need to research the type of cryptocurrency to understand its value and stability better.
You can also prepare for this by adding some type of volatility formula into the divorce contract. For example, if the value changes by “X” percent, there may be a corresponding “Y” percent change in how you divvy other assets. You will need to obtain a valuation at every stage of your divorce process so that you both know what you are dealing with.
Transferring Cryptocurrency assets
After signing your divorce paperwork, you may have a new challenge of transferring cryptocurrency Accounts from one spouse to another. While traditional investment companies know how to split up assets for a divorce, some cryptocurrency exchanges may have less experience. However, transferring the cryptocurrency itself from one spouse to another is much easier.
If you are anticipating a divorce, it is essential to educate yourself on locating and valuing crypto holdings to ensure that the property division is fair and just. More importantly, you need to hire a divorce Financial Specialist with cryptocurrency expertise. Some divorce specialists have more digital currency knowledge and experience, with better insights into proceeding with the settlement.
Is cryptocurrency and divorce an issue that affects you personally? If you wonder how to ensure that your spouse reveals all their assets, or if you want to fully and completely disclose all your cryptocurrency in divorce, visit Divorce the Smartway to learn all you need to know about Bitcoin divorces.
Divorce the Smartway helps separating couples create separation agreements with clarity and soft landings for secure futures. You can schedule a free “get acquainted call”
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