Family Law’s Failure To Grasp The Crypto Craze
It’s no secret that Bitcoin and other cryptocurrencies have the potential to wreak havoc on a divorce. There is scarcely any practical advice, however, on how to handle cryptocurrencies in a divorce. Researching this article, two things became apparent. First, finding and accounting for cryptocurrencies is no easy task. There are no simple solutions and likely won’t be for some time. Second, despite these difficulties and despite a dearth of ability and knowledge, far too many divorce attorney charlatans are promoting their ability to help.
I’m no crypto expert myself, but I’d be surprised to learn if most of these “crypto-expert divorce attorneys” can navigate a Roku. If a Jihadist walks through the door for a consult, most family law attorneys would quickly fashion a bomb-vest to wear into the conference room.
Several of these “crypto-experts” claim that the source of Bitcoin is the key. It had to be purchased from an account, they claim. We’ll find that transaction and we’ll track down those new-fangled bit-a-ma-gigs.
This ignores the fact that cryptos can be accepted in exchange for goods or services. Design a website for a someone and they can pay you in Bitcoin. Buy someone gift cards or send them items from their Amazon wish-list and they can send you Bitcoin. There’ll be no starting point and no smoking gun there.
“We’ll use a forensic accountant,” the “experts” say. I’m sure they will. Forensic accountants are family law attorneys’ “outs.” Got a complex situation – get a forensic accountant. Potential hidden money – get a forensic accountant. Need a perfectly rare steak – get a forensic accountant.
Forensic accountants are helpful in some instances, but family law attorneys use them to pass the buck or, more appropriately, pass the malpractice risk. How can I have committed malpractice, they reason, I hired an expert.
Forensic accountants are only as good as the documents they analyze. If there’s no tangible evidence of a crypto-transaction, if it never originated from any traditional account, they’ll be at a dead end.
It seems there is no full-proof way to find someone’s cryptocurrencies if they’ve taken sufficient measures to prevent detection. The best tactics may yield nothing. From the attorney’s perspective, the effort must nevertheless be undertaken and undertaken vigorously. Otherwise, failing to uncover six-to-seven figures worth of cryptocurrency hiding just below the surface can spell a sure-fire malpractice claim. From the party’s perspective, the likelihood of finding a treasure trove of Bitcoin must be weighed by the resources that will be expended in the hunt. Is it worth it to spend $20,000 in attorney’s fees, forensic accountant fees, and forensic computer expert’s fees to find $3,500 worth of Bitcoin?
This leads to another area where Bitcoin and cryptos will make a mess in divorces. The current focus is on Bitcoin’s ability to hide assets in a divorce, but Bitcoin also has the potential to be used as a mirage of undisclosed treasure – a scapegoat for continuing the divorce. There’s a breed of husbands and wives out there who cannot fathom settling a case or even talking settlement until every bank account statement back to the Mesozoic era has been reviewed and every Amazon order inspected. The lack of knowledge is a smoke-screen for simply not wanting the divorce or wanting to keep their not-so-soon-to-be ex-spouse in the torture chamber that is divorce.
Trying to prove there are no cryptocurrencies is trying to prove a negative – it can’t be done. All one party has to do is continue to point the finger and say, “they’re lying…I know those crypto-bits are somewhere…maybe they’re in a Folgers’ can in the backyard.” There is no document or evidence that will definitively show the cryptos don’t exist. Marry a willing client to an attorney all too glad to chase down this rabbit hole, and you’ve got a recipe for a long and costly divorce.
Uncovering cryptos in a divorce is a two-step process. First, exhaust all tools available. Second, pray.
The first tool in the bag is simple discovery requests. Discovery requests are just that – requests trying to discover information. They chiefly take two forms in divorce cases – (1) a request for documents that the other side is required to provide, and (2) interrogatories, which are questions that must be answered under oath. These requests must specifically include cryptocurrency. It’s not enough to simply ask whether anyone has any “cash or cash equivalents” or to ask someone to identify all the “securities” they hold.
The IRS, U.S. Commodities Futures Trading Commission, and the US District Courts all have different definitions of what cryptocurrencies are – ranging from commodities, to currency, to property. When governments, securities exchanges, and courts can’t agree on how to categorize cryptocurrency, a savvy party and attorney can easily navigate their way around poorly worded discovery requests from an attorney who’s more suited to work at Waffle House than practice law.
Most family law attorneys’ discovery requests aren’t even sophisticated enough to uncover PayPal accounts. Document requests should specifically ask for cryptocurrencies. Interrogatories should not only ask whether any cryptocurrencies are currently owned or held, but also whether a party has ever dealt in cryptocurrencies, how they were acquired or disposed of, what was the purchase and sales price, and when were they purchased and sold.
Another tool that a party should use is a computer forensics expert to examine all a spouse’s electronic devices. In the luckiest scenarios, the crypto key will be found somewhere on a phone, laptop, or desktop. At a minimum, the examination may provide circumstantial evidence, such as numerous visits to crypto websites or exchanges, or e-mails regarding cryptocurrencies.
Speaking of the crypto key, this number must be written down somewhere. If it’s not, then the other party is John Nash and has the ability to memorize a 256-bit number. If the latter, you’re dealing with a genius and there’s virtually no hope of finding the Bitcoin. If the former, think about getting an ex-parte order that allows access to places where the crypto key may be hidden. The ex-parte part means only the party seeking the order and the judge would know, affording the other spouse no time to destroy or relocate the key. This order should allow access to any offices, safes, safe deposit boxes, vehicles, the martial home (to the extent any parts are locked or off-limits) – anywhere that the spouse may hide their crypto keys.
The greatest ally in finding cryptos in a divorce may simply be timing and the market. Couples starting the divorce process now were likely together as Bitcoin and cryptos made their meteoric rise and subsequent decline. One would have to be extremely tight-lipped to invest in such a roller-coaster with the family finances and not mention it. And that’s the thing about 99% of cryptocurrency advocates – they can’t shut the hell up about the stuff.
If and when cryptos are found, the question then turns to valuation and division. Many attorneys suggest that the wild swings in crypto values from day-to-day make them a nightmare for equitable division purposes. The value of cryptos on the day of trial or settlement could be 5, 10, or even 20% higher (or lower) than the week before. To avoid this issue, simply divide the crytpos – wife gets ½ and husband gets ½. This way, each party is assured of getting the same value, regardless of what that value may be on the day of division.
Equally dividing the cryptocurrency itself, however, may trigger tax consequences for the spouse who originally held the cryptos. Contrary to a brokerage account, with the ability to transfer securities with their tax basis intact, there does not appear to be a similar way to transfer cryptocurrencies. This means that any built-in gains – for which taxes will have to be paid – will fall to the original owner and inadvertently provide the other spouse with a windfall.
The commentary regarding cryptocurrency and divorce focuses upon finding and dividing cryptocurrency. In equitable division states, however, a key issue remains overlooked: what was being bought or sold with cryptocurrency? In states where conduct purportedly matters, stockpiling weapons, dabbling in drugs, and illegal pornography habits could potentially move the equitable division needle at trial or force a more favorable settlement. Even more difficult than uncovering whether a spouse owns cryptocurrency and how much is what, if anything, that cryptocurrency was used to purchase.
Another issue that remains overlooked is classifying Bitcoin and cryptos as separate or marital property. Separate property is defined in most states as property that was brought into the marriage, inherited, or gifted to one party (not the marital unit) during the marriage. Finding Bitcoin in the first instance is difficult enough, but it’s even harder to trace when and how the Bitcoin was acquired. The owner may say it was acquired before the marriage, or that it was gifted to them for whatever reason passes the smell test.
It seems there is virtually no easy way to find Bitcoin in a divorce if the owner has taken enough steps to prevent its disclosure. The best, and only, approach is to fire away with the weapons available and hope something sticks through tenacity. Be wary of any attorneys promising otherwise.