The rise of the bitcoin divorce – crypto assets are increasingly being hidden in marital disputes

Erica and Francis DeSouza were a wealthy San Francisco couple who decided to get divorced. The negotiations were over the usual arguments over access to the kids, who got the house and the pension, but also something extra. Who got the crypto?

Theirs is considered the first “bitcoin divorce” where cryptocurrency was factored in the financial arrangement. After three years of legal wranglings, a San Francisco court found that Francis had not properly disclosed the currency – which had exploded in value – and ordered him to pay up more than £5m to Erica.

This happened in 2013, and family lawyers interviewed by i say Bitcoin divorces are increasingly happening here too. In the modern-day equivalent of stashing money in a mattress, most commonly, they involve one spouse (usually male) who tries to hide money in cryptocurrency accounts, so they pay out less to their partner.

This has resulted in a growing industry of financial forensic investigators, who charge hundreds of pounds an hour to track down digital coins like bitcoin and ethereum on behalf of wives or partners who are not convinced the numbers add up. Tens – if not hundreds – of millions of pounds have been uncovered this way, found on crypto platforms the partners had never heard of, or hidden on hard drives.

The digital investigation firm CipherBlade has worked on almost 150 crypto-related divorces in the past three years, said Paul Sibenik, a forensic analyst for the company. On several occasions he has traced more than $10m in cryptocurrency that one spouse has hidden from another, and he won’t disclose how much he earned for these discoveries.

“Crypto has the capability of being the new Cayman Islands bank account,” he said, adding that though it may not “necessarily be the intention” of crypto investors to hide their assets, it certainly helps when it comes to divorce cases.

As people wise up to the use of crypto to stash cash, others are getting craftier, by making lots of small deposits into crypto account over time to hide them from any snooping lawyers or analysts. Some may even turn to “mixers” or “tumblers”, where a third party will take lots of crypto transactions, mix them all together to obfuscate where they came from, then pass them out to where they’re supposed to be going, said George Morris, partner at Simmons & Simmons, a corporate law firm.

Stephen Bence is the founder of financial forensics at family law firm Vardags. Some of the people he catches aren’t as sophisticated as you might assume.

“In one case the husband denied having any crypto but we were able to prove that he did as he used his own name as his username in various coin chatrooms,” he said. “In another case we discovered undisclosed transfers to a crypto exchange by looking through his bank statements.”

In the UK divorcing couples are expected to disclose all of their assets at the beginning of proceedings, it is easy to obfuscate as many judges do not properly understand crypto. Laws about how owners must disclose it are not yet set in stone, which adds to confusion.

One woman currently going through a divorce, who spoke toi on condition of anonymity, said that this was the problem in her case, which has lasted for years and is costing an increasing amount because of the expense of trying to track down her husband’s crypto assets.

“The disclosure process is open to influence by parties who have something to hide, as the knowledge is completely asymmetric,” she told i. “The only person in the courtroom with any knowledge is the one who owns the asset.”

She has some professional expertise in the world of finance and has undertaken a great deal of independent work – and provided a lot of money – to educate herself and her legal team on the matter.

“The family courts need help, and we have to open the dialogue and allow judges to be educated,” she added. “If someone does not have my background then there’s no chance they will get even close to resolving it.”

Crypto is a useful tool to hide money, which is why criminal gangs and money launderers favour it. It is difficult to track down, held anonymously on the blockchain – a digital database of the asset’s owners – and hid in online wallets that can be difficult to get into. It is next to impossible to link a given wallet to an individual without corroborating evidence. The lack of middle-men in crypto transactions – unlike cash, which always involves banks – also means a lack of paper trail.

Beth Sheridan, Partner at Stowe Family Law, described crypto assets as a “headache” for family lawyers: “They only exist in electronic form and any paper data that can be provided is nonsensical pages of information”, full of strings and letters and numbers instead of names.

One recurring problem is that because of the nature of the of the asset, it is extremely difficult for lawyers to prove that something exists without some heavy legwork, says Emily Brand, partner and head of family at Boodle Hatfield, another law firm focused on wealthy clients.

She described a scenario where one divorcing spouse was a non-dom, UK resident was going on luxurious holidays abroad, who would be asked to explain how they funded the trips.

“Then it all gets a bit knotty”, Brand explained. “One of the problems we have in the court is they are massively busy, and they don’t like fishing expeditions,” or requests for extra documents that the court does not believe there is sufficient evidence or time to go looking for. “Your client saying ‘we flew by helicopter to Monaco five times a year’ is not really great evidence.”

There are other wrinkles that have emerged more recently. Some partners who have hidden cash this way will have lost a lot of it, as the price of Bitcoin has crashed by 68 per cent in the last year, and Ethereum by 70 per cent.

The fall of some exchanges – like FTX, which collapsed spectacularly this month – has also posed a problem for some cases where their collective wealth has been tied up in them.

Bence detailed exactly such a case where the amount held in the failing company was “in the millions”, and it remained in question throughout legal proceedings “whether it was ever going to be recovered”. The process may yet take years to resolve.

Another problem comes with theft: some crypto investors rely on an online wallet to store their assets, while others keep their coins on a physical hard drive. These external wallets are vulnerable to being stolen by thieves who are increasingly on the lookout for them. Some $14bn (£11.7bn) worth of cryptocurrencies was stolen worldwide in 2021, according to Chainalysis, a blockchain data platform.

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In another case Bence was familiar with, tens of millions worth of Bitcoin was stolen on an external harddrive as the divorce was still underway. “The assets in the case cut in half overnight,” he explained, adding there is some prospect it will be returned.

Even with experts on hand, tracking down the assets can be like finding a needle in a haystack , and there is increasing pressure from the courts to make sure that any costs of tracking it down is proportionate to the value of what is found.

Another issue is that the consequences for improper disclosure are “remarkably low”, said Bence. “Those that get caught can expect the newly discovered assets to be added into the pot to be divided up, but only rarely are they actually punished.”

He has joined calls for more to be done by family courts to understand crypto, and to exact more harsh penalties.

“Until the courts start making an example of offenders, non-disclosure is something of a one-way bet and the relative ease of hiding crypto will only increase the numbers of those chancing their arm,” Bence added.

How to track down your partner’s cryptocurrency

In UK law, crypto assets are considered “property” and can be treated like any other asset, said Hinesh Shah, a forensic accountant at corporate law firm Pinsent Masons. “You can make various types of legal orders [a judgment made in court over who owns it] on crypto just like you can on a car or property,” he added.

He told i that there are a number of ways that forensic accountants can tell if somebody has some secret crypto holdings.

Step number one is to ask: “Does it look like my partner has had a significant change in lifestyle that is unexplained?” From there, you can add: “Does what they disclosed in legal proceedings look completely different to what you I was expecting? Do you have reason to believe they may have been hiding assets?”

Other tell-tale signs can include:

  • Transfers from a bank account to a known cryptocurrency exchange – “There is always a fiat currency transaction somewhere,” said Shah.
  • Crypto wallets or unfamiliar accounts appearing on a device.
  • Devices that look like USB sticks or hard drives that are used as “cold wallets” – a more secure way of holding cryptocurrencies.
  • So-called “seed phrases” – 12 random words to allow you to get back into your wallet – or long strings of alphanumeric text appearing on notes apps or pieces of paper.
  • Checking their recent search history for price updates or other crypto news.

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