Identifying and Discovering Cryptocurrency in a Divorce

by | Dec 13, 2019 | divorce

As part of the discovery process during many divorce proceedings, it’s relatively common for parties to request and review investment accounts and bank account statements to identify any assets that have not been readily disclosed as required. Even in contentious divorce cases, people are usually honest and upfront about assets they own, but occasionally, people do end up trying to hide it from their spouse and the court altogether. While hiding assets in a divorce is not a new development, utilizing cryptocurrency assets such as Bitcoin is, and frankly, it’s proving to be extremely effective.

Why Cryptocurrency Is so Effective

Cryptocurrencies like Bitcoin are a particularly effective means of hiding wealth in divorce cases because they’re pseudonymous and a person’s portfolio or crypto holdings cannot be obtained from any institution or by any court order. Cryptocurrency can be tracked by those who have the expertise to do so, but without the right expertise and tools, tracking cryptocurrency is difficult and time-consuming (if not entirely impractical) – and that includes for almost any traditional auditor or forensic accountant. That being said, even if cryptocurrency is found, the assets still can’t be requisitioned by any court order.

Cryptocurrency is actually an extremely transparent asset class since on the Bitcoin blockchain, one can see the holdings of any Bitcoin wallet, along with each and every transaction performed by that wallet ever. This history is viewable by anyone and everyone who wishes to do so. What isn’t always so clear is who owns the wallet since neither the wallet itself nor transactions on the blockchain identify an individual that controls a given wallet. Also, the names of the sender and recipient are not identified in transactions.

To make matters worse, all parties other than the spouse that holds the cryptocurrency are likely going to have little to no understanding of even how cryptocurrency worse, much less actually be able to identify cryptocurrency assets. Lawyers and judges often really struggle to understand what is happening, as they lack expertise in the area. As a result, what ends up happening in these cases is the ‘blind leading the blind’ so to speak.

Finally, for the cherry on top, cryptocurrency is a highly liquid asset class. Funds can be moved easily, quickly and traded in large amounts. Millions of dollars can be traded, laundered or liquidated in a matter of minutes, as we’ve seen in multiple cases before.

Identifying Cryptocurrency in a Divorce

Given the complexities involved, it might sound like the prospects for finding, identifying, and ultimately recovering non-disclosed cryptocurrency in a divorce are pretty bleak. Without a professional, the odds of success are not great, however, working with an expert that’s able to utilize blockchain forensics to track transaction history will drastically increase both odds of recovery and amount recovered. Below are the steps people should take if they suspect their spouse may not be truthfully disclosing cryptocurrency assets.

Step 1: Identify if the Spouse Owns Cryptocurrency

Before proceeding with any investigation or attempting to value holdings, there should first be either confirmation or at least a reasonable suspicion that the spouse does indeed possess cryptocurrency. The total value of the assets doesn’t need to be determined yet, but there should be a determination as to if they hold cryptocurrency or not.

This is typically the easiest step, but an important step nonetheless to conduct before proceeding to the later steps. The best way to begin assessing if a spouse is in possession of cryptocurrency is whether or not they’ve talked about cryptocurrency before. And the individual going through a divorce is the best person to identify if it’s something their spouse has mentioned before or has demonstrated knowledge in the area.

People who invest in cryptocurrencies are generally extremely vocal about it and often can’t ‘shut up’ about it, sometimes to the annoyance of friends and family. Those who aren’t vocal about it, do still typically like to talk about it from time to time with close family and friends. It’s incredibly rare for an individual to invest a significant sum of money in cryptocurrency while staying perfectly quiet about it. Besides, when a person starts investing in cryptocurrency, they have no reason not to mention it to their spouse because at that time, they certainly have no intention of filing for a divorce in a few years and hiding assets in cryptocurrency when doing so. If the spouse has talked about cryptocurrency numerous times before and/or has demonstrated knowledge of cryptocurrency, chances are they own at least some cryptocurrency.

The alternative way of identifying if there is cryptocurrency investment would be through sifting through bank and credit card statements. Large wire transfers both inbound and outbound should raise red flags but are not always easy to identify without knowing what the major cryptocurrency exchanges are. Furthermore, many cryptocurrency exchanges use payment processors as an intermediary, so without knowing payment processors utilized by certain exchanges, it can sometimes be difficult to identify cryptocurrency investment. Large credit card transactions and cash withdrawals should also be scrutinized.

Step 2: Determine If It’s Worth It to Pursue Further

Whether you elect to consult an expert or attempt to investigate cryptocurrency holdings yourself, you first need to determine if it makes sense to pursue further given both the time and costs involved. This step can be trickier, but it’s important to note that you’re still not necessarily trying to determine how much is at stake and/or what the payoff might be. Rather, you’re trying to determine if there are enough non-disclosed assets at stake to warrant spending both money and time investigating further.

If an individual invested a few hundred dollars into cryptocurrency after 2017, chances are that based on the current value, it won’t be economically practical to properly investigate or pursue further. That being said, there are exceptions to consider here, primarily when investment approximately occurred. Since cryptocurrency prices have generally increased considerably over time, if an investment occurred ‘early’, the value of that investment has likely increased substantially, meaning that in some cases even an investment of a few hundred dollars could be worth well north of a million today.

Remember the question at this stage is NOT how much they invested or how much they have as the answers to those are considerably more complex. Rather, the question one should ask themselves is “whether there’s reasonable suspicion that suggests enough assets are at stake to warrant an investigation”.

The ‘minimum amount’ is debatable but as a general rule of thumb, one should have a suspicion that there’s 10k USD or more worth of non-disclosed cryptocurrency assets to warrant an investigation, but this minimum can vary on a case by case basis depending on the situation. What’s also important to understand is that in most cases we’ve encountered, individuals significantly underestimate cryptocurrency holdings their spouse has. We’ve seen cases where people suspected ‘a few thousand dollars’ and we’ve ended up discovering hundreds of thousands and even millions of dollars in numerous cases to the bewilderment of our clients.

Step 3: The Investigation

Once an investigation is underway, the real work starts. There are a bunch of matters that ought or need to be determined as part of the investigation including:

How much money was invested?

What cryptocurrencies were invested in? There’s a lot of other cryptocurrencies other than just Bitcoin, including Ethereum and Litecoin for example.

What cryptocurrencies do they currently have? They have likely sold or traded cryptocurrencies they previously owned.

How & where did the investment occur? Cash? Wire transfer? Credit card? Was it on a cryptocurrency exchange? If so, which one(s)?

Where is the cryptocurrency now? On exchanges or personal wallets?

What wallet addresses does the person control?

What wallets are the Bitcoin or cryptocurrency currently held in?

What cryptocurrency exchanges are funds located on?

And ultimately, what’s the current total value of all cryptocurrency assets?

At this juncture, a common investigative starting point would be to subpoena relevant cryptocurrency exchanges for trading, deposit and withdrawal history of an individual. Since individuals typically have to go through KYC before doing business on an exchange, and the exchanges keep those records on file, this is generally a good strategy, and it would likely provide some trading, deposit and withdrawal history of the spouse.

If you haven’t already retained a blockchain forensics expert or firm by this point, it’s likely that you will now need to hire one that can track cryptocurrency in divorce cases. There are a plethora of reasons for this, the first one being that without subject matter expertise, you might be able to find a cryptocurrency exchange the spouse purchased cryptocurrency from, but in all likelihood, the spouse will have transferred funds out of the exchange and will likely have purchased or traded cryptocurrency on other exchanges as well. Unless you have both subject matter expertise, sophisticated (& expensive) blockchain forensics tools, and considerable experience conducting investigations and using those tools, it’s unlikely you will discover much, if anything on your own. Or even worse; your findings may be rife with errors and be mistaken about attribution which would severely hamper your case.

Asset Recovery

After an investigation has been conducted, there should finally be a good picture of the spouse’s crypto holdings and portfolio value. The next step is to requisition the appropriate share of discovered cryptocurrency assets. In most cases, asset recovery goes smoothly without too much difficulty or fuss. This is because the findings of the investigation, if conducted professionally, are fact-based and frankly indisputable; the blockchain doesn’t lie.

In most cases, when presented with such conclusive and damning evidence proving ownership of cryptocurrency assets, the spouse will be very happy to turn over the cryptocurrency and settle as quickly as possible. This is because the spouse will realize that there would be severe and serious consequences should matters play out legally without a settlement, including possibly being charged with contempt, perjury, and/or fraud as a result of demonstrably lying to and misleading the court. If the findings are to be submitted in court, we’re available to attest to them as an expert witness as well.

For the sake of argument, let’s consider other ways assets could be requisitioned, other than through coercion and/or negative consequences associated with contempt, perjury, and fraud. For one, any cryptocurrency found on an exchange can be frozen and ultimately repossessed when ordered to do so by a court or law enforcement. Most people keep at least some funds on exchanges.

For any funds that are not on an exchange, search warrants can be conducted to find the private keys and seed phrases to the wallets. Device forensics can be performed as well if needed. If the assets still cannot be repossessed after pursuing these avenues, a judge may order other assets to be forfeited or frozen in lieu.

To make matters worse for the spouse, he or she may still technically have access to the cryptocurrency, but if they attempt to move, transfer, or liquidate it at any time ever again, CipherBlade has monitors set up to detect cryptocurrency movement and freeze assets once the spouse attempts to ‘cash out’ or trade through a cryptocurrency exchange or service provider. Furthermore, when he or she moves the assets at all against a court order, it also opens them up to charges of contempt, money laundering and wire fraud, among others.

The bottom line is once there is solid, actionable evidence as the result of a professionally-conducted investigation, the spouse will realize the potential consequences of non-compliance, putting them in a position of needing to settle, very quickly.

Conclusion

Non-disclosed cryptocurrency assets in divorce cases are a real growing problem, sometimes involving millions of dollars per case but the vast majority of people who work on these cases are ill-equipped to deal with the matter by themselves. Sometimes the individual going through the divorce tries to track things on their own, or they ask their lawyer or forensic accountant to do so which presents numerous problems.

The first problem is that rarely do such self-investigations by non-professionals result in any actionable findings due to the lack of understanding, expertise, and forensic software tools. The second problem is that any such self-investigation will inevitably miss key data points and will be rife with errors; it’s likely to have some false positives, but will also likely miss a very large portion of the cryptocurrency assets. The third problem is that a non-professional investigation will take far, far longer. Something that may take days or even a week to uncover, might take a professional firm like CipherBlade a few minutes. From both a time-efficiency and cost-benefit standpoint, it really is a no-brainer to utilize a professional in such situations.

Note: Nothing in this article shall be construed as legal or financial advice