Crypto assets hidden during divorce proceedings

Despite promises of decentralization bringing innovative transformation to all corners of society, many of blockchain’s anticipated disruptions have yet to materialise. One sector that has been disrupted, however, is law. The potential that bitcoin gives an individual to take ownership of their finances is creating cause for concern in the courts, where legal complications are on the rise from a range of bitcoin-related incidents.

In the UK, and all over the world, courts are seeing more and more cases relating to cryptocurrency. Speaking to Brave New Coin, British lawyer Vandana Chitroda said that her firm Royds Withy King has seen a huge rise of this “relatively new phenomenon” and has been in contact with people all around the world concerned about their spouses hiding crypto.

Undisclosed assets

Given the rapid growth of Bitcoin, and increased exposure in the mainstream media, a greater percentage of people are holding cryptocurrency—up to five percent of the American population, according to a survey by the Global Blockchain Business Council.The vast majority of these Bitcoin holders, as might be suspected, are male and under thirty—a similar age to the average divorcing American couple.

As divorce typically requires each partner’s economic assets to be laid bare and attempting to hide funds can result in contempt of court charges. Historically, however, aggrieved partners attempting to hide assets often through company holdings or offshore bank accounts has been relatively commonplace.

But now secretive spouses tempted to take a chance at non-disclosure can use another loophole—Bitcoin. Because laws tend to lag behind the capabilities of modern technology, proving ownership of digital assets—especially where they are not held on a cryptocurrency exchange—is nigh on impossible.

“Proving that one spouse has a holding in a cryptocurrency, to be considered as part of marital assets” can be a big problem, said Vandana, elaborating that her firm is “facing huge challenges” around disclosure: “Where a party has not disclosed a crypto holding, there is no body to seek disclosure from, given the decentralization, meaning forensic experts will need to become involved to trace the crypto through seizure and searches of electronic devices.”

In a traditional case, once hidden funds had been located a court could order a central monetary authority, like a bank, to hand the money over. With crypto, however, there is no central authority to enforce court orders over funds and the assets may be located in a range of different jurisdictions — leaving the law powerless to intervene. “If the crypto is the largest asset in the marriage and there is a risk of it being dissipated, the courts can grant a freezing injunction, however there is no central body to administer the freeze,” Vandana says.

As the technology progresses, the situation is likely only to become more difficult for courts, if not completely impossible. After all, it’s not difficult to hide your funds with privacy coins. Even if you are known to have significant holdings, all you need to do is claim that your private keys have been lost in a “horrible boating accident” like Riccardo Spagni, founder of Monero.

As courts wise up to Bitcoin, financial forensic experts will be more focusing on cryptocurrency in their crackdown on non-disclosure, but even once possession has been proven, another problem arises.

Fluctuating funds

The value of Bitcoin fluctuates far more than other assets, meaning that drastic differences in valuation must be taken into account, and a final value determined by the judge. As in one of Royds Withy King’s cases, which involved an original investment of £80,000 made in November 2016, now valued at £600,000.

“It’s not as straightforward as valuing your ordinary shares and investments,” says Vandana “There will have to be valuations made at every step in the proceedings. You would then have to agree to a value on the date of the final hearing.” Until financial forensic technology adapts to the blockchain, and the whole ecosystem stabilises, then issues of fluctuation, disclosure, traceability and the ability of the courts to make orders that can actually be enforced are likely to persist.

As Vandana says “We are only seeing the first wave of these cases through the courts and we haven’t reached a stage as yet where the courts have had to make orders”

The legal sector is facing challenges locating and distributing crypto assets on divorce