Cryptocurrency has been a buzzy topic for a few years now, with many companies, such as Facebook, attempting to deep their feet into this vast ocean of monetary opportunities. If you are ending your marriage and there is cryptocurrency involved, that means you need to get up to speed about divorce and cryptocurrency.
Cryptocurrency is often thought of as hard to trace, difficult to value and highly volatile. All that can spell trouble when you’re negotiating your divorce settlement.
So what exactly is cryptocurrency, who typically holds it and how can you find it?
We turned to Paul Sibenik from Cryptforensic Investigators for some answers. These investigators help lawyers and their clients going through divorce to track, trace, and recover non-disclosed or undeclared cryptocurrency through forensic accounting.
Cryptocurrency is a digital asset which can be traded online. It’s also referred to as ‘blockchain network.’ It is governed by code created by the owner/creator. This is different from hard currency, like the U.S. dollar, which is governed by a central bank. Changes can be made to the code but only if all the parties to the code agree. There’s another big difference between digital and hard currencies.
“What’s really important to know about cryptocurrencies is that they are non-custodial in nature,” says Sibenik. “When you own cryptocurrency, you really do own that cryptocurrency just as if you owned gold. No one can take it from you unless they steal it.”
This is different from holdings in dollars, for example. Typically, you deposit these to the bank but it’s the bank that holds the actual currency, not you. If that’s a little puzzling, imagine going to the bank branch where you opened your account and asking to see the actual bank notes and coins you used to open the account. You can’t.
There are hundreds of virtual currencies. The most common ones are Bitcoin, Ethereum, Tether and Ripple
With cryptocurrency, your holdings are traceable to you through “addresses” that look like long strings of numbers and letters.
The most common place to acquire digital currency is through an online exchange which Sibenik says is a bit similar to a Forex exchange you’d used if you had a discount brokerage account.
“You would typically wire transfer funds to a bank account owned by these cryptocurrency exchanges,” says Sibenik. “In some cases, you can use a credit card.”
Once you hold digital currency, then you can trade it for other virtual currencies. You can also use it to pay for other digital assets or even regular goods and services, although the latter is challenging.
“Merchants typically want to have a quick-fire way to be able to convert cryptocurrency they receive into their local currency,” says Sibenik. “There are some car dealerships that will accept cryptocurrency. It’s not super common yet but it will probably be more common in the future.”
There are a variety of reasons people hold cryptocurrency. One is simply to speculate on an increase in value.
“People sometimes think cryptocurrencies are the way of the future because they can be transferred so much quicker, so much cheaper,” saysSibenik. “You don’t have to wait a week to transfer funds to somewhere in Zimbabwe. It can happen in seconds.
That ease of trading means that changes in holdings can be made extremely fast, allowing a trader to take advantage of perceived shifts in market demands.
The second, and what Sibenik thinks is the most common reason to hold digital currency, is as a stored value. That sounds like a contradiction given the volatility in value but when you look at cryptocurrency as you would other non-custodial currencies, such as gold, it makes sense.
“People realize that over time government-backed currencies will lose money through the inflation of the money supply,” says Sibenik. “They see that as a form of taxation. By having a cryptocurrency, which has a fixed supply, that cannot be printed arbitrarily thereby decreasing the value, people see it as a better stored value.”
Another reason to hold virtual currencies is a choice to avoid the traditional banking system. That could be driven by wanting to hide assets or a distrust of the banking system that is heavily regulated and controlled by the government.
If cryptocurrency is so easy to hide and challenging to trace, then knowing if your STBX might be holding it, is your first research step.
Sibenik says the typical profile is younger people who are technologically savvy. You do have to be comfortable using a computer and the internet. Add to this, people who are more risk tolerant (because of the volatility). In the U.S. it trends more to white males under the age of 40. There are however countries where people don’t have access to a stable currency and there the profile is going to be very different.
To find out if your STBX has any cryptocurrency, Sibenik suggests starting with a generic conversation about digital currencies and what they think about it. They may volunteer what they are holding but they may also clam up. You’ll have to use your own detective skills to assess if they’re lying to you.
Ultimately, digital currency is like any other financial asset in divorce: it has to be disclosed.
Hunting down digital currency is like any other forensic investigation. It can get expensive. Before you start down that road, you want to have some real evidence or reason for believing your STBX is hiding something. You also want to have some idea of what it would be worth.
You can start your own research by looking at past credit card statements. According to Sibenik, people who use credit cards to buy cryptocurrencies tend to invest in smaller amounts, like under $1,000. Larger investments are made by wire transfer so that means going through bank statements.
Finding those unexplained or odd transactions gives you reason to move to the next step. Then you want to look at the timing of the transactions.
“Typically, the earlier someone invested in this asset class, like if they invested in 2013, their portfolio has likely increased considerably more than if they invested two or three years ago,” says Sibenik.
The novelty with cryptocurrency makes it mysterious and compared to other more traditional money instruments, it can appear hard to trace but that’s not true.
“It’s a common misconception that blockchains are difficult to trace,” says Sibenik. “It Is quite transparent but because it’s somewhat anonymous, people associate that with being untraceable.”
If you’ve established your STBX is holding virtual currency and its likely value is worth pursuing it further, then as part of your divorce case, your attorney can subpoena the exchange through which the purchases were made. The exchange is then required to handover trading deposits and transaction history.
Given how new these cryptocurrencies are and the required technical knowledge, your attorney may need to hire a forensic expert that specializes in this area, like Sibenik’s firm Cryptforsenic.
And while traditional money assets can disappear offshore, Sibenik says that people who want to fund their digital currency holding using U.S. dollars would typically use a U.S.-based exchange, Many other exchanges don’t accept U.S. dollar deposits. And the U.S.-based exchanges can’t just ignore subpoenas.
“The major exchanges want to work with regulators and they want to work with the legal system,” says Sibenik. “They don’t want to get in trouble. It’s in their best interest to comply. Potentially, the owners of these cryptocurrency exchanges can be banned from travel to the United States.”
The issues in dividing a holding in cryptocurrency in divorce are similar to dividing a 401(k) except that they are significantly compounded by the volatility of the asset class.
Agreeing on a stated dollar amount to be transferred to the other party, means the account holder is bearing all the investment risk. It means they are going to bear the downside and if the account value plunges below the agreed stated transfer amount, then the account holder would have to make up the shortfall from other assets.
Conversely, the account holder has all the upside benefit.
Sibenik argues that a fairer agreement is a percentage split. That may be but it doesn’t address what happens to the holding during the time from the date an agreement is made until the account is actually divided. You could be looking at a couple of months and up here. Does the account holder have the authority to make trades during this period? You could give them that authority assuming that you both have the same vested interest in preserving and benefiting from an increase in value. But what if your STBX is driven by revenge?
The other issue is whether you want to receive the value of the asset as digital currency or as U.S. dollars. The answer to that is all about your degree of comfort with digital currency and your own risk tolerance profile.
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