Discovering Digital “Dollars” in Divorce, Part 1

For as long as there has been money, people have come up with creative ways of hiding it from others.  As one could imagine, there have been more than a few instances of a divorcing spouse concocting an imaginative scheme to hide or disguise assets that are subject to division in a divorce proceeding.  Historically, these scheming spouses resorted to hiding assets in offshore accounts in Switzerland and the Grand Cayman Islands or literally stuffing cash under a mattress.

These days, elevating one’s mattress with cash or taking a “ski trip” to the Alps are not the only ways spouses seek to hide assets in divorces; the age of “virtual currency” is upon us, and opportunistic spouses may think these new currencies will be the best way to maintain their hidden assets since the Swiss Banking Law of 1934.

By now, many of you have heard of Bitcoin, the first and most famous of the virtual or “crypto” currencies, which has experienced meteoric rises and precipitous drops in market value even within the past year.  Here is a basic overview of this complex and relatively new form of currency:

  • Bitcoin, first introduced in 2009, is just one example of a virtual currency and exists as a version of “electronic cash” to purchase goods or transfer money. The exchange of the virtual currency allows for peer-to-peer online payments or digital cash to be sent directly from one party to another (whether individuals or business entities) without the transaction going through a traditional banking institution.
  • A Bitcoin user stores the currency in a “digital wallet” on the cloud or on the user’s computer. The digital wallet is akin to a virtual bank account, complete with a wallet ID.
  • Each bitcoin transaction is recorded in an online public log. However, the names of those involved in the transaction are not revealed on the log, just their wallet ID.  This relative transactional anonymity is just one of the reasons for the popularity of virtual currency, though some argue that it can encourage illicit activity and transactions.
  • Small businesses can opt to accept virtual currency as payment, in part, to avoid having to incur transactional credit card fees associated with traditional banks. If a party in a divorce has a small business, it is important to find out whether the business has used virtual currency in its transactions.
  • Bitcoins and other virtual currencies can be purchased and sold, similar to stocks and other investment assets. There are specific marketplaces called “exchanges” which allow for market trading of bitcoins and other virtual currencies.  One prominent market exchange is called Coinbase. These marketplaces often have phone apps that allow for mobile trading.
  • For reference of the scale of Bitcoin, there are currently approximately 17.7 Million bitcoins in circulation, with a current market capitalization of $141 Billion.
  • As with other more traditional investments (i.e. stocks), the market for Bitcoin and other virtual currencies is subject to market volatility and large swings in price. As of today’s date, a single bitcoin is worth approximately $8,000, though it has previously been as high as roughly $20,000 per bitcoin.  As recently as six months ago, one bitcoin was worth around $3,000. The occasionally lengthy duration of a divorce proceeding makes these sudden market shifts all the more noteworthy, as fluctuations in virtual currency market values can cause the overall value of the marital estate to fluctuate immensely during the pendency of the divorce.

This new form of currency has added an interesting layer to the equitable division of assets in the context of a divorce. First, should virtual currency be considered an asset that needs to be disclosed by the divorcing party who owns it? You bet your wrinkly, old paper dollar that virtual currency is considered an asset subject to division; and yes, it does need to be disclosed as an asset in any divorce action (whether contested or uncontested). Failure to disclose assets during the divorce can result in forfeiture of that asset to the other spouse and other consequences.

That said, the mere disclosure (or suspicion) that the other spouse has some bitcoins in a virtual piggy bank is only the tip of the iceberg. In Part 2 of this topic, we will explore some of the discovery tools to use in a divorce proceeding to better understand a divorcing spouse’s virtual currency activity and portfolio.  Stay tuned…