Erica and Francis DeSouza were a wealthy San Francisco couple who decided to divorce. The negotiations revolved around the usual arguments about access to the children, who got the house and the pension, but also something more. Who has the crypto?
Theirs is believed to be the first “Bitcoin divorce” to include cryptocurrency in the financial arrangement. After three years of legal wrangling, a San Francisco court found Francis had failed to properly disclose the currency – which had exploded in value – and ordered him to pay Erica more than £5million.
This happened in 2013 and was questioned by family lawyers I say that bitcoin divorces are increasingly taking place here as well. The modern equivalent of stashing money in a mattress is most often a spouse (usually a man) trying to hide money in cryptocurrency accounts so they pay less to their partner.
This has led to a growing industry of financial forensic scientists charging hundreds of pounds an hour to track down digital coins like bitcoin and ethereum on behalf of wives or partners who aren’t convinced the numbers are right. Tens – if not hundreds – of millions of pounds have been uncovered in this way, found on crypto platforms partners had never heard of or hidden on hard drives.
Digital investigation firm CipherBlade has worked on nearly 150 crypto-related divorces over the past three years, said Paul Sibenik, a forensic analyst at the company. On multiple occasions, he has unearthed more than $10 million in cryptocurrency stashed by one spouse from another, and he won’t disclose how much he made for those discoveries.
“Crypto has the ability to be the new bank account in the Cayman Islands,” he said, adding that while it’s not “necessarily the intention” of crypto investors to hide their wealth, it certainly helps in divorce cases.
As people become familiar with using crypto to hide cash, others are becoming more sophisticated, making many small deposits into the crypto account over time to hide them from snooping lawyers or analysts. Some may even turn to “mixers” or “tumblers,” where a third party takes many crypto transactions, mixes them all together to disguise where they’re coming from, and then passes them to where they’re supposed to go, he told George Morris, a partner at Simmons & Simmons, a law firm.
Stephen Bence is the founder of financial forensics at the Vardags family law firm. Some of the people he catches aren’t as sophisticated as you might think.
“In one case, the husband denied having crypto, but we were able to prove that he did as he used his own name as a username in various coin chat rooms,” he said. “In another case, we discovered undisclosed transfers to a crypto exchange by searching his bank statements.”
In the UK, divorcing couples are expected to disclose all of their assets early in the process, which is easy to conceal as many judges don’t understand crypto properly. Laws about how owners must disclose them are not yet set in stone, adding to the confusion.
A woman going through a divorce spoke upI on condition of anonymity, said that this is the issue in her case, which has been going on for years and is costing an increasing amount due to the cost of trying to track down her husband’s crypto assets.
“The disclosure process can be influenced by parties who have something to hide because knowledge is completely asymmetric,” she said I. “The only person in the courtroom with knowledge is the one who owns the asset.”
She has some expertise in the world of finance and has done a lot of independent work – and provided a lot of money – to educate herself and her legal team on the matter.
“Family courts need help and we need to open dialogue and enable judges’ training,” she added. “If someone doesn’t have my background, there’s no chance they’ll come up with anything remotely close to a solution.”
Crypto is a useful tool for hiding money, which is why it is favored by criminal gangs and money launderers. It’s difficult to track down, stored anonymously on the blockchain — a digital database of the asset’s owners — and hidden in online wallets that are difficult to get hold of. It is nearly impossible to link a specific wallet to an individual without corroborating evidence. The lack of intermediaries in crypto transactions — unlike cash, which always involves banks — also means there are no paper trails.
Beth Sheridan, a 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 are nonsensical information pages”, full of strings and letters and numbers instead of names.
A recurring problem is that the nature of the asset makes it extremely difficult for lawyers to prove something exists without heavy footwork, says Emily Brand, partner and head of family at Boodle Hatfield, another law firm that focuses on wealthy clients.
She described a scenario where a spouse who was divorcing was a British non-Dom going on a luxury holiday abroad and was asked to explain how he funded the trips.
“Then it gets a bit tricky,” explained Brand. “One of the problems we have in court is that they are very busy and don’t like fishing expeditions,” or requests for additional documents that the court believes there isn’t enough evidence or time to look for . “Your client’s statement ‘We used to fly to Monaco by helicopter five times a year’ is not really good evidence.”
There are other wrinkles that have appeared more recently. Some affiliates who hid cash this way will have lost much of it as the price of Bitcoin has plummeted 68 percent and Ethereum by 70 percent over the past year.
The collapse of some exchanges – like the FTX, which fell spectacularly this month – has also raised a problem for some cases where their collective wealth was tied up in them. For some, like celebrity couple Tom Brady and Gisele Gisele Bundchen, there is a risk of losing millions — although in their case there is no evidence that crypto has been hidden.
Bence described just such a case, in which the bankrupt company’s amount was “in the millions” and throughout the trial it was in doubt “if it would ever be recovered.” It may be years before the process is resolved.
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 prone to being stolen by thieves, who are increasingly looking for them. According to Chainalysis, a blockchain data platform, around $14 billion (£11.7 billion) worth of cryptocurrencies were stolen worldwide in 2021.
In another case Bence was familiar with, tens of millions worth of Bitcoin were stolen on an external hard drive while the divorce was still ongoing. “The fortune in the case has halved overnight,” he explained, adding there was some chance it would be returned but wouldn’t say if it was hidden from one partner from the other.
Even with experts on hand, tracing assets can be like looking for a needle in a haystack, and there is increasing pressure from the courts to ensure the cost of the search is reasonable in relation to the value of the assets found.
Another problem is that the consequences for improper disclosure are “remarkably low,” Bence said. “Anyone caught can expect their newfound fortune to be shared in the pot, but they’re rarely actually punished.”
He has joined calls for family courts to do more to understand crypto and impose tougher sentences.
“Until the courts start making examples of criminals, secrecy is something of a one-way bet, and the relative ease of hiding crypto will only increase the number of those willing to risk their arm,” Bence added.
How to track your partner’s cryptocurrency
Under 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 issue different types of legal orders [a judgment made in court over who owns it] on crypto just like on a car or property,” he added.
He said I that there are a number of ways forensic accountants can determine if someone has secret crypto holdings.
Step number one is to ask, “Does it appear my partner is having a significant lifestyle change that is unexplainable?” From there you can add, “Does what you disclosed in court proceedings look very different, than I expected? Do you have reason to believe they have hidden assets?”
Other telltale signs may include:
- Transfers from a bank account to a well-known cryptocurrency exchange – “There’s always a fiat currency transaction somewhere,” Shah said.
- Crypto wallets or unknown accounts appearing on a device.
- Devices that look like USB sticks or hard drives used as “cold wallets” – a safer way to store cryptocurrencies.
- So-called “seed phrases” – 12 random words that can get you back into your wallet – or long strings of alphanumeric text that appear on note-taking apps or pieces of paper.
- Checking their recent search history for price updates or other crypto news.