Bitcoins and hiding wealth in divorce
Divorce ends the marriage but does nothing to end the financial arrangements between the parties. If the parties cannot agree these, and as part of court proceedings to determine who gets what, the parties have to provide full and frank disclosure to the other of their entire financial means. This procedure allows the parties to be open and transparent about the extent of the assets in the marriage. There could be a situation arising whereby a party seeks to hide their wealth but evidence provided with disclosure such as bank statements in paper form provides a paper trail and this makes for the hiding of cash movements very difficult. But what if that party holds Bitcoins or other crypto-currencies? The bitcoin is digital currency developed in 2009 and its features include;
- It is virtual and doesn’t exist in paper form.
- It is created electronically by “mining”.
- It is de-centralised in that it is not affiliated with any country, government or financial institution.
- It is held largely anonymously in a virtual wallet not linked to the holder’s identity.
- Its value is determined by means of supply and demand only.
These Bitcoins must be disclosed but what if they aren’t? Once disclosed, how do the parties agree their value?
There could be the temptation for the unscrupulous to hide wealth in Bitcoins as it presents as the ideal hi-tech equivalent of “hiding cash under the mattress”. Asking the right questions and seeking the right information from the onset though can reveal their existence for the Bitcoin is largely, but not entirely, anonymous. Every Bitcoin transaction is evidenced on a shared public ledger but users transact under pseudonyms called Bitcoin addresses. But once the identity behind the addresses is uncovered, perhaps with the use of the court’s powers and a cryptocurrency expert, it is possible to reveal the user and this, and their transaction history, can be traced. Hiding assets carries high risk. Non-disclosure in financial proceedings can amount to contempt of court and may also result in criminal proceedings e.g fraud. Further, where it can be shown cash has gone out of accounts (perhaps into Bitcoins) the offending party will be asked to explain away any “missing money”. If this results in a finding of dishonesty (and the Judge has a wide discretion to draw inferences from a party’s behaviour) this may result in the innocent party getting a greater share of the assets by way of compensation.
Once the bitcoin asset has been uncovered how, then, is it valued for the purpose of apportionment? Even more difficulties to overcome as the price of Bitcoin is not the same as its value. Price is determined by the market. It is simple supply and demand on its trading sites. Its value changes daily and could be wiped out overnight (think the Dutch trade in tulip bulbs in the 17th Century or the boom and fall in the dot.com industry). The non-owning party may want a liquid cash asset in settlement and not a share of a speculative investment which affords limited spending power (Bitcoins cannot be used as a deposit on a home or pay off a debt). Bitcoin mining is limited and will cease when their number reaches 21 million and it is a complete unknown as to how this will impact on its value long term. Whether it is a sound investment or not the Bitcoin is likely to be around for a good while yet and will feature more and more in divorces.
For further advice please contact; Pauline O’Rourke, senior associate and family law specialist, on 0121 624 4000 or email email@example.com