This blog is designed to provide a basic background to cryptocurrency and its application in divorce cases.
Before September 11, 2001, it was possible to hide money outside of the United States. Tax havens, like the Cayman Islands or Switzerland, provided strict bank secrecy laws that protected the identities of account holders with anonymous or numbered bank accounts. With limited international cooperation, tracing funds and account ownership was difficult. The terrorist attacks on September 11, 2001, changed it all.
Regulations like the USA Patriot Act and international cooperation overhauled the global financial market and made it difficult to hide money outside of the United States.
Today, an alternative to secret banking is Cryptocurrency. Much like Swiss bank accounts, the identity of a cryptocurrency holder is anonymous. Cryptocurrency accounts are not highly regulated, and the holder’s account is identified by a series of numbers and letters and is password protected. This secrecy practice comes with significant risks, dangers, and potential for fraud. Although potentially a very lucrative investment, with the recent increase in cryptocurrency values, recent fraudulent schemes have left many investors’ accounts empty. Indeed, some analysts have likened the risks and rewards of cryptocurrency with playing the slots at casinos.
Background of Cryptocurrency
Lehman Brothers was one of the largest investment banks in the United States. In September 2008, Lehman Brothers filed for bankruptcy. This sent shock waves in the finance industry and is believed to be the genesis to the birth of cryptocurrency.
On October 31, 2008, Satoshi Nakamoto (to date, there has been no confirmation whether Nakamoto is a single person or a group of people) published (on a website) the Bitcoin whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper outlined a system of sending funds to each other in peer-to-peer transactions (decentralized) through what is referred to as blockchain. This new mode of banking would allow an individual to send funds to another individual within minutes and without any paperwork or tracing in the traditional banking system.
In January 2009, Bitcoin was made available to the public and could be mined (the process of creating cryptocurrency). Nakamoto mined the first block of the Bitcoin blockchain, known as the “genesis block” or “block 0,” on January 3, 2009. This block contained the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” which is seen as a comment on the financial instability at the time. It is estimated that Nakamoto holds around 1 million bitcoins, which has a current market value of billions of dollars.
Nakamoto’s creation of Bitcoin has had a profound impact on the financial world, leading to the development of thousands of other cryptocurrencies, such as Ethereum (another Whitepaper issued by Vitalik Buterin in 2014) and the broader blockchain technology.
To date, there are over 2.2. billion available cryptocurrencies, but Bitcoin and Ethereum are the most common.
How do people buy Cryptocurrency
Buying cryptocurrency involves several steps. The first step is to get what is called an “address”, which is the owner’s unique alphanumeric code. This is like a bank account number. The address is automatically generated when a user creates an account. The unique address is used to send funds or to purchase cryptocurrency.
In the U.S., there are 4 different crypto storage options; (1) an exchange, (2) software wallet, (3) hardware wallet, and (4) paper wallet.
An exchange is a third-party website that helps with the buying and selling of cryptocurrency. Popular exchanges include Coinbase, Binance, Kraken, Robinhood and Bitfinex.
A software wallet is an application held on a computer or phone that can generate addresses for the user. A popular software wallet is Metamask.
A hardware wallet is an electronic device (similar to a thumb drive) that is password protected. This is the safest way to hold cryptocurrency because the information is on a USB drive that can safely be ejected from a computer. This keeps your information away from potential computer hackers. A popular hardware wallet is Trezor.
A paper wallet is a piece of paper where a user’s address is recorded. This is also another safe way to hold cryptocurrency. The only downside is that every time you want to access your funds you have to input the address.
After getting an address and deciding where to store your crypto, the next step is choosing a cryptocurrency. The two popular currencies are Bitcoin and Ethereum.
To buy cryptocurrency, you first initiate a request for a transaction using your phone or computer. Then, a group of computers called “miners” confirm that your transaction is valid, and you have funds. Once confirmed by the miners, then your transaction is posted to a blockchain. A blockchain is a public digital ledger that records a crypto transaction across many computers. Each block contains a list of transactions, a timestamp, and a reference (hash) to the previous block.
Some cryptocurrencies have a limited supply, like Bitcoin (BTC), which will only ever have a finite supply of 21 million coins. Other cryptocurrencies have a maximum supply but not a finite supply. Ether’s (ETH) supply, for example, is not hard-capped like Bitcoin, but the issuance of new coins was fixed at 1,600 ETH per day.
In the U.S., the most popular way to purchase Cryptocurrency is through an exchange such as Coinbase or Robinhood. Both Coinbase and Robinhood, while not regulated by the government, are legal entities in the United States. This is not always the case for cryptocurrency which is purchased outside of the United States.
Risks Associated with Cryptocurrency
Cryptocurrency carries several risks and dangers. First and foremost, cryptocurrency prices are highly volatile and can fluctuate dramatically in a short period, which can result in significant losses or gains.
Since the cryptocurrency market is less regulated than traditional financial markets, investor fraud, manipulation, and other illicit activities are very common. A popular manipulation technique is a pump-and-dump scheme, where the price of a cryptocurrency is artificially inflated and then sold off, leading to losses for other investors. Last year, NFL great Tom Brady lost millions in the collapse of cryptocurrency company FTX,
Cryptocurrencies are ALSO vulnerable to hacking, phishing, and other cyber-attacks. Exchanges and wallets can be compromised, leading to the theft of funds. Fake exchanges and accounts overseas are another common scheme. Cyber attackers create fake exchange platforms, attract investors, and demand ransom amounts after investors try to withdraw their funds. A recent scheme in Brazil demanded a daily fee of $50,000 or a one time withdrawal fee of $250,000 when an investor tried to withdraw his initial investment.
If you plan to invest in cryptocurrency, it is important to do the research and consult the appropriate experts before opening an account, particularly if the investment is outside of the United States.
Top 10 Nations with Cryptocurrency Holders – by % of Population
- United Arab Emirates -30.4%
- Vietnam – 21.2%
- United States- 15.6%
- Iran -13.5%
- Philippines – 13.4%
- Brazil- 12%
- Saudi Arabia – 11.4%
- Singapore – 11.1%
- Ukraine- 10.6%
- Venezuela – 10.3%
Hiding Marital Assets in Cryptocurrency
If you suspect that your spouse is hiding cryptocurrency, here are five (5) things to consider:
- First and foremost, get a copy of your tax return. If your spouse filed an accurate tax return, he or she would have reported the gains and losses from cryptocurrency on the tax return.
- Review your spouse’s bank statements. A bank statement will show any purchases or ACH withdrawals from an exchange.
- Take a look at a recent loan application or financial statement sent to a bank to see if he or she listed a crypto account as an asset.
- Look in your home office or the family safe for any indication of a paper wallet or hardware wallet. Many times, you can find a user “address” or login information written down on a calendar, notebook, or a piece of paper.
- Lastly, check to see if there is an application or website on a family computer or cell phone.
If you do happen to find an address for cryptocurrency, the address can be used to identify what cryptocurrency is held. For example, cryptocurrency held on an Ethereum blockchain starts with the letters “Ox.” Using the address, you can search the Ethereum blockchain at https://etherscan.io/, which may show the current balance and all historical transactions. By way of another example, Bitcoin blockchains can be searched on the Bitcoin blockchain at https://www.blockchain.com/explorer.
Cryptocurrency can complicate divorce proceedings due to its unique nature. Handling cryptocurrency in a divorce case requires careful consideration of its unique properties, legal implications, and potential challenges. Transparency, expert advice, and thorough documentation are essential to ensure a fair and equitable division of assets
Finding a divorce lawyer who understands cryptocurrency requires careful research and vetting. Reza Golesorkhi and the lawyers at Joseph, Greenwald & Laake, P.A. are equipped with the educational tools and expertise to handle the unique challenges of locating and dividing digital assets in a divorce.
