In Illinois, incident to resolving a divorce case, all assets and liabilities are required to be identified, valued, and allocated between the parties equitably. Although often resulting in a 50/50 division of marital assets, “equitable” does not necessarily mean “equal.” Prior to either reaching an agreed upon division of assets, or proceeding to trial on the issues of property division, all assets must first be identified and then where possible, valued. With the rise of the digital age, issues of valuation have expanded to the world of cryptocurrencies such as Bitcoin. Valuation, however, is not the only issue involving bitcoin and divorce. Today, divorcing parties and their attorneys must be diligent in approaching bitcoin (and all other cryptocurrencies for that matter) during divorce.
While identification of the existence of bitcoin or other cryptocurrency is the starting place, one must first understand what bitcoin is. Bitcoin is an electronic currency that allows users to transfer funds directly to one another through a peer-to-peer system without the need for a middle man, like a bank or Western Union. As set forth in the Wall Street Journal,
“Bitcoin, despite its name, isn’t money. It does not have governmental backing. According to the Journal, its extreme price volatility significantly diminishes its usefulness as a reliable unit of account or effective means of payments. Bitcoin might, however, serve as a sustainable store of value, like gold.”
If Bitcoin is not money, then why is there so much emphasis on its identification and valuation in divorce?
Michael Leon, a financial and cryptocurrency expert with Athena Investor Services stated:
“For divorcing couples, there are two main challenges in dealing with a spouse that might have purchased bitcoin or other cryptocurrencies. The first is dealing with a spouse who is determined to use bitcoin to hide assets, much the same way as a spouse might have used an overseas bank account to hide assets in divorce years ago.”
The issues of identification of assets, particularly ones contained solely in a digital platform, require additional detail and attention by divorce attorneys. Because there are no middle men required (like a bank, government entity, or wire transfer facility) in the transfer and use of bitcoin, obtaining a paper trail can be difficult. Unlike transfers in and out of a bank account for which one can request copies of statements, bitcoin transfers occur primarily via the web or in cash. Further, the peer-to-peer trading concept of bitcoin, although easy for the user, proves extremely difficult for purposes of identification. Regardless, there a few necessary steps divorce attorneys can take when dealing with bitcoin. First, attorneys should be sure to include in their standard discovery a request for all information regarding bitcoin and cryptocurrency in general. Further, attorneys should seek to identify large, unexplained cash withdrawals and entries showing “localbitcoins.com” or other peer-to-peer sites which may explain the purchase, transfer or sale of bitcoin in their discovery requests. Inquiring about unexplained outgoing wire transfers should be made.
Bitcoin can be owned individually or through an exchange and can be bought and sold person to person or through an exchange. Perhaps a records subpoena should issue to one or more exchanges that trade bitcoins. Also, government regulations are in their beginning stages. The IRS is now looking at gains on the sale of bit coins as a reportable taxable event, which would provide another avenue for discovery.
The second primary issue related to bitcoin and divorce is the market volatility. As discussed above, valuation of assets is a key component to resolving a divorce. Because of the extreme price volatility of the cryptocurrency market, valuation of said asset may prove difficult. According to Michael Leon:
“The price of bitcoin went from $1800 in August of 2017 to $19,000 in December 2017, which is a move of over 1,000%. Then, from the time period of January 2018 to February 2018, the price of bitcoin went from $19,000 to $11,000.”
In order to effectively deal with the change in price through a volatile market, divorce attorneys must be diligent and ask the right questions regarding the acquisition of bitcoin, the activity and transfer of bitcoin, and fluctuation of price of bitcoin throughout the divorce. Is valuation of bitcoin like trying to catch a falling knife when its price is dropping? Perhaps. In cases where there is extreme volatility, a division in kind may make the most sense.
Ultimately, the rise in the digital age poses additional challenges to resolving divorce cases. In order to promote an equitable division of the marital estate, divorce attorneys should take necessary measures through specific discovery to ensure protection for the non-cryptocurrency holding spouse.