Could a divorcee hide their assets by squirrelling them away in bitcoin? A rogue poster on the Bitcoin Talk Forum raised the issue this week, so CoinDesk asked some lawyers.
According to the user on Bitcoin Talk, a man discovered that his wife cheated on him and decided to divorce her. However, before he did, he spent several weeks moving a large percentage of his assets into bitcoins, in an attempt to shield the assets. The post continues, saying:
"He just sprung the divorce on his ex-wife and now her lawyer is arguing he must have much more money than he claims to be. The judge ordered he must turn over all his assets to give one half to his ex-wife. Does the court have right of access to his bitcoin wallet?"
Commenters queried the validity of the original poster's claim, based on her stated age and some of the claims made. And she subsequently replied to CoinDesk:
"Sorry to disappoint you, my post was a forum troll, like all my other posts in this forum."
"But I am sure the same story has happened, or will happen in the near future."
The debate on the forum was a heated one. The concept is clearly interesting, so CoinDesk took up the hypothetical issue with some attorneys.
Disclosure and enforcement
There are two separate questions here: firstly, should parties in a divorce be made to declare bitcoin assets, and secondly, if they are, then could they illicitly hide them and be free from enforcement? After all, bitcoin is supposed to be a way of storing value anonymously (if a person knows what they are doing).
It's difficult to find a family lawyer specializing in bitcoin. Neither they nor a divorce court judge are likely to get the intricacies, said Greg Broiles, an attorney specializing in estate planning, trust and probate, who spoke on bitcoin and taxation at Bitcoin 2013:
"They're not likely to understand the technical nuances, but I think they'll understand that value exists, and has been hidden."
He went on the say that family law courts are inherently practical.
Typically, parties in a divorce ask for disclosure of assets, and are expected to divulge their holdings honestly. Bitcoins would likely be eligible for disclosure, says Stuart Hoegner, a gaming lawyer with expertise in bitcoin, and general counsel for Canada's Bitcoin Alliance.
Much depends on the jurisdiction in which the case plays out, however. Some US states carry a community property rule, where only assets acquired during a marriage are to be divided, while property owned before a marriage is considered an individual's own.
The question, then, is whether someone in a divorce case would be able to hide their coins effectively (if illegally) from a soon-to-be ex-spouse?
Hiding money is nothing new, points out Hoegner:
"People have been burying money under rocks, putting money into safety deposit boxes, giving money to friends to hold on to, and saying that they have been gambling money away for a long time. I see bitcoin as an extension of those."
If a counterparty's lawyer believes that a disclosure is false, they will attempt to trace any extra funds, generally by demanding bank statements.
"We'd go back and look at the statements and then say 'here's where you transferred some money to Mt. Gox or Coinbase'," said Broiles. If the exchange had a US presence, they could demand records from that business.
One of the appealing things about bitcoin is its ability to quickly transfer funds to a destination out of US jurisdiction. That makes it difficult to retrieve those funds. A friend or other institution holding the funds outside the country would be harder to get the money back from.
In any case, it would be difficult to prove just who owned that money, after it was sent from a person's bitcoin wallet to another address. Sometimes, judges will jail parties in a divorce suit until the money comes back, or until it can be proven that they have no control over that money.
That could backfire on anyone trying to hide assets from their spouse by transferring them to bitcoins. Broiles went on to say:
"It's difficult to prove that someone has control of it. It's also difficult to prove that someone doesn't have control of it. I don't think it's a great approach."
In general, it's inadvisable to be dishonest with anyone in a divorce case (or anywhere else). Trying to squirrel away assets by hiding them in a virtual currency leaves people at risk of a perjury charge.
But even though this incident was little more than fictional fun from an online troll, we can expect to see real cases, warns Hoegner:
"We are going to have family law issues that crop up. We're going to have estate issues, and people dying with substantial amounts of bitcoins. The question becomes, are they disposed of through the estate, or in another manner?"
In many countries, it isn't yet clear whether bitcoin is a currency, a commodity, or another asset.
Updated: A day after this story was written, we found this gem, in which a company's discovery request explicitly included bitcoin. Clearly, it is starting to appear on litigators' radar.