While divorce is nothing new, crypto is. Indeed, bitcoin and other “21st Century currencies” have little precedent in official proceedings; creating a 21st Century divorcee headache, according to separation experts.
By way of background, across Europe, Canada and nine U.S. states, non-inherited assets acquired during a marriage are typically split 50:50 – regardless of who earnt them. According to U.S. lawyer Pamela Morgan, crypto is broadly classified as "property." In this category, half of the assets' agreed value goes to each party.
However, simple as that may sound, adding crypto to the mix brings unique obstacles to a divorce settlement; including judges’ difficulties in tracing and accessing the assets. Two lawyers describe some of the novelties they are facing with clients in the emotional context of divorce.
The key issue is that crypto can be stored anonymously and outside the remit of a judge.
With traditional assets, a judge can subpoena the given bank or brokerage account where the fiat or shares are stored if a spouse does not cooperate. But with crypto, a judge’s powers are limited as the assets can be stored offline or with a foreign third party.
“You might want to subpoena the exchange, but if it’s registered in the British virgin islands for instance, you’d have to hire an attorney in the relevant jurisdictions. So that becomes a lot more expensive,” says Joseph Neudorfer, a civil litigation attorney based in Montreal.
He summarised that the lack of transparency around crypto means the “other side [is left] with very few options.” He added that while it wouldn’t be impossible for a judge to order the seizure of a phone where a crypto wallet was stored, for instance, that would just be the beginning.
“You still need the password. And then you need someone who understands all the jibberish…There’s very few lawyers attuned to it.”
This complication recently made its way to the Ontario Superior Court of Justice. In February, a judge had to determine whether a trader should provide documents relating to his crypto investments and holdings to his former partner to consider the size of his child support contributions. The applicant believed that her former partner owned crypto valued “at about [CAD] $10 million” and accused her former partner of failing “to provide actual evidence of the value of this investment.”
This is common Morgan says, reporting that one part of a couple usually thinks the other is hiding assets. Ultimately, the underlying issue is a spouse may not know what assets their former partner has – or be able to prove it.
In this case, the court settled on asking for redacted documents to assess the size of the party’s assets, setting a precedent about where to draw the line between privacy, state seizure, and spousal rights.[related id="1"]
An expensive novelty
Morgan also notes that even when the divorce settlement is transparent, it may call for specialised counsel and expertise. This is particularly important if the couple chooses to share the crypto rather than liquidate it and share the returns, as there are tax implications (variable by jurisdiction).
“You have to get accountant who understands crypto because to an outsider it will look taxable,” Morgan notes, highlighting that it must be registered as a ‘transfer of assets’ and not a sale.
Advisors might also be needed if the other partner does not know how to set up a crypto wallet and other technicalities to ensure they get the assets.
“When they split it up, they don’t want to have to go their ex [for help],” she jokes. There may also be privacy issues to consider. Or, if the crypto was cashed out before the marital breakdown, any gains made on it would also be potentially divisible.
In short, all this specialised help adds up to unforeseen, added costs.
Another issue is that the Courts are using existing legislation for a rather new asset, which may require fresh guidelines.
“There’s not a lot of new legislation, so the existing legislation is adapted to it,” says Neudorfer. “The issue then is how do you monitor it and enforce it.”
He added that it was “inevitable there’ll be more case law” judgements like the one in Ontario that will have to deliver lengthy legal settlements as bitcoin turns 10. The bear run might also mean crypto becomes an increasingly common point of contention as its value increases, Morgan predicts.
Of course, there are infinite variations to how divorce proceedings can go. It depends on the jurisdiction of any given state, prenups, the individuals involved, their relationship, and so on. But in general, crypto is introducing new rules for couples and lawyers alike.
“A lot of times you feel like you’re doing completely new stuff,” says Morgan.
For now, it’s likely the wedding vows will remain “for richer or for poorer.” But for the 40% of first marriages that end in divorce in the U.S., an understanding of what happens when you put crypto in the mix may be worthwhile.