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Bitcoin Divorce and the New Digital Underground: What You Need to Know

Posted By Edwin Castellanos || 9-Aug-2014

Unfortunately, Bitcoin Divorce is quickly becoming the new reality attorneys and courts will have to deal with in California. Bitcoin is a new and recent type of “e-currency” that is sold online. It is a digital, decentralized currency that is not backed by governments or legal entities and not redeemable for any commodities. Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4 Hastings Sci. & Tech. L.J. 159 (2012). Users of Bitcoin enjoy the liquidity it offers online and low transaction costs as it is quickly transferable to users who want to send payments over the internet. The popularity of Bitcoin is evidenced by a growing number of websites that are beginning to accept Bitcoin payments in lieu of other forms of payment.

Bitcoin has become the leading digital currency in the world. Recently, California legalized digital currency with the passage of AB-129. Assem. Bill 129, 2013-2014 Reg. Sess. (Cal. 2014). A major concern regarding the use of Bitcoin is that because it is so easily and quickly transferable people may begin to use Bitcoins to hide assets, particularly in divorce cases.

AB-129 describes Bitcoin as transactions using two mathematically related keys online. One is the “private key” which is used the by the individual. The other key is made public. Individuals use their “private key” to approve Bitcoin transfers while the transaction is registered in a public ledger called the “block chain.” Bitcoin is a finite resource because there are only so many Bitcoin units for sale; the block chain ensures that Bitcoin hasn’t already been used. Since Bitcoin is exclusive to the internet and independent of corporations, banks and governments, transferring Bitcoins among users is nearly impossible to trace. Without a centralized authority, transfers between “online wallets” where Bitcoin currency is stored can be completed almost instantaneously to elude detection.

Although not completely anonymous, Bitcoin is somewhat like cash when it is received by one party because no third party exists between the parties that know their identities. However, a person’s IP address is recorded in the block chain ledger when making a transaction or exchanges dollars from Bitcoins. Even so, retrieving such information will be much harder than if it there was a government regulating the transactions that could quickly and easily reveal identities. Therefore, people converting their assets into digital currency such as Bitcoin can make it extremely difficult for spouses or others to trace or even know about its existence.

In the future, spouses who are filing for divorce may need to be mindful of the existence of Bitcoins, and the possibility that spouses may be converting significant amount of assets into Bitcoins prior to filing. In California, each spouse in a divorce is required to submit income and expense declarations as well as asset and debt disclosures. These forms ask for disclosures related to stocks, bonds, cash, autos, checking accounts, real estate, household items, jewelry and other assets. A spouse should technically be required to disclose Bitcoins as “other assets” on these forms. Among other things, clients should be mindful of a spouse’s dwindling bank accounts with no explanations of where the money went. Clients may also need to consider requesting a Court order discovery of digital assets or hire an expert that can trace online transactions.

Categories: Divorce, English