Husband hid $500,000 in bitcoins during divorce and got caught by cryptocurrency hunter (2023)

After several months of divorce proceedings, Sarita found it suspicious that her husband, who earned $3 million a year, did not have many assets. After spending half a year discovering and enlisting the help of a forensic accountant,a New York housewife finally located 12bitcoins- then worth half a million dollars - in a previously undisclosed crypto wallet.

Sarita, who has been married for a decade and asked to use a pseudonym to protect herself from retaliation, said she was surprised by her husband's investment in cryptocurrency.

“I know about bitcoin and things like that. I just didn't know much about him," Sarita said. "It didn't even occur to me because we didn't talk about it or invest together... It was definitely a shock."

The world of financial infidelity is getting more sophisticated as investors “hop” coins between blockchains and sink their money into Metaverse properties.NBC News poll foundthat 1 in 5 Americans have invested in, traded in, or used cryptocurrency, and men ages 18-49 make up the largest portion of any demographic.

CNBC spoke with divorce attorneys in Florida, New York, Texas, and California, blockchain forensic investigators, financial advisers, and spouses seeking virtual currencies or cryptocurrency owners. Most agree that the law has not kept up with all the new ways to monetize and protect digital assets, which exist largely outside the reach of centralized intermediaries like banks.

Matrimonial and family law attorney Kim Nutter said she first encountered crypto language in 2015, but the state of Florida, where her practice is based, recently added "cryptocurrency" to the standard request to submit documents, a part key to establishing a relationship. marital property during the discovery process.

"I really still think the law is trying to catch up with this new form of currency, even though it's been around for a long time," Nutter said.

"What I find in litigation is so new to all of us, even the most seasoned lawyers, unless you really do your best to study it, educate the court, know what to ask for, and find experts on the right, it's much more confusing. to me than other areas of the law that have been around much longer,” he said.

The search for hidden crypto caches during divorce has created a whole new category of investigative work. CNBC spoke to some of these cryptocurrency hunters and they said that while the blockchain is a public ledger, some spouses are very good at hiding their financial ways.

"If you have one spouse who is very tech-savvy and one who is not, it can be very easy to hide those assets," divorce attorney Kelly Burris told CNBC.

"The thing about cryptocurrencies is that they're not regulated by any central bank, so you can't normally subpoena someone and get documents and information related to someone else's cryptocurrency holdings," Burris said. She said that she sees clear cryptocurrency claims in discovery in 40% to 50% of her cases.

He An attorney in Austin, Texas told CNBC that the ideal way to obtain information about your spouse's cryptocurrency is to request that information from a centralized cryptocurrency exchange. Otherwise, the process often involves a forensic analysis of your computer or phone to identify the address of the wallet, followed by further analysis of the blockchain.

“Crypto asset forensics, cryptocurrency and blockchain forensics have become an essential part of our practice and by far the fastest growing part of our practice,” said New York researcher Nick Himonidis. .

Himonidis, who is also a licensed private investigator and computer forensics expert, estimates that 25% of his divorce cases involve some element of cryptocurrency. Some of these cases, he said, are simple and straightforward: situations where, for example, a cryptocurrency like bitcoin is a fiat asset held in a brokerage account or on a trading platform likecoin base.

“These companies keep records just like your broker at Morgan Stanley would keep records of their trades,” he said.

Other cases are what Himonidis describes as "a whole enchilada."

“They call us because they want us to be neutral cryptocurrency experts who will collect and account for the party's crypto assets and track down any undisclosed crypto assets that a party may have,” he said.

When Himonidis started looking at cryptocurrencies, it was about bitcoins,etherand some other currencies.CoinMarketCap now lists over 24,000 cryptocurrencies, with a total market capitalization of $1.1 trillion.

“You no longer have to worry about a few blockchains. There are hundreds of coins on their own little independent blockchains,” he said.

One of the basic assumptions of bitcoin is that your public ledger, where all token transactions in your history are stored, is visible to everyone. However, there is a subset of cryptocurrencies known as privacy tokens that have built-in anonymity features. Coins like monero, dash and zcash running on their own blockchains are practically dressing up all the details of the transaction, including the identity of the sender and recipient, as well as the amount of the transaction. Himonidis said it was "virtually impossible" to track and anonymize Monero transactions.

In one case, Himonidis found approximately $700,000 worth of coins in a MacBook that turned up in the discovery.

“We found something called a command line wallet for Monero,” Himonidis said, describing it as some kind of software wallet. "You cannot find it using Finder on your Mac. To access this wallet, you need to go to the command line: Bash shell command in a Mac environment."

Many researchers and lawyers told CNBC that they are always on the lookout for all kinds of cryptocurrencies, but privacy tokens in particular. Special attention is also paid to all kinds of hardware wallets or computing devices that can act as "cold storage" for cryptocurrencies.

People who own their own cryptocurrency can store it "hot", "cold", or some combination of the two. A hot wallet is connected to the internet and allows owners relatively easy access to their coins so they can spend their cryptocurrencies. The tradeoff for convenience is potential exposure to bad actors.—and a researcher who works for divorce lawyers.

With cold storage, private keys, or passwords to extract cryptocurrency from your wallet, are stored on devices, such as computers, that are not connected to the Internet. Devices the size of a flash drive, such as Trezor or Ledger, offer another way to cold protect cryptographic tokens by protecting both the crypto itself and the keys to access it.

Mark DiMichael, who has been doing forensic accounting for more than 14 years and is a certified cryptocurrency forensic scientist, described to CNBC a case where a divorced couple had a dispute over a password-protected Ledger device.

In the case, DiMichael said, the husband had a Ledger and then the wife found the device at home and took it with her. “So the wife had the Book, but she didn't know the PIN or the password. And the husband, he knew the PIN number, but he didn't have the Book."

Neither of them could access the funds without the cooperation of the other.

DiMichael, who said he has tracked millions of dollars worth of cryptocurrency since he began tracking digital assets in 2018, explained that when cryptocurrency is stored at low temperatures, it can be more difficult to intercept, but still traceable.

"If they're transacting on-chain and moving something to cold storage, it's still visible on the blockchain," he said.

DiMichael told CNBC that in a divorce case, if you can at least prove that the cryptocurrency is there, or that it wasn't sold, that's usually good enough for the judge. If his spouse bought 100 bitcoins forcoin base, for example, and then you transferred the coin from the exchange to the wallet, it is still there and fully visible on the blockchain. According to DiMichael, the court can then order other measures to recover these funds.

New York City divorce attorney Sandra Radna told CNBC that at the beginning of the case, when she serves the summons and petition for divorce, she also asks for security of the property, known as "automatic orders" in New York. York. At this point, the councilwoman said that she was highlighting the computer hard drives at her request to make sure nothing was damaged. This is crucial as researchers use these devices to determine where assets, both crypto and non-crypto, have gone.

"They're looking at your computer hard drive to find ticker symbols in emails so they can see what purchases have been made," the councilwoman said.

The councilwoman said she was also asking for information like her spouse's "public keys," which she described almost like a blockchain account number.

At the moment,much of the world workssomething called asymmetric cryptography where people use a private and public key pair to access things like email and crypto wallets. A private key is a secure code that gives the owner access to their crypto assets, while a public key is a unique wallet address. Thanks to the public key, you can find the complete history of every transaction made to or from this wallet.

"If you have this information, you'll be able to see every transaction they've made, and that's something that lawyers can find out because you don't provide a private number, a private key," the councilwoman said.

Bill Callahan of the Blockchain Intelligence Group said that with this wallet address, cryptocurrency hunters can tell a lawyer or prosecutor's investigator to go to a specific exchange to request more information.

“One of the things we are looking for is boarding and disembarking ramps. We want to see how the money ended up on the blockchain, where it might end up, and then where it will go,” Callahan said. He said the flow of funds could also show if something was intentionally hidden using an obfuscation technique, such as the use of a crypto asset mixer.

These so-called mixers are designed to cover the funds trail by mixing someone's tokens with a pool of other people's assets on the platform. They go beyond traditional cryptographic platforms by continuing to hide the identities of the people involved in the transactions.

"We can follow the flow after the proceedings are concluded to see if anything has been deliberately withheld," Callahan said. "Blockchain never forgets."

Himonidis said that, in one case, he had to track down around $2.3 million that was emptied from a Coinbase account within months of the start of the divorce proceedings. The cryptocurrencies were not paid for in fiat, but were instead transferred as cryptocurrency to addresses outside of Coinbase in a series of approximately 14 outgoing transfers.

“This all ended up in two or three different wallets at an exchange, a place like Coinbase, but in a foreign country that does not operate in the US and is not subject to US law or jurisdiction. Himonidis told CNBC.

DiMichael said that he encountered similar issues in cases where funds were transferred to a global Binance account and was therefore unable to subpoena the records as the funds were in an untouchable jurisdiction.

Asset tracking becomes especially tricky when investors start moving their tokens between blockchains.

DiMichael He said that "chain hopping," a person moving from one blockchain to another very quickly, is an increasingly common technique used to mislead researchers.

Blockchains have their own native tokens. For example, in the case of ethereum, the token is ether. The developers built cross-chain bridges to allow users to send tokens from one chain to another. Inter-network transfers of digital assets have helped expand the crypto market by giving people more ways to pay and transact. Cross-chain bridging is essential to the development of decentralized finance, or DeFi, a space that is a cryptocurrency alternative to the banking system.

But in the case of a divorce, these bridges make it difficult for investigators to follow the trail of the chips.

Take the crypto token in points, that's itit is trading at around $5.40and has a market valuation of more than $6.3 billion. Since the virtual currency is on its own blockchain, when someone wants to trade it, they have to "wrap" it to buy and sell on the Ethereum blockchain, Himonidis told CNBC. Wrapped tokens are tied to the value of the original coin, but are compatible with other blockchains.

“If we have to start tracking things like this, it becomes very complicated,” he said. Himonidis. “When they trade currencies, we are now jumping, literally jumping, on blockchains trying to track funds. It used to be complicated enough, and now it's gotten exponentially more complicated in the last year or two."

Himonidis said he and his company can track funds through blockchain with a tool previously only available to law enforcement, the Internal Revenue Service and financial institutions that need it for their know-your-customer functions and anti money laundering.

But even with the new search tools, Himonidis described his job as a literal race to keep up with the latest fast-moving cryptographic technologies.

"It's very suitable for people who have figured out how it works and understand what's going on there," Himonidis said. "It's a constant arms race."

DiMichael agrees, telling CNBC that it was "inevitable" that these types of obfuscation techniques would emerge given the amount of money in the crypto ecosystem, even in the midst of a shaky market.

"But it's still a complete shock to the so-called non-monetary spouses," DiMichael said.

Many centralized exchanges, such as Gemini, offer clients the option to stake their tokens in order to profit from digital assets that would otherwise lie dormant on the platform. With cryptocurrency staking, investors typically store their crypto assets with a blockchain validator that verifies the accuracy of transactions on the blockchain. Investors can receive additional crypto tokens as a reward for locking up these assets.

In one of their divorce cases, DiMichael said, the husband disclosed the cryptocurrencies he owned, but did not disclose the tokens that were staked.

"The ones that he bet, he didn't actually count in his numbers, so I found that out in the research process," DiMichael said. “Even though that cryptocurrency was no longer in his wallet, he still had rights to it.”

Even if both parties to a divorce are fully prepared for discovery, volatility in the crypto market can be a significant problem when lawyers try to value marital assets.

NodeBaron, a 36-year veteran and vascular surgical engineer who asked to be identified by his Twitter handle, said he liquidated about $5,000 of his dogecoin stake during his divorce. Six months later, his possessions would be worth close to a million dollars.

"The cost of getting divorced was almost like a million dollar decision," he said.

Divorce attorney Alexandra Mussallem said that because California, where her practice is based, is a community property state, she often advises her clients whether they should stay in the property in question, meaning take half of the property. joint in kind rather than seeking liquidation value.

“For volatile investments, the correct strategy for a spouse trying to build a stable asset base would be to look for a cash buy at the market value of cryptocurrencies,” Mussallem said, adding that this is a risk management issue.

She said that a spouse with a higher risk tolerance might want to cash out their partner and hold onto the crypto assets given the high volatility in the crypto market.

Burris, an attorney from Texas, said that in her first cryptocurrency case about five years ago, the husband wanted to buy his wife her cryptocurrency, which ultimately turned out to be a good decision for him, given the rapidly rising prices in the cryptocurrency market since 2020.

New York is an equitable distribution state, which means that the spouse receives 50% of the marital property accumulated during the marriage.

Radna, a New York divorce lawyer, told CNBC that digital assets can be taken in two ways.

“One way is to say what the value of that digital asset is today, and we'll split it up,” he said, calling the process analogous to inventory. "You can take a part of the shares or you can take their value."

The councilor said that in a rising market, spouses often choose to take the value of crypto assets.

The valuation and division of marital assets can become especially problematic when spouses diversify their cryptocurrency portfolios into metaverse real estate and non-fungible tokens, or NFTs. Despite the NFT markettotal loss of almost $2 billionas of the peak in 2021, there are still blue-chip franchises like Bored Ape Yacht Clubreserve price greater than $80,000.

"You've got the digital earth like NFTs, you've got the digital art like NFTs, you've got the metaverse digital apparel like NFTs," DiMichael said, adding that one of his clients sold $80 million worth of NFTs.

DiMichael, who first spoke to CNBC in 2022, said that if a spouse has multiple NFTs from a collection like Bored Ape Yacht Club or Crypto Punks, it could add several hundred thousand dollars to the marital estate.

“NFTs really drive me crazy. How do I find a real expert to value NFT, which is my duty in court? said Nutter, a Florida divorce attorney, referring to the Daubert Standard, a rule that governs the admissibility of expert testimony in court. "It takes more reviews, more articles, a lot more science and community buy-in, which is challenging when you have something particularly NFT-like."

"NFTs are kind of new and people know what they are, but finding someone with a level of experience who can rise to the challenge and listen to Daubert's court seems problematic for almost everyone," he said. "It doesn't matter which side of the coin you're on."

The councillor, who primarily handles divorce cases and has been in practice for 30 years, said that when she asks for discovery, she specifically looks for digital real estate assets in the metaverse.

"You don't think it's real, but they make real money off of it," the Councilor said. "They can pay someone to rent this digital property where they can have ads and a billboard, but that would be in the metaverse."

If a spouse owns digital property and receives rent on it, this would be income and count toward divorce, according to the councillor, who said 20% of his cases involved cryptocurrency in recent years.

"It's a whole new world and people should be aware of that," he added.

Certified financial planner and analyst Davon Barrett told CNBC that with a traditional asset class, he could give Fidelity a divorce settlement and the company would handle the division itself.

"But with cryptocurrency, it's a newer space," said Barrett, a senior adviser at Francis Financial in New York. "Sometimes it's harder to get customer support over the phone, so breaking away becomes a little trickier."

Tax implications are another important consideration when choosing how to distribute your crypto assets.

The IRS treats cryptocurrencies as property, which means that every time you spend, trade, or sell your tokens, you record a taxable event. There is always a difference between how much you paid for the underlying cryptocurrency and the market value at the time it was issued. This difference can give rise to the taxation of capital gains.

"There are people who bought bitcoins years ago, so their cost base was $10,000," Barrett said.

He gave a hypothetical situation where a client would potentially be smarter to keep $500,000 in cash, rather than bitcoin, for their spouse to keep the proceeds.

“The government may not have gotten it in the past, but Uncle Sam is really good at getting your money,” Barrett said.

"I think you're burying your head in the sand if you don't think that's something that's going to hold up here even during market downturns," the councilor said.

“Just like with any other asset, just like the stock market, there will be ups and downs. I think that people who are interested in digital assets will continue to be interested in digital assets,” he said. "When the market is down, that's when you go shopping."