Couples Fight Over Cryptocurrency In Divorces

The divorce process dragged on for eight years, almost as long as the marriage lasted. The wealthy San Francisco couple fought over custody of their children, splitting the profits from the sale of her husband’s software company, and controlling their $3.6 million home.

But the most important legal battle between Erica and Francis deSouza involved a bitter dispute over millions of dollars worth of missing bitcoins.

Francis DeSouza, a technology executive, had bought just over 1,000 bitcoins shortly before splitting with his wife in 2013, and lost nearly half of those funds when a prominent cryptocurrency exchange went bankrupt.

After three years of legal wrangling, a San Francisco appeals court ruled in 2020 that he had not properly disclosed some elements of his cryptocurrency investments, whose value had soared. The court ordered him to hand over more than $6 million of his bitcoin balance to Erica deSouza.

In legal circles, the deSouza case has become known as perhaps bitcoin’s first major divorce. Marital disputes like this are becoming more and more common. As cryptocurrencies gain more widespread acceptance, the division of family reserves has become a major cause of dispute, and dissolving couples exchange accusations of cheating and financial mismanagement.

A hostile divorce tends to generate disputes over virtually everything. But the difficulty of tracking and valuing cryptocurrencies, a digital asset only traded on decentralized networks, is creating new headaches. In many cases, divorce lawyers say, spouses report cryptocurrency values ​​lower than they actually hold, or try to hide funds in online wallets that can be difficult to access.

“Originally the money was hidden under the mattress, then came the bank account in the Cayman Islands,” said Jacqueline Newman, a New York divorce attorney who works with high-net-worth clients. “Now it’s cryptocurrencies.”

The rise of cryptocurrencies offers a useful medium of exchange for criminals, creating new opportunities for fraud. But digital assets are not impossible to find. Transactions are recorded on public ledgers known as blockchains, which allows skilled analysts to track the money.

In interviews, nearly a dozen lawyers and forensic experts have described divorce cases in which one spouse — usually the husband — has been accused of lying about cryptocurrency transactions or hiding digital assets. None of the couples involved wanted to be interviewed. But some of the divorces left trails of documents that illuminate how those disputes played out.

The deSouzas were married in September 2001. That same year, Francis deSouza founded an instant messaging company, IMlogic, which he later sold in a transaction that netted him more than $10 million, according to court records.

Francis DeSouza’s investments in cryptocurrencies date back to April 2013, when he met in Los Angeles with Wences Casares, one of the first entrepreneurs in the cryptocurrency field, who convinced him to invest in digital assets. That month, he acquired $150K worth of bitcoins.

The deSouzas split later the same year, and Francis deSouza revealed shortly afterwards that he owned the bitcoins. By the time the couple was ready to split their assets in 2017, the value of that investment had soared to over $21 million.

But there was a problem. In December of that year, Francis deSouza revealed that he had left just over half of the amount deposited in a cryptocurrency exchange, Mt. Gox, which went bankrupt in 2014, and that because of that, the money was no longer within his reach.

In court documents, Erica DeSouza’s lawyers said it was “outrageous” that her husband had not mentioned earlier that such a large portion of the bitcoins had disappeared, and argued that his secrecy in managing that investment had cost him millions of dollars. couple. Lawyers also speculated that he may have been withholding additional funds.

“Francis was less than candid in his ever-changing stories of what happened,” his wife’s lawyers said in a petition.

No hidden money was found. A representative for Francis deSouza said he had fully disclosed his positions on cryptocurrencies at the start of the divorce. “As soon as Francis learned that bitcoin was held up in the Mt. Gox bankruptcy, he informed his ex-wife,” the rep said. “If the bankruptcy of Mt. Gox had not occurred, the cryptocurrency split would have taken place without any controversy.”

Erica deSouza, through her attorney, declined to comment.

But the appeals court ruled that deSouza, 51, now chief executive of Illumina, a biotechnology company, had violated divorce procedural rules by failing to keep his wife fully informed about his bitcoin investments.

The court ordered him to transfer to Erica deSouza about half of the bitcoins he held before Mt. Gox’s bankruptcy, which would reduce his position to 57 bitcoins, the equivalent of $2.5 million, at the current price. The bitcoins transferred to Erica deSouza are worth more than US$2 million.

Not all divorces involving cryptocurrencies include such high amounts. A few years ago, Nick Himonidis, a forensic expert in New York, worked on a divorce case in which a woman accused her husband of under-reporting his cryptocurrency investments. With court permission, Himonidis went to her husband’s house and searched his laptop. In it, he found a digital wallet that contained around $700K worth of Monero cryptocurrency.

“He said something like, ‘Oh, that wallet? I didn’t even remember I had it,'” recalled Himonidis. “And I’m like, ‘You’re serious, boy’.”

In another case, Himonidis said, he discovered that a husband had transferred $2 million worth of cryptocurrency from his account on the Coinbase exchange, a platform where people buy, sell and hold cryptocurrency deposits. A week after his wife filed for divorce, he transferred the money to digital wallets and left the United States.

A court can order a cryptocurrency exchange to transfer funds. But the online wallets in which many investors store their cryptocurrencies are not subject to any centralized control; access requires a unique password created by the wallet owner. Without this digital key, the ex-husband’s funds would effectively be beyond his ex-wife’s reach.

In some divorces, the cryptocurrency pile proves to be tiny or even non-existent. Several lawyers have described cases in which a spouse’s suspicions were unfounded. But all too often, said Kelly Burris, a divorce attorney in Austin, Texas, who usually represents husbands, men come to her office and reveal detailed plans for hiding cryptocurrencies.

“The weird thing is that a lot of them aren’t creative at all,” Burris said. “They say things like ‘I’m going to transfer everything to my brother for $1’ or something, and I have to explain that they can’t do that.”

Burris is a frequent presence on the divorce industry lecture circuit, and often talks about the challenges of tracking digital assets. In some cases, she said, her male clients have proposed slightly more sophisticated scams, such as using an ATM that transacts in cryptocurrencies to purchase bitcoins for cash.

“They figure there’s no way their women can track that,” Burris said. “There’s no way for them to get access.”

Translation by Paulo Migliacci