This week Brian sits down with Andrew Speer, an Associate Attorney at Walters Gilbreath, PLLC in Dallas, to discuss a hot-button topic: how cryptocurrencies are dealt with in a divorce. Listen as Andrew explains what exactly a cryptocurrency is, how courts typically view them when dividing up assets, and some tips for handling cryptocurrency if you're going through a divorce.
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Dealing with Cryptocurrency in a Divorce (feat. Andrew Speer)
Brian: Hi, this is Brian Walters. I'm here with Andrew Speer from our Dallas office and we're going to talk about something that's been in the news a lot, especially recently, which are cryptocurrencies. Andrew, do you want to just introduce yourself for a moment and then we'll get into this interesting topic?
Andrew: Absolutely. My name's Andrew Speer, as Brian said I'm up here in the Dallas office. I went to law school at SMU, graduating in 2015. Before that I did my undergrad at UC San Diego. I clerked at a family law firm for two years in law school and I've been practicing ever since, I guess the last five years, six years.
Brian: Okay, so let's back up. What is a currency? So back in the caveman days if you wanted a leg of a prehistoric bison you might go to the next cave and say, all right, I want some bison and they say okay, we need some apples. So you go get us a bushel of apples.
If you want to make that trade, you had to go find a bunch of freaking apples, find a bushel and drag them over to these folks and then hope they still wanted to make that deal or the bison hasn’t gone bad.
For better or worse, when our societies became more organized governments began creating, well actually not just governments, but generally that's the case, began creating currencies, which is a method of exchange. So if I wanted to buy some leg, rather than having to go get apples I could hand them a hundred dollars or seashells or pieces of wood or whatever the currency was.
Initially that tended to be very simple things. Pieces of seashells was actually an example of a former currency. Then as societies got further organized, they started to have currency like coins and eventually paper money. So generally for a long period of time, if anybody was going to believe that this currency or money was worth anything, it had to be backed by something of tangible value, silver or gold for example. You can actually trace the decline of the Roman empire by the percentage of silver in their currency, basically as their society declined they went from a hundred percent silver in their coins down to 10% by the end.
The most advanced societies, such as ours in the United States, have stopped using gold or silver to back their currencies quite a time ago. Now we just have these pieces of paper that we pass back and forth, or actually pieces of linen, but they're pieces of something that if I took that and said “wait a second, I want something real for this.” And I went over to the federal government, they’d look at me funny and say you have it in your hand.
The problem with that is similar to the Roman empire, where governments can play games with that. I lived in West Germany as a kid growing up for a little bit and I wandered through a flea market at one point and saw an old piece of German paper currency. that was for 1 trillion Reichsmark dated 1932. I thought that's really bizarre and sure enough, the German government long story short, had a lot of bad consequences as a result. It started just printing money on a printing press because they couldn't meet their obligations and the more money they printed, the less each one became worth and they eventually essentially destroyed the economy.
That's a problem. So, tell us a little bit about how cryptocurrencies came to be and what problem they were attempting to address.
Andrew: It depends on the currency, but let's talk Bitcoin, right? Bitcoin's the big one. Bitcoin has a finite number of units. Right now you have miners. They essentially are verifying transactions and getting paid a fee, but no matter what, there can never be more than a certain number of them. So the inflation rate there is very low. Eventually one day it will be treated like gold.
There's a finite number of it and that scarcity is what makes it important. Then with that scarcity in the same way you can smelt gold into smaller units, you can do that with Bitcoin. So with Bitcoin, they're named after the founder Satoshi, so you get smaller units called Toshi, but that's getting off topic. There’s scarcity. There's a finite number of them with.
Brian: So, is this something the government has put together?
Andrew: No.
Brian: Okay. So for the first time in a really long time, we have something other than a government creating a currency, is that right?
Andrew: And they don't even know who really did it. He's this phantom author. There's been multiple people claiming to be the author, but none of them can ever back it up.
Brian: So just at a really basic level, because I don't understand it very well, can I go to a bank or to a building and get a physical “something”?
Andrew: No, not really. So thinking about your dollar bill, right? It has a serial number on it. Each dollar bill is actually unique, right? Now, if you were to make that digital, what's the problem you run into? You can copy it. I could photocopy that same dollar bill and give it to everyone and then I've just destroyed it's worth.
What they do with Bitcoin is they have that unique identifier, but it's secret and it changes each time it changes hands so you can't copy it, and that's called a private key. Then you have your public key, your public addresses, where you receive a debt.
Now that private key, right? It's called a paper wallet. You could write that down on paper or have it printed out, and then you could exchange that, but that's not a very good way to do it. I wouldn't recommend anyone do that. Some people carve it into steel or they have all these different unique “paper” wallets that aren't even made out of paper, but you can't go to a bank and walk out with Bitcoin because the second anyone takes a picture of it they could steal it. That's the issue.
Brian: So if there's a finite number, let's just say there's a million Bitcoins. Sure. If I'm mining it, which I understand involves computers. How can I mine something that's finite?
Andrew: Oh, it's baked into the cost. So first there's going to be like a transaction fee essentially, but every mine Mine operator what they're really doing is confirming the transaction. Let's say, I send you a private key. They confirm that, and they confirm it all the way back to the original one, because what you're doing is you're splitting them. That's the chain and you confirm it in a block. That's why they call it blockchain.
So you're confirming it after that. Once we're done with the actual mining part of, it's called proof of work algorithm, then you're just paying a fee and it's going to be baked into your transaction, so when I transfer it to you, I'm going to lose a certain amount to the guy who's verifying.
Brian: Let me back up and say, this is in some way a competitor to our government who has a monopoly on the creation of money, or at least certain types of money currencies. What is to stop the government or some government from saying “Nope, they're illegal. We're going to confiscate them and give them all to me. Or they're worthless.” What would stop that from happening?
Andrew: First they have to find it. So there's some currencies there called privacy coins. Not all of them are really, truly private, but some of them have multiple, they call them rings. So there's multiple codes, multiple keys. One of the keys will tell you the amount you're sending and one will say who it's going to, and then you have to be able to decipher those. So it's very difficult for the government to decipher that.
They have entire networks built and the government actually tries to ban those. One of them is Minero and they haven't been very successful at that because I can just send it straight to you. I don't need the government. I can just enter your information and as long as that network is up and running somewhere in the world and my internet connection can connect to it they can't do anything.
Brian: Now let's talk about why we're discussing this on a family law podcast. People buy and sell cryptocurrencies, correct? So in a divorce the value or existence of that cryptocurrency is important to determine, correct?
Because it's complex, as we've been discussing, valuing it can be difficult to do or difficult to do properly. Am I correct? Okay. And so what are some examples of are just an example of a problem that might occur on either side, to either the person who owns it or the person who doesn't own it?
Andrew: The first mistake is when people use cash values. That's mistake one that everyone needs to stop doing. You need to treat it as if it's a stock and you're trading shares. You need to do units when you're dividing, because one they're all over the place. You don't know how else you're going to divide it besides sending units. You want me to send you $20,000? What's it worth today? What's it worth tomorrow?
Another problem people have is if, when they make trades, or they buy or sell, if they don't keep a record of it, because that record is much like tracing any other property. I can follow everything back, but I need to prove I started at step one. So, there's something everyone should keep their public addresses, keep track of them.
Other mistakes people make, forgetting their passwords is a big one, especially if you have what's called a hardware wallet. It looks like a USB key that has a little password on it. If you forget that on a lot of them on your third try it's going to wipe the whole thing. What do you do if that happens? You need what's called a seed key and a seed key is 24 words. That's really what your public address is. That one key can have multiple things and I can enter that into a new one and all of my coins will reappear there, but everyone loses that when they lose the seed key and they lose the password. That's when you end up with these stories in the news of someone losing $70 million. So if a party has cryptocurrency and they lose both of those there's literally no way to get it back.
Brian: So there could be two problems here that I see. For example, I read in the newspaper last week that there's a German guy who lives in San Francisco who can't find the key and their codes are for $252 million of this. So that's a problem. So one problem could be that you were the investor but you legitimately lost those Information keys and you lost therefore your cryptocurrency, but your spouse is saying “Oh no, you have it. You have it. You're just pretending to not do it.” Then you get stuck with something you don't own and your spouse gets the big windfall.
That's one problem, correct? They could reconstitute it.
Then the second problem, I think probably much more common would be the one spouse who does not understand this, or even know what's going on or, or have any sense of it goes into a divorce. The knowledgeable spouse who's investing gives them some limited information, or like you said, gives them a dollar number rather than units or some other set of shares. Then they walk out of there with a fraction of what they should have, and probably will never figure out that they were screwed over.
Andrew: One way that could happen is there's a thing called a token, but think about it as a sub coin. So if there is this main network of Ethereum, I can trade other coins over that network, and so if you don't actually follow the correct protocol to identify everything, you can actually see those and you might be awarded part of it, but not all of it. Or maybe I get to keep my 20 Ethereum and you don't know that I've actually got another 200 grand in these smaller tokens underneath it. That can happen.
Brian: Okay. That sounds like a bad situation. We could go into this a lot more obviously, but I wanted to give everybody a broad overview of things so that they had a general sense of it. If anybody has further questions, we'll put some writing up on our website in more detail about this or feel free to call us if you're in a situation where this has become an issue and we'll be happy to help.
Thank you.