Remains of the day: Custody battles move on from kids and house to crypto

The divorce dragged on for eight years, almost as long as the marriage. The wealthy San Francisco couple sparred over child support, the profits from the sale of the husband’s software company and the fate of their $3.6 million home.

But the most consequential court battle between Erica and Francis deSouza concerned a bitter dispute over millions of dollars in missing Bitcoin.

deSouza, a tech executive, had bought a little over 1,000 Bitcoins before he separated from his wife in 2013 and then lost nearly half the funds when a prominent cryptocurrency exchange collapsed. 

After three years of litigation, a San Francisco appeals court ruled in 2020 that deSouza had failed to properly disclose some elements of his cryptocurrency investments, which had exploded in value. 

The court ordered him to give deSouza more than $6 million of his remaining Bitcoin.

In legal circles, the deSouzas’ case has become known as perhaps the first major Bitcoin divorce. Such marital disputes are increasingly common. As cryptocurrencies gain wider acceptance, the division of the family stash has turned into a major source of contention, with estranged couples trading accusations of deception and financial mismanagement. An ugly divorce tends to generate arguments about virtually everything. But the difficulty of tracking and valuing cryptocurrency, a digital asset traded on a decentralized network, is creating new headaches. In many cases, divorce lawyers said, spouses under-report their holdings or try to hide funds in online wallets that can be difficult to get into.

“Originally, it was under the mattress, and then it was the bank account in the Caymans,” said Jacqueline Newman, a divorce lawyer in New York who works with high-net-worth clients. “Now it’s crypto.”

The rise of cryptocurrencies has provided a useful medium of exchange for criminals, creating new opportunities for fraud. But digital assets are not untraceable. Transactions are recorded on public ledgers called blockchains, enabling savvy analysts to follow the money. Some divorce lawyers have come to rely on a growing industry of forensic investigators, who charge tens of thousands of dollars to track the movement of cryptocurrencies like Bitcoin and Ether from online exchanges to digital wallets. The investigative firm CipherBlade has worked on about 100 crypto-related divorces over the last few years, said Paul Sibenik, a forensic analyst for the company. In multiple cases, he said, he has traced more than $10 million in cryptocurrency that a husband hid from his wife.

“We’re trying to make it a cleaner space,” Sibenik said. “There needs to be some degree of accountability.” In interviews, nearly a dozen lawyers and forensic investigators described divorce cases in which a spouse — usually the husband — was accused of lying about cryptocurrency transactions or hiding digital assets. None of the couples agreed to be interviewed. But some of the divorces have created paper trails that shed light on how these disputes unfold.

Not all crypto divorces involve large sums. A few years ago, Nick Himonidis, a forensic investigator in New York, worked on a divorce case in which a woman accused her husband of underreporting his cryptocurrency holdings. With the court’s authorization, Himonidis showed up at the husband’s house and searched his laptop. He found a digital wallet, which contained roughly $700,000 of the cryptocurrency Monero. “He was like: ‘Oh, that wallet? I didn’t think I even had that,’” Himonidis recalled. “I was like, ‘Seriously, dude?’”