We all know the French proverb; the more things change the more they stay the same.  It has a place in the current controversy over the sudden collapse of Bitcoin’s leading dealer, Mt. Gox. Bitcoin is a virtual or cryptocurrency.  It is an asset that a customer holds in a form where only the asset holder and the person with whom he transacts are aware.

Bitcoins are created through a process termed “mining” by which an investor typically puts up cash in exchange for debits logged on an electronic ledger. Mt. Gox was the largest of the exchanges offering to buy or sell bitcoins at prices determined by supply and demand.  The system was created in 2009.  It soon attracted legitimate businesses because the transaction fees were substantially less than credit cards.  It also attracted customers interested in selling merchandise and services that they did not want traced.  Like most other currency, there are actual coins minted but the system is predicated upon electronic transfer rather than some form of specie.  While Bitcoins have been issued for several years now, the press began to report extensively on this new “investment” when prices rose precipitously from $100 in mid-October, 2013 to $1,100 by years’ end.  Since that time they have declined by half to about $575.

Ironically, the explosion in Bitcoin prices coincided with the announcement by the Swiss government that it would become a party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  While the title of that protocol leaves something to be desired, the net effect was lauded as “the end of banking secrecy” in a country long considered the home of the private untraceable bank account.  While this arrangement has not yet been formally ratified by the Federal Assembly (the Swiss Parliament) it is expected to pass as the result of pressure that began with the money laundering traced to the September 11, 2001 attacks and subsequent mass migrations of deposits during the 2008 financial crisis.  Swiss banking giant UBS began to do this in April, 2009.  In July, 2013, the Swiss Courts further opened the door to these kinds of disclosures to US tax authorities.

Today 58 nations are members of the “Convention.”  The purpose of the compact is to permit taxing authorities of the member states to trace the assets of its own nationals beyond the borders of the lands where they reside.  While the list of adherents includes most major countries, the more noted tax havens in the Caribbean have not jumped on the bandwagon.

Why is this topic part of a discussion about divorce?  For decades our profession has dealt with the suggestion that one spouse is holding assets “offshore.”  Inevitably this allegation was met with the lawyer’s inquiry: “Any idea what shore?”  The more famous sites included the following island nations: Bahamas; Cook, Caymans, Leeward, St. Vincent & Grenadines.  In addition, Dominica, Liechtenstein, Lebanon, Panama and the Philippines were found on a list compiled by the Financial Action Task Force.   Israel, Lebanon, Russia and the Philippines have also been named as potential hideouts.

Bitcoins offer a new haven and one that an investor need not visit to open an account.  In addition Bitcoins are but one form of cryptocurrency. Wikipedia currently lists nine other forms of this new financial instrument and suggests that there are more than fifty others.  See Cryptocurrency; Digital Currency.

The danger is that a spouse wishing to hide assets now has an untraceable means to accomplish his or her purpose.  If there is good news, it is that these forms of assets are highly volatile and some economists have suggested that these kinds of systems are not sustainable.  Typically, once fiat or government regulated currency enters these markets it is not exchangeable for any other form of hard currency.  It may be exchanged or other virtual currency but unless these other systems survive, there is risk that the entire investment could be lost.  If it is hacked or otherwise stolen there is essentially no recourse.  But people determined to keep money away from the claims of a spouse may be willing to absorb that risk.

Bitcoins received another blow this week as the IRS announced how it would deal with them.  The Service announced that bitcoins were not currency but property and were therefore treated as capital assets for which gain and loss needed to be reported.  Thus, if you acquired a bitcoin at $700 and used it in 2013 to acquire a piece of jewelry worth $1200 (because the bitcoin had appreciated), your jewelry purchase was not merely an asset acquisition but a capital gain as well since your $700 investment allowed you to purchase a $1200 asset.  The guidelines also indicate that exchanges that make a market in bitcoins will have a duty to report transactions to the IRS.  How much compliance the exchanges will provide with that regulation remains to be seen.