In recent years, cryptocurrency has sparked concern in some divorcing clients. We hear questions such as “I believe my spouse has cryptocurrency or other digital assets and we are going through a divorce. What can I expect?”
With the increase in popularity over the past decade of cryptocurrency and other digital asset holdings, including non-fungible tokens (NFTs), more divorcing couples are now fighting over those holdings. The difficulty in locating, tracking, and valuing cryptocurrency and other digital assets has added another layer of dispute in a divorce. Some divorcing spouses believe that they can underreport or hide funds in cryptocurrency wallets given it can be difficult to find or access information about those assets due to the built-in secretive nature of the holdings.
But digital assets are not untraceable. While the process for locating and tracking these assets can be a long, slow, step-by-step process, it is possible to follow the money and account for most, if not all, of the digital assets held by a spouse in the divorce process. with the guidance from an attorney knowledgeable in the area, and the assistance of a savvy expert/analyst.
While most cryptocurrency holders buy and sell on an online exchange, like Coinbase, Binance, or Kraken (think E-trade but for cryptocurrency), some more private or tech savvy spouses may hold their cryptocurrency in private wallets. A private wallet is a private/personal storage device for private keys (similarto passwords) used to transact in cryptocurrency. Rather than have an online exchange hold a user’s private keys, a private wallet allows the holder to use those private keys and public addresses, which represent ownership and control of virtual tokens, to access and transact in cryptocurrency.
To complicate things, a spouse can have more than one wallet and different types of wallets:
- Software: where private keys are stored on an application on the individual’s phone or computer
- hardware: a physical, tangible storage device that plugs into a computer when the user wants to transact in cryptocurrency
- paper: a piece of paper that lists a private key or contains a bar code.
Gathering evidence of these private wallets, particularly when they are not disclosed by a spouse, may be challenging. In addition to the normal discovery options available to a divorcing spouse, a physical search for the wallets and/or forensic expert analysis of electronic devices may be required in order to locate these holdings. For a further discussion about discovery options available, please see Attorney Bownes’ article on digital dollars in divorce.
Once cryptocurrency is uncovered, some analysis will need to be done to determine whether the transactions made by the spouse holding the cryptocurrency are benign, such as paying for goods and services that are for marital purposes, such as purchasing food for the family from a local farmer’s market that accepts payment in cryptocurrency, like my local farmer’s or whether the transactions were made to hide, dissipate, or otherwise dispose of an asset to keep it from the other spouse.
Spouses can dispose of or hide cryptocurrency through sales on an exchange or by providing cryptocurrency to a merchant. Other ways include making purchases on the dark web, purchasing gift cards with Bitcoin, gambling the funds on unregulated gambling websites, or through unregulated or peer-to-peer exchanges (i.e. giving the cryptocurrency to a friend or family member for cash or for holding during the divorce). A spouse can also use tumblers – online companies that launder the cryptocurrency for a fee (i.e. you send in Bitcoin, they send you back a different type of coin with slightly less value after subtracting their fee).
It is important to fully investigate and analyze the holding spouse’s transactions to ensure that they have not transferred, hid, dissipated, or failed to disclose assets. Once the analysis and discovery process is complete, and the non-holding spouse is satisfied that they have a full understanding of the other spouse’s holdings (and that the transactions made during the marriage were not for nefarious purposes or made to hide assets from the other spouse), the assets need to be valued for the purposes of division of the divorce. If the digital assets can be divided, the non-holding spouse needs to decide whether to receive a share of the other spouse’s digital assets in kind (i.e., receive actual cryptocurrency to manage on their own) or whether the digital asset(s) should be valued and then accounted for in other ways when dividing the entire marital estate.
A non-holding spouse should consider whether they are willing and able to manage digital assets. For instance, depending upon what type of cryptocurrency coins a spouse has, there may be mining fees, or transaction costs, associated with dividing the coins that need to be determined and apportioned between the parties. If, on the other hand, the digital asset is unable to be divided or the recipient spouse does not want to have the digital asset, the asset will need to be valued and accounted for by way of an offset in the overall division of the marital estate. The valuation date then becomes key, as the cryptocurrency and digital asset markets are incredibly volatile. For instance, while the value of Bitcoin (BTC) has declined by approximately 21.49% over the past year, the value of SHIBA INU (SHIB) has increased by over 481,104% over the past year. Agreeing upon an early valuation date may not be beneficial to one or the other spouse if values significantly change during what likely will be a long discovery process.
While locating, tracking, and valuing cryptocurrency or other digital assets in a divorce may be overwhelming for a spouse going through a divorce, retaining knowledgeable counsel early on in the process can help alleviate some of that stress. With the right attorney, and experts as needed, hidden cryptocurrency and other digital assets can be found and accounted for in a divorce, even if the spouse holding the asset is not forthcoming with information or blatantly trying to hide assets.