© 2023 Best Lawyers. Reprinted with permission. Originally published in Best Lawyers December 17, 2023.
Cryptocurrency has gone from being a niche and obscure quantity to a rapidly growing form of investment for many. Due to its rising popularity, cryptocurrency has become an important asset that cannot be overlooked in divorce proceedings. However, due to their relatively new nature, cryptocurrency holdings may be unknown to the divorcing spouse. A CNBC article discussed this very issue, highlighting a New York divorce in which “the wife thought it was questionable that her husband, who earned $3 million a year, had no assets.” After spending more than a year discovering, with the help of a forensic accountant, the wife learned that the husband had cryptocurrency — worth half a million dollars — in a previously undisclosed encrypted wallet.
Cryptocurrency remains a relatively misunderstood asset, and should be disclosed, valued and distributed — just as stocks or other investments should be — in a divorce suit. To combat potential deception or confusion, questions to ask in divorce include: What is cryptocurrency? How do I find it? How do I deal with it after I found it?
What is cryptocurrency?
Cryptocurrency? Encryption? Blockchain? What does it all mean?
Simply put, cryptocurrency is digital or virtual currency. It does not exist in physical form, like paper money, and does not use a central authority, such as a government or bank, to maintain it. Instead, records of ownership of individual cryptocurrencies are stored in a digital ledger, i.e. a computerized database for decentralized networks based on blockchain technology. A blockchain is an ever-growing list of records, called blocks, that are linked and secured on a network using peer-to-peer review and cryptography (i.e. algorithms and code techniques that keep information secure or encrypted).
There are thousands of different types of cryptocurrencies, the first and most popular of which is Bitcoin. Cryptocurrencies other than the well-known Bitcoin are called “altcoin” and include, for example, Ethereum and Tether. Cryptocurrencies are known for their price volatility, often experiencing rapid rises and falls in value, which is determined by supply and demand.
Cryptocurrency is purchased through an exchange or trading platform. Once purchased, ownership is recorded through two keys: (1) the public key, which is the encrypted information that creates the investor’s wallet address where the cryptocurrency is sent; and (2) a private key that allows the buyer to decrypt the information, i.e. unlock or access his or her virtual currency. The investor must decide how he wants to store his private key, which must be kept secret and secure to avoid theft. While an investor can store cryptocurrency on the exchange/platform it was purchased on, most use non-custodial “crypto wallets,” which are software that have different options depending on the type of cryptocurrency held, as well as different tiers. Of security. Because of their Internet connection, they are called “hot” wallets. In some cases, an investor may choose to hold their cryptocurrency in a “cold” wallet, which is an external physical device that is not connected to the Internet. The latter is considered the least at risk of being hacked or compromised, but certainly, for divorce purposes, it can also mean the least likely to be discovered by an unsuspecting spouse.
How to find it
Cryptocurrency is not always on a spouse’s radar when determining which marital assets are at issue in their divorce and, therefore, can easily go undisclosed or discovered. Just like tax returns or bank statements, which may reveal unknown financial information to a spouse, discovering whether and to what extent cryptocurrency investments exist should be a consideration in any divorce proceeding.
In most divorces, the parties are generally required to exchange some basic or preliminary financial disclosures. Recognizing the growing need for transparency regarding a spouse’s virtual currency holdings, in 2021, Florida amended its initial “mandatory disclosure” rule to require a party to a divorce (or other family law matter) to provide the following:
The most recent statement and data for the last 12 months of any Virtual Currency Transactions in which either party to this proceeding has participated in the past 12 months or has an interest, including one held in the name of the party individually, in the name of the party jointly with any person or entity, in the name of the party As guardian or conservator of a party or a minor child or dependent adult of both parties, or in the name of another person on behalf of the party. . A list of all current holdings of virtual currency will also be revealed.
In addition to mandatory disclosure, as part of a divorce, a party can seek to discover cryptocurrency through various other means, whether requests for additional documents, interrogatories, or through a deposition. Through discovery, a party can identify a comprehensive list of all cryptocurrency assets held by exchanges or wallets where they are located, as well as all relevant primary investments and transactions related to such holdings.
Due to their decentralized and anonymous nature, cryptocurrencies can be difficult to track, especially if they are only stored in a “cold” wallet. If a party suspects undisclosed assets or is unsure how to locate virtual currency, it may be wise to hire a forensic expert (including a computer forensic expert and a forensic accountant). Forensic experts can help locate cryptocurrency, whether, for example, by tracking withdrawals or transfers made for initial purchases of cryptocurrency, or by locating login credentials or digital wallet tags when scanning a computer or Husband’s smartphone.
How to evaluate and deal with it
Sharp price fluctuations can make valuing cryptocurrency as difficult as finding it. If cryptocurrency holdings are discovered, one of the first inquiries is often what the initial investments were made to purchase the asset, where the funds to purchase the asset originated from (e.g., a marriage bank account), and how much. The next inquiry is often whether this initial investment has paid off (i.e. increased in value) or, in some cases, has been lost entirely.
In this regard, determining the value of a cryptocurrency can be difficult. Should the value attributed to cryptocurrency in a marital asset allocation be the initial investment made if the investment loses money? Should the currency be worth as of a certain date — such as the date a divorce was initiated — even though the price may vary significantly day to day before and after that date? Should the value be the average price? Parties may also need to consider the tax implications associated with cryptocurrencies, which may affect the value for divorce distribution purposes as well.
Once the value is agreed upon or determined by the court, the final question is: who holds the asset? Given price fluctuations, some spouses may prefer that the investing spouse hold cryptocurrency holdings at a reasonable value, so the other spouse is entitled to hold more of other (possibly more predictable) assets instead. Others may choose to “go ahead with the journey” and split their cryptocurrency holdings with their spouse, which one may choose to do if they believe the value may increase significantly in the future. In doing so, the spouse who does not have much cryptocurrency knowledge will need to be sure to educate themselves on the nuances of owning cryptocurrency and how to protect their interests moving forward.
Ultimately, while initially locating and valuing cryptocurrency may have its challenges, including this asset in the distribution scheme may be a necessary and significant component of the overall marital net worth for both parties and, therefore, an important piece of the puzzle in ensuring that the spouse gets their share. Equity of marital property in their divorce.
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