What do you know about cryptocurrency and divorce?
In most divorce cases, each party understands that dividing the assets and debts of the marriage is an important part of the case. What many people do not understand is exactly how complicated this can become. Perhaps no category of asset exemplifies these challenges more than cryptocurrency.
Once the territory of techy investors, cryptocurrency is gaining in popularity and becoming a more and more common asset seen in divorce cases. The problem is that – with the exception of the investor – most parties and attorneys know very little about cryptocurrency, including how to track it, how to value it, or how to divide it. A savvy investor can use cryptocurrency to hide assets and value with relative ease when going through the divorce process. Consequently, it is important to have a working knowledge of what to look for when divorcing a spouse who may have an investment in cryptocurrency.
Cryptocurrency and Divorce: What You Need to Know
Cryptocurrency is a type of code or software that dictates how a unit of currency is produced and regulated. Essentially, the creator of the cryptocurrency makes the units using an algorithm that relies on cryptography to secure the currency. The most common cryptocurrency, and the first of its kind, is Bitcoin, but there are thousands of other types that can be purchased or earned. The different types of cryptocurrency vary greatly in value and stability. One of the reasons cryptocurrency has become so popular is that it is not tied to any government or third-party bank or brokerage. It can be transferred anywhere in the world without any third-party interference, regulations, or fees.
Cryptocurrency transactions are stored and recorded on a database known as a “blockchain.” The blockchain is open to the public and can be viewed by anyone with internet access. The units of cryptocurrency, commonly known as a “coin” or “token,” are just numbers on the blockchain, known as an address or “public key,” and can be easily tracked using that number. Instead of a bank or financial institution regulating the transactions, cryptocurrency is verified by a process known as “mining.” Miners audit the blockchain to be sure all the transactions are valid and earn coins for their work. Any member of the public can be a miner.
Why Is Cryptocurrency So Problematic During Divorce?
The central reason cryptocurrency can be so problematic in a divorce is that the numbers on the blockchain cannot be traced to a certain individual or owner of the currency without the “private key.” The private key is the password held by the individual owner of the unit of cryptocurrency that allows them to spend or trade the units on the blockchain. If the private key is not known or is lost, it is impossible to access the cryptocurrency or trace it back to an individual. Consequently, when confirming whether someone has cryptocurrency, the private key must be known.
The private keys are kept in a virtual “wallet,” which is basically whatever method the holder of the currency chooses to keep track of the private key. The wallet can be a piece of paper where the holder writes down the number, an app or some other software designed to hold the numbers, or some type of hardware not connected to the internet. Many owners of cryptocurrency use a third-party service known as an exchange to hold the private keys.
Because there is no bank that holds cryptocurrency, there are no financial institutions where records can be requested to obtain information about the holder of the currency unless the holder chooses to purchase or hold their currency using an exchange. Although difficult, it is possible to subpoena an exchange for information. However, a spouse who is motivated to hide cryptocurrency can easily transfer the private keys from exchanges to a wallet that is not easily tracked.
The good news for the non-holding spouse is that most cryptocurrency owners keep more than one wallet which makes the private keys easier to locate. Additionally, once the private keys are known, it is easy to track all transactions related to that public key as the blockchain logs every detail of every transaction, ever. The bad news is that, unless the private key is located, it is extremely difficult to locate and trace the coin and, therefore, the value of any cryptocurrency holding.
When It Comes to Cryptocurrency and Divorce, Always Be Honest
For the spouse holding the cryptocurrency, it is always advisable to be honest and disclose relevant and necessary information related to the amount and value of the holdings when requested. Most good attorneys can locate assets a party intends to hide no matter how badly they want to conceal something. Once the court is convinced a party is dishonest about disclosing assets, the damage that is done to the case as a whole is significant. Not only can a judge in many states consider dishonesty when determining how the marital estate will be divided, but the judge is then likely to doubt any testimony of the individual as it relates to any other aspect of the case.
Because of the difficulty or impossibility of obtaining information from an independent institution about the type or amount of cryptocurrency a person may hold, it is important that a spouse do their own investigation into any cryptocurrency holdings that may exist as part of the marital estate. Not only must the wallet holding the private keys be located, but it is also important to look for unexplained transfers, investments, or other spending on financial statements. As previously mentioned, cryptocurrency can be purchased using an exchange or earned through “mining” the blockchain. However, cryptocurrency can also be received as a gift or purchased peer to peer using cryptocurrency ATMs or websites that act as a marketplace. Some businesses accept cryptocurrency as payment for goods or services, so if a spouse owns a business, it may be necessary to watch out for undeclared payments just as if someone were paid in cash.
In addition to finding evidence of cryptocurrency holdings by reviewing bank and financial statements, there is often evidence of cryptocurrency transactions on a person’s electronic devices. Smart phones, tablets, and computers are how cryptocurrency transactions are almost always made. Consequently, a forensic expert can usually pull data related to cryptocurrency transactions directly from personal devices. However, it is important to consult an attorney before attempting to have any information pulled from a private device to avoid any issues with possible wiretapping laws.
How Will Assets Be Divided?
Once a divorcing party has all the information related to the cryptocurrency holdings, it is then determined how those assets will be divided. Because of the volatility in value of much cryptocurrency, the easiest solution may be to equally divide the holdings. However, a spouse wishing to either forfeit or keep the holdings needs to research the type of cryptocurrency that is held to have a better idea as to the value and stability of those holdings. If the cryptocurrency is divided, it is important that the language in any agreement or order contain specific details as to the division so that there are no complications later with a transfer or value of the awarded currency.
With cryptocurrency skyrocketing in popularity among the general public, it is a certainty that it will become more common as a marital asset that needs to be valued and divided when parties go through a divorce. A spouse that is not knowledgeable about cryptocurrency may be easily duped into giving up significant value to which they may be otherwise entitled. Consequently, it is important for anyone anticipating a divorce to educate themselves on how to locate and value holdings to ensure that the division of the property is fair and just.
Kelly L. Burris is a litigation partner with the family law firm Cordell & Cordell in Austin, Texas. Board Certified in Family Law by the Texas Board of Legal Specialization, she has litigated complex property cases involving multi-million dollar estates. www.cordellcordell.com.