Cryptocurrency and Divorce
One of the most common concerns among our clients facing a divorce is the preservation of wealth and assets they have accumulated over the course of their marriage. Preserving wealth and navigating a divorce has taken on a new layer of complexity amidst the rise of cryptocurrency. It is important to understand what digital assets are, how they are secretive by nature, and how they can play into divorce negotiations and distribution of wealth.
Marital Wealth v. Separate Wealth
As we have discussed in previous blogs, typically assets are divided into two categories: Separate assets and marital assets:
- Marital Assets are assets that commence at the moment of marriage and cease after the initiation of a divorce action. These marital assets are separated among parting spouses. This means that bank accounts, homes, cars, investment portfolios, art, and jewelry need to be valued and distributed.
- Separate Assets are assets that individuals owned prior to a marriage and are outlined through a prenuptial agreement or postnuptial agreement. These assets are the unique property of the individual designated in these agreements. As a result of this distinction, these assets are not subject to division during a divorce.
In this week’s blog, we turn our focus on one specific type of marital asset: cryptocurrency. To learn more about marital and separate assets, we encourage you to check out our webinar on complex divorce, as well as our prenuptial agreement page.
Understanding Cryptocurrency
Cryptocurrency, or crypto for short, is inherently volatile since there is no tangible value attached to the digital asset. The price of a digital asset is directly linked to the supply and demand for that specific form of cryptocurrency. This helps to explain why we frequently hear investors stating their opinions that crypto is not a wise investment, as there can be large fluctuations in the value of crypto as soon as demand dies down.
Some common types of cryptocurrency are:
- Digital “coins” (such as Bitcoin, Doge Coin, Ethereum, etc)
- Digital art
- Trading cards
- Videos
- Memes
A Brief History of Crypto
Cryptocurrency was created back in 2008 following the financial crisis. Some people felt that they wanted to create a currency that was not tied to a governmental regulation agency or central bank subject to state policies, since the oversight and lack of enforcement is often attributed as a contributing cause of the 2008 recession. Crypto transactions are instantaneous, so they do not require any trust to be placed in an institution, such as a bank, to broker the transaction. Additionally, since crypto assets are not linked to any tangible value, such as gold or physical currency, there is no immediate need for a bank or reserve to hold onto the physical asset of value. Crypto was also designed to be incredibly hard to track. All transactions are encrypted to preserve user anonymity, despite the ledgers being public record.
This anonymity has implications in the context of a divorce as it has become a convenient vehicle to secreting assets from spouses. For example, a spouse intending to file a divorce could easily purchase cryptocurrency using the marital checking account. Once purchased, that spouse can easily hide the cryptocurrency due to the anonymous nature of crypto transactions and the way digital assets are managed.
So How is an Intangible Asset Managed?
Unsurprisingly, cryptocurrency assets are managed digitally. A “blockchain” is like a digital checkbook. It contains a ledger of transactions that anyone can view and verify, however they require a “private key” to access the account information. This private key is often stored in a special software or hard drive to ensure that it is not easily accessible to anyone not intended to have the passkey. It is important to note that without this private key, crypto assets can be nearly impossible to locate or verify. Additionally, blockchains allow for the instantaneous transferring of digital assets from one individual to another. This ability to immediately transfer cryptocurrency makes moving assets around at fast rates incredibly easy.
Cryptocurrency in Divorce
We’ve discussed what cryptocurrency is, how it is managed, and how it can be used in a secretive way. But even if your spouse is moving crypto assets around, you’re probably wondering if it is really relevant to your divorce.
The answer is a resounding yes.
Digital assets can hold substantial value. They have the potential to yield high returns over the course of a marriage. Often, significant marital funds may be used to finance substantial crypto investments. The large profits earned from the sale of cryptocurrency are often used to fund large marital projects, such as the purchasing of a home, the renovating of an existing property, or even just maintaining a certain lifestyle.
Divorce negotiations require full financial transparency. In New York, each spouse is required to disclose any sources of income and any liabilities they may have in their name. The schedule of your assets and liabilities is often referred to as a Statement of Net Worth, and is one of the most important documents in a divorce. However, a big loophole in creating these schedules exists when it comes to crypto assets. This is because it is a relatively new concept to divorce lawyers and many do not know how to value the digital assets of their clients, or even how to include them in a statement of net-worth. It is crucial that your divorce attorney works with reputable digital asset appraisers to fully understand your financial picture.
What Happens When a Spouse is Attempting to Conceal Their Digital Assets?
Due to the lack of governmental regulation on cryptocurrency, digital wallets can be hidden or transferred quite easily. While the original intent of crypto may not have been to allow for nefarious acts, such as secreting marital assets, the pseudonymous nature of the technology unfortunately permits this behavior. So, what do you do if you think your spouse may be hiding some of your marital assets in the form of cryptocurrency?
First, you will want to consult with and hire an attorney who knows what questions to ask the Opposing Party to understand if secreting of marital assets is occurring. More specifically, you will want to hire an attorney who is experienced with and has an understanding of cryptocurrency. They may call in the assistance of “crypto hunters” if they believe that there is a reasonable suspicion of hidden digital assets. Crypto hunters are experts who can track down hidden digital assets through bank transactions. They will comb through you and our spouse’s statements to search for any bank or card transactions that have the potential to be linked to an initial purchase of a digital asset. If they find a transaction with a link to a digital asset marketplace, they can use this information to track down the specific blockchain associated with the digital asset to find where the digital asset is and what it may be worth.
Large Investments in Cryptocurrency and Dissipation of Marital Assets
If you are dealing with a spouse who is not familiar with the digital asset marketplace, they may not recognize when a “good” or “bad” time to invest in cryptocurrency may be. This can lead them to not have any doubts when a large investment is made in a digital asset, such as Bitcoin, using marital funds. This is particularly important to your divorce proceedings, since the other side can argue that the spouse who was investing in the cryptocurrency was doing so to “dissipate”, or reduce, the marital funds that would have been up for distribution in the divorce.
We're Here For You
As we’ve discussed in this blog, cryptocurrency can be a significant aspect of a divorce that can influence the financial future of both parties involved. Engaging a skilled divorce attorney can provide the expertise needed to navigate the complexities of divorce and ensure your rights are protected.
As experienced divorce and family law attorneys, our office is skilled at moving cases along efficiently, while still ensuring your interests are represented in your agreement. In addition to a skilled and experienced attorney, it is also important that you work with experienced mental health professionals. They can help you navigate this uncertain period of your life with grace and clarity.
If you are ready to move forward with a divorce or a separation agreement, we are here for you. The decision that you reach following your therapy sessions will help allow you to create the next chapter of your life with understanding, clarity, and purpose. Our dedicated and experienced attorneys will make sure that your interests and needs are heard and advocated for throughout the litigation/settlement process. Our mission is to protect what’s most important to you. You can reach us at info@douglaslaw.com for more information, or call us at 914.615.9058.
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