Cryptocurrency, NFTs, and even digital real estate are some of the more widely known concepts that are leading a digital revolution in our ever-evolving global economy. As various forms of digital assets become more mainstream, so too does it become increasingly important to understand these assets and their relation to the divorce process. In this blogpost, I will attempt to de-mystify digital assets, such as cryptocurrency, NFTs, and digital real estate to equip you with a general understanding of these concepts so that you are better prepared to discuss these assets in the setting of a divorce matter.
Divorce and Digital Assets:
At a base level, a digital asset, particularly cryptocurrency, shares many similarities with other financial asset. In the setting of a divorce, like with any other financial asset, cryptocurrency can be identified and valued and added to a chart comparing assets for the purposes of negotiation and determining “off-sets”. However, it is important to appreciate that cryptocurrency should be considered a separate class of asset.
Generally, most users will acquire cryptocurrency through exchange or trading platforms such as Coinbase, Gemini, Robinhood, or Webull. As a result, observing a user’s cryptocurrency holdings can be as easy as viewing an account statement or summary. During the midst of a divorce matter, when the parties exchange their financial documents, statements from an exchange or trading platform should be produced if the individual holds cryptocurrency. Even if a statement from an exchange or trading platform is not provided, significant information related to cryptocurrency holdings can be determined by an experienced professional just by reviewing bank statements, which may exhibit transactions made on exchange/trading platforms.
What happens when one spouse breaches their duty to fully disclose their assets?
Traditionally, if one spouse believes the other was not disclosing a financial asset, they could rely upon the use of subpoenas to access the information directly from the financial institution in question. Despite the fact that cryptocurrency is decentralized by nature (meaning there is, generally, no singular financial institution from which you can acquire information), it remains possible to request records of an individual’s transactions from a particular exchange/platform.
Consulting with an expert, experienced in asset tracking and tracing, particularly relative to cryptocurrency, can be useful when attempting to track/trace the acquisition of cryptocurrency, even if it has been transferred to a “virtual wallet” (a virtual wallet can be anything that stores the unique key to the individual’s portion of the blockchain, including a thumb drive). If access to the “virtual wallet” is lost, then access to the cryptocurrency could be lost for good. Similarly, if access to the wallet is refused or blocked, then access to the cryptocurrency, even for evaluation purposes, is all but thwarted. Therefore, one should be mindful of how freely the unique cryptocurrency key is disclosed because the loss of the unique key could mean the loss of the cryptocurrency holdings. Nevertheless, like with any expert, significant consideration must be given to the cost of the expert relative to the potential value of the cryptocurrency assets.
Though cryptocurrency functions like many other financial assets in the context of a divorce and can be divided in a manner that the parties feel appropriate, careful consideration is required. Initially, unlike many assets which can maintain their value for keeps and even months at a time, the value of cryptocurrency is particularly volatile and unlike a traditional stock exchange, cryptocurrency trades 24 hours a day and so the value can fluctuate at any given minute. It is good practice to keep apprised of the trading value of a particular cryptocurrency throughout your asset negotiations as well as accounting for the taxable consequences (capital gains) associated with cryptocurrency holdings (depending on the extent of the cryptocurrency, consulting with a tax professional may be appropriate). Additionally, the parties should consider how the transfer is effectuated. Unlike retirement benefits or bank accounts, many cryptocurrency exchanges/platforms are new and have limited experience with transferring cryptocurrency assets subject to a divorce. If the asset(s) have been transferred to a virtual wallet, there is an added layer of complication concerning how you can transfer the cryptocurrency.
Property distribution as part of a divorce settlement can be a complicated process. Having an experienced divorce attorney that understands not only traditional assets, but new assets, such as cryptocurrency, will be an asset to how you can effectively settle your case.
What is it? – A General Explanation of Cryptocurrency
The IRS defines cryptocurrency as a type of virtual currency “that utilizes cryptography to validate and secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.” Predictably, this definition is nearly as complex as cryptocurrency itself.
Cryptocurrencies, like Bitcoin, are based on blockchain databases. The blockchain database operate as a ledger of all transactions in the particular cryptocurrency network. The blockchain database fundamentally relies upon the concept of cryptography (hence “crypto”) to establish the entire framework of how information and ultimately, the resulting cryptocurrency, is distributed.
Generally speaking, a blockchain database organizes data in decentralized “blocks” and once a “block” is full of information, it is time-stamped and connected to a prior “block” via an encrypted connection (cryptography), hence a chain of blocks. Once a block is connected, that data is immutable as if set in stone. This is fundamentally different from traditional databases, which typically store information at a central location and are therefore vulnerable to corruption if that central location is compromised. The nature of blockchain databases allow it to operate on a decentralized global network of connected computers (or nodes), which means that each connection to the network is able to cross-reference the other, making for an optimally secure system that checks itself. However, in order to maintain this network, the connected computers (or nodes) are encouraged to participate in efforts to maintain the system, such as by “validating” the transactions that make up each block on the chain.
In order to encourage enough members of the network to validate the transactions that establish the blockchain and therefore maintain the security of the network, the network offers incentives in the form of cryptocurrency, which itself is part of the blockchain. The process of validation depends on the network and can include validation protocols including energy intensive “mining” protocols (Proof of Work validation protocols) to less intensive protocols (Proof of Stake validation protocols). Therefore, the “ownership” of cryptocurrency, is really the entitlement to the portion of the blockchain, which that user helped to validate. The portion of the blockchain that a person “owns” is accessible with a unique key (or code) specific to that particular portion of the blockchain.
The value of a particular cryptocurrency increases the incentive to participate in the network itself as well as create the market of trading the coins themselves. Bitcoin is perhaps the most widely recognized cryptocurrency and like many other cryptocurrencies, it operates on a deflationary basis, which means that there is a finite amount of “coins” and the availability of coins will reduce overtime, hence the general increase in value. Aside from earning cryptocurrency as an incentive for participating in the validation process, cryptocurrency can also be traded on exchange platforms. Most commonly, a participant links their traditional bank account to an exchange platform and purchases available cryptocurrency.
One should employ significant due diligence when reviewing bank account statements to determine the extent of cryptocurrency holdings. If there is a substantial amount of cryptocurrency at issue, it may be beneficial to consult with a professional experienced in asset tracing/tracking to determine the extent of cryptocurrency holdings, which could result in a significantly different financial distribution.