By: Christian Schweitzer
Cryptocurrency (“Crypto”) is a decentralized digital currency stabilized by the blockchain, a digital ledger accessible and verifiable by millions of computers worldwide, that records every crypto transaction.[1] Crypto is no longer a fringe venture reserved for only the savviest players in the digital marketplace.[2] Recent estimates suggest that over twenty-seven million Americans own cryptocurrency in one form or another, and broad expert consensus acknowledges that crypto is here to stay, with enormous potential for market growth in the near term.[3] Crypto offers users a myriad of benefits, including fast, private transactions twenty-four hours a day and the chance to diversify their investment portfolio in a way that hedges against inflation, with the possibility of outsized future returns.[4] However, as with any emerging, largely unregulated technology, there is potential for abuse.
One such abuse that has garnered recent attention is the practice of using digital assets like cryptocurrency to conceal or dissipate wealth in anticipation of divorce.[5] Of course, using digital tools to hide assets is neither new nor exclusively associated with certain pitfalls of cryptocurrency.[6] For example, the popularity of using electronic transfers to offshore accounts to conceal assets from spouses and the IRS has left some commentators arguing for reforms to the discovery process to give courts the tools to increase transparency in the asset disclosure process of a divorce proceeding.[7] Nonetheless, because crypto can be purchased anonymously and through foreign organizations, it can prove especially difficult for spouses and their attorneys to recover amid contentious divorce proceedings.[8]
While courts and the IRS continue to disagree about whether crypto is best classified as money—as held by multiple United States District Courts—or property—as suggested by the IRS—all courts have stated clearly that cryptocurrency is a “marital financial asset subject to distribution in divorce.”[9] Despite the unique nature of cryptocurrency, courts encountering instances of a spouse attempting to use it to conceal wealth have not been flummoxed, and have simply applied existing doctrines to these new facts. In perhaps the most newsworthy case on the matter, In re Marriage of DeSouza[10] held that because of the confidential relationship between spouses, spouses have a wide-ranging, affirmative duty to disclose all information relevant to community assets and that this duty extends to the period of separation immediately following marriage.[11] Thus, the husband’s failure to disclose his bitcoin purchases, which had since appreciated in value, afforded his wife a claim for breach of fiduciary duty, for which she was awarded a one-half share of the bitcoin purchased with marital assets as well as court costs and attorney’s fees.[12] Therefore, for litigants who suspect that their former spouse has hidden wealth using crypto, their biggest hurdle will not be a court’s willingness to grant relief, but the threshold issue of realizing that the deception has occurred and finding evidence to prove it.[13]
Because the chief difficulty in proving crypto-related fraud in a divorce action is evidentiary, effective factfinding during and before discovery is of the utmost importance.[14] For clients in their individual capacity, experts recommend reviewing bank and credit card statements, loan applications, tax returns, and browsing history or applications installed on shared electronic devices if a client suspects that their spouse is concealing funds invested in crypto.[15] Clients should be careful to only review devices or documents which they share with a spouse, and not the other spouse’s private devices, to avoid violating privacy laws.[16] Upon reaching the discovery phase, it is incumbent on an attorney to recognize that significant knowledge gaps still exist among the public with regard to cryptocurrency, requiring an attorney to do some handholding while questioning their client about the possibility of their spouse owning digital assets.[17] Questions may need to be highly generalized, inquiring as to whether a client’s spouse is good with technology or owns many electronic devices.[18] If either the client’s answers or discrepancies between available financial information and the lifestyle of the client’s spouse trigger suspicion of hidden crypto assets, the best practice is to send a preservation letter to opposing counsel to warn the spouse against destroying evidence, strengthening a later claim for spoliation if the spouse attempts to discreetly liquidate or destroy records of the crypto assets.[19]
Next, send discovery requests for items such as the hard drive of the spouse’s computer, credit card statements, and loan applications.[20] The rise of a few preeminent trading platforms like Coinbase, which now has over 89 million users worldwide, means it is likely that if a spouse has invested in cryptocurrency, an industry-leading name like Coinbase is likely to appear on those documents or devices.[21] If a spouse is more savvy and using less mainstream mediums, the only way to find records of the transfer may be through forensic accounting, which can be prohibitively expensive unless the suspected value of the crypto is large.[22]
Above all, family law attorneys must understand that the way they approach crypto assets in a divorce is likely to shift soon, especially as the Biden administration signals a willingness to take a serious look at applying substantive cryptocurrency regulations.[23] Reforms such a reclassifying crypto from property to a security could help create more stringent disclosure requirements and provide a more appropriate means of valuing highly volatile crypto assets.[24] For now, family law attorneys can best serve their clients by maintaining a general awareness of new developments in digital assets and practice finding those assets by thoughtfully speaking to their clients and utilizing the tools of discovery in consultation with trusted forensic accounting experts.[25]
[1] Kate Ashford & John Schmidt, What is Cryptocurrency?, Forbes (Jan. 25, 2022, 4:15 PM), https://www.forbes.com/advisor/investing/what-is-cryptocurrency/.
[2] Keegan Francis, Crypto Mass Adoption: A Matter of When, Not If, NASDAQQ (Jan. 24, 2022, 10:20 AM), https://www.nasdaq.com/articles/crypto-mass-adoption%3A-a-matter-of-when-not-if.
[3] Id.
[4] Brian Nibley, 12 Benefits of Cryptocurrency in 2022, SoFi (Dec. 20, 2021), https://www.sofi.com/learn/content/benefits-of-crypto/.
[5] Kate Dore, Spouses in Divorce Proceedings are Using Cryptocurrencies to Hide Money. Here’s How Experts Find it, CNBC (Jun. 1, 2021, 7:52 PM), https://www.cnbc.com/2021/06/01/divorcing-spouses-are-using-cryptocurrency-to-hide-money-how-experts-find-it.html.
[6] Khrista McCarden, Till Offshore Do Us Part: Uncovering Assets Hidden from Spouses and
Tax Authorities, 62 St. Louis U. L.J. 19, 19–20 (2017).
[7] Id. at 20–21.
[8] Dore, supra note 5.
[9] Sandra M. Radna, Column: Family Law Corner: Discovery in the Age of Bitcoin, 63 Orange Cnty. Law. 44, 44 (2021); United States v. Ulbricht, No. 14-cr-68 (KBF), 2014 U.S. Dist. LEXIS 93093, at *66–72 (S.D.N.Y. July 9, 2014); SEC v. Shavers, No. 4:13-CV-416, 2013 U.S. Dist. LEXIS 110018, at *4–5 (E.D. Tex. Aug. 6, 2013).
[10] 266 Cal. Rptr. 3d 890 (2020).
[11] Id. at 894–95 (2020).
[12] Id. at 895.
[13] Helen Cort, The Rise of Cryptocurrency in Divorce, BDD Pitmans (Sept. 28, 2021), https://www.bdbpitmans.com/insights/the-rise-of-cryptocurrency-in-divorce/.
[14] Radna, supra note 9.
[15] Sandra M. Radna, What to do If Your Spouse is Hiding Cryptocurrency During Divorce, Divorce Mag (June 23, 2021), https://www.divorcemag.com/articles/what-to-do-if-your-spouse-is-hiding-cryptocurrency-during-divorce.
[16] Richard West & Jonathan Fields, A Divorce Practitioner’s Bitcoin Primer, 33 J. Am.
Acad. Matrimonial Law. 177, 190 (2020).
[17] Id. at 188.
[18] Id.
[19] Id.
[20] Radna, supra note 9.
[21] Coinbase Powers the Cryptoeconomcy, Coinbase, https://www.coinbase.com/about (last visited Mar. 14, 2022).
[22] Shaelyn Comiskey et al., Legal Considerations of Cryptocurrency in Divorce, 6 J. Inter. Acad. Bus. Disciplines 255, 260 (2019).
[23] Alex Gailey, Biden’s New Executive Order on Crypto Is a Big Step in the Right Direction, Experts Say. Here’s What Investors Should Know, Time (Mar. 11, 2022), https://time.com/nextadvisor/investing/cryptocurrency/biden-executive-order-crypto-expert-reaction/.
[24] Caline Hou, Note, A Bit-ter Divorce: Using Bitcoin to Hide Marital Assets, 16 N.C. J.L. & Tech. On. 74, 104–05 (2015).
[25] Radna, supra note 9.