The biggest problem faced by most parties involved is that they have no idea their spouse holds cryptocurrency.
Written by: Kevin Williams
Compiled by: Chopper, Foresight News
TL;TR
- The U.S. legal system (especially divorce law) has failed to keep pace with the rapid development of cryptocurrencies, while the millennial generation, who hold the most cryptocurrencies, is entering a period of high divorce rates.
- Cryptocurrency splitting is similar to other assets such as real estate, and there are several ways to handle it: splitting crypto assets such as Bitcoin directly on the blockchain, splitting them after selling them and exchanging them for fiat currency, or offsetting the value of digital wallets with other assets.
- A crypto asset research expert in Texas says the biggest problem her clients (mostly women) face is that they have no idea their husbands have cryptocurrency investments.
Divorce always brings up the thorny issue of dividing marital property. In most cases, the solution is quite straightforward: the assets of both spouses must be divided precisely. However, assets like pet dogs or aquariums cannot be handled in this way. But if you think the dispute over "who gets to own a pet dog" is complicated enough, then the real challenge lies in the division of assets related to cryptocurrency.
Currently, many families have only recently accumulated crypto assets, and the recent sharp decline in crypto assets such as Bitcoin and Ethereum after reaching all-time highs has dampened investor confidence, making the future of crypto asset division even more uncertain. However, for many married people in the United States, the current price of cryptocurrencies is not even a core issue, as these assets can easily be hidden by one spouse without the other's knowledge.
"In divorce cases, the problems caused by cryptocurrency are strikingly similar to the long-standing issue of offshore accounts. The difference is that crypto assets can be transferred instantly and without a trace," said Mark Grabowski, professor of cyber law and digital ethics at Adelphi University and author of several books on cryptocurrency. He added that the key issue is that ownership of crypto assets is not determined by the account name, but by who holds the private key.
"If one spouse controls the wallet, it's equivalent to having actual control over those assets," Grabowski said.
Today, lawyers must issue subpoenas to access exchange records, trace transaction history on the blockchain, and determine whether the cryptocurrency was purchased before or after marriage.
"Due to the lack of transparency and uniform reporting standards, it is easy for a party to conceal or underreport its holdings of crypto assets. Courts are still struggling to catch up in this area," Grabowski noted.
In theory, cryptocurrency-related property division in divorce cases should be handled in the same way as other assets. Renee Bauer, a divorce lawyer who has handled crypto asset division cases, says the core issue in the couple's dispute appears simple on the surface: who gets the wallet?
"But this issue will raise a series of complexities that have never been encountered in traditional property division," Bauer said.
The first challenge is to ascertain the actual holdings of crypto assets.
“Retirement accounts will have statements, and properties will have clear addresses, but cryptocurrencies may be stored on exchanges or in hardware wallets that one party ‘just happened to forget to mention,’” Bauer explained.
Therefore, the process of tracking crypto assets combines elements of detective work and digital forensics. Once the crypto assets are verified, the next step is to determine custody.
"Some couples want to keep their digital wallets intact (especially the one who manages the wallet during the marriage), while others want a complete monetization split," Bauer said.
The courts are still exploring the best way to handle these kinds of issues.
"There are also security concerns: if one party hands over their private key, it's equivalent to completely surrendering control of the assets; if they refuse to do so, the court must decide how to enforce access rights," Bauer added.
She recalled a lawyer who knew very little about cryptocurrency trying to compensate another party by converting the value of Bitcoin into other assets, without realizing that this approach was neither simple nor fair.
“Many divorce lawyers are slow to catch up with industry trends and don’t even ask their clients to disclose crypto assets. In my state of Connecticut, there’s no specific section on cryptocurrency in financial affidavits. For some, not actively pursuing this could mean missing out on a valuable asset,” Bauer said.
Crypto Asset Investigator: Private Investigator in the Era of Digital Asset Divorce
BlockSquared Forensics is one of the few companies that can help locate hidden crypto assets. Ryan Settles, founder and CEO of the Texas-based company, says demand for its services has grown exponentially since the company's founding in 2023. BlockSquared specializes in handling cryptocurrency-related matters in family law and divorce cases.
If one spouse (Settles says this is mostly women) suspects their partner of hiding crypto assets, their lawyer may hire BlockSquared to conduct an investigation—the company offers services ranging from simple asset verification to tracing cryptocurrency flows across continents and delving into the hidden world of wallets and exchanges. Afterward, Settles' team will provide the client with a flowchart detailing the cryptocurrency's transfer path and adding timestamps.
He stated that the need to investigate whether a spouse holds crypto assets is becoming increasingly common, "especially in divorce cases involving high-net-worth individuals."
Ryan Settles, Founder and CEO of BlockSquared Forensics, Texas
Settles points out that millennials hold the most cryptocurrency, and this age group will enter a period of high divorce rates in the next six months. Coupled with the increase in cryptocurrency holdings, the pursuit of cryptocurrency assets in divorce cases will only become more common.
Another aspect that Settles focuses on is the spouse's tax liability, ensuring that this issue is handled properly during the divorce process.
“There are a lot of tax-related issues that most people (including lawyers) are not familiar with,” Settles said. He added that even a single cryptocurrency transaction can involve a number of taxable events and reporting requirements that may surprise even seasoned litigation lawyers.
"Most lawyers neither understand the relevant knowledge nor the professional terminology, and often blindly trust without ever verifying," Settles said.
In many of the cases he handled, the wives were not only unaware of their husbands' involvement in cryptocurrency investments, but also faced potentially huge tax bills due to capital gains after the assets were finally divided.
“Unlike savings accounts, the value of cryptocurrencies can fluctuate wildly within a day,” Bauer said. “Selling cryptocurrency and splitting the proceeds could trigger capital gains tax; while holding assets could spark new disputes when their value changes.”
The IRS's relatively lenient reporting requirements for cryptocurrencies have exacerbated the complexity of the issue.
"There are too many details involved, and many lawyers just nod and smile, pretending to understand," Settles said.
He stated that clients typically only engage firms like theirs when they have compelling reasons to suspect their spouse is hiding substantial amounts of crypto assets. The company charges a $9,000 upfront fee and investigation fees can reach up to $50,000; Settles claims its service fees are often higher than those of lawyers.
The core legal challenges of crypto asset fragmentation
Roman Beck, a professor at Bentley University and head of the Crypto Ledger Lab, said that since this is a relatively new field, the best approach is for the court to divide not the digital wallet itself, but the assets controlled by the wallet.
"The legal definition of cryptocurrency is far less complex than people imagine. The basic principle is simple: at the tax and most property law levels, cryptocurrency is considered property, not currency," Beck said.
This means that in divorce cases, Bitcoin, Ethereum, stablecoins, and NFTs acquired during the marriage are generally considered marital property, no different from brokerage accounts or second homes, and the specific division method depends on the laws of the state.
"The court isn't dividing up the wallet, it's dividing up the value," Beck emphasized.
He stated that the real legal issue is not "who gets access to the wallet?", but rather "how we allocate the economic value represented by the wallet, and who subsequently assumes responsibility for the technical custody aspects?"
This requires courts and lawyers to choose one of three options: directly dividing the assets on the blockchain, dividing the fiat currency after the sale, or using other assets to offset the debt.
"From a technical standpoint, a wallet is essentially a set of private keys, typically stored in various locations such as hardware devices, mobile applications, or even a seed phrase written on paper. After a divorce, it's impossible to securely share a hardware wallet or private keys," Beck explained.
Another complicating factor in cryptocurrency divorce cases is the volatility of the underlying assets. The price fluctuations of cryptocurrencies make it difficult for couples to agree on the timing of division, whether it's the division of the marital relationship or the division of digital assets. In the past two months alone, the price of Bitcoin has plummeted from a high of over $126,000 to the $80,000 range, a drop of 35%, erasing all of its year-to-date gains, and experiencing significant daily volatility.
If the couple can handle the issue rationally rather than emotionally, one of the simplest solutions is to split the wallets on-chain, creating new wallets for each divorcing party so they can continue to hold their own share of crypto assets; or to sign a legal agreement that clarifies the equity ratio between the two parties in the same wallet.
"They don't have to sell assets immediately," Beck said.
However, in reality, one party is often unfamiliar with wallet operations and therefore not comfortable with this solution.
Similar to how couples might be reluctant to sell jointly owned real estate during a market downturn, they could also agree to entrust their crypto assets to a trusted third party for safekeeping until the market recovers (reaching the minimum value agreed upon by both parties) before selling them.
But Beck added that while divorced couples can clearly define their respective legal rights through any of the above methods and delay liquidation until market conditions improve, this is contingent on both parties reaching an agreement—and "most people just want to get it over with as quickly as possible."
Blockchain ledger transparency and court proceedings
One positive factor is that, despite the reputation of cryptocurrencies as an "anonymity haven," certain characteristics of crypto assets are actually beneficial to the progress of divorce proceedings.
"Public blockchains like Bitcoin and Ethereum are essentially transparent ledgers, with every transaction permanently recorded. In other words, on-chain data analytics makes the blockchain a very patient financial witness," Beck said. "Once you understand how to interpret the blockchain, you can find perfect audit clues... The real cutting edge isn't law itself, but forensic technology."
The growing popularity of cryptocurrency in the United States (recent surveys by Gallup and Pew Research Center show that 14% to 17% of American adults have owned cryptocurrency) is forcing the field of family law to become more data-driven.
"The combination of transparent ledgers and powerful analytics tools provides lawyers and judges with unprecedented tools to reconstruct financial behavior that was impossible in the cash age. The policy question for the future is not whether we can track it, but how much scrutiny the courts will require in everyday divorce cases," Beck said.
Even so, this doesn't mean people will stop trying to hide assets. Settles says he can usually see unusual asset movements on the ledger within 20 minutes.
"They'll start frantically transferring assets, hiding assets, or transferring assets to coin mixing services. It's quite an interesting process," Settles said.
And all of these behaviors are traceable.
