The world of divorce proceedings is facing new challenges as cryptocurrency becomes an increasingly common asset that needs to be divided between separating spouses. Cryptocurrency investments, such as Bitcoin, have gained popularity in recent years, with one in five Americans having invested, traded or used cryptocurrency. However, these digital assets can be easily hidden and difficult to trace, creating complications during divorce settlements.
Divorce attorneys and forensic investigators have found themselves in a new job category, as they are now responsible for hunting down hidden crypto stashes. Divorce attorney Kelly Burris explains that cryptocurrency assets can be easily hidden by tech-savvy spouses, as these digital assets are not regulated by centralized banks and cannot be subpoenaed for information.
The rapid growth of the cryptocurrency market, which now has more than 24,000 different cryptocurrencies, further complicates the task of tracking hidden assets. Privacy tokens, such as Monero, Dash and Zcash, obscure transaction details, making it virtually impossible to trace and de-anonymize them. Additionally, the use of hardware wallets and cold storage complicates asset discovery as private keys are stored offline and are not easily accessible.
Forensic investigators have developed various methods to track down hidden cryptocurrencies. One approach is to subpoena information from centralized crypto exchanges, but this is not always possible. In such cases, investigators perform a forensic analysis of the spouse’s computer or phone to identify wallet addresses and conduct blockchain analysis.
Investigators must also consider storage methods used by crypto holders. Cryptocurrencies can be stored in “hot” wallets, which are connected to the internet for easy access but pose a higher risk of exposure to bad actors. Alternatively, they can be stored in “cold” storage, such as hardware wallets or devices not connected to the internet, which provide better security but are still traceable on the blockchain.
Divorce attorneys now have to request the preservation of assets, including computer hard drives, to prevent the destruction of evidence. Investigators can search these devices for email communications containing ticker symbols and public keys associated with cryptocurrency transactions. Public keys, similar to account numbers, allow attorneys to request information from specific crypto exchanges and trace the flow of funds.
However, tracking assets becomes more complicated when investors start moving their tokens across blockchains. This technique, known as “chain hopping,” involves quickly switching from one blockchain to another, making it challenging for investigators to follow the trail of tokens. Furthermore, obfuscation techniques, such as using crypto asset mixers, can be employed to obscure the flow of funds and further hide assets.
Valuing cryptocurrency assets for divorce settlements can also be problematic. The volatile nature of the crypto market makes it difficult to determine the current value of these assets. Additionally, the emergence of non-fungible tokens (NFTs) and metaverse properties further complicates the division of marital assets. NFTs, which represent unique digital items such as artwork or virtual land, can have substantial value but are subject to market fluctuations.
Divorce attorneys and investigators must navigate these complexities and determine the fair distribution of cryptocurrency assets. In community-property states such as California, the right strategy may involve seeking a cash buyout at market value on crypto holdings to manage risk. In equitable distribution states such as New York, spouses can choose to divide the value of the digital assets or take the assets themselves.
The coming years are likely to see the authorities in different jurisdictions reaching out to blockchain companies such as Riot Blockchain Inc. (NASDAQ: RIOT) for help in matters of identifying people trying to hide crypto-related information from those who seek it for lawful purposes, including divorce settlements.
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