Cryptocurrency. Bitcoin. Blockchain. For some, cash is no longer king. Cryptocurrency is an electronic form of currency that is intangible. You cannot hold Bitcoin in your hand. There is no dollar bill. Cryptocurrency is a technology that changes the way people accomplish certain financial transactions. Perhaps most important—cryptocurrency is not for the faint of heart or the inexperienced investor. Cryptocurrency is extremely volatile as witnessed by its highs and lows in just the past week or so. This past Monday, Bitcoin fell to its lowest point since July 2021, but it rebounded later in the day to positive territory. Bitcoin and another cryptocurrency, Ether, are about 45% and 49% off their respective highs. Basically, cryptocurrencies are experiencing volatility similar to stocks as investors are selling riskier technology stocks in the expectation of stricter monetary policy from the Federal Reserve Board. Despite the wild ride, some people are going to take the risk, hoping for the big return.
Like standard currency, Bitcoin is produced and has processes and safeguards in place to prevent fraud and ensure appreciation in its value. The main building blocks of Bitcoin are blockchain, mining, hashes, halving, keys, and wallets. Bitcoin is a digital currency, a decentralized system that records transactions in a distributed ledger called a blockchain. Bitcoin is the most common form of cryptocurrency and it is the most well-known. Bitcoin owners usually purchase their cryptocurrency through a Bitcoin exchange. These are online platforms that facilitate transactions of Bitcoin and, often, other digital currencies.
Bitcoin exchanges such as Coinbase bring together market participants from around the world to buy and sell cryptocurrencies. These exchanges have been both increasingly popular (as Bitcoin’s popularity itself has grown in recent years) and fraught with regulatory, legal, and security challenges. With governments around the world viewing cryptocurrencies in various ways—as currency, as an asset class, or any number of other classifications—the regulations governing the buying and selling of Bitcoins are complex and constantly shifting. Cryptocurrency exchanges are also important to making Bitcoin work because they enable ordinary users to purchase or trade Bitcoins, thereby increasing the number of transactions on its network. Finally, cryptographic keys and wallets are necessary to access and store Bitcoin.
How are keys and wallets used in Bitcoin?
There are two types of keys in Bitcoin. A public key is used to identify an address on a blockchain and can be likened to a username. A private key is used to access your Bitcoin and can be likened to a password that must not be shared with anyone. A wallet is a set of keys and can take on various forms such as QR codes. There are two types of wallets. A hot wallet is connected to the internet, while a cold wallet is not connected to any network. Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and as matrimonial attorneys we caution against holding assets in something that is speculative unless the client fully understands the risks and has advisors in place to ensure that their portfolio is well diversified.
Why is the knowledge of cryptocurrency important in the practice of Family Law today?
It is important for at least three reasons. First, cryptocurrency needs to be accounted for as a matter of Discovery. Like any asset, it needs to be disclosed and accounted for—especially given its volatility. Second, Family Law attorneys need to be creative and flexible when deciding how to divide this asset class. In one recent case, the opposing party agreed to have their client open a wallet and the account was divided in half at an agreed-upon date of division. In a separate recent case, our client retained the cryptocurrency holdings, but provided an offset with other assets—again as determined on an agreed upon date. Agreeing upon a date to value the cryptocurrency is of paramount importance given its volatility. A third important reason for matrimonial attorneys to have a working knowledge of cryptocurrency is because it can be used (or is perceived to be used) as a way to hide money in a divorce. Lawyers in contested divorce cases involving finances must now be prepared to examine emails and hard drives in addition to bank statements. Today’s Family Law attorneys need to understand cryptocurrency and be able to detect the signs indicating that a spouse may have diverted funds into this new form of money. Matrimonial attorneys need contacts with forensic experts who are able to trace cryptocurrency and provide valuations for this very volatile asset.
A spouse that is tempted to try and hide marital assets may think that their spouse will never be able to find the cryptocurrency accounts. Rest assured, this is not the case. There are forensic experts who are trained in tracking down cryptocurrency accounts. There are also other indications that a spouse is hiding money in cryptocurrency. These include, but are not limited to, the following:
- Bank statements and/or credit card statements include a transaction with a cryptocurrency exchange.
- Cryptocurrency Exchange Apps or Digital Wallet Apps are present in a person’s App Store account.
- A person’s bank account(s) shows unusual and large cash withdrawals.
- A person has unusually high Amazon purchases.
- The person buys goods for another person who pays in cryptocurrency.
- Secretive behavior regarding bank statements.
Some of these indicators are the same as found in more traditional asset hiding attempts. It is always a red flag when a spouse’s bank statements suddenly stop coming to the marital home, either by snail mail or email. It is the same if a spouse is cut off from an account password. It is always possible that the reason for these account changes is due to other factors including addiction, an affair, another child to support, and other deceptive investments such as offshore accounts. As has always been the case, spouses need to be as aware as possible of any changed financial habits of their partners. Cryptocurrency is now added to the mix.
At McConnell Family Law Group, we are knowledgeable and prepared to represent you in all your Family Law matters. We know that new concepts such as cryptocurrency present new challenges, and we are here to help you meet those challenges. Moreover, we have relationships with forensic accountants and financial experts who may be enlisted on a case-by-case basis as necessary. To learn more or to schedule an appointment with our office, contact us today at (203) 541-5520 or by visiting www.mcconnellfamilylaw.com. Find Peace Through Strength!