Bitcoins and Cryptocurrencies: What to know before and during your Connecticut divorce

Just as Zoom has become a word to describe all video conferences, Bitcoin has become the term to describe all cryptocurrencies.  Previously individuals came to our office concerned their spouse was hiding assets in a Swiss or offshore bank account.  With cryptocurrency becoming mainstream, individuals are now asking us how to determine if their spouse is hiding Bitcoin.  The problem is that most parties (including the investor) and lawyers know very little about cryptocurrency, including how to track it, how to value it, or how to divide it.  In addition, a savvy spouse can try to use cryptocurrency to hide assets when going through a divorce.  Thus, it is essential to know what to look for when divorcing a spouse who may have a cryptocurrency investment.

What is cryptocurrency?

Cryptocurrency (or “crypto”) is a digital asset based on a distributed network across many computers without requiring a third party, such as a bank or financial institution. This decentralized structure allows digital assets to exist outside the control of governments and central authorities. It enables individuals (“peers”) to connect through a digital process that reveals the value of transactions but not the identities of those conducting them. Because banks do not hold cryptocurrency, a financial institution cannot be subpoenaed to obtain information about the currency holder, unless the holder chooses to purchase or his/her currency using an exchange.

What are common cryptocurrencies?

The most common cryptocurrencies are Bitcoin, Enterum, and Litecoin.  “Memecoins” such as Doge are currently very popular.  Initially started as a joke in 2013, Doge was the sixth-largest digital coin as of April 2021, with a total market value of approximately $42 billion.  It takes its name and branding from the “Doge” meme, which depicts a Shiba Inu dog alongside nonsensical phrases in multicolored text.

How are cryptocurrencies stored?

Cryptocurrencies are stored in “hot” or “cold” digital wallets.  Hot wallets are connected to the internet and are more accessible but less secure. Hot wallets are either (1) downloaded and installed on a computer and accessible only from that computer, (2) accessible online from any device via the cloud, or (3) on phone Apps, such as Coinbase.  Cold wallets are kept offline and are less accessible but more secure. A user’s private and public access keys are usually stored on a USB device.

How do I know if my spouse has cryptocurrency during my divorce?

In a Connecticut divorce, each party is required to submit a Financial Affidavit.  A Financial Affidavit is a sworn statement listing the affiant’s income, expenses, assets, and liabilities.  Each party must disclose all assets on his or her Financial Affidavit, which includes cryptocurrencies.  However, you have the right to serve interrogatories, requests for documents, subpoenas, and/or depositions.  Once you receive responses to your discovery requests, you and your attorney will have the opportunity to review the materials in search of cryptocurrency activity, such as:

1. Bank, Venmo, PayPal, and Credit Card Statements – This is generally the first place to look since individuals often buy and sell cryptocurrency over exchanges. Thus, if you see a payment to Coinbase, your spouse may own cryptocurrencies.
2. Tax Returns – Beginning in 2019, taxpayers are required to “check the box” on Schedule 1 to Form 1040 to disclose whether they received, sold, sent, exchanged, or otherwise acquired any financial interest in any “virtual currency.”
3. Electronic Devices and App Stores – The common cryptocurrency exchanges (Coinbase, Kracken, and Binance) offer Apps for mobile crypto transactions. If you share a phone account, you may be able to access the history of all Apps downloaded to any phone on your plan. If you cannot obtain this information on your own, your attorney may request it be produced during discovery.

The above methods can help determine if your spouse owns cryptocurrencies in a “hot wallet.” However, if your spouse purchased cryptocurrencies years ago and holds those cryptocurrencies in a “cold wallet,” it will be much more difficult to locate the same as there is a limited information trail.  Thus, if you have any proof of cryptocurrency, do not delete it.

Broder Orland Murray & DeMattie LLC, with offices in Westport and Greenwich, CT, concentrates specifically in the area of family law and divorce.  Cryptocurrency can hold real value. Therefore, it is crucial to make sure that it is properly discovered and valued in a Connecticut divorce.    Our lawyers are well versed in the discovery process, including searching for cryptocurrencies.  If you know or suspect that your spouse owns cryptocurrency, let us know immediately so you can formulate a strategy to protect your rights.