Cryptocurrency Is the Latest Headache For Divorcing Spouses

Cryptocurrency is by design difficult to trace, making it an ideal asset to hide from a spouse.

Cryptocurrency is by design difficult to trace, making it an ideal asset to hide from a spouse. Mathieu Stern/Unsplash

Divorce lawyers are no stranger to dealing with financial disputes for splitting couples but in the past year, the already contentious process of dividing money has been complicated even more by the rise of cryptocurrency.

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“Before 2021, cryptocurrency was kind of still distant in the background. But last year, it seemed like it really started becoming more mainstream in divorce settlements,” said Sandra Radna, a Long Island, New York family law attorney who serves high net-worth clients.

As of late 2021, roughly three in 10 American adults under the age of 30 had invested in or used a cryptocurrency, according to a survey by Pew Research Center. Men were twice as likely than women to own cryptocurrencies, the survey found. And interest continues to grow: as of May 2021, half of Americans who own cryptocurrencies said they bought for the first time within the last 12 months, according to a poll by the Ascent, a personal finance website.

Cryptocurrency and other blockchain-based assets, such as NFTs, are by design difficult to trace. This, coupled with the fact that they are extremely risky and potential lucrative investments, might help explain why some people choose to hide them from spouses.

The most challenging part of tracking down hidden crypto assets, Radna said, is determining whether they exist.

Unlike stocks and bonds, which are usually kept in a brokerage account, cryptocurrency can be moved freely from one digital wallet to another. A popular place to host digital wallets today is crypto exchanges, which under US law can be subpoenaed for information about individual asset owners. But if the cryptocurrency is stored in another type of virtual wallet or if an exchange is based overseas, there’s not much that can be done.

This is often a problem with niche, anonymous-focused cryptocurrencies like dash, zcash, PIVX and verge, Radna said. “For example, the initial crypto investment is made from a joint marital bank account in Bitcoin. Then the Bitcoin is sold and a spouse invests that money in a lesser-known cryptocurrency. [The other] spouse wouldn’t know.”

Also there are no financial institutions, like banks, that keep records of cryptocurrency transactions, meaning that unless you know it exists, it’s almost impossible to trace it from a centralized source.

Time to bring in the forensic accountants

In Radna’s recent experience, some disputes had to be settled by involving forensic accountants. In one case, a client didn’t become suspicious money was missing until noticing gaping discrepancies between their family’s high income and low assets—a common red flag suggesting financial infidelity, Radna said.

It doesn’t always make economic sense to hire a forensic accountant, however, unless the money involved is significant. “If it’s over $100,000, it might be worth it,” Radna said.

The best practice is prevention, she said. “The best way to know what financial assets a future spouse has is through a prenuptial agreement, where you are required to list all your financial assets,” Radna said. However, it’s never a popular choice. According to a Harvard Law School survey, only 5 percent of married couples in the U.S. have prenup agreements, despite the fact that half of all marriages end up in divorce.

Which leaves couples with non-legally binding forms of precaution, such as the simple action of being open about money from the very beginning.

“When you enter a relationship, you need to be financially transparent. If only one spouse is working, you need to make an effort to say that you want to know what’s going on,” Radna advised. “For example, if there’s a financial advisor, you need to make sure you both have access to them. If there’s a major investment, you should both have access to details about that investment.”

Cryptocurrency Is the Latest Headache For Divorcing Spouses