What’s a matrimonial lawyer to do when presented with an entirely new asset class that is little understood and whose value fluctuates wildly on a daily basis?
By Edward Bryan, Family Lawyer
At the beginning of a divorce, one of the first steps for a matrimonial attorney is to identify and value each spouse’s assets. The identification and valuation of real estate, business interests, stocks, and other assets occasionally present unique but manageable challenges. When in doubt, forensic accountants, appraisers, valuation experts and the like are hired to identify and determine values of those hard-to-value assets. But what is the matrimonial lawyer to do when presented with an entirely new asset class that is little understood and whose value fluctuates wildly on a daily basis?
This is the problem presented by cryptocurrency. While the idea of cryptocurrency has floated around the dark corners of the internet for years, no viable cryptocurrency came to fruition until 2009 with the creation of Bitcoin. The cryptocurrency universe now has a market capitalization of about $700 billion*.
What is Cryptocurrency – and Where Does It Come From?
Cryptocurrency is digital currency that allows for the transfer of funds from one party to another without a third party (think: bank) involvement. The digital currency is transmitted directly from the “wallet” of one party to another and can be used to purchase goods, services or other assets. Cryptocurrencies are generally decentralized from governmental entities and are not backed by hard assets.
Cryptocurrencies rely on their protocols and codes to ensure the security of transactions based on blockchain technology, a mechanism that publicly and securely records each transaction, making it difficult if not impossible to manipulate transaction information.
The most well-known of the cryptocurrencies are Bitcoin, Ethereum and Litecoin. There are over a thousand other cryptocurrencies available for purchase, with more coming to the market almost daily.
There are generally two ways to obtain cryptocurrency. The first and most common way is to purchase it using government-backed currency like the U.S. Dollar. The second way is to “mine” it: a process by which third parties confirm and document cryptocurrency transactions. They usually receive that cryptocurrency for their efforts.
Cryptocurrency Concerns in Divorce
Many people associate cryptocurrency with a scheme for tax evasion, money laundering, and nefarious purchases. While each transaction is recorded into the unalterable blockchain ledger, determining who actually made the transaction, and for what purpose, can be difficult. That is why it is important to formally request documentation concerning cryptocurrency as you would any other financial account, as well as to review financial statements for signs of cryptocurrency transactions. Failure to do so may result in those assets being non-disclosed in a divorce, which may deprive the non-cryptocurrency owning spouse of a significant financial asset. Additionally, this information may indicate fraudulent financial activity has taken place during the marriage.
Cryptocurrency Valuation and Distribution Concerns
After determining whether a spouse possesses cryptocurrency, its value must be determined for distribution. Unlike most assets, cryptocurrency is highly speculative and subject to wild swings in value on an almost daily basis. For example, in December 2017, the cost of one Bitcoin went from $10,859 to $19,343 and back down to $13,860 by the end of the month. Because of this, by the time you negotiate an agreement to the time you go to judgment, there could be a substantial increase or decrease in the marital estate. As a result, one party could end up with substantially less or more of the estate due to the asset volatility, depending on your valuation date and method.
Further, depending on when the cryptocurrency owning spouse purchased the asset(s), selling could trigger substantial capital gains taxes which must be considered in your dissolution calculus.
3 Cryptocurrency Practice Tips
- Ask for information/documentation regarding cryptocurrency wallets as you would any bank or brokerage account in discovery requests, including purchase and sale information.
- Review bank, credit card and other financial documentation for records of cryptocurrency transactions.
- Ensure your client understands the volatility of cryptocurrency and gauge their aversion to risk. Your client may wish to retain more stable assets as an offset to cryptocurrency. Conversely, your client may be willing to part with stable assets in order to retain cryptocurrency (“HODL” in the crypto-world) in the hopes that the value will rise dramatically in the future.
*As of Jan. 14, 2018.
Edward Bryan is an attorney at Mickelson, Jacobs and Bozek, LLC. in West Hartford, Connecticut. His practice focuses on family and matrimonial law. Edward spends his “spare time” volunteering with many organizations in Connecticut and as an adjunct professor at the University of Connecticut, his alma mater. www.mjblawct.com
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