Crypto can make messy divorces even messier
Why it matters: Crypto's unique nature makes it trickier to recover than typical assets in a marital split.
The big picture: The fact that crypto can be self-custodied or held on a USB drive doesn't change what spouses are legally entitled to, according to Citrin Cooperman Advisors' Mark DiMichael.
- But the process of investigating what crypto assets a spouse might have could be extensive, even if those funds are sitting at an exchange like Coinbase or Kraken.
- DiMichael, who leads the firm's digital assets practice and handles divorce litigation, said response times to subpoenas can vary from exchanges but typically takes eight weeks, and longer if there's an argument around it.
What he's saying: "Usually the first place I'm going to try and identify is the on- or off-ramps. There's a limited number of ways a person gets their cryptocurrency, but most commonly, they buy it on an exchange."
- "In that case, we're going to see a paper trail when the dollars leave the bank account."
- "There are cases where someone says they paid for services or bought my car for bitcoin, but it's not the most common. There's also mining."
A wife who still lived with her soon-to-be ex-husband grabbed a cold wallet right out of his hands, DiMichael said, referring to a device that stores cryptocurrency offline.
- She realized later that he had the seed phrase to access the funds. And the husband didn't have a backup.
- "These two people who were going through a contentious divorce... would've have had access unless they worked together," he said.
Of note: The process of wrestling a cold wallet into settlement from an unwilling participant is hard, because even a court order can't force someone to physically give up their wallet keys.
- "In the event a court wants to compel someone to hand over their bitcoin, [it] can write a court order. Only if they don't, the court will have to seize some other assets," DiMichael said.
Men and s**tcoins
Of the dozens of divorce cases DiMichael has consulted on, it has almost always been that "the husband has the crypto and the wife is trying to assess the situation."
The type of crypto matters too. Bitcoin and ether are generally easier to dole out in kind, DiMichael said.
- "If we're dealing with lots of low-market-cap coins, it's usually too much of a hassle to split in-kind. Some of these lesser-known coins might only be salable on decentralized exchanges."
Be smart: So why not just give your crypto to someone else, maybe a new lover?
- It could be considered "marital waste," a catchall term for when a spouse wastefully dissipates marital assets: If one spouse, physically gave it away, spent it on credit card bills or had a second family with a secret budget, the other spouse could make a claim.
The bottom line: With the price of bitcoin having roughly doubled in the past year — if there is a stockpile of it somewhere, it might be worth trying to hold onto some of it, even as you let go of your partner-for-life.