Crypto divorce cliff looms for married millennials

The Challenge of Crypto in Divorce Proceedings

The U.S. legal system, particularly divorce law, has struggled to keep pace with the rapid evolution of cryptocurrency. As millennials, who hold the highest amount of crypto, enter their peak divorce years, the complexities of dividing digital assets have become increasingly apparent.

Dividing cryptocurrency during a divorce is not unlike splitting traditional property such as real estate or retirement accounts. Couples must decide whether to split the crypto holdings on-chain, sell them and divide the proceeds in fiat currency, or offset the value of the digital wallet with other assets. However, the biggest issue for many individuals, especially women, is the lack of awareness about their spouse's crypto investments.

Divorce proceedings often involve complex decisions about how to divide marital property. While traditional assets like homes or vehicles come with clear documentation, cryptocurrencies can be hidden or mismanaged. In many cases, one spouse may control the private keys to a digital wallet, effectively giving them full control over the assets. This creates significant challenges for lawyers and courts trying to determine the true value of marital property.

Mark Grabowski, a professor of cyber law and digital ethics at Adelphi University, highlights that the ownership of crypto is determined by who holds the private keys, not by who is listed on an account. This makes it easier for one spouse to hide or underreport their crypto holdings, complicating the process of asset division.

Lawyers now need to subpoena exchanges, trace transactions on the blockchain, and determine whether coins were purchased before or during the marriage. Without transparency and standardized reporting, it's easy for one party to conceal their digital assets. Courts are still catching up to these new challenges.

Renee Bauer, a divorce attorney with experience in crypto splits, notes that the most common question couples face is "who gets the wallet?" This seemingly simple question opens the door to a host of complications that traditional property division never had to deal with. The first challenge is identifying what actually exists — unlike a retirement account or a house, which comes with clear documentation, crypto may be stored in an online exchange or a hardware wallet that one spouse conveniently forgot to mention.

Tracing crypto holdings often involves detective work and digital forensics. Once the digital assets are authenticated, the next step is determining custody. Some spouses want to keep the wallet intact, while others prefer a clean monetary split. Courts are still figuring out the best way to handle these situations, especially when it comes to security and access to private keys.

The Rise of Crypto Hunters

One of the few companies that can help locate hidden crypto assets is BlockSquared Forensics. Ryan Settles, founder and CEO of the Texas-based company, says the demand for his services has increased exponentially since he founded the company in 2023. BlockSquared specializes in the crypto aspects of family law and divorce, offering everything from simple asset verification to deep investigations across continents.

Settles' company presents clients with a "storyboard" that traces and timestamps the movement of cryptocurrencies. He notes that the need for such services is particularly high in high-net-worth divorces, where one spouse may be hiding significant crypto assets.

Ferreting out crypto in a divorce is becoming more common, especially among millennials, who hold the highest amount of crypto and are approaching peak divorce years. Settles also emphasizes the importance of addressing tax liability during the divorce process, as many people are unaware of the complex tax implications of crypto transactions.

"There are a significant number of tax issues that most people, even attorneys, are not familiar with," Settles said. He added that the number of taxable events and reporting requirements from even a single transaction can be overwhelming for those unfamiliar with the space.

Another challenge is the volatility of crypto, which can lead to unexpected capital gains when assets are sold. Unlike a savings account, the value of crypto can swing wildly in a single day, making it difficult for couples to agree on the timing of a split.

Legal Considerations and Future Outlook

Roman Beck, a professor at Bentley University, explains that while crypto is a relatively new area, it is treated similarly to other forms of property in divorce proceedings. "For tax and most property-law purposes, cryptocurrency is treated as property, not as money," Beck said. This means that crypto acquired during the marriage is typically part of the marital estate, just like a brokerage account or a second home.

Courts do not split wallets but instead focus on the economic value they represent. This leaves lawyers and judges with three main options: split the holdings on-chain, sell and split the proceeds in fiat, or offset the value with other assets.

From a technical standpoint, a wallet is just a set of private keys, often spread across hardware devices, mobile apps, or even seed phrases on a piece of paper. Sharing a wallet after a divorce is not safe, as it could compromise the security of the assets.

Another complication is the volatility of crypto, which makes it challenging for couples to agree on the timing of a split. Over the past two months alone, Bitcoin has seen a 35% decline, highlighting the unpredictable nature of digital assets.

Beck suggests that one solution is to split the wallet on-chain, creating two separate wallets for each partner. Alternatively, couples could agree to turn over the crypto holdings to a trusted third party to act as an agent until market conditions improve.

Despite the challenges, there is a positive aspect to crypto in divorce proceedings. Public blockchains like Bitcoin and Ethereum offer transparent ledgers, with every transaction recorded forever. This creates a perfect audit trail if you know how to read the chain.

"The combination of transparent ledgers and powerful analytics gives lawyers and judges better tools to reconstruct financial behavior than they ever had with cash," Beck said. However, he acknowledges that people will continue to try to hide assets, and the future of crypto in divorce will depend on how far courts are willing to go in requiring scrutiny in everyday cases.