Worldwide adoption of blockchain technology is exploding at an exponential rate. The technology and its corresponding regulation continues to develop at a blinding speed. As digital assets like cryptocurrencies and NFTs become more prevalent, it is imperative that practitioners remain prepared to address these assets and income streams in their family law cases. Assume that a new client, Elon, walks into your office and informs you that he knows his spouse, Kathy, “is into crypto and NFTs”, but does not know much more than that – what should you do next?
Identifying Digital Assets
The very nature of blockchain assets (being an open, public, distributed ledger accessible to anyone with an internet connection) is what makes these assets easier to identify and trace than cash or other traditional financial assets so long as you are armed with the right information and know the tools available to you. As you proceed with discovery in your case, you should be sure to target the following key sources of information:
- Bank and credit card statements – To purchase cryptocurrencies or NFTs, users still need a fiat on and off ramp where they can convert their native currency (e.g. USD) to crypto or sell their crypto back into cash. This is why you should be sure to request and review Kathy’s bank and credit card statements and look for transfers or deposits to or from major exchanges (e.g. Coinbase, Binance, Kraken, Voyager, Gemini, Kucoin, Huobi, FTX).
- Exchange balances, NFT marketplaces (such as OpenSea) and their transaction histories – Many users acquire and hold their crypto and NFTs on exchanges. Practitioners should be sure to request the current and historical balances of these exchanges and marketplaces, including transaction histories.
- Wallet ID/Address – It is critical that you request Kathy’s wallet address as this information will allow you to immediately (and at no cost) access: i) the current and historical crypto and NFT holdings in Kathy’s wallet; ii) all transfers or other transactions for the entirety of the wallet’s existence (including which exchanges she uses); iii) whether any of her assets are staked and generating income; and iv) whether she utilizes decentralized finance (or “DeFi” – more on this below).
- Decentralized finance – DeFi refers to financial services provided by protocols and apps run entirely by code. Kathy might be using DeFi to lend, borrow, trade or stake her crypto or NFTs to earn outsized returns. There are thousands of protocols and apps, with new ones going live every day, but some popular protocols include MakerDAO, Aave, SushiSwap and Compound. The trouble with DeFi in the context of a family law case is that the assets in these protocols will not show up in Kathy’s wallet. Another challenge that comes with financial services run entirely through code is that there is no entity to sue or subpoena and no records custodian (or any employees for that matter). This is why it is critical to ask whether Kathy uses DeFi in your discovery requests. But what happens if Kathy denies using any DeFi protocols in her interrogatory responses?
Finding the Missing Assets
Fortunately, Kathy did provide her Metamask (wallet) address in her response to your interrogatories so you can tell Elon that all is not lost. Since the blockchain (e.g. Ethereum) literally is a public, open distributed ledger of every transaction that has ever occurred on the chain, you can enter Kathy’s wallet address into your favorite block explorer tool (try etherscan.io for the Ethereum blockchain) and you will immediately have the complete history of every asset, account, exchange and DeFi protocol Kathy has ever interacted with. Much to Elon’s delight, etherscan.io actually allows him to click on every single transaction to reveal every relevant detail about that transaction (e.g. the recipient wallet address for an outgoing transfer, the specific assets that Kathy transferred or staked, the NFTs she owns and leases to other users for additional income). This invaluable tool allows you to click on the wallet addresses that Kathy transferred funds to and to immediately pull up all the same information about that wallet – a tracing exercise that is significantly more efficient and transparent (and much less expensive) than tracing traditional financial assets through the banking system. Practitioners need to be aware of the block explorer resources for each of the major blockchains (e.g. blockchain.com for Bitcoin, etherscan.io for Ethereum, snowtrace.io for Avalanche).
If your search shows that Kathy interacted with exchanges that she did not disclose in discovery, you can subpoena any necessary supplemental information directly from those exchanges. Note that many exchanges are not based in the United States so acquiring those records can be challenging.
Dividing the Assets
Now that you have worked to identify Kathy’s crypto and NFT holdings, Elon has learned enough that he wants to maintain some exposure to the space as you proceed with the property distribution phase of the divorce. Fortunately for Elon, cryptocurrencies likely represent the easiest asset class to divide and transfer in any divorce. With the click of a few buttons, Kathy can transfer the agreed upon portion of her crypto holdings to Elon’s new wallet instantaneously (including fractions of any coin) without the need for wire transfer forms, a centralized clearinghouse or QDRO. If Elon were to have a change of heart, most cryptocurrencies are highly liquid and can be sold just as easily and converted to cash. It is critical to keep tax consequences in mind as new regulations continue to roll out in the digital asset space.
But what about Kathy’s rare Bored Ape NFT, her crown jewel that currently receives $1,000,000+ offers that she rents out to crypto aficionados for significant sums? Elon is nervous about attempting to value the asset due to market volatility and wants to share in the significant income stream that Kathy brings in from her rentals. Again, Elon is in luck, as smart contact platforms currently allow users to fractionalize ownership of NFTs, which allows them to seamlessly share in related income streams and the proceeds from a future sale of the asset.
Dive In And Learn!
Many of the platforms mentioned in this article likely will be considered ancient history a year from now so it is important for attorneys learn about digital assets now. Like most things, we find that the best way to learn about the technology and the related tools is to dive in and try it yourself. Make an account with an exchange, try buying and selling a small amount of crypto, transfer funds to a wallet or explore decentralized finance – it is a fascinating space and it will prepare you to address the relevant issues in your cases.