December 2021 Family Law Corner - Discovery in the Age of Bitcoin

by Sandra M. Radna

Attorneys who represent clients in litigated divorces are tasked with ensuring that their clients obtain their fair share of the marital estate. Hidden assets are a challenging concern for matrimonial attorneys and cryptocurrency has added another layer of complexity that is beginning to be addressed by courts throughout the country.

In 2014, the dispute about whether cryptocurrency is “money” or “property” was addressed by the courts in United States v. Ulbricht, No. 14-cr-68 (KBF), 2014 U.S. Dist. LEXIS 93093, at *66-72 (S.D.N.Y. July 9, 2014) (Ross Ulbricht was sentenced to life in prison for creating and operating the “Silk Road” website which enabled its users to buy and sell illegal drugs, goods, and services only through the use of Bitcoin. One of his defenses was that he could not be convicted of money laundering as Bitcoin is not money. The court rejected that claim). A district court in the Texas case of SEC v. Shavers, No. 4:13-CV-416, 2013 U.S. Dist. LEXIS 110018, at *4–5 (E.D. Tex. Aug. 6, 2013), found similarly. The court stated, “It is clear that Bitcoin can be used as money. It can be used to purchase goods or services . . . . [I]t can also be exchanged for conventional currencies.”

In contrast to those two rulings that classify digital currency as money, the IRS continues to classify it as property.

In 2014, California signed assembly bill 129, which legalized the use of digital currency for purchasing goods and transmitting payments. Bill AB 129 revised Section 107 of California’s Corporations Code which made the use of “anything but the lawful money of the United States” illegal.

Underscoring the relevance of cryptocurrency is the fact that lawmakers in thirty-one states introduced legislation in the 2021 legislative session concerning digital currency.

For family law practitioners, what is important to know is that whether it is classified as property or income, digital currency is a marital financial asset subject to distribution in a divorce.

The cryptocurrency investor may incorrectly believe that the purchase of cryptocurrency is “secret” and fail to disclose it in discovery. The court in the California case of DeSouza v. DeSouza, 54 Cal. App. 5th 25 (2020), recently addressed this issue. In DeSouza, the husband withheld information from his wife concerning cryptocurrency investments. Importantly, the court found that the husband’s failure to disclose the digital assets was a breach of his fiduciary duty to his former wife. The court then ordered the husband to transfer bitcoins and other cryptocurrency to the wife and further ordered him to pay her attorney’s fees and costs. On the husband’s appeal, the lower court’s decision was affirmed.

As family law practitioners, we assist our clients in the fair distribution of marital assets. They rely on us to also find and distribute “hidden” assets. This article aims to help you become familiar with digital currency and suggests what to request in discovery to recover potentially undisclosed digital assets for your client.

In order to locate assets, you first need to understand what you are looking for. First, it is advised to familiarize yourself with the terminology. The following are some examples.

Cryptocurrency is digital cash that is exchanged between parties without banks or third parties. As of this writing, there are over 10,000 types of cryptocurrency. The most well-known types of cryptocurrency are Bitcoin, Litecoin, Ethereum, Ripple, and Monero.

Blockchain: Most transfers of cryptocurrencies, with the exception of newer controversial digital currency (see IOTA), are recorded on the blockchain. Simply, it is blocks of information linked together, similar to an Excel© spreadsheet that permanently records all crypto transactions.

Alt coin: Any coin that is not Bitcoin. Bitcoin was the first crypto currency, so anything else is “alternative coins” or “alt coins.”

ICO: Initial Coin Offering. When a company launches, they have an “IPO” or “initial public offering.” In crypto world, it is called an ICO.

NFT: A Non Fungible Token is a digital file containing art, music, video, or similar content that is “minted” in a blockchain, which then makes it an “original.” It is something that is unique and becomes a collectible that can be bought and sold. NFTs have become very large in the arts, sports, and music world.

Cryptocurrency Exchanges: Similar to the stock exchange, this is where cryptocurrency is bought and sold. As of this writing, there are over 500 crypto exchanges. The most commonly used ones are Coinbase, Binance, Bitstamp, Kraken, and Gemini.

Private Key: Like a password, a private key is a string of numbers and letters that allows the user to access their cryptocurrency.

Digital Wallet: stores your private keys, keeping crypto safe and accessible.

Paper Wallet: A printed piece of paper that contains keys and QR codes that are used to facilitate crypto transactions.

Once you understand what you are looking for, you can then conduct an investigation. Every investigation starts with your client. Incorporate questions about whether there were any purchases of cryptocurrency or NFTs during the marriage into your initial client meeting. Your client may or may not know the answer to the question. In your analysis of the marital assets, when the parties’ lifestyle and income is incongruous with their stated assets, in addition to investigating the likelihood of undisclosed cash, consider undisclosed digital assets including cryptocurrency and NFTs.

Speak to your forensic accountants and find out if they have experience in uncovering digital assets. If they do not, get to know the professionals who do so that you are ready when the time comes. At the start of your action, along with serving your initial pleadings, if permissible in your jurisdiction, or shortly thereafter, put opposing counsel on notice that all computer hard drives and electronic devices must be preserved.

During discovery, you should request the following:

The computer hard drive. Computer forensics can look through the hard drive for transactions.

Bank and credit card statements. There is often a transfer of cash to an exchange in order to purchase crypto. Bank statements will likely contain the name of the exchanges, such as Coinbase or Gemini.

Tax returns. There is a section on the tax return that requests reporting of digital assets.

Loan applications. People try to look their best on a loan application, so they might report any crypto to look more affluent.

Any and all exchanges used by the party to transact in digital currency.

Transaction reports from exchanges.

The digital currency address.

NFT Discovery: NFTs are mostly on the Ethereum block chain. They are not traded on the other crypto exchanges. “Super Rare” is one of the exchanges that trades NFTs.

Digital money is here to stay. It is important for practicing family law attorneys to understand what it is, recognize it as a potentially high value marital asset, and understand how to find it so that it may be fairly distributed between the parties. Incorporating the above into your discovery requests is a great starting point.

Sandra M. Radna is the owner of Law Offices of Sandra M. Radna, PC., a law firm based in NYC and on Long Island, New York. With 28 years of experience practicing law, Radna founded Law Offices of Sandra M. Radna in 2012. Ms. Radna is also the author of the book You’re Getting Divorced . . . Now What? and has been featured in cnbc.com, decrypt.co, yahoofinance.com, cryptolitan.com, msn.com and cryptopotato.com discussing crypto­currency and divorce.