Digital Assets and Divorce

The rapid rise of digital assets over the last several years has introduced new considerations and investigative needs for forensic accountants and family law practitioners.  Once considered a niche investment vehicle, digital assets have become an increasingly common component of marital estates.  Today, we must consider a broad range of digital assets, including cryptocurrencies, non-fungible tokens (“NFTs”), assets held in digital wallets, decentralized finance (“DeFi”) accounts, token-based compensation, and other blockchain-based holdings.

Digital assets present unique challenges in divorce proceedings as their complex, decentralized nature, evolving regulatory framework, valuation volatility, and potential for concealment may require specialized approaches.  As digital assets continue to mature and proliferate the market, they demand the same attention in discovery, classification, valuation, and equitable distribution as traditional financial assets, such as bank accounts, retirement accounts, and brokerage accounts.  Navigating this evolving landscape requires understanding of the unique issues presented by digital assets, whether held in Bitcoin, Ethereum-based tokens, NFTs tied to digital artwork, or governance tokens within a DeFi protocol with focus on when and how the asset was acquired.

Discovery Challenges in the Digital Asset Environment

Digital assets introduce distinct discovery challenges compared to traditional financial accounts:

• Complexity and Concealment: Many digital assets are recorded on public blockchains or held in digital wallets using alphanumeric addresses and cryptographic keys rather than personal identifiers. While many transactions on public blockchains are transparent and recorded, the identity of the individual who controls or beneficially owns a given wallet is not apparent from the blockchain itself; the blockchain can show that a transaction occurred but does not show who controls the wallet.  Common concealment tactics include transferring funds to anonymous wallets, splitting holdings across multiple addresses, or use of decentralized exchanges.
• Diverse Storage Locations: Digital assets may be held in custodial exchange accounts (e.g., Coinbase, Binance, etc.), self-custody wallets (hardware or software), DeFi platforms, or even foreign exchanges. NFTs and other tokenized assets may be associated with marketplaces rather than traditional accounts.  Accordingly, the fragmentation of digital asset locations complicates the discovery process.
• Evolving Regulatory Frameworks: The regulatory environment governing digital assets is constantly changing and varies across jurisdictions and platforms. Some exchanges operate under U.S. regulatory oversight and maintain detailed records subject to subpoena, whereas others are domiciled offshore or operate in regulatory gray areas with limited reporting, retention, or cooperation obligations.  Additionally, classifications of digital assets (e.g., as property, securities, or commodities) can influence recordkeeping practices and the availability of transactional data.  These inconsistencies can complicate discovery efforts, delay compliance with information requests, and require forensic accountants and counsel to tailor investigative strategies to the regulatory posture of each platform involved.

To overcome these hurdles, forensic accountants and family law attorneys rely on a blend of traditional and technical approaches, including subpoenas to exchanges, structured interrogatories, financial affidavit disclosures, and depositions.  In our experience, digital asset discovery issues are rarely resolved through a single request or subpoena; instead, they often require iterative analysis as additional wallet activity or exchange relationships are identified.  Despite the decentralized nature, most digital assets intersect with traditional financial institutions, through bank transfers, credit card purchases, cash withdrawals, or custodial exchanges, which provide forensic accountants with viable starting points for tracing activity.  In certain complex cases, a digital asset or cryptocurrency expert may be retained to provide blockchain analytics and specialized tracing software.

Valuation Complexities

Valuing digital assets in divorce settlements presents a unique layer of complexity not typically encountered with stocks, bonds, real estate, or other traditional assets.  Unlike traditional, publicly traded securities with widely accepted reference prices, many digital assets lack stable markets and are inherently volatile.

Key considerations in the valuation of digital assets include:

• Valuation Date: The valuation date is state-specific and may be the date of separation, filing, or trial; all of which can significantly impact settlement outcomes due to price volatility.
• Liquidity and Market Depth: Unlike major securities exchanges, many digital asset markets are fragmented, less liquid, or subject to platform-specific restrictions; however, some digital assets can be readily converted to cash. For NFTs, certain DeFi interests, or other large holdings of digital assets, quoted prices may not reflect the value a divorcing spouse could reasonably realize.
• Income-Producing Features: Digital assets may generate income through staking rewards, yield farming, royalties, or governance participation. These features raise additional questions regarding the classification of income versus property and may require ongoing monitoring post-separation.
• Source Reliability: Valuation sources should be documented and defensible. Well-established price indexes from recognized platforms increase credibility in settlement negotiations and expert testimony.  Forensic accountants play an integral role in developing valuation methodologies, documenting assumptions relied upon, and communicating risks to attorneys and the trier of fact.

Best Practices for Practitioners

Given the complexity and evolving nature of digital assets, early collaborative engagement between forensic accountants and legal counsel is essential.

• Early Discovery Requests: Attorneys should incorporate digital asset discovery requests into initial interrogatories and subpoenas, including to traditional financial institutions and known digital asset exchanges. Requests should explicitly reference digital assets, wallets, exchange platforms, NFTs, and DeFi platforms.
• Employ Specialized Tools and Expertise: As discussed previously, engaging a digital asset or cryptocurrency expert to leverage specialized software may be beneficial to support a forensic accountant’s analysis.
• Educate Clients on Disclosure Obligations: People may often misunderstand or underestimate the prevalence of blockchain transparency. Despite perceived anonymity, public blockchain transactions are recorded on a globally accessible ledger and can be traced across jurisdictions, though this becomes more difficult as it moves offshore.  Informing clients of legal requirements and potential penalties for non-disclosure can mitigate conflicts and expedite resolution.
• Address Post-Valuation Risk: Settlement agreements may require consideration of post-valuation price movements, ongoing income streams, or future token vesting events.

Conclusion

 Digital assets are no longer peripheral or sparse in divorce proceedings.  As prevalence continues to grow and people familiarize themselves with digital assets as potential investment vehicles, a rise in attentive forensic accounting, defensible valuation approaches, and clear communication between parties is warranted.  With appropriate expertise, tools, and strategies, digital assets can be identified, analyzed, and incorporated into equitable distribution of the marital estate.

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