What are cryptocurrencies and NFTs?

Cryptocurrencies and NFTs (non-fungible tokens) are digital assets that are subject to equitable distribution. They are assets that may have significant value and should not be overlooked when pursuing your equitable distribution claim.

They also can be used as a mechanism for hiding assets from a spouse, the spouse’s attorney and the court. Because of the decentralized and private nature of digital assets, it is easier to secrete and conceal cryptocurrencies and NFTs.

Specifically, cryptocurrencies are decentralized currency systems that currently operate mostly free from any control or regulation by the US government.* Cryptocurrencies can be used to purchase and sell products and services through various crypto marketplaces, including to purchase NFTs. NFTs can represent digital artwork, be exchanged for real-world items and experiences, and even be used for a variety of other purposes, including event tickets and purchases of digital music. Both cryptocurrencies and NFTs rely on blockchain, which is the decentralized ledger that records the existence of the transaction and, as a result of that record, the current owner of the related assets. Despite this, the prefix “crypto,” which means “secret” or “hidden,” is apt because what cryptocurrencies and NFTs are, what are they worth, and how they factor into our lives are mysteries to many of us. Crypto transactions take place through crypto wallets, which are assigned a unique wallet address but are otherwise typically anonymous or pseudonymous. Not all cryptocurrencies and crypto-assets are compatible with each crypto wallet, so an individual may very likely have multiple crypto wallets.

With respect to digital assets, many people are in the dark and somewhat skeptical as to the legitimacy of representations that they have value. Others believe passionately in cryptocurrencies and have invested hundreds of thousands of dollars in trading and developing new cryptocurrencies, taking the view that crypto investments aren’t much different than investing in the stock market or putting faith into the concept that physical currency has value beyond what we collectively believe it to have.

There is a market for cryptocurrencies that can fairly be characterized as volatile.  You need to remember that values of digital assets can fluctuate significantly and quickly, with little to no warning.  For example, an NFT for the first tweet by Twitter CEO Jack Dorsey was originally purchased for $2.9 million in 2021, was listed for sale in April 2022 at $48 million, but then only received purchase offers up to 0.09 ether (approximately $280 at the time).

If you believe your spouse deals in or owns digital assets, alert your attorney as soon as possible. Your attorney will need to conduct discovery requiring your spouse to reveal all digital assets that were acquired during the marriage, what crypto wallets they possess, and the respective addresses for those assets and wallets for verification purposes.

Documentation evidencing the existence of digital assets is different from other assets.  Don’t think of cryptocurrencies as another form of  “flat currency,” e.g., dollars.  There are typically no regular statements that are automatically issued.  Instead, the record of transactions involving cryptocurrency can be found stored in the related blockchain and linked in the asset owner’s crypto wallet. If you have access to the crypto wallet(s), you can generate statements for past transactions. Additional information may be needed in order to document crypto transactions. Discuss with your attorney as to what is needed to pursue your equitable distribution claim.

If you notice unusual withdrawals from your bank or investment accounts that you cannot trace to any specific asset, check whether the funds have been converted into cryptocurrencies and, from there, other crypto assets. An investor can convert dollars/yen/Euros or other conventional forms of currency into cryptocurrencies, such as Bitcoin or ether, and then trade one cryptocurrency for another cryptocurrency or currencies multiple times, thus making tracing that much more onerous.

Accounting for the potential existence of cryptocurrencies and crypto-assets is and will likely become a bigger issue that you should be aware of with respect to equitable distribution claims. Be sure to raise these and any related questions that you have with your attorneys so that appropriate efforts can be taken to identify and account for these potentially valuable assets.

* However, the US Securities and Exchange Commission has announced initiatives to register and regulate crypto exchanges.

Guest contributor to this blog is David Johnson. David is a principal with Offit Kurman, whose practice is devoted to Intellectual Property. If you have any questions pertaining to the subject matter of this blog or regarding other legal issues, please contact Offit Kurman.

Beth Hodges’ practice is devoted exclusively to family law.  Ms. Hodges’ cases involve the litigation, negotiation, and settlement of simple as well as complex financial and non-financial issues and disputes.

In her family law practice, Ms. Hodges handles equitable distribution, alimony, child support, and child.