Hudson Intelligence

Investigating and Valuing Cryptocurrency in Divorce

In divorce proceedings, both spouses are required to fully disclose all assets, including cryptocurrency and digital tokens. Failure to disclose assets may lead to revaluation of a property settlement — and, if omissions on financial disclosures are material and willful, they may lead to more serious consequences, such as findings of perjury or contempt. Yet tracking and properly valuing cryptocurrency can be complicated, particularly if one spouse has attempted to conceal their digital assets.

Hudson Intelligence locates, traces, and evaluates cryptocurrency holdings to support equitable distribution in divorce proceedings. Divorce litigants and their legal counsel receive investigative assistance and expert testimony in these areas:

Investigation

• Identify exchange accounts and self-custodial wallets.

• Analyze blockchain transactions and digital asset holdings.

• Determine the movement and disposition of cryptocurrency.

Discovery

• Identify appropriate subpoena targets.

• Review exchange records and transaction histories.

• Interpret blockchain evidence produced in discovery.

Expert Testimony

• Explain blockchain evidence.

• Evaluate cryptocurrency valuation issues.

• Assist the court in understanding technical evidence.

Cryptocurrency can be a contentious and unfamiliar issue in divorce proceedings. Spouses and their legal counsel may benefit from qualified experts to help explain technical blockchain evidence to the court. They also need to know what to seek and demand at every stage of litigation: from discovery, to depositions, to equitable division of marital assets.

Concealed Cryptocurrency in Divorce

In some divorce proceedings, a financially sophisticated spouse may attempt to conceal assets through undisclosed cryptocurrency investments. Digital assets like Bitcoin (BTC) and Tether (USDT) are frequently believed to be highly anonymous and easy to hide. This makes them a popular – but imperfect – choice for wealth concealment. 

Forensic investigation may identify previously undisclosed digital assets in self-custodial wallets, cryptocurrency exchange accounts, income-bearing decentralized finance (DeFi) stakes, nonfungible tokens (NFTs), metaverse properties and electronic payments. 

Confirming Suspicions of Concealed Cryptocurrency 

An estimated 20% of adults in the U.S. have owned cryptocurrency – with higher rates of ownership among men – according to some published surveys. That’s roughly the same amount of Americans who buy and sell stocks in publicly traded companies. (Though it’s less than the 60% of Americans who own stocks and bonds indirectly through mutual funds and retirement plans.) These numbers, alone, tend to support a reasonable expectation that almost any married person of means could have some cryptocurrency stashed away — somewhere.

Spouses who are hiding cryptocurrency may attempt to cover their tracks by moving money through multiple exchanges, changing wallets, swapping assets and jumping chains. Yet expert forensic investigators with advanced blockchain intelligence tools can often reconstruct significant portions of the movement of digital assets by combining blockchain analysis with financial records and other investigative evidence.

Understanding Custody of Cryptocurrency Assets

Cryptocurrency Exchange Accounts: One of the most common ways to acquire and store cryptocurrency is through a customer account at a cryptocurrency exchange.

Self-Custodial Wallets: Outside of exchanges, cryptocurrency can be stored and operated with self-custodial wallets (sometimes known as non-custodial wallets) in which the user has exclusive control over their private keys.

Because the owner of a self-custodial wallet is the only person with control over their assets, there is no service provider or third-party that can be subpoenaed to produce account records.

Yet if at least one blockchain address or transaction hash is known, investigators may be able to develop substantial information regarding a self-custodial wallet, including its transaction history, current asset balance, and interactions with relevant counterparties and exchange accounts. 

Alternative Digital Investments: Virtual assets may also be staked in interest-bearing decentralized finance (DeFi) applications; represented as digital properties in the metaverse; or collected in the form of nonfungible tokens (NFTs). These financial activities are all traceable, to varying degrees, on the blockchain. 

Where to Look for Crypto Clues (And What to Look For)

Bank Records: First and foremost — especially if you are starting without any specific details on a spouse’s suspected crypto activities — account statements from known bank, brokerage and credit card accounts should be scrutinized for past transfers to/from cryptocurrency exchanges and virtual asset service providers.

ACH transfers and wire transfers from bank and brokerage accounts are commonly used to transfer cash to cryptocurrency exchange accounts. Bank accounts might also receive deposits and incoming transfers from exchanges related to cryptocurrency trading and sales activity.

Forensic review of banking records should be conducted by a professional who is familiar with cryptocurrency transactions. Statement lines might not explicitly identify transactions involving an exchange, but may instead show the name of an affiliated bank or parent company. 

For example, searching past bank statements for customer transactions at Kraken might not yield any records explicitly listing the name of that exchange. Yet an experienced blockchain investigator would know that relevant transactions may appear in bank statements involving affiliated counterparties such as Kraken’s parent company Payward Inc. or its financial partners such as Metropolitan Commercial Bank (MCB).

Tax Documents: Taxpayers in the U.S. are now required to report income related to cryptocurrency sales, trades and conversions to the Internal Revenue Service (IRS) and applicable state tax authorities. Spouses who have filed joint tax returns should review those documents to identify any gains, losses, or other entries related to crypto. If necessary, copies of past tax returns and tax transcripts can be requested from the IRS.

Personal Papers: If a spouse moves out of the marital residence and leaves behind an accumulation of personal records, they may include valuable information on financial activities. In these situations, it is important to know how to recognize relevant information once you’ve found it.

• Seed Phrases: A seed phrase (also known as a recovery phrase) is a series of random words that are auto-generated by wallet software when the wallet is first set up.  Seed phrases can be used to recreate a wallet and regain access to its associated digital assets – even if the wallet itself has been lost, compromised or destroyed. A spouse who jotted down a list of 12 to 24 odd words that read like a bad haiku might have a hidden self-custodial wallet.
  

• Blockchain Address: Any record of wallet addresses found in personal papers or past communications of an opposing spouse may be highly relevant to asset discovery. An address is a long string of letters and numbers that serves as the virtual location to which digital currency is sent and received. Bitcoin addresses begin with 1, 3, bc1 or bc1p. Ethereum addresses begin with 0x. Addresses are used by cryptocurrency exchanges such as Binance and Coinbase to process customer deposits. They are also used by individuals operating their own self-custodial wallets, such as a Ledger hardware wallet, an Onchain mobile wallet, or a MetaMask software wallet. For blockchain investigators, a known address is a valuable thread to follow during forensic analysis, and may sometimes be used to uncover an entire portfolio of digital assets.
  

• Transaction Hash: A transaction hash appears similar to an address, but references a particular transaction on the blockchain. Entering a hash into a blockchain explorer will reveal the addresses involved on both sides of a transaction – sender and recipient – as well as the asset type, amount, and date/time of the transaction. A hash of a past transaction can be a very useful starting point for forensic analysis and asset discovery.

Digital Devices: Hardware wallets, mobile phones, tablets and laptops left behind by an opposing spouse who abandons the marital residence may contain valuable data for asset discovery. Computer hard drives and mobile devices should be imaged and inspected by a digital forensic analyst. Relevant files for review include software wallet applications, browser history, password managers, email archives, tax reports and personal finance applications, as described below. Recovery of deleted data may be possible under certain circumstances. 

• Hardware Wallet: Hardware wallets from Ledger resemble thumb drives; Trezor wallets look like key fobs; and Tangem has models as slim as a credit card. All of these devices enable owners to self-custody their crypto assets and keep them offline, in cold storage, until needed. Finding a hardware wallet — even one that has been wiped of its data — may be a ‘eureka’ moment for someone who suspects their spouse has hidden crypto.
  

• Email Messages: Cryptocurrency exchanges regularly send marketing emails to their customers. Some also send confirmation receipts by email after every buy, sell, trade and transfer is executed. These receipts contain dates, amounts, addresses and hashes.
  

• Multi-Factor Authentication Apps: Certain cryptocurrency exchanges require their customers to use multi-factor authentication (MFA) or two-factor authentication (2FA) to safeguard their accounts. Even when not required, MFA/2FA are commonly used by security-conscious cryptocurrency investors. If authentication apps like Google Authenticator or Authy are installed on a spouse’s devices and generating sign-in codes for specific exchanges, this information can help determine where legal discovery and subpoenas should be directed. 
  

• Virtual Private Network (VPN): Investors in the U.S. and Europe are prohibited from using a number of cryptocurrency exchanges based in offshore and foreign jurisdictions. Some of these exchanges are known for their lack of anti-money-laundering (AML) and Know Your Customer (KYC) compliance. Users with U.S.-based IP addresses may be automatically prevented from accessing these exchanges online; but those security measures may be circumvented using a Virtual Private Network (VPN) that tricks the exchange’s servers into believing the U.S. customer comes from another, non-prohibited country. In conjunction with other evidence, the use of a VPN (e.g., CyberGhost, ProtonVPN or IPVanish) may be relevant when investigators are assessing whether a user may have accessed cryptocurrency exchanges otherwise unavailable from their jurisdiction.
  

• Privacy Coins: Privacy coins like Monero, Dash and Zcash are part of a special subset of cryptocurrencies with their own blockchains that have been designed to enhance transaction privacy and reduce public visibility. Basic information of each transaction – down to small details like the amount – may be disguised and remain opaque to external inspection. These enhanced privacy features are intended to make it more difficult to forensically investigate and trace assets. Even if it is not technically possible to de-anonymize certain transactions, gathering evidence that an opposing spouse has invested in privacy coins may be useful for establishing a potential pattern of asset concealment. Such evidence may be found in subpoenaed transaction histories from exchanges, or through deep-dive digital forensic examination of a spouse’s devices that includes browser history, command-line wallets and installed applications.
  

• Tax and Accounting Apps: Financial software customized for cryptocurrency traders include CoinLedger, Koinly and CoinTracker. These applications often connect directly to exchanges and wallets to automatically sync financial data for the user’s portfolio. They can be a valuable repository of data on trades, transactions and accounts. 

Effective Subpoenas of Cryptocurrency Exchanges for Divorce

Subpoenas can be a powerful tool for discovery of digital assets in divorce proceedings. To be effective, preparation of these subpoenas must be tailored to cryptocurrency exchanges; it is not advised to reuse the same, standard subpoenas served on traditional financial institutions likes banks and brokerage firms. 

Personal Identifiers for Exchange Customers: Email addresses are used by cryptocurrency exchanges as a primary customer identifier. This is different than banks and brokerage firms, where Social Security Number (SSN) or paired name and date of birth (Name+DOB) are primary criteria for identifying accountholders. Certain exchanges might not have record of the accountholder’s SSN or DOB, depending on their KYC compliance practices and policies on retaining personally identifying information (PII).

Details on customer deposit addresses as well any outbound transfers executed by the exchange on behalf of its customer (identified by transaction hash) can also be used by exchanges to identify a particular customer account.

It is recommended that subpoenas on cryptocurrency exchanges and virtual asset services providers include all available personal identifiers for accountholders, including, if known: 

• Name (Full Legal Name and Known Variations)

• Email Addresses 

• User Name or Handle

• Customer Deposit Addresses

• Transaction Hashes

• Account Number

• Cell Phone Number

• Tax Identification Number

• Date of Birth

• Passport Number

• Physical or Mailing Address

Appropriate Scope of Exchange Subpoenas: In general, subpoenas of exchanges should include a request for all information associated with the accountholder, including but not limited to:

• Name of accountholder(s) 

• Account registration and use information, such as registered email address, cell phone number, Know Your Customer (KYC) compliance documents, support tickets/correspondence, and any changes/revisions to the aforementioned

• Any and all account statements, including monthly statements, annual year-end statements, and tax reporting statements

• Historical transaction data — including complete deposit, trade, transfer and withdrawal records — with amounts, time-date stamps, transaction hashes and wallet addresses

• Linked financial accounts (such as bank accounts, credit cards, other exchange accounts) and historical transaction data, including all deposits and withdrawals of fiat currency and digital assets to/from external accounts

• Source of Funds (SoF) and AML compliance audit reports

• Account-related correspondence (internal or external), including copies of subpoenas, warrants, etc.

• Login history with date/time-stamps, IP addresses and user-agent data

• Any other information pertaining to the identified account(s) that the exchange has in its possession, custody, or control

After customer account records have been produced by a subpoenaed exchange, analysis and interpretation of the transaction history by blockchain investigators may reveal many other relevant findings, in addition to the account’s current status and balance.

Tracing the flow of assets in – and out – of the customer account can identify patterns of activity involving self-custodial wallets, NFTs, DeFi stakes, mixers, gambling sites, darknet markets, decentralized exchanges and other potentially relevant entities. 

Blockchain intelligence experts can provide guidance on identifying exchanges that are most likely to be responsive to subpoenas – and alternative approaches to develop asset-related information if an exchange does not comply with requests for account records or transaction history.

How to Determine Value of Cryptocurrency for Divorce 

Determining the proper value of cryptocurrency investments can be challenging in contested divorces. The same attributes that make cryptocurrency attractive to its proponents – its decentralized nature, technical innovations, extreme price swings and perceived anonymity – can be complicating factors for court proceedings.

Valuing cryptocurrency assets can present challenges beyond simply determining the market price on a particular date. Digital assets may be held in multiple wallets or exchanges, converted between different cryptocurrencies, staked to earn rewards, pledged as collateral, or transferred through decentralized finance (DeFi) protocols. The value of these holdings may fluctuate significantly over short periods of time, and the apparent balance of a wallet may not reflect the subject's complete digital asset portfolio.

In addition, not all digital assets have the same degree of liquidity or readily ascertainable market value. While major cryptocurrencies and stablecoins often trade on established exchanges with transparent pricing, other digital assets may have limited trading volume, significant price volatility, or restrictions affecting their transferability or sale. Determining the fair value of these assets may require consideration of available market data, trading activity, liquidity, and the specific circumstances of the holding.

Depending on the issues presented, valuation may require coordination with legal counsel, accountants, tax professionals, or other subject matter experts.

For these reasons, cryptocurrency valuation is often best considered in conjunction with the broader financial investigation. Wallet balances, blockchain transaction histories, exchange account records, tax returns, and other financial documents may each provide important context when evaluating the existence, ownership, value, and disposition of digital assets. An accurate assessment frequently depends not only on the blockchain itself, but also on the surrounding financial evidence and the legal issues presented in the case.

Consult a Crypto Forensic Expert

Hudson Intelligence assists law firms and divorce litigants with locating and appraising cryptocurrency assets. Every cryptocurrency investigation is led by a Cryptocurrency Tracing Certified Examiner (CTCE) and Certified Fraud Examiner (CFE). If you would like to discuss a potential investigation or expert witness engagement, please complete the form below.