Crypto Assets Are Making Divorce More Complicated

Inspecting a spouse's computer to ferret out hidden crypto accounts is only one thorny aspect of disputes over digital assets in divorce cases.

Indeed, the overarching challenge is valuing these high-tech assets so they can be divided by court order.

"I have one extremely wealthy client who wrote his private wallet address on a piece of paper; but he can't find it. He said, 'I had $20,000.' Now he doesn't know what it's worth. It could be $80,000!" martial and family law attorney Yueh-Mei Kim Nutter, a partner in the Florida firm Brinkley Morgan, tells ThinkAdvisor in an interview.

Financial advisors can play an important role even before the divorce process starts by gathering information and documents about crypto holdings.

Then they can help, for sure, by providing input into the valuation of those assets, Nutter says.

Valuing the couple's crypto assets is difficult, especially when it comes to non-fungible tokens, which can be highly complex and esoteric.

In the interview, Nutter discusses one of her current cases in which the husband bought, as a hobby, about 2,000 website domain names that aren't in the market.

How to value each of them presents a significant problem, she says.

Digital assets comprise cryptocurrency, real estate, e-books, art works, documents and, because crypto is growing in popularity, much, much more.

Divorce law varies from state to state, of course. But Nutter argues that, in general, the law "isn't keeping up with the times" as to the issue of dividing digital assets in divorce.

A Fellow of the American Academy of Matrimonial Lawyers, Nutter is a certified family mediator and founding member of the Collaborative Family Lawyers of South Florida.

Since 2011, she has been on U.S. News & World Report's list of the Best Lawyers in America.

ThinkAdvisor recently interviewed the attorney, who was speaking from her office in Fort Lauderdale.

She sees disputes over digital assets in divorce cases to continue on the rise. "The high-end divorces of the next generation are going to have a lot more digital assets [to divide]," she says.

Here are highlights of our interview:

THINKADVISOR: Are disputes over digital assets in divorce cases increasing?

KIM NUTTER: I've been seeing that over the past couple of years. I think this is going to be absolutely growing, particularly because the next generation is very much into digital assets.

Many wealthy people own digital assets. So the high-end divorces of the next generation are going to have a lot more digital assets [to divide].

And now Fidelity is letting you put digital currency into your retirement account. So I don't think [digital assets are] going away.

Crypto will get bigger and bigger.

What's the crux of the issue about digital assets in divorce?

A lot of it is finding these assets, but the real challenge is the evaluation.

I have a case right now in which my benefit is that I have the client who has all the digital assets and is quite knowledgeable about them.

However, when I go to court to present evidence as to the assets, I need an independent expert, not the client, to testify about the valuation.

It would be a little self-serving and wouldn't go over well if the client [presented that]. It's not the kind of credibility that you want.

How do you rate the courts when it comes to divorce cases involving digital assets?

The problem is that the law hasn't caught up with society. In a divorce, you have to ascertain what all the marital assets and liabilities are so you can value them as of a certain date and then try to divide them.

My job as an attorney is to offer the court a reasonable way to do that.

But divorce law isn't keeping up with the times; it's lagging behind.

What are the main challenges in valuing digital assets?

I've found that [typically] one [spouse] is far more knowledgeable about the [couple's] assets than the other, particularly digital assets.

Even though the lesser-knowledgeable spouse may be aware that they have an NFT [non-fungible token], for instance, they have no idea how to find the information about it [to value it].

And the concept of a [crypto] public wallet and a private wallet is — you might as well be speaking Martian to them. So that's a problem.

I have an extremely wealthy client who wrote his private wallet address on a piece of paper; but he can't find it.

He said, "I had $20,000." Now he doesn't know what it's worth. It could be $80,000!

How can financial advisors be of help when digital assets need to be divided in a divorce?

This will sound a little unusual, but maybe the evaluation of digital assets is one of those situations where the spouses should work together since there are so many unknowns.

So with a collaborative divorce, maybe financial advisors need to come into the process. Otherwise, you could hire two digital asset experts who could say the assets are worth divergent amounts.

There might be a way that a financial advisor could help the [parties] not to waste all that time and money.

Advisors need to understand how to find digital assets and then how they're going to be valued. They could give some direction ahead of time.

How far ahead?

Even before the divorce process starts, the advisor may get an inkling that one spouse may be going to file for divorce.

So they can certainly start talking about gathering the paperwork and all the information, particularly getting public wallet and private wallet addresses.

What else specifically could the advisor do?

Whenever they can assist the clients in information and document gathering, it saves so much time and money, and gives the attorneys such a lovely head start.

Can you discuss one of your cases in which digital assets have been especially difficult to value?

I have a client who purchased approximately 2,000 domain names [website addresses] not connected to any business; [that is], they're not in the market. He bought them simply as a hobby.

They're all titled under his name, but they're marital assets. The question is: How do you value them?

Maybe someday someone may want one of those names, but they have to find [this client who owns it].

How have you gone about trying to value these assets?

I went to GoDaddy [domain registrar] and plugged in one of the names. It said that the least it would be valued at is $25,000. It only gave a minimum value, not a maximum.

Then I went to another domain registration website and put in the same name. It gave the opposite, that the name could sell for as high as $225,000.

Try to present that in court!

So it's extremely difficult to value a domain name that isn't in the market.

What complicates that case even more?

I'm laughing because the motion the [spouse's] attorney filed shows that he hasn't had a lot of discussion with [digital] experts yet.

He thinks the client has a company and that the company owns all the domain names. He's wrong.

My client testified completely to the contrary. He wants the court to order that his wife gets one-half of all those domain names.

But the problem remains: How do we value them?

What might the court decide?

My concern is that the court may say, "Let's put all the domain names into a constructive trust," and then, as the husband sells them, [each ex-spouse] gets half.

But that could go into perpetuity, which would be ridiculous. So this is really a big problem.

What's the greatest challenge when it comes to NFTs?

One thing is that there are [several] traits to look for, and that makes valuing NFTs very difficult.

Sometimes many of the NFTs have a number of special traits or unique traits that, for example, give you access to certain things, extra privileges [and so on]; but [you don't get] ownership. So how do you add value to that?

If you have an NFT that gives you extra information, for example, shouldn't that have a greater value than another NFT [in the collection] without those extras?

NFTs are certainly complex. Can you cite another example of what you've run into with these assets?

Well, here's gambling going one step deeper: There are NFTs that relate to a way to generate money.

One of my clients has an NFT known as Axie [Infinity], which is a game; and you can sometimes make money from it, or you can hire people to work their Axie.

They build villages. You build your own city, and monies can be generated.

NFTs are a problem that we really need to pay attention to because they're too unknown.

How do you value a self-directed online investment account in a divorce case?

As long as I can identify the asset and where it is, I can then include it before the court and the court can order it be divided.

What happens if one of the divorcing spouses has a secret online account with lots of money in it, like a gambling account?

We search for gambling websites, and we also try to scrutinize tax returns because you'll find statements for losses [and so on].

Sometimes we're asked to do an inspection of someone's computer, which isn't easy to get permission to do.

In such case, the [suspected] spouse will insist: "I'm not gambling online!" But the other spouse will say, "Hogwash! He's holed up in his room. I hear the noise. I hear him playing blackjack. I know he's gambling!"

So sometimes the only way you can get information is to go in and see the history of where they've been, which is not an easy task.

How does doing that go over with the court?

I believe the courts are becoming more open to this more invasive type of discovery.

They want to make sure everybody has a fair and even playing field and that everyone has the same type of disclosure to financial information.