The rise of cryptocurrency in divorce
While the first decentralised cryptocurrency has been around for over a decade it is probably only in the last year or two that it has come to prominence. There is rarely a week that goes by without a news story about the latest rise, crash or new currency. However, to most of us it still feels quite alien. Even so it is now starting to feature with more regularity in a couple’s settlement upon divorce/dissolution of a civil partnership. While it is a relatively new phenomenon legal representatives and the family court have had to quickly grasp the implications of this new asset.
Before looking at its relevance in divorce, it is essential to have a basic understanding as to how the asset can be used, traced and controlled to appreciate the challenges it can throw up in a divorce court.
What is a cryptocurrency?
According to HMRC cryptocurrencies are:
‘Cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically’.
Not the simplest definition to understand! It is probably easier to view cryptocurrencies as essentially digital assets that you can buy, sell, spend and trade on exchanges. They are not based on an actual asset, so there is no intrinsic value; the value is determined by supply and demand. This makes cryptocurrencies speculative, unpredictable and hard to accurately value.
There are thousands of cryptocurrencies in existence, with Bitcoin and Ethereum probably two of the most well-known.
How is it different from foreign currency?
Cryptocurrency is not overseen or controlled by a central authority such as a bank or government and operates on an open network. They use ‘distributor ledger technology’ (the best-known type is blockchain) to keep a public record of all transactions.
The blockchain on which Bitcoin and most other cryptocurrencies is built consists of two lines of code, each called a key. The public key is visible to anyone who views the Bitcoin blockchain. The corresponding ‘private key’ is not publicly visible. The linking of the public key to a private key is how an individual proves ownership and control of the relevant number of units of Bitcoin. The private key can be stored anywhere. The place it is stored is known as the ‘wallet’. This could just be a piece of paper, or more likely it will be stored digitally on a computer or USB. Some go as far as breaking up the key and storing different parts of the codes in different places.
What is cryptocurrency used for?
One of the early appeals of cryptocurrency was that it provided the opportunity to transfer large amounts of wealth anonymously without any government or institutional interference. These days, cryptocurrency is used by some owners to take care of routine matters such as paying bills, buying goods, and others use it as collateral to obtain loans. Many others are purchasing it as a form of investment.
Why is cryptocurrency relevant upon divorce/dissolution?
Cryptocurrency is an asset to be considered in the financial settlement. The reality is that it is not a feature of mainstream divorce yet. This is because a large proportion of the general public still views cryptocurrency as too much of a gamble and the difficulty of identifying whether or not someone holds cryptocurrency.
How does a party know if their spouse/civil partner is holding cryptocurrency?
Both parties are under a duty to provide full and frank disclosure, and that includes disclosing any cryptocurrency. However, if one party merely has a suspicion that their spouse/civil partner is holding cryptocurrency and the other party has not disclosed it, preliminary investigative works need to begin. Within court proceedings the standard disclosure process requires each party to disclose bank statements. These should be carefully examined to see if there are any transactions which point to the purchase of cryptocurrency such as from exchanges or trading platforms. The limitation is that under standard disclosure these bank statements will only go back 12 months and the purchase of cryptocurrency may well go back further.
If the bank statements haven’t shown up anything the party may wish to request their spouse’s credit card statements to see if these throw anything up and make a more specific request for disclosure of all apps on their spouse’s smart phone.
An expert can also be instructed to try and track and trace any cryptocurrency. It is important to speak to the expert before instruction to understand what is and is not possible for them to find. It is important to carefully weigh up the costs of these investigations as there is a danger the costs of trying to trace the assets could easily outweigh what is actually held in cryptocurrency.
What should a party do if they suspect their partner is trying to get rid of their cryptocurrency?
It is possible to obtain a freezing order to prevent a disposition, although this is more complicated than the usual procedure of freezing a party’s bank account. It may also be necessary to take steps to physically secure the means of storage on which the private codes needed to make up a unit of cryptocurrency are stored, so as to prevent their transfer or even destruction of the means of storage.
How are agreements reached on dividing up crypto assets?
Careful consideration will need to be given as to whether each party will have a specific percentage of the crypto assets, or whether the spouse without the crypto assets chooses to waive their interest in it because of volatility and instead take a larger percentage of a more stable asset, such as the family home. In the first scenario there is a real potential difficulty with enforcing a property adjustment order.
In either scenario a key difficulty is what value should be given to the crypto asset. Whilst the courts are used to the fluctuating value of assets such as shares, the volatility of cryptocurrency is a whole new phenomenon. A party could go to bed one day a millionaire and the next be broke because the currency has crashed.
With more people dipping their toes into crypto assets and unscrupulous spouses taking advantage of its relatively anonymous nature to hide assets, this is an area which is likely to continue to develop in the family court over the coming years.