Cryptocurrency in Divorce Proceedings

What happens during financial disclosure in divorce proceedings where my spouse may have Cryptocurrency investments?

The topic of many news articles and financial discussion, cryptocurrencies have developed in popularity and in prominence over the last decade. To most people however, the asset class is still largely mysterious.

A Refresher on Crypto

Cryptocurrencies are a digital form of value which have no physical representation. Rather, they operate using Blockchain technology which is a decentralised, computerised ledger. This means that there is neither a central record nor person verifying transactions such as in the traditional banking system.

Crypto assets are traded online and used to store wealth or invest in other digital assets. However, they are slowly starting to be used to buy some physical goods.

Crypto assets include cryptocurrencies and also Non-Fungible Tokens (NFTs) which are unique digital art pieces where their ownership if proven through Blockchain technology.

A key feature of crypto is that it is currently outside of the traditional financial system and is therefore largely unregulated. This means it can be more anonymous, which makes tracking crypto holdings and transfers challenging.

Cryptocurrency Considered in Divorce

As cryptocurrencies are assets which constitute property, (as confirmed by the High Court in AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 (Comm), they should be considered in divorce and finances proceedings. With crypto capable of holding significant values, the family courts have powers to make orders against it.

Crypto can be held and traded in different ways which can make each case different when addressing crypto assets in divorce. For example, where someone has invested into crypto assets through a popular online trading exchange such as Binance or Coinbase, these can be traced through bank statements by forensic accountants.

Similarly, experts can use the ‘public key’ information relating to the crypto in question in an attempt to trace its value and activity. This is similar to the account number of a traditional bank account. However, the public key will not assist in linking the number back to your spouse if the public key number is unknown before any investigation as they are listed without any names attached.

Likewise, private keys are only held by the owner of crypto like a password. These are not linked or published on any public domain.

Crypto can also be stored in ‘wallets.’ A so called ‘hot wallet’ refers to crypto held on an online exchange account or desktop application for example. They are internet linked. A ‘cold wallet’, however, is held off-line on a hard-drive device much like storing files on a memory stick. Cold

wallets are much more secure and therefore difficult to trace or investigate as they are not linked to any online accounts.

It should be remembered that full and frank financial disclosure beginning with a Form E is required in divorce matters and deviating away from the truth can result in significant civil and criminal repercussions due to a party potentially being in contempt of court in hiding their assets.

If it is suspected that a party to divorce and finances proceedings is concealing information relating to significant crypto assets, forensic experts can be instructed who will assess bank statements in search of crypto ‘entry’ and ‘exit’ points where the party has bought crypto through an online exchange. This is the most common way people convert traditional currencies into crypto or digital assets.

Enforcement and Settlement

Crypto assets are inherently volatile and although the courts are familiar with assets which fluctuate in value such as stocks and shares, crypto valuations generally vary much more in short spaces of time. For instance, less than a year ago, Bitcoin was valued at over £56,000. It is now worth around £17,000 at the time of writing. Less well known cryptocurrencies can be much more volatile.

In lengthy court proceedings or financial negotiations, this can be problematic for both parties as their relative financial position is open to so much change. As crypto is generally considered a more risky asset class, it would often be recommended that spouses take their share of assets in traditional currency or take another matrimonial asset of a similar value such as a larger proportion of real property using an average moving price of the crypto assets in question or a fair value which is decided within negotiations.

Furthermore, accepting any part of financial settlement in crypto holdings may also prove problematic because the law is unclear on the relative jurisdiction of crypto due to its borderless nature. Likewise, as there is generally no body or authority such as a bank between a crypto holder and the transferee who is wishing to receive the crypto, it is difficult to enforce orders and compel payment. For instance, a freezing order may not be possible where there is no central bank storing the asset like with traditional currency.

Accepting crypto assets in a settlement may also leave a section of your financial portfolio in a high risk allocation.

Where crypto asset holdings cannot be properly identified, the courts can use an ‘add-back’ order in the presence of convincing evidence which provides for adverse inferences on a spouses’ financial disclosure the court can award a share to make up for this.

Likewise, if you are In divorce proceedings and a party holding crypto assets, it should be brought to the attention of your solicitor who will advise on the legal position and how the assets fall into the matrimonial asset portfolio as a whole.