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Partner - Head of Family Law
Cryptocurrencies are forming a significant new asset class – how does this affect divorce cases and how prepared are lawyers and the courts to deal with them?
19 April 2018
With fortunes being won and lost in the space of months, cryptocurrencies are on everyone’s minds and it is inevitable that they are going to form a significant new asset class in many future divorces. But how prepared are lawyers and the courts to deal with them?
All cryptocurrencies are digital currencies based on block chain technology originally developed in 2009 which, as a result of their volatility as well as their unregulated and decentralised nature, carry with them intrinsic difficulties of disclosure, tracing and valuation.
Holdings of cryptocurrencies like Bitcoin will not be kept in a bank. All that owners need to access their coins are their keys. Accordingly, crypto was initially thought of as an ideal currency for those who wanted to protect their anonymity and keep their wealth and transactions secret. While this had certain attractions to terrorists and drug dealers it could, unsurprisingly, also be of interest to tech-savvy individuals looking to hide assets from their spouses and the divorce courts.
All that is needed to disclose a regular currency are dated bank statements displaying the account-holder’s name showing the latest balances. By contrast, the fact that proof of ownership rests in the key to the Bitcoin presents a difficulty. If that is literally all one has, simply reeling off the long alpha numeric code is not going to leave anyone much wiser about the extent or value of the holding. It also creates a vulnerability as, if someone else has access to the key they also, potentially, have unfettered access to the Bitcoins. However, these days most legitimate holders of Bitcoins will not just have a key. They will have a wallet. And although it is quite possible to have a paper wallet most people will use either a standalone digital wallet (kept encrypted on their computer) or an online wallet provided by an exchange like Coinbase. Anecdotal evidence suggests that new investors are increasingly using wallets provided by trading platforms like Coinbase or online providers like Exodus to store their Bitcoins as these provide easy to use real-time at-a-glance information about their holdings. Typically such information includes the current holding and value of each type of cryptocurrency held and recent transaction information. This makes disclosure far simpler as a dated print out or screenshot of the wallet should suffice.
Although ownership is hard to trace (there is, for example, no tell-tale interest) because all transactions are recorded on the public ledger, Bitcoin is strictly speaking only a pseudo-anonymous currency. If you know someone’s Bitcoin address, it is possible, if you know how, to see all of their transactions and the resulting balance held by that address.
There are a number of ways in which Bitcoin owners can reveal the fact that they have a crypto holding including buying currency using their regular bank accounts or credit cards, and purchasing items with their Bitcoins. In the latter case, if proof of purchase is requested then the fact that the transaction was completed in Bitcoins may become evident.
Ultimately what you are looking for is a copy of the holder’s’s wallet (in whatever form that takes) and then a documented explanation of their crypto purchases, mining and trading history. If they have been using an exchange, the easiest means of verifying some of this information may be by seeking a print out of their trading history from the exchange. Obtaining this information from some exchanges direct by way of a third-party summons may be possible. Many exchanges are, however, beyond the reach of the courts in Europe and the US (for example in China) and other means of discovery may need to be considered.
In extremis, where there is good evidence that very substantial wealth is being concealed, an application to seize and search the computer of the owner (and, possibly, their safe or safebox if it is thought that they have a paper wallet) could be considered.
Cryptocurrencies are notoriously volatile. Movements in value of 10 or 15 % in a day are not uncommon. Due to such volatility it is possible that a sale will be the most sensible route to explore. This is particularly the case given capital gains tax does not currently appear to be payable on the gains (although HMRC are reviewing the situation).
That said, if there is very substantial holding the court will need take into account that a sudden large sale may drive the market down and devalue the holding. Time will, therefore, be required to allow for an orderly disposal.
Alternatively, a transfer of some of the holding to a claimant spouse may be more sensible. In that case, the possibility of a restriction on the disposal of a very large holding may be advisable. Otherwise there could end up being a race to dispose of the Bitcoins that destroys the value of the holding of the spouse who is slower to sell.
There are, at the time of writing, 1565 different types of crypto with a total market capitalisation of just under $300bn. Cryptocurrency as an asset class is, therefore, already very well established and its ubiquity is only set to grow. Lawyers and their clients are, therefore, going to need a very thorough understanding of what this entails when matrimonial assets are being “fairly” divided on divorce.
You are contacting
Partner - Head of Family Law