Cryptocurrencies and Divorce

Increasingly, we are finding that cryptocurrency is appearing as an asset in divorce proceedings. Here we explore what it is, why it is popular and the role it plays in divorce.

 What is cryptocurrency?

A complex digital currency that uses cryptography as a means of security. Most cryptocurrencies operate without the need for essential authority like a bank or government. Blockchain technology (a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system) is used to make cryptocurrency. Complex pieces of computer code in the public domain combined with code that is kept private, with the second being held in a digital wallet or in cold storage (storage saved away from the Internet, most commonly on a USB or written down).

In October 2008, the world started to hear about a new cryptocurrency called Bitcoin. Subsequently, more cryptocurrencies have been launched and now dozens of cryptocurrencies are available. Cryptocurrencies like Ethereum have continued to grow whilst others have gone bust as quickly as they came into existence.

Why is cryptocurrency popular?

• Unregulated
• Portable
• Divisibility
• Censorship resistance
• Scarcity
• Security

One of the early appeals of cryptocurrency was that it offered an opportunity to transfer large amounts of wealth without any government or institutionalised interference. Some people use cryptocurrency to take care of routine matters such as paying bills, while others will use it as collateral to obtain lending. You can also use crypto currency to invest in business or start-ups, and soon you will be able to use it to buy a Tesla.

Is cryptocurrency classed as an asset in divorce proceedings?

Absolutely, yes. However, cryptocurrency transactions can be very hard to trace. It is easy to sell and trade at the click of a button and there can be very little paper trail beyond the initial purchase of the currency. Providing full and frank disclosure has been provided with the necessary statements, you should be able to at least trace the initial transaction; it is vital that these initial transactions are identified at an early stage and follow up questions are raised. Understanding what has happened to the cryptocurrency beyond that initial transaction can be extremely difficult and, in some cases, you may need specialist help in tracing and valuing the currency.

Volatility in the cryptocurrency market is considered an issue for valuing assets during divorce. Often, the value at the disclosure stage can be very different to the value of the same investment when matters are being considered at court. The Court would also need to account for the tax payable on the realisation of the investment.

Problems will arise when you are deciding how to divide cryptocurrencies. There is an inherent risk with any type of investment and one party may not have an appetite for retaining an interest in such an asset. Offsetting a crypto investment against a liquid asset (cash, property) is also likely to be fraught with problems, much like those faced by divorcing parties when comparing liquid assets against the value of a pension fund (which is often not accessible for many years and is taxed on payment).

What if cryptocurrency is being dissipated to avoid financial claims on divorce?

If there is evidence of dissipation it may be possible to seek a Court injunction freezing the assets of the other party and, if necessary, seeking to cover the cryptocurrency exchanges so that the investment cannot be traded.

You may also want to secure the storage for the private codes relevant to the investment to stop them from being used or destroyed (people have infamously lost very valuable investments because they could not recall their passwords).

 What if it is “hidden”?

 As mentioned above, it is important to ask the right questions at an early stage of the disclosure process. If the required disclosure is not forthcoming or does not evidence the purchase of cryptocurrency, it may be necessary to seek an Order from the Court for specific disclosure from the party suspected of holding the investment or even from relevant third parties. Failing to provide full and frank disclosure will place parties in contempt of court, risking a fine and even potential imprisonment.

If there is sufficient evidence, it may be possible to convince the Court to draw inferences about the existence of crypto investments and subscribe the benefit to the accused non-disclosing spouse, so that they get less of the assets known to the Court.

 What is cryptocurrency mining?

Cryptocurrency mining refers to the reward gain from verifying transactions on a blockchain. Blockchain transactions are encrypted when added to the block. Therefore, these transactions need to be verified for accuracy before the blockchain can continue adding transactions to the next block. This is where the “miners” come in. They used their computing power to solve complex mathematical problems to verify transactions in a block on the blockchain. Entire businesses have been created to mine cryptocurrency and profit from the rewards. If “mining”, a spouse is likely to have valuable technical equipment which should be disclosed and included as an asset, and the income being generated will also be relevant.

Charlotte Southworth is a Senior Solicitor in the family team with a particular expertise in complex financial aspects of divorce and separation for medium to high net worth clients with particular experience in complex matters involving international aspects, trusts and corporate structures. For any advice on the above or any other family law matters, please contact her on charlotte.southworth@ibblaw.co.uk

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