Cryptocurrency assets may be in trouble in terms of increasing fraudulent activity and volatile market values but experts are firm – digital assets are not a fad and the market is continuing to grow. It is approaching a total capitalisation of $1 trillion and the number of people trading in cryptocurrencies is increasing year on year. For divorcing couples, especially those who are high-net-worth (HNW) disclosure of cryptocurrency assets is becoming increasingly commonplace. Therefore, when negotiating a financial settlement, you need to ensure your Divorce Solicitor is experienced in cryptocurrency assets.
Cryptocurrency remains a mystery to many of our family law clients, therefore, in this article we deep dive into the various legal matters crypto assets can raise in divorce financial settlement proceedings.
What is cryptocurrency?
Cryptocurrency is a digital currency that can be used to purchase goods and services (the UK beauty retailer Lush takes crypto as a form of payment on its website). When Argentinian football superstar, Lionel Messi transferred to French club Paris Saint-Germain, he received part of his $30 million package in cryptocurrency. You can also invest in cryptocurrency assets in the form of purchasing the currency directly or investing in crypto funds and companies. Crypto assets can take different forms, for instance non-fungible tokens (NFTs) which can represent different property for instance digital art.
Where is cryptocurrency kept?
Cryptocurrencies are managed using blockchain technology which means they are outside of the central banking and financial system, albeit subject to anti money laundering laws. Therefore, no ‘currency’ actually exists. Instead, cryptographic keys are stored in ‘wallets’ which are managed by a centralised crypto exchange (CEX).
This may sound confusing, however, it is no different than notes and coins which are worthless in themselves (as paper and metal) but have a value attached which can be used to purchase goods and services.
Do cryptocurrency assets have to be disclosed in family law proceedings?
Cryptocurrency is considered an asset in family law proceedings and therefore must be disclosed. The Courts have considerable powers at their disposal to seek disclosure and value cryptocurrency assets, although their volatile exchange rate can make this a challenging exercise.
One of the attractions of dealing with cryptocurrency assets is that transactions can be made anonymously, or in the case of Bitcoin, the most well-known cryptocurrency, pseudonymously. This can lead to disputes where one spouse believes the other is hiding cryptocurrency assets in order to keep them out of the divorce financial settlement.
Can cryptocurrency assets be traced?
As there is no centralised ownership register for cryptocurrency assets a specialist forensic expert may need to be instructed to establish where such assets are held and their approximate value. In theory crypto assets are represented by an immutable record on blockchain, but given the number of cryptocurrencies that have been lost by hacking or just not been accounted for there is an argument to say not all blockchain systems are failsafe.
If there is evidence that your spouse is engaging in cryptocurrency transactions in order to hide or dispose of the assets so they do not become part of the financial settlement, your Divorce Solicitor may be able to obtain a freezing order. Case law in recent years supports the principle that cryptocurrency is a form of property. This will prevent them from dealing with or disposing of their cryptocurrency assets for as long as the injunction is in place. The order can be extended to cover not only your spouse but also any CEX that may facilitate potential transactions.
What if cryptocurrency assets cannot be traced?
If it becomes clear that the assets cannot be found despite the best efforts of forensic experts, your Family Law Solicitor may be able to persuade the Court that the assets do in fact exist by providing evidence such as bank statements or tracked wallet transactions showing dealings in cryptocurrency. If your Solicitor’s argument is successful, the Family Court Judge, after considering all the factors under section 25 of the Matrimonial Causes Act 1973, may award you a larger share of the overall matrimonial assets ‘pot’ after taking into account the approximate value of the undisclosed cryptocurrency assets. Additionally, persuade the court that any financial settlement is not on a ‘clean break’ basis allowing the opportunity to recover further income or assets as evidence of crypto assets materialise.
Although cryptocurrencies have technically been around since the 1980s (with Bitcoin coming into play in 2008) they are unregulated in most economies. This, along with the speed of crypto transactions, and the ability to trade anonymously with some currencies means that when it comes to tracing undisclosed cryptocurrency assets in family law proceedings, it is vital to instruct a Solicitor who has not only experience in dealing with this type of asset, but the necessary expert forensic contacts who can conduct effective traces.
To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at email@example.com.
Note: The points in this article reflect the law in place at the time of writing, 19 January 2023. This article does not constitute legal advice. For further information, please contact our London office.
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