Financial remedies: splitting the cryptocurrency

What is cryptocurrency?

There are thousands of different types of cryptocurrencies, also known as cryptoassets, out there. Cryptocurrency is a digital currency that exists electronically in the virtual world. Well known examples are Bitcoin and Ethereum. They have no physical properties and no intrinsic value. There are no central banks, governing bodies or government agencies managing cryptocurrency. As an investment those who invest in cryptocurrency expect the value to increase over time, however the risk is they can easily fall in value. Cryptocurrency can be bought, sold, and traded. This is done using a distributed database or ledger. The most common example is Blockchain, which maintains a secure decentralised record of transactions for Bitcoin.

A common appeal of cryptocurrency is its anonymity. Cryptocurrency is held in a wallet and there is no requirement for any personal information to be associated with the wallet, which can make tracing cryptocurrency difficult.

Is cryptocurrency relevant in divorce proceedings?

Cryptocurrency until recent years has not been a central consideration for lawyers when considering the division of financial assets in divorce. It is becoming more prominent as more people accept it as an asset and use it as an investment vehicle. Therefore it should be considered when establishing the assets of the parties. It will have a capital and income value and it can be divided, transferred or sold as part of a financial order.

Identifying cryptocurrency as an asset

Cryptocurrency can be hard to identify and is inherently difficult to trace. It will be challenging to find evidence of a cryptocurrency investment. With no governing body, or links to banks and financial institutions overseeing the records of the asset, it can be easily and furtively hidden, moved and transferred, and on occasions impossible to trace.

There are actions that a spouse can take to identify cryptocurrency as follows:

1. Prior to marriage, clients should be advised to enter into a pre-nuptial agreement. As part of the process, parties are required to complete a schedule of all their assets at the time of entering into the pre-nuptial agreement. That would include disclosure of cryptocurrency.
2. During the marriage, both spouses should always be involved in all financial decisions that are made, including investments that are set up. Spouses should take an interest in how the family money is being used and ensure that there is joint access to all investments whether they are traditional physical investments or alternative digital investments.
3. During financial proceedings there is a duty of disclosure by both parties to provide full and frank documentary evidence of all assets in joint or sole names, including cryptocurrency. This disclosure is initially provided in the Form E. Subsequently, questionnaires can be used to raise further questions about cryptocurrency investments. It is always best to be open, honest and transparent about all investments. Clients should be aware that dishonesty will not be tolerated by the court and could lead the court to making findings of dishonesty, inferences being drawn, and the other party being compensated by receiving a greater share of the other assets.
4. When reviewing the disclosure of the other party it will be important to examine the entries on their bank and credit card statements to see if there are any transactions that show cryptocurrency has been purchased, sold or traded.
5. If a party is still suspicious that cryptocurrency has been bought, but due to its inherent characteristic found that it is difficult to trace, it may be necessary to instruct an expert forensic accountant to trace any cryptocurrency investments.
6. Ask the other party to disclose the apps on their phone. Apps are often used as a quick and convenient way to monitor how the cryptocurrency is performing.

How to protect cryptocurrency from being disposed of by one party

Unscrupulous spouses may try to take advantage of the ability to easily hide cryptocurrency. However, if a spouse does have suspicions that the other party has cryptocurrency and has a reasonable belief that the other spouse is trying to trade the cryptocurrency to prevent the spouse from receiving a share of its value, then an application for a freezing injunction can be made. The injunction would have to be a specialist order because of the electronic nature of the asset. In these circumstances, lawyers will need to act swiftly to preserve the asset.

How does the court treat cryptocurrency?

As an asset, it can be divided between the parties. The courts will face difficulties in valuing the cryptocurrency as its value can fluctuate wildly. One day it could be worth a large sum and the following day worth zero. Given the volatility of the value of cryptocurrency, that it is not a physical asset, that it can easily be lost in the electronic world it sits within and that there is no centralised monitoring of the asset by a bank, financial institution or government, a more cautious spouse may not want to own a share of the cryptocurrency and may be concerned about enforcing an order against an asset that only exists digitally. In those circumstances, the more cautious spouse may want to have the value of their share in cryptocurrency reflected in compensation by having a greater share of tangible assets, such as the family home, savings or pensions.

Other considerations

It is important to consider the tax implications of cryptocurrency. Increases in the value of cryptocurrency could give rise to income tax and the sale of cryptocurrency could attract capital gains tax. This assumes that the cryptocurrency can be identified as a UK asset and therefore subject to UK tax rules. When negotiating a settlement and weighing up the advantages and disadvantages of having a share of the cryptocurrency the tax implications are important to consider and specialist tax advice should be obtained.

When advising on the preparation of a Will, specific provision should be included in the Will regarding any cryptocurrency investments and sufficient information provided to identify where the cryptocurrency is held.

As cryptocurrency becomes more mainstream, widely accepted and understood as an investment, it is important for family lawyers to understand the concept of cryptocurrency and how it may play a part in the assets of the divorcing parties, to avoid overlooking it as matrimonial asset.

Susan J Williams, Partner and Head of Family (Cardiff), Ince