Crypto assets – what are they and how are they considered within divorce proceedings?

With an increase in online use and digital banking it is no wonder why cryptocurrency has obtained immense popularity within the current society that we now live in.

What is cryptocurrency?

Cryptocurrency is a digital or virtual currency which enables online payments without the use of third-party intermediaries – essentially cutting out the middleman. This form of currency doesn’t physically exist, for example if you withdraw money from your bank, you will receive cash. This is not the case with cryptocurrencies which are instead completely virtual. 

Cryptocurrencies come in any form, some of the most well know ones are Bitcoin and Ethereum. There are also online platforms such as Coinbase and Revolut who deal with selling and buying. 

Cryptocurrencies use an alternate system called cryptography to deal with transactions.  There is a decentralised system which maintains transaction records. This means there is no regulating authority (banks and other financial services in the UK are normally regulated by The Financial Conduct Authority).  

The way that cryptocurrencies are dealt with can cause a number of challenges within divorce and financial proceedings. Cryptocurrencies provide anonymity to those who use it, meaning it is increasingly difficult to follow, it can be hard to correlate transactions and essentially work out where money has transferred to and from.

So how is cryptocurrency dealt with in the family proceedings?

Cryptocurrency is treated the same as any other asset such as investments and shares. Within financial proceedings, both parties are required to provide full financial disclosure of all assets.

What information should be provided?

A party should provide as much information as possible, and at the very least, documentary evidence confirming the units held, type of cryptocurrency, where the cryptocurrency is held and current market value should be provided.

You can also ask for a full account history which should show full trading history and evidence of initial deposits or purchases which is most likely to have been made from a bank account. Although this will not always mean if someone has invested £10,000 that they will have £10,000 in cryptocurrency (see more information on volatility below). You can also ask the other party for the public key to decipher some of the transactions if they are encrypted.    

What can you do if someone hasn’t disclosed their cryptocurrencies?

Once disclosure has been provided, each party will have the opportunity to raise questions on the other parties disclosure. A party can raise questions in respect of information they feel is missing or has been omitted.  It is important to raise any concerns over non-disclosure as soon as possible.

An application can be made to the Court for disclosure from crypto exchanges as the exchanges will often hold information as many are in jurisdictions whereby, they need to follow or comply with legislation such as Money Laundering Regulations within the UK. 

Alternatively, an expert such as a forensic accountant or tracing company can be instructed to assist in tracing any undisclosed assets.

Disposing of cryptocurrencies

As with all other assets, the Court’s have the power to prevent cryptocurrencies being disposed of by making a freezing order or alternatively, if the cryptocurrencies have already been disposed of the Court can make an avoidance of disposition order.

What orders can the Court make?

It has been suggested that cryptocurrencies are dealt with by way of property adjustment orders. This essentially means cryptocurrencies can be transferred to one party or sold. If the cryptocurrency is sold, this can present some issues with the division of any net proceeds of sale:

Volatility

There are concerns over the volatility of cryptocurrencies due to the instability of the market. Similar to other assets such as shares, the value of a cryptocurrency can radically change in a short period of time.  This may mean that the value of a cryptocurrency at the start of proceedings is drastically different to the value at a Final Hearing or when matters conclude. Values can significantly change just in the short period of time between providing disclosure and the hearing. It is therefore imperative that disclosure is provided and updated throughout proceedings.

Liquidity

Unlike other forms of currencies, cryptocurrencies need to be sold to release monies. Some rarer cryptocurrencies may prove difficult to find a buyer.

If the cryptocurrency is to be sold with the parties sharing the net proceeds, the party who is not the crypto owner should put measures in place to secure any monies they should be receiving. An alternate way to deal with matters would be for the Court to offset the value of the cryptocurrency against other assets available, however, this has its own risks given the volatility of cryptocurrencies.

As with all types of investments, capital gains tax will need to be considered and advice from an accountant should be sought.

More information

If you are concerned about cryptocurrencies during a divorce, then please do not hesitate to get in touch with our experienced family team.