It is well documented that Cryptocurrency has increased in popularity over the past decade or so. Considered by some to be a risky and leftfield investment, cryptocurrency now often features in divorce disclosure documents. To understand how cryptocurrency is considered in the context of divorce, it is important to understand what cryptocurrency is, how it works and how it can be approached by the court, particularly as the general public’s understanding of cryptocurrency varies wildly.
What is cryptocurrency?
Cryptocurrency is a form of virtual asset that exists only online. It is not controlled by a bank or government. Whilst it can be used to trade, it is quite different from traditional currency. Blockchain technology is used for cryptocurrency which keeps a record of all transactions that take place. Every time someone buys, sells or transfers cryptocurrency, a record of that transaction is added to the virtual blockchain; blocks are groups of online transactions – each block is linked to the one before it, forming a chain. The chain is particularly secure because each block is connected by complex data, making it almost impossible for the records to be interfered with.
To use cryptocurrency, a digital wallet is required. This is an application or programme that stores the cryptocurrency. Every wallet will store public and private keys.
The public key is an identifier that can be readily shared and used for the transfer of funds funds. It is equivalent to the account number someone would use to identify the wallet that the cryptocurrency would be transferred to. That transfer is recorded on the blockchain, ensuring the transaction is secure and verifiable.
The private key is similar to a PIN number for a bank account or a password to an email address, giving access for the accountholder. The person with the private key would be able to ascertain the value of a wallet, whereas someone holding only the public key would not be able to do so.
How is cryptocurrency approached in the context of divorce?
The court is well versed in cryptocurrency and regularly deal with cases where crypto assets are owned by a husband or a wife.
One of the crucial stages of the divorce process is the exchange of financial disclosure. The parties have a duty to provide full and frank disclosure of all their finances – both income and capital – to ensure that the complete financial picture is known and that negotiations and calculations encompass the complete asset pool. A standard form, known as Form E, is used by solicitors and the court in the vast majority of cases to collate that disclosure. If a party has crypto assets, then they should be disclosed within the financial disclosure process.
Some of the most popular currencies, such as Bitcoin and Ethereum have increased in value compared to when they were in their infancy and not as widely used. Some individuals were able to acquire crypto assets at a very low price and not as popular. Sometimes they can be very guarded around those assets and more inclined to conceal them, given their huge rise in value. If they are not included in the Form E financial disclosure when it is exchanged however, there are opportunities to make further enquiries and otherwise identify the existence of crypto assets.
- Crypto portfolio trackers – These tools sync with wallets, exchanges and blockchains to provide a comprehensive view of holdings. Popular options include Kryptos, CoinTracker and Delta.
- Exchange and wallets – Many exchanges and wallets have built in portfolio trackers, such at Bitcoin and Binance.
- Blockchain explorers – Tools like Etherscan and Bitcoin Block Explorer can provide transactions and balances for specific addresses.
Following financial disclosure there is always the opportunity to ask questions about the disclosure you have received. That disclosure might show transactions to any one of these services that would point to the existence of such assets and a clear requirement for their disclosure. Don’t overlook PayPal accounts, from which there is very often the option to make transfers to crypto assets as well. You will require itemised PayPal statements to be able to check for any crypto-related assets.
The more information a questioning party has about the ownership of the crypto assets, the better, however even if nothing is known, you are still quite entitled to address the possibility of crypto assets in follow-up enquiries, simply asking the question as to whether the spouse holds or has in the last 12/24 (for example) months held any crypto assets and provide disclosure of them.
All assets should be disclosed. If crypto assets of a sizable value are not disclosed and their disclosure would have led to a materially different outcome, any settlement agreed between a couple can be set aside with penalties levied against the non-discloser.
How are crypto assets considered by the Court?
Crypto assets fall under the definition of property under the Matrimonial Causes Act 1973. They can therefore be subject to the usual catalogue of options available to the Court when deciding how they should be divided in the context of a divorce. The Court may order they are sold, transferred or a lump sum paid by one party to the other to offset against their value, in the same manner as any other asset.
If one party is concerned that crypto assets may be dissipated then a freezing injunction can still be pursued in relation to the assets, although, given the intangible nature of cryptocurrency and the speed at which they can be disposed of, there can be further complications and expert legal advice should be taken without delay.
When crypto assets are being considered as part of a financial settlement, expert accountancy advice may also be required because they can be subject to CGT, inheritance tax and income derived from them can be subject to income tax.
Conclusion
At first glance, the prospect of having to consider crypto assets in divorce may seem daunting or be perceived as unknown territory, the reality is they are assets that are frequently having to be taken into account and will continue to feature in many divorces. As long as appropriate expert advice is sought to help navigate the process, the existence of crypto assets in proceedings should not be a cause for concern.