What are the special features of cryptoassets and how are they treated on relationship breakdown?
If cryptoassets feature in a relationship breakdown, early legal advice is crucial.
On relationship breakdown, the financial remedies available to the separating couple are regulated by different legal regimes, depending on whether they were married or civil partners, or parents.
Divorce and civil partnership dissolution: on a divorce or dissolution, the court has a wide discretion to make a fair and reasonable financial award. The parties have a duty to disclose assets held worldwide.
Unmarried parties: an unmarried couple can only bring financial claims against the other if they can establish a proprietal interest in an asset, using property law or trust principles.
Unmarried parents: an unmarried parent can bring additional claims if in the interests of their children.
In this article, we will concentrate primarily on a couple who are married/in a civil partnership, although the general principles regarding disclosure apply in any of the above scenarios.
Why do cryptoassets cause complexity?
The very nature of cryptoassets (also called cryptocurrency – the terms are used interchangeably) can cause significant issues on relationship breakdown if the party holding the assets is not prepared to deal with matters transparently and openly.
Secrecy and anonymity: part of the appeal of this technology is its security and anonymity. Usually, the files are created using the same methods as cryptography (the science of hiding information).
Take Bitcoin as an example. Bitcoin is stored in a virtual wallet, and this virtual wallet has two keys – a public key and a private key. The public key is just a string of characters and is visible to anyone as an address for sending and receiving cryptocurrency, whereas the private key is what allows the owner to access the wallet’s contents.
Intangible assets: cryptoassets are intangible and could be held anywhere in the world. By their very nature, they are more obscure than almost all other assets or investments. Access to records may be very difficult to establish. In financial remedy proceedings, the very existence of any asset may be uncertain and hard to ascertain.
Valuations: coupled with this, a value must be ascribed to all matrimonial assets, whether by agreement between the parties or a judge. The volatile nature of the cryptoassets can result in huge swings, with high values one day, with the value crashing the next day.
What steps need to be taken?
Cryptoassets must be identified and located as quickly as possible.
Failure to disclose: although failure to disclose may result in penalties being imposed on the non-disclosing party – which could include imprisonment in some circumstances – the reality is that in many cases, it can be vital to secure the asset and keep it ‘safe’ until a financial settlement is awarded by the court.
Worldwide freezing orders: if there is a real risk that an asset may be moved out of reach, the court does have the power to make freezing orders over investments in digital currencies if necessary. However, to secure a freezing order, one needs to know the identity and location of the asset sought to be protected. It may be necessary to get expert help from a forensic accountant to help establish an evidential trial to find the assets.
A word of warning: the Court of Appeal has confirmed that there is a fundamental right to privacy and confidentiality between spouses, both prior to or after a breakdown in their relationship. It is unlawful, to take, copy and keep copies of confidential documents even if you think your spouse or partner may be trying to hide assets. It may also arise in civil or criminal prosecutions, or leave you unable to instruct your chosen legal team. As such, we strongly recommend taking legal advice before taking any steps to access to documents and computers belonging to your spouse or partner.
Inability to locate cryptoassets: if, having exhausted all options, establishing the location and value of the precise cryptoassets remains elusive, with sufficient evidence, it is still possible to persuade a court to infer that the resources are available and factor them into a settlement.
The non-disclosing party will also severely damage their own credibility and prospects of the judge exercising their discretion to their advantage.
As in any litigation, evidence is key.
Although care needs to be taken in obtaining confidential information belonging to another party, as highlighted above, the following can prove invaluable:
Paper trail: is there any evidence of funds moving to or from more conventional investments, such as bank accounts, to initially fund the cryptoassets or make any further transactions?
Social media/emails: are there any records of discussions taking place before the relationship breakdown, to evidence a proposed or actual purchase? Are there emails, texts, WhatsApp messages and so on?
Passwords: who might hold information about passwords for the investments?
Third parties: were any third parties involved in the discussion and what evidence might they be able to provide?
Tax reporting obligations/tax or estate planning advice: did the non-disclosing party pay tax, or seek tax or wills/estate planning advice before or after acquiring the assets and from whom? It is probable that they may have completed tax returns to report any earlier disposals. It may be possible for a court to order the release of papers or files.
Expert evidence: consider whether it might be of value to appoint a forensic accountant to help you piece transactions together.
As the value of a cryptoasset may change from hour to hour, let alone day to day, that needs to be factored into the financial negotiations.
The court will need evidence of a value in order to undertake its discretionary exercise, but in practice, options such as using a percentage of a net sale price might be a sensible approach.
The court has various options available, including the sale or transfer of the asset. However, if a party is unwilling to co-operate, whether enforcement options are realistic need to be considered and other options may need to be pursued.
If unable to establish/evidence a cryptoasset at the time of a financial settlement, if it later transpires that there was such a resource, it may be possible to reopen the case and set aside the original order. A new financial order would then be made.
Cryptoassets are not yet mainstream, but are increasingly popular. If they feature in a relationship breakdown, early legal advice is crucial.
For more information on cryptocurrency and digital assets in relation to relationship breakdown, contact our family law experts for clear and practical divorce financial advice.