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16 May 2022

Galleon Insider: Crypto assets during divorce

Crypto usage is growing; in 2021, 20% of people in the UK owned a crypto asset. High on the agenda of most governments, the Chancellor of the Exchequer announced last month his detailed plan to make the UK a global hub for crypto asset technology and investment.

Crypto is becoming impossible to ignore during divorce and has the potential to be the most valuable asset in a case. Yet, there is currently a lack of knowledge and understanding within the family law industry on the topic and how to deal with it.

Galleon interviewed Harriet Errington, Partner at Boodle Hatfield, on overcoming the challenges that cryptocurrency assets presents to divorce proceedings.

How often are you dealing with crypto assets in divorce?

Increasingly often – a large number of divorces commencing now involve cryptocurrency assets. As such, I would say currently in around 10-20% of my cases one or both of the parties own some cryptocurrency assets. This is a significant increase from a couple of years ago.

What will be interesting to see is how this trend continues now that crypto-asset prices are down heavily from last year’s peak; with Bitcoin and Etherium prices (to US Dollars) both down by around 5% since last year.

What problems is crypto presenting during divorce proceedings?

The two main issues that I tend to come across as a divorce lawyer are, first, non-disclosure of cryptocurrency assets and secondly, valuation issues – the family court needs to understand the value of an asset in order to determine how to divide or transfer it, or alternatively how much compensation is required to be paid in lieu.

At the outset of financial remedy proceedings, both parties are required to provide full and frank disclosure of all of their assets, including non-tangible assets, such as cryptocurrency and other digital assets (such as NFTs). However, cryptocurrency assets are, by design, extremely difficult to trace (but, critically, not as impossible as some may think).

This creates a dangerous temptation for divorcing crypto investors to try to hide their investments from the reach of the family courts. Further, even if you suspect your spouse is not disclosing cryptocurrency it can be difficult to prove. Unlike conventional bank accounts or investments, for example shareholdings, there is no official paper trail underlying the ownership of cryptocurrency; there is just an encrypted block-chain that does not use names.

Thus, the best way to track, find and prove crypto assets exist is often to look where cryptocurrencies interact with the ‘real world’ financial system of dollars, euros and pounds sterling. This could involve going back to the initial investment in cryptocurrency or a more recent purchase/conversion using cryptocurrencies – bank account inflows or outflows from exchanges, platforms and companies that deal in crypto assets.

In short, you must find a “thread” at which to pull. This might involve asking the family courts to order disclosure covering a longer period than they would normally require – instead of 12 months, you may need to ask for an order that your spouse provides disclosure going back, say, 2 or 3 years or whenever it was that you suspect he/she made that initial investment.

Even if you are successful in proving that your spouse does own cryptocurrency you will then encounter the second difficulty inherent in dealing with such assets on divorce – that is finding a valuation which is fair to both parties. The value of cryptocurrency is notoriously prone to dramatic fluctuations so that the value on one date (for example the date of separation) may be unrecognisable from the value on a later date (for example the date of the final hearing in financial remedy proceedings). Bitcoin, for example has fallen -51% versus the dollar since November 11th, as at the time of writing.

Parties going through contested financial remedy proceedings following divorce may have to wait for 6 to 12 months, or sometimes even longer, for a final hearing and the potential for fluctuations in the value of cryptocurrency during that period is immense.

Even if the parties agree as to the appropriate timing of the valuation, getting an accurate valuation can be extremely difficult given the lack of official paper trail. Further, the court is then faced with enormous difficulties when determining how to deal with the ownership of that asset and/or compensation to the other party, which is compounded by the relatively recent rise of cryptocurrencies leading to a lack of expertise and understanding from the professionals involved.

What are the current laws surrounding disclosure of crypto assets?

The Form E, which is the detailed financial disclosure form which both parties are required to fill out at the outset of financial remedy proceedings in England and Wales, requires full disclosure of all assets. This includes crypto assets. Penalties for non-disclosure can be severe and include adverse inferences being drawn by the court (for example the court could make a finding that the evidence points to your spouse owning Bitcoin), imposing heavy fines and even making orders for imprisonment in serious cases.

Which methods are used to uncover crypto assets?

If a party to divorce proceedings has failed to disclose crypto assets, the first step is to speak to the client and work out how much is known from what his/her spouse has indicated previously during their marriage about their cryptocurrency investments. Evidence from one of the parties can be crucial in obtaining court orders from the judge in family proceedings, for example for disclosure of historic bank statements which may uncover the initial investment into cryptocurrency. Further evidence may be gleaned from my client such as if a new asset had been purchased by his/her spouse without any clarity on which funds were used to purchase the asset. Asking straightforward questions such as “where did the money for the purchase come from” can be illuminating.

This can be particularly helpful if the newly purchased asset is of a type that can be bought using Bitcoin, such as a Tesla (until recently). Specific questions can be asked and ordered by the court for that party to answer formally.

I would then ask the judge to make a formal order that (a) your spouse provides a formal answer to the question as to whether he/she has ever owned crypto assets previously; and (b) your spouse provides bank statements covering the relevant period during which it is suspected that he/she may have made the initial investment.

It can also be necessary to appoint experts who deal directly in the sphere of cryptocurrency on a daily basis. At Boodle Hatfield we have links with cryptocurrency investigators, experts at finding, pulling and unravelling those crypto ‘threads’, who we will call on if necessary to conduct the investigations.

Your predictions for the future of bitcoin in divorce

The existence of Bitcoin, and indeed other cryptocurrency assets, will become more and more prevalent in divorce and resulting financial remedy proceedings. This is even more so given that the demographic of the average crypto investor is young.

In my view this is likely to be the case in spite of the recent decline in crypto asset prices.

At Boodle Hatfield we have seen evidence of this even in the last 12 months. The courts, and the lawyers and who work in them, really do now need to understand how cryptocurrency works, to build on our methods revealing such assets, and to employ better ways of working out how to deal with the vastly fluctuating values.

What resources are there for family law professionals to keep informed on the rising use of crypto?

While there is a wealth of material now available online with tips on how to deal with these assets in divorce proceedings, it should be noted that not all of it is reliable, accurate or, to the lay person, understandable. Therefore, nothing can substitute sound legal advice from a divorce lawyer who has dealt with these issues before. It is therefore increasingly important that clients should question to their solicitor directly at the outset as to their experience and understanding of crypto assets. Using professionals who deal with cryptocurrency investigations on a forensic basis is becoming increasingly essential for clients going through a divorce, especially within the high-net-worth demographic, who are the most likely to have a sustainable portfolio investment – crypto or otherwise.

This Q&A was first published by Galleon International Property Search on 15 May 2022. Read the full article here.