Bitcoin - cryptic currency for shielding assets or just risky business? - Boodle Hatfield

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Article
27 May 2021

Bitcoin – cryptic currency for shielding assets or just risky business?

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Alexandra Hirst View profile
5 min read

It was so interesting to read the comments made by Harriet Errington (partner in the family team at Boodle Hatfield) in the Telegraph money pages this weekend about the reported surge in divorce cases involving crypto-currencies.

She rightly indicated that as more and more people invest in these assets, those dealing with financial remedy cases on divorce will need to understand how they work, how to identify them, how they are valued and how they are to be factored into financial awards. It is hard to argue that this is merely a flash in the pan when, according to the Bloomberg website, the total market value of cryptocurrencies as of this month stands at $2.48 trillion, up from $1 trillion at the start of the year.

The concepts involved are certainly not easy to get your head around. Going back to basics, what actually is a cryptocurrency? HMRC have produced a helpful manual which can be accessed here: CRYPTO10100 - Cryptoassets Manual - HMRC internal manual - GOV.UK (www.gov.uk)

According to HMRC, crypto assets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be, transferred, stored and traded electronically.

While all crypto assets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve crypto assets. There are different types of crypto assets, which work in different ways. The main types of crypto asset include:

  • Exchange Tokens:  intended to be used as a means of payment and are also becoming increasingly popular as an investment due to potential increases in value (bitcoin is an example of an exchange token).
  • Utility Tokens: provide the holder with access to particular goods or services on a platform, usually using DLT. A business or group of businesses will normally issue the tokens and commit to accepting the tokens as payment for the particular goods or services in question. In addition, utility tokens may be traded on exchanges or in peer-to-peer transactions in same way as exchange tokens.
  • Security Tokens: provide the holder of a security token particular rights or interests in a business, such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.
  • Stablecoins: these are another prominent type of crypto asset. The premise is that these tokens minimise volatility as they may be pegged to something that is considered to have a stable value such as a fiat currency (government-backed, for example US dollars) or precious metals such as gold.

So now we know what they are (sort of), why might they be seen by some as a useful tool for hiding assets on a divorce? You may be aware that when parties become involved in financial proceedings on divorce, they are compelled to produce a Form E, which sets out all the details of their assets and income. They also need to provide documentary evidence of support. In contrast to a standard bank account or savings portfolio, where the amount held within them is clear to see and it is fairly easy to identify transfers being made across various accounts, crypto assets are less clear cut. As noted in the Telegraph, the value ascribed to these assets could range from nothing at all to several thousands or millions. Savvy operators may be able to use this to their advantage in order transfer significant sums into cryptoassets which their spouse may have considerable trouble in establishing a reliable value for. Indeed, in terms of tracing the assets, the investments may show up as several relatively small transactions on a credit card (which may go unnoticed and/or unscrutinised) and in fact amount to a pretty significant sum. Given that family law practitioners are still relatively new to dealing with these assets, it may not even cross their mind to make enquiries into them. Following exchange of disclosure, parties are able to raise a questionnaire about what the other party has stated or in relation to the documents they have provided. It may be worth considering whether it is appropriate to ask a specific question in the questionnaire as to whether the other party does hold any crypto-assets, in order to seek to flush this out.

In her comments in the Telegraph, Harriet wisely noted that while one might feel tempted to go digging around for evidence of these assets, it would be very unwise to do so. The Court does not look kindly on those who resort to the "self-help" technique of disclosure. A spouse caught poking around in their other half's emails and private documents is at best going to receive a severe ticking off (resulting in an unhelpful blot on their copy book for the remainder of the proceedings) and at worst potential criminal sanctions. Therefore, anyone involved in proceedings with a concern that their spouse does hold a form of crypto asset and is failing to disclose should speak to their family lawyer about this so they can consider how best to approach it. They may then seek to consult a specialist asset tracer who will be able to advise how to approach this issue.

There will of course always be parties to litigation who seek to minimise or mask their assets and that is a matter for them. Those considering this option need to be aware of the fact that if it can be established that they have not provided full and frank disclosure and have deliberately misled the Court as to their true financial position, they are at risk of costs orders being made against them and/or being subject to an application for the financial agreement or order reached in the proceedings to be set aside and the case reopened.

While crypto-assets appear to be an exciting new proposition for investors who may be able to make gains in dealing in them, they are volatile and it remains to be seen if they will hold their appeal. As noted above, however, these assets do appear to be gaining traction and may be exploited by those seeking to hide their assets on a divorce. There are, however, ways to spot this kind of trickery and consequences if disclosure obligations are not fulfilled.

Harriet Errington, a lawyer for Boodle Hatfield, believes that Bitcoin divorces are “going to become a massive issue” and fears that courts used to traditional ways of unearthing hidden wealth could be ill-equipped. “The family court is quite old fashioned I suppose, imagine a fuddy duddy judge faced with one of these issues? [Bitcoin] could be worth hardly anything or could be worth a fortune depending on the date of valuation,” she says.

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