Crypto Assets & Divorce: What Should I Do?

In this blog, FLiP Associate Rory Collett discusses how crypto assets are dealt with on a divorce or separation. He explains the challenges of valuation and the powers the court has in relation to crypto assets. 

With over 16,000 different virtual currencies worldwide and $300 billion traded daily, cryptocurrency assets are a complex consideration when you separate from your partner. These funds, by their very nature, are hidden and present distinctive challenges within family proceedings. However, at their core, crypto assets are items of value that can be held, valued, and transferred just like any other asset and must be tackled appropriately at the point of separation.

Identifying the asset

You may have discussed crypto investments with your ex-partner over the course of the marriage and be aware that they are holding some form of virtual currency. You may even be aware of a digital currency App on their mobile phone, or that they follow crypto-based social media pages on Instagram or even that they hold a ‘paper wallet’. Possibly you have seen them using particular websites or platforms, such as Coinbase or Binance and witnessed them actually trading bitcoin. These are all clear indicators that your partner may hold virtual assets, and it could be necessary (subject to when they were acquired and the amount) that they are included in the overall marital acquest.

On divorce or separation, both you and your ex-partner are required to provide full and frank financial disclosure of your worldwide assets. Therefore, the hope would be that they would provide information on a voluntary basis about any virtual currency they hold. Within financial proceedings on divorce, you and your former partner must fully and accurately disclose your financial position and present all material facts in a clear manner. If your partner has already discussed their digital currency investment with you during your relationship, then what you know, or can recall, can act as an entrée for formal questions and (if necessary) documentary disclosure. Specifically, you should be expecting from your ex-partner the full details of all crypto assets held, alongside details of the name and type of asset, size of holding and where it is held. All account numbers/wallet addresses and public keys, and crypto transaction statements for the period of 12 months prior to the date of Form E should be provided. This should be enough, initially, for your solicitor to grapple with.

It is important to remember, that you cannot go looking for evidence of any cryptocurrency over the course of your case (e.g. opening letters that are addressed to your partner), as all parties have a right to confidentiality. However, you can use your recollection to assist your solicitor. As is the case with any matrimonial asset, detailed information can then be additionally requested through a comprehensive questionnaire, and it will be important to know the right questions to ask. Specifically, your solicitor can probe whether digital currency is being held in a trading platform or in a hot or cold wallet, with a view to giving your former spouse the opportunity to fully explain their holdings/finances. For this to be effective, your ex-spouse must be willing to be open and transparent about their digital wealth.

If your former partner is not forthcoming (or there is tangible proof that asking questions will lead to them disposing of these assets), you or your solicitor can investigate matters in more detail. As part of the financial disclosure process, your former partner will be expected to provide 12-months’ worth of bank statements. There are often helpful signposts in these statements which can help establish where non-virtual, centralised currency (or ‘fiat currency’) has been used to purchase virtual assets via trading platforms or virtual currency exchanges. Specifically, if their fiat currency bank accounts are linked to any digital currency exchanges or a cryptocurrency ATM (which converts fiat currency into digital currency), then this will be immediately apparent. There may even be records of digital currency income on your former partner’s tax returns.

Inevitably, however, it is not always as easy as reviewing bank statements. It is likely that you or your solicitor will need to assess the transactions for your spouse’s electronic wallet via the blockchain. Any transaction relating to that particular digital wallet (including the balance) is held within a block within the blockchain and will be visible. These transactions are publicly available to view by using transaction explorers. This will be especially prevalent with the likes of Bitcoin and Ethereum which are ‘payment tokens’ and can be traced when ‘real-world’ items have been purchased. This, for example, is a helpful indicator when a private key (used to authorise a transaction or withdraw and transfer coins) has been apparently ‘lost’, yet trading is continuing to take place.

However, there are limitations to monitoring public wallets. The data provided via the block is restricted to ‘hash’ addresses only, rather than any specific shop details or item purchases. Hash addresses are a unique string of characters that are given to every transaction; this can be understood as a digital fingerprint and can be viewed in the same way as a beneficiary name on a check. This anonymity is (and always has been) a draw for anyone wishing to use digital currencies but, regardless, being able to follow payment tokens on the blockchain can bear serious fruit.

Whilst the anonymity will mean that your lawyer will be unable to assess who and what exactly has been bought, they will be able to draw-out ‘trends’ that can be investigated. In particular, significant payments to another wallet which hasn’t been disclosed by your spouse can be challenged in proceedings, whilst questions can be raised about sums being received from any unknown source. If you speak with your solicitor and deem it proportional, this information can then be further evaluated by forensic analysis service providers who can be appointed as a single joint expert and who can track users across the blockchain. They will review whether the information available aligns with the disclosure provided and identify any gaps. Similarly, you can also instruct experts in ‘open-source intelligence’, who can conduct searches across websites and find if your partner has been posting on online forums. These expert reports can be used as supporting evidence in court proceedings.

What’s it worth?

If you do manage to gather information on the holding, the next challenge is to assess the value of any virtual currency. If your former spouse is a cryptocurrency ‘whale’ (a community term that refers to individuals that hold large amounts of digital currency) then it is essential your solicitor gets to grips with how much the holding is worth. However, one of the major issues is the volatility of virtual currency; the value of some currencies can fluctuate on a daily basis by 20% or more. Consequently, if you wish for a settlement where you receive some virtual currency, it is best to negotiate the split as a percentage of the total holding, rather than the value. If you do not wish to receive any currency and would rather offset it against other assets (such as the matrimonial home), then it can be suggested that a valuation of the cryptocurrency is calculated by working out the average price of the currency across historic trends.

The powers of the court

However, if you are no closer to finding how much and what virtual currency your former spouse is holding, you may want to explore an application to court for an order. These applications are complicated and will require tangible evidence in order to be successful. There are a number of applications that may be worth considering: (i) a computer search, possibly to access the IP address to see whether your ex-partner has been viewing cryptocurrency websites; (ii) the delivery up of a paper wallet; (iii) for third-party disclosure from a compliant trading platform to confirm your spouse is an account holder by providing their KYC documentation; or (iv) for third-party disclosure by a bank, where your spouse is holding their fiat trading profits.

If there is a concern of dissipation of crypto assets and you have the appropriate evidence available to you, then a freezing order could be considered against the UK legal representatives of the various trading platforms. You cannot freeze a wallet, as there is no centralised company to regulate or serve the order on, so serving the trading platform will be your likely avenue. The platform will then possibly report this to HMRC. If there are assets held on a trading platform in another jurisdiction, then your lawyer will likely advise that you take local legal advice on producing a mirroring freezing order to cover that jurisdiction.

The novelty and hidden nature of virtual currency are slowly being eroded and better understood, and it is becoming increasingly easier to navigate these issues with family lawyers who are experienced in dealing with crypto assets.

At FLiP Director Helen Greenfield and Senior Associate Nicole Phillips advised on one of the first financial remedy (divorce) cases of its kind in which a worldwide freezing order was secured over crypto assets. A detailed summary of the case can be found here.

The author of this blog, Rory Collett, is an associate at Family Law in Partnership. Rory’s practice involves advising clients on all aspects of private family law including financial and children matters and pre and post nuptial agreements. Having qualified at a City law firm as a commercial litigator, Rory has invaluable experience of corporate structures and business arrangements across numerous sectors enabling him to provide a breadth of experience to his family law clients.