Challenges encountered with Cryptocurrencies in divorce settlements
It is fair to say that reaching a financial settlement in divorce cases can be a challenging journey for the parties involved. Regardless of which process the parties wish to embark on, most cases start with basic disclosure.
This means disclosure of financial assets and liabilities, whether they are in joint names or sole names. In a court process, the parties are under obligation to provide full and frank disclosure and are directed by the court to produce disclosure by a particular date. In any other process, parties rely on voluntary disclosure.
It is difficult to hide most investments because there is usually a paper trail if you look back far enough. However, assets such as cryptocurrency will require a keener eye.
Cryptocurrency is becoming a more common investment that may need to be considered in a divorce case. It is essentially virtual currency protected by cryptography and predominantly produced and exchanged through the use of blockchain.
Blockchain is a digital ledger, recording all virtual currency transactions in an encrypted fashion, making it a more secure way to transfer funds. Cryptocurrency allows for the transfer of funds from one person to another without third party involvement such as a bank, which adds an unnecessary layer of cost and delay.
There are many different types of cryptocurrency that investors can purchase and new virtual coins are being developed all the time, making it a growing and ever changing area for investment. The most well known cryptocurrencies are Bitcoin, Ethereum and Litecoin.
The first difficulty is determining the existence of the asset through disclosure, where it has not been forthcoming and volunteered in the first instance. There is no third party institution, such as a bank, that can be compelled to comply with orders for disclosure if required.
Also, while each transaction is recorded in the blockchain ledger, it is incredibly difficult to determine who actually made the transaction and for what purpose. For this reason, parties should seek information and documentation regarding cryptocurrency wallets along with purchase and sale information.
Bank and credit card statements should also be studied closely for evidence of the initial investment. Ultimately, if a spouse is unwilling to provide the information the court can impose a fine, cost order or other penalty, and could also make assumptions about the asset held. One would hope these deterrents would prevent attempts to hide the asset.
Assuming the issue of disclosure is resolved, the next step will be valuing the asset. When it comes to virtual currencies, some are centralised and supply is controlled by the developer of the currency; however, cryptocurrencies such as Bitcoin are not created or controlled by a single central entity. This means supply and value is determined by demand and unlike most assets, is subject to wild swings in value on an almost daily basis.
It is also worth mentioning that the value will change according to social acceptance; whether bigger businesses adopt blockchain technology, how readily suppliers will accept virtual currencies as a form of payment and whether governments around the world will accept cryptocurrencies as legal tender. Some cryptocurrencies have an identifiable exchange rate with the pound, but others do not. When dealing with a case falling into the latter category, it would be sensible to consult an expert financial adviser to assist in determining the value of the asset.
Assuming it is possible to agree a value or obtain expert evidence on the same, consideration then needs to be given as to how the cryptocurrency might be shared. Half of the asset could be transferred to the non-owning spouse to continue to hold, or an offsetting arrangement could be entered into whereby the non-owning spouse would perhaps receive more of a different investment or asset, such as the proceeds in the house or money in a saving account.
The non-owning spouse may well be very daunted by the prospect of owning cryptocurrency and have no idea what to do with it, however, if offsetting is to be considered appropriate it is worth noting that due to the erratic value of cryptocurrencies, what is fair one day may not be the next, if the cryptocurrency has soared in value or plummeted.
Once a financial agreement is made and sealed by the court there will not be an opportunity to revisit the settlement on the basis that investment values have changed, so the parties should be comfortable that one person could end up with a substantial increase or decrease with the asset if they enter into an offsetting arrangement.