Dealing with cryptocurrency in divorce proceedings

Bitcoin and divorce

I think my spouse may own Bitcoin or another cryptocurrency.  How does this fit in with a divorce?

Cryptocurrencies are becoming increasingly popular, and the biggest name (and earliest established) among them, Bitcoin, has been splashed over the front pages of the news last week for reaching an all-time high…before dropping again.

These assets are renowned for being remarkably volatile, and anonymous. Both are major factors that your divorce lawyer ought to be taking into account in any negotiations around financial remedy proceedings accompanying your divorce. With other cryptos such as Ethereum, Litecoin, Cardano, and Monero taking off, and stories about paying for your kids' nursery in crypto becoming more common, it’s becoming more and more likely that divorces will involve disputes over this type of asset. Below, we’ll consider some of the jargon, and some of the key areas for consideration.

1. How you find it and quantify it. 

A key part of crypto’s draw for some people (aside from universally laudable benefits like the speedy transactions and low fees thanks to cutting out the middle-man i.e. banks) is its anonymity. You’re not obliged to have a name and address associated with it like you would be with a traditional bank account. In fact, whilst you might hold an account with an online exchange (rather like the old-school physical currency exchanges you might use before going on holiday abroad) which would hold your details, there is no personal information associated with a crypto wallet at all. Crypto is held in a 'wallet' which may be either the 'software' variety (where your regular PC holds the information on its hard drive), ‘hardware’ variety (where you possess a specially designed dedicated device which stores the relevant information) or 'paper' (where you write down the relevant information, sometimes expressed in the form of a QR code, on a piece of paper). The central information needed to access crypto is the ‘public key’ (which can be made available to others, and operates something like an account number and sort code for your traditional bank account does, as a location to which to send money) and the ‘private key’ which only the owner of the crypto should hold (loosely akin to a password which you might use to login to your online banking). Whilst public keys are listed in the publicly available blockchain (akin to an anonymised ledger of transactions) this won’t help you identify if your spouse has been spending crypto unless you already know which public key belongs to them.

During financial remedy proceedings, both parties must provide full and frank financial disclosure (of all their assets, worldwide) beginning with Form E. This should include any crypto holdings. If you think your spouse holds cryptocurrency assets (for instance if you heard them remark once about how a Bitcoin crash affected them) but your spouse hasn’t disclosed these, then you should flag this with your solicitor as soon as possible. There are steps which can be taken to identify the missing asset.

You may wish to instruct a specialist forensic investigation expert, who will look for crypto 'entry and exit' points. Unless your spouse has successfully mined a cryptocurrency themselves, it’s common to convert run of the mill national currency into a cryptocurrency at an exchange (and vice versa). This may show up in their disclosed bank statements. However, depending on the value of crypto you think it likely is being hidden, it may not be cost-effective to investigate the matter in this way, if at all. At the very least however, your solicitor should be including questions about crypto holdings in the Questionnaire which your spouse will have to answer after the First Appointment at court (also known as the ‘FDA’/First Directions Appointment). Those questions should be guided by a forensic crypto specialist, and will likely include open questions relating to the existence of any crypto assets or online accounts with exchanges, or the location of any hardware or paper wallets.

If crypto holdings cannot be positively identified, but convincing circumstantial evidence can be provided, it is within the court’s power to make an ‘add-back’ order. This is where the court draws adverse inferences against your spouse and concludes that although they haven’t disclosed or admitted it, they must hold assets (in this case, crypto) of at least a given value, and should therefore be treated as holding those on their side of the balance sheet. The court will then award that spouse a smaller share of the disclosed assets than it otherwise would. Your solicitor should consider running such an argument if investigations have not proved sufficient to get your spouse to admit to their non-disclosure.

2. Risk laden assets and enforcement v safer, liquid assets.

The value of crypto is inherently volatile, and any family lawyer worth their salt will therefore tell you to be wary of them when it comes to negotiating a settlement. If you take part of your award in crypto, you could be looking at a very fair or advantageous settlement one day, and a very disadvantageous one the next. It is usually advisable to try to take your share of the assets in the form of more traditional, stable value propositions. In addition, because of the way in which the public key must be possessed by the owner in order for them to make use of their crypto, this is a relatively easy asset to lose. If a software or hardware wallet is hacked or corrupted, or a hardware or paper wallet is physically damaged, stolen or otherwise lost, the crypto assets could evaporate overnight. If you’re still in the negotiation stages this could completely undermine all your hard work and change the form in which you need to receive assets to meet your needs, or worse, leave you in the lurch if an order for transfer of the crypto asset to you has already been perfected.

If you do accept some of your settlement in the form of crypto, if this is due to be transferred to you from your spouse and they don’t follow through, you may find yourself in a very difficult position. Although the High Court of England & Wales has considered crypto far enough to declare that it constitutes ‘property’ (see AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 (Comm)), it is still unclear what jurisdiction a crypto might be considered to fall within, given its online and worldwide nature. Add to this the fact that transactions are anonymous and entirely within the gift of the person holding the public and private keys (because there are no middle-men banks) and enforcement if your spouse doesn’t pay up on time is much more difficult than with traditional assets. Common recourses such as freezing orders might be difficult to obtain, and to implement via an entity such as a bank or the land registry interceding in your favour. This is another reason why it will usually be advisable to try to take your share of the assets in a more traditional form, such as pounds sterling or real estate.

Similarly, if you are a party in possession of crypto, you should bear in mind that under the current law this must be declared in the same way as any other property during financial remedy proceedings, and that hiding it could lead to you being left largely with a volatile asset at high risk (and, if you are found out later, to a revisit of the court’s order and potentially to fines and/or imprisonment). Crypto is high risk, and (if you are lucky) high stakes.

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