As cryptocurrencies continue to gain mainstream attention, with several high profile companies now accepting cryptocurrency as a method of payment, they are inevitably making their way into various aspects of our lives.
Cryptocurrencies have made a large impact on the financial landscape, and subsequently have made their way into divorce and financial settlements. Dealing with the financial aspects of a divorce is already a complex process, but the emergence of cryptocurrencies has added an additional layer of complexity, and family law solicitors have had to adapt quickly to these changes.
What are Cryptocurrencies?
Cryptocurrencies are digital or virtual currencies that use cryptography for security, a process of hiding or coding information. They operate independently of central authorities, such as banks. Essentially, it is a digital asset that you can buy, sell and trade.
The most notable cryptocurrencies include Bitcoin and Ethereum, with one Bitcoin currently equating to around £50,000.00, but there are thousands of other cryptocurrencies (currently around 19,000), each with its own features and functionalities.
Mainstream platforms such as Coinbase and Binance are trading platforms and allow users to hold, exchange and track the value of cryptocurrencies using a crypto wallet.
One of the primary appeals of cryptocurrencies is their decentralised nature, as they are not controlled by a single entity, such a government or financial institution. Transactions involving cryptocurrencies are recorded on a public ledger, known as the blockchain, providing both transparency and security.
Cryptocurrencies on Divorce
When a couple decides to divorce, their assets must be divided fairly in a way that meets their respective needs. Traditionally, this involves identifying and valuing assets such as property, bank accounts, investments and pensions. However, identifying and valuing cryptocurrencies poses a set of unique challenges –
Volatility – one of the primary issues that arises in divorce cases involving cryptocurrencies is the valuation. The volatile nature of cryptocurrency markets can lead to significant fluctuations in value over short periods. Having £1,000.00 in cash will still be £1,000.00 the week after, whereas with cryptocurrencies, £1,000.00 worth of a currency may be worth £0.00 or £10,000.00 the week after. Determining the fair market value of cryptocurrencies can therefore be challenging, especially when one spouse may attempt to conceal or undervalue their holdings.
Anonymity – while cryptocurrency transactions are recorded on the blockchain, they often provide a degree of anonymity. Tracing transactions can be complex, especially if there are multiple wallets or exchanges involved. This anonymity can make it difficult for one spouse to identify the other’s cryptocurrency holdings accurately and can make it easier for either spouse to hide assets from the other party.
Complexity – understanding cryptocurrencies requires a certain level of technical knowledge. Many divorcing couples may struggle to comprehend the intricacies of cryptocurrencies, leading to disputes over ownership and valuation.
Global Nature – cryptocurrencies transcend geographical boundaries, and individuals can hold them in digital wallets accessible from anywhere in the world. This global nature introduces jurisdictional challenges, especially in international divorces where different legal systems may apply.
Addressing Cryptocurrencies
Given the complexities involved, divorcing couples with cryptocurrency holdings and their legal representatives should take proactive steps during the settlement process as follows:-
- Full and Frank Disclosure – both parties are required to provide full and frank disclosure of all assets during proceedings, including cryptocurrency holdings. It is important to ensure that you or your client are transparent.
- Evidence – if you are suspecting that one spouse is hiding crypto assets, there are various types of evidence which can provide evidence of this. Careful consideration of bank statements can bring to light previous investments or withdrawals which provide definitive proof that your spouse has crypto assets.
- Disclosure Orders – should evidence not come to light, further steps can be taken and you may wish to apply for a Third-Party Disclosure Order. This is an Order of the Court which requires a non-party to the proceedings to provide documents and information on the requested subject.
- Valuation – determining the value of cryptocurrencies requires careful consideration. Some approaches include using the value of the cryptocurrency at the time of separation, hiring experts, or utilising the exchanges’ valuations.
- Case Law – Courts are still adapting to the presence of cryptocurrencies, however, there have been various high profile cases in recent years providing valuable information and definitions on crypto assets and their role when dividing the assets to a marriage.
- Negotiation and Compromise – as with any settlement, negotiation and compromise are often necessary. Couples may need to work together to reach agreements on how to divide cryptocurrency assets fairly, taking into account factors such as each party’s contributions to acquiring the assets and their future financial needs.
- Alternative Dispute Resolution (ADR) – methods such as mediation can help couples resolve disagreements regarding crypto assets. ADR can offer more flexibility and confidentiality compared to the Court processes and may help couples reach a smoother resolution.
How are the assets divided?
Like all other assets, once a value has been determined, this can be added to the matrimonial pot. There are various options that may be used –
- The crypto assets are sold and transferred into ‘real’ money, which is subsequently divided.
- The crypto assets are transferred to the other spouse’s crypto wallet.
- The crypto assets are offset against the other assets to the marriage.
Final Thoughts
Cryptocurrencies present both opportunities and challenges in divorce settlements. While these digital assets offer greater financial autonomy and privacy, they also introduce complexities that must be carefully navigated during the divorce process.
As they continue to evolve and become more prevalent, they will undoubtedly play a more significant role in financial settlements. Couples and legal professionals must stay informed about developments in cryptocurrency regulation, technology, and market trends to navigate these complexities effectively.
Divorces involving cryptocurrencies require careful attention to detail, patience, and a willingness to adapt to the unique challenges presented by digital assets. By approaching the process with transparency, expertise, and a commitment to fairness, couples can mitigate conflicts and achieve settlements that address their financial interests comprehensively.
Given the complexities that cryptocurrencies pose when going through a divorce, you should always seek legal advice from a solicitor. For more information, please contact a member of our family team at North Ainley, your trusted Solicitors in Oldham.
