How are cryptocurrencies and digital assets treated on divorce?
Fiona Wood, partner in Beyond Group‘s specialist family law practice McAlister Family Law, has specialised in family law for over 20 years. She is an expert in dealing with divorces which involve businesses and is know for her commercial awareness. Here she examines what happens to cryptocurrency in a divorce.
In recent months Bitcoin and other cryptocurrencies have seen a resurgence, with the value of many of these digital currencies now being worth more than ever. The value of the industry itself was worth more than $1trillion in January 2021 and is on course to double in value by the end of March. This has led to a rise in people turning to digital investments during the lockdowns, with many more investors purchasing these rather than more traditional stocks – my colleague Jim Truscott has recently commented on this.
So how will digital investments be treated if you are going through a divorce?
Division of assets
Despite having no physical form, there is no difference between how cryptocurrency is treated from other more traditional investments, should a couple divorce. These and the other assets owned by the couple will be divided between them, considering various factors, including the couple’s and their children’s reasonable needs, and the specific circumstances of their case.
However, due to the nature of these assets there are several potential issues that may arise, which are specific to cryptocurrencies, during a divorce. Those issues include:
Issues regarding disclosure
There are concerns that due to the relative anonymity of cryptocurrency trading that a spouse could exploit this to try to hide their assets. In divorce each spouse has a duty to provide full disclosure of their assets. Most of those who hold cryptocurrency do so via a digital exchange, also known as a digital wallet. These wallets hold ‘keys’ and these keys are a sequence of letters and numbers which then correlate to the amount held in the account ledger. The benefit of holding keys in a digital wallet is that a person is able to easily see what they hold, as well as allowing them to buy and sell as they wish. These digital wallets provide records of what cryptocurrencies a person holds, the trades they make and the value of their holdings. This is what will need to be provided in disclosure.
It should be noted that if an asset has not been disclosed, it may be obvious from the other disclosure provided. A judge has the power to infer that there are undisclosed assets, if a reasonable explanation is not provided regarding where money has gone. However, there is no guarantee that all undisclosed assets will be traced. The nature of cryptocurrencies makes these assets easier to hide for those who are not prepared to abide by the law and provide full disclosure.
Issues regarding valuation
Unlike traditional stocks, the values of cryptocurrencies are very volatile and can swing dramatically, with 500% swings within a week not uncommon. This can lead to challenges when valuing assets in divorce proceedings.
Cryptocurrencies will be considered more risky assets in divorce because of this. A judge will often consider it appropriate that both spouses receive some of the more risky assets, so that that they are both impacted by large increases or decreases in their values, thus sharing the risk.
Issues obtaining a freezing order
If one spouse is trying to get rid of an asset in order to frustrate the other’s financial claims in divorce proceedings, you can apply for a freezing order to prevent this happening. This is a difficult application to make successfully regarding cryptocurrencies, but there have been cases where the court has made a freezing order against the digital wallet and the digital exchange who operated the wallet have fully cooperated with the order.
Cryptocurrencies are potentially more problematic to deal with if you divorce. However, the world of cryptocurrencies is a growing one and is likely to feature in an increasing number of divorces. If you are concerned about how cryptocurrencies owned by you or your spouse will be dealt with if you divorce it is important that you take specialist legal advice.