Law Articles

How cryptic is cryptocurrency and how is this involved in family law cases? 10/02/2023

What is cryptocurrency?

Cryptocurrency is a type of digital currency which seems to have emerged from nowhere over the past few years. It is what is known as a “decentralised” system which to the uninitiated means that it is run by several different offices rather than one central one. The system is also governed by cryptography which is defined as “the art of writing or solving codes” which sounds very James Bond! The more prominent type of cryptocurrency that the masses are likely to have heard of is Bitcoin.

Why are we discussing cryptocurrency on a family law forum?

When dealing with division of matrimonial assets on divorce, it is imperative that both parties provide full financial disclosure of all their assets to enable them to reach a fair settlement or to allow a court order be made if the parties cannot reach agreement themselves. However, should assets be hidden by one party, a fair division of assets cannot be achieved.

Why is cryptocurrency so popular?

When it burst onto the scene, there was the novelty of it being new and everyone seemed to jump on the bandwagon which has made it more attractive, which has then generated more money. We will not go into the whys and wherefores of how it makes money. However, as we understand it, money can generally be made from cryptocurrency in a similar way to how money is made by trading.

The reason that it is attractive to a lot of people is because they can seemingly make a lot of money on their investment in a comparatively short space of time. It is also an attractive prospect to some users due to the secretive nature of the system given how it is managed and unregulated and due to the lack of documentation associated with it.

Due to the limited paper trail it can therefore be very difficult to trace cryptocurrency. This is particularly difficult if no “custodial wallet” exists. There are two main ways that this sort of account can be held. One way is in a centralised exchange where the exchange holds the private key to the account. Another way is where there is no third-party involvement, and the person holds their own private key to their account directly.

As the latter type of account has no third-party involvement, it can be very difficult to trace and therefore almost impossible to enforce against in divorce proceedings. Even if such an asset is declared during divorce, if there is no third-party involvement, the owner retains sole responsibility and access to it. So, if the owner loses or forgets the key, access cannot be gained to it. To compare it to something we all know, it would be like having a Gmail account and losing your password. You can simply request Google reset the password. However, if you have such an account where there is no third-party involvement and you are solely responsible for your key and you forget your password, you could potentially lose out on hundreds, thousands or in some cases millions of pounds worth of cryptocurrency because there is nobody in place to recover your account.

What do you do if you suspect that your partner has invested money in cryptocurrency, and they have failed to disclose it during divorce proceedings?

The first thing is to identify such an asset. To do this, you can instruct a crypto expert to help you. However, there will be associated fees for doing this so it will only be worth doing if you strongly suspect such an asset exists. The obvious way to check whether such an asset may exist is to go through the financial disclosure documents provided by your partner during the process of divorce proceedings and identify any large transactions that seem to have gone missing. The amount involved would need to be substantial enough to justify incurring additional fees for instructing a crypto expert.

If you can clearly show that your partner has an undisclosed valuable asset and you have expended a reasonable amount of money uncovering that asset, not only will you potentially be able to realise a percentage of that asset (or offset it against another tangible asset in the matrimonial pot), you may also be able to recover your costs of doing so by way of a Costs Order on the basis that the other party was being dishonest with their financial disclosure.

How do you enforce against an asset that is so secretive and unregulated?

In some instances, where there is no third-party involvement, this might be almost impossible to do. All you can do is identify that large sums of money are missing from your partner’s bank accounts and ask the court to draw its own inferences.

If you can identify the account, with or without the help of a crypto expert, the next step would be to apply to court for a Freezing Order or equivalent to ensure that the owner of the account is not able to move the money, or worse, deplete the money before you have had a chance for the information to come before the court.

There are not many reported decisions involving cryptocurrency accounts relating to family law matters. However, in 2022, some Family Court Judges in complex financial cases had training by crypto experts which suggests the court feels this is something that is going to come up more extensively in the future.

Why have there not been many court decisions in family law cases yet?

Is it because cryptocurrency is such a new phenomenon that people are not necessary looking for it, or is it so well hidden that opposing parties do not know that the accounts exist? Is it that the signs are there, such as large amounts of missing money, but that people cannot find an expert to help them locate such accounts or even know that such experts exist? Or is it that the searching parties do not know the value of the accounts from the outset and are concerned about expending money chasing an account which may be worthless? The answer is that any of these scenarios could be true.

What steps should you take if you think your partner has not disclosed such an asset in divorce proceedings?

1. Identify any large sums of money missing from joint or sole bank accounts.
2. Locate a crypto expert and obtain quotes regarding their fees.
3. Consider whether the use of a crypto expert is proportionate in your case. 
4. If it is proportionate, instruct an expert, locate the account, apply for a Freezing Order in respect of the account and apply for a Costs Order. 
5. If it is not proportionate to instruct a crypto expert, clearly identify the monies you believe are missing and bring it to the attention of the court. The court can draw its own inferences and can make an order giving you an interest in the undisclosed asset or, more likely and preferably, can offset your interest in the asset against other more tangible assets in the matrimonial pot. Again, applying for a Costs Order would be prudent in this case.