The emergence of cryptocurrency in family law
Cryptocurrency is becoming an increasingly popular choice of investment and we are seeing this crop up more frequently in Financial Remedy cases. Accordingly, Family lawyers will need to develop an understanding of cryptocurrency as society makes a shift towards ownership of digital assets.
What is cryptocurrency?
Cryptocurrency is a digital currency that can be traded online as an investment or used to buy goods and services. There is no central bank or government to regulate cryptocurrency.
Cryptocurrency is made up of blockchain technology, which is a digital string of blocks, which hold individual transaction information or individual coin ownership. This information is timestamped and posted to a distributed ledger which is a computerised database using strong cryptography to secure transaction records, control the creation of coins, and verify the transfer of coins between people. The blockchain consists of two lines of code, each called a key. The public key is visible to anyone who views the blockchain, however, the corresponding ‘private key’ is not publicly visible. To date, the most known types of cryptocurrency are ‘Bitcoin’ and ‘Ethereum’.
Cryptocurrency is becoming increasingly popular due to its anonymity and freedom from internal regulations. The numbers on the blockchain are completely anonymous and cannot be traced to one individual without the private key. The ‘private key’ is the password held by the cryptocurrency owner that allows them to spend or trade coins on the blockchain. Therefore, control or ownership of cryptocurrency rests with anyone in possession of this private key. The private key can be kept in a digital ‘wallet’ which is usually in the form of an online trading app, or it can be memorised or kept in ‘cold storage’. ‘Cold storage’ refers to saving the data away physically from the internet, most commonly on a USB drive or written down somewhere.
There have not been any family law cases that have had to address whether cryptocurrency is a form of ‘property’. However, the commercial courts have treated cryptocurrency as property capable of ownership and regulation in much the same way as a house, cash or a pension. The leading authority for this can be found in AA v Persons Unknown [2019] EWHC 2556 (Comm).
Should cryptocurrency be disclosed?
There is an ongoing legal duty to provide full, frank, and clear, disclosure in financial proceedings on divorce, therefore, any party that owns cryptocurrency must disclose this in their Form E.
Due to cryptocurrency’s volatility and ease of changing hands online without leaving a footprint, it can often be easy for a dishonest spouse to hide or dissipate their investments in cryptocurrency. If a party suspects that their spouse may have investments in cryptocurrency, it is imperative that on financial disclosure, the spouse’s bank/credit card statements are carefully reviewed for any transfer activity or deposits into ‘wallets’ such as Coinbase or Binance, or exchanges or use of a cryptocurrency ATM.
Can a freezing order be obtained over cryptocurrency?
If it is believed that disclosed cryptocurrency is susceptible to a real risk of dissipation, it may be possible to obtain a freezing order to prevent this, although this is highly complex due to the nature of cryptocurrency and how difficult it is to prove ownership. Since cryptocurrency has no physical form, significant thought has to be given as to how cryptocurrency can be ‘within someone's control'.
It may be necessary to take steps to physically preserve the means of storage on which the private keys are stored to prevent the transfer or even destruction of the means of storage. For example, a piece of paper with the private key written down or USB sticks on which the private key is stored.
Don’t forget tax!
Parties’ who have used or sold cryptocurrency between 6 April 2020 and 5 April 2021 should check whether they have a reporting obligation to HMRC.
If the gains for the disposal of crypto assets for the year are more than £12,300 (the tax-free CGT personal allowance), then the disposal may be subject to capital gains tax. The disposal may need to be reported to HMRC via the UK self-assessment tax return. However, parties should seek expert tax advice on this.
Take advice.
Family lawyers should consider taking expert advice to try and track and trace any cryptocurrency. The expert should be familiar with cryptocurrency holdings due to the high volatility and nature of these digital assets.