Crypto currencies and divorce

23rd April 2021

Many people will be aware of the press coverage about the ever-increasing value of bitcoin and other alternative crypto currencies. Crypto currencies can be used to buy goods throughout the world and traded online like other types of traditional investment. Until recently this was the domain of only a few investors, but crypto currencies are becoming mainstream despite their volatile nature.

Within divorce proceedings, they are treated like any other asset that falls to be divided on divorce, regardless of who owns them. However, they are notoriously difficult to track down and transcend international boundaries.

As a purely digital asset based on a virtual network, they are harder to trace and sometimes this is one of the attractions to investors. It also adds complexity to the disclosure process. Effectively the control of the asset lies with anyone who has the private key. This acts as a security pass that enables the individual to access information about the assets held and trade them. They have no physical presence or central register of ownership and can be traded swiftly.

If there is a fear that a spouse is dissipating or intending to transfer crypto currency to conceal the assets, it is possible to obtain a freezing injunction from the court. Where it can be proved that such assets have been dissipated, the family courts do have the power to add the value back into the matrimonial pot.

But how do you know if your spouse is hiding crypto assets? First, it is important to have a good knowledge of your spouse’s and the family finances prior to any divorce. Both parties have a duty of full and frank financial disclosure and should produce evidence of crypto currencies and bank statements. If they don’t, you can analyse bank statements going back 12 months (sometimes longer) to identify transactions which could suggest the existence of crypto currencies. Specialist forensic accountants can also be instructed to ‘read between the lines’ so they can establish what should be there and what isn’t.

Valuing the asset can be difficult as they fluctuate wildly. Agreeing an advantageous valuation date can make a significant difference. The courts have been consistent on the point that even a sudden change in the asset value after an agreement is reached is not a reason to depart from the settlement.

Crypto currencies are here to stay and becoming ever more popular, so if you do have concerns about whether your spouse is investing and not disclosing the value of crypto currencies, it is important not to delay and act fast before they are dissipated.

Crypto currencies and your will

If you own crypto currencies, or indeed any digital assets, it is important to think about what will happen to the assets when you die.

You should ensure you have a will that the defines your personal belongings to include tangible and intangible property, so as to include digital assets. If your digital assets are worth a significant amount, you could consider leaving them in a separate legacy, with specific digital executors. Otherwise your digital assets will fall into your residuary estate.

Make sure that you check the terms of the assets to ensure the executors will be able to legally access them. You should also prepare a regularly updated inventory with a hard copy stored with your will, with a record of the login details stored securely. Finally make sure your executors know where the records are kept!

Crypto currency on bankruptcy

Crypto currencies are assets for the purposes of the Insolvency Act 1986, and therefore vest in the trustee in bankruptcy upon the making of a bankruptcy order by the court.

The common difficulty, as with divorce, is identifying the existence and ownership entitlements of an asset as intangible as crypto currency. They are easier to conceal, so the cooperation of the bankrupt is essential unless, of course, the ledger (commonly block chain) records their ownership. Even then, without the private key, realisation is an issue.

Crypto currencies will become increasingly more prevalent in insolvencies and care must be taken to ensure no concealment of such assets is taking place to the detriment of the insolvency estate.
While a trustee can seek suspension of the automatic discharge from bankruptcy where a bankrupt is non-cooperative, the court will require real evidence of a risk of concealment, as opposed to mere suspicion. So some evidence of acquisition of such assets in the period prior to bankruptcy will be essential, requiring trustees to carry out thorough investigation of the bankrupt’s bank records and other documents.

The Insolvency Act 1986 provides the trustee with a range of powers and tools to assist in such investigations. Nonetheless, realising crypto currencies will remain a significant challenge for insolvency practitioners.

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