We have asked Hetty Gleave and Rebecca Christie of Fladgate LLP, a law firm based in central London, about crypto assets, and in particular how they are increasingly becoming a significant element in divorce proceedings.Download PDF Version
We have asked Hetty Gleave and Rebecca Christie of Fladgate LLP, a law firm based in central London, about crypto assets, and in particular how they are increasingly becoming a significant element in divorce proceedings.
There is no doubt that the events of the last two years have seen a disruption in global economic activity on a massive scale. It is also clear that technology has emerged as one of the “winners” in the commercial success stakes, with the enormous reliance on meeting platforms like Teams and Zoom making their brand become part of everyday vocabulary.
As technology has come to the fore, so too have other digital services and products. We now know that it is possible to hold digital art and assets by way of an ownership token called an NFT (the topic of the next article). Also, the rise of crypto currencies, as a decentralised finance base, has become much more appealing to a wider market and commercial businesses as a way of trading quickly, efficiently and across borders. Crypto currencies and Block Chain are no longer technological experiments for the nerdy few who understand them, but part of mainstream financial markets and cannot be ignored.
By way of example:
Hetty states that “as family lawyers we cannot ignore crypto as an asset class when looking at the resources available to each party on divorce.” During financial remedy proceedings both parties have a duty to provide full and frank financial disclosure of their assets, income, and liabilities worldwide.
The usual way in which disclosure is made is by way of mutual exchange of a document called a Form E, which requires each party to provide supporting documentation, such as the last 12 months bank statements for every account they have worldwide. The High Court has recently ruled that crypto currency constitutes ‘property’ and therefore for the purposes of financial remedy proceedings on divorce, crypto assets must feature on a Form E in some way. Although there is a general “catch all” question asking if the author holds any other assets not already covered in the form, there is not yet a direct question about digital currency”
So how can we prove that someone holds crypto if they do not voluntarily disclose it? One of the problems with crypto is that it is held in digital wallets, which create an anonymous address for the account holder. While all transactions and activity relating to the wallet are recorded on the Block Chain, the immutable digital ledger, there are no statements produced that reveal the account ownership or contents, and so non-disclosure of a valuable resource is a significant risk.
At present the only way of establishing whether someone holds crypto, if they have not voluntarily disclosed it, is by analysing their traditional bank/building society statements. Although crypto can be “mined” or created, the most common way of acquisition is by purchasing it using good old-fashioned cash. This means there will be a record on a statement of interaction with a crypto exchange either when the crypto was purchased or when it is eventually sold and converted back to currency. Find the crypto clue and prize the door open by way of Questionnaires to establish the purpose of the debit or credit until the digital wallet is found.
It is also possible to employ expert forensic accountant/investigators to look for the “fingerprint” evidence of 'entry and exit' into the crypto market from bank statements, business accounts, tax returns, or electronic devices.
If crypto assets can’t be located within proceedings, but there is evidence of activity in the market, Hetty Gleave tells us that the court has the power to draw adverse inferences that the assets do exist and therefore some value should be included when dividing up the matrimonial pot. However, “it is important to note that the court will only do this in exceptional circumstances – proving motivation will be key.”
It is also possible to obtain an injunction against a crypto wallet, even though the identity of the owner of the wallet is unknown. Hetty tells us that “Courts just need to be confident that the wallet is there so that an order can be attached to it and there is a real risk of unjustified dissipation which may render enforcement of any future order less effective.” Specialist firms can trace crypto assets that one party has attempted to dispose of or divert if they realise the wallet has been discovered.
The other main issue with crypto currency is its volatility in terms of value. Between January 2020 and January 2021, the value of Ethereum rocketed by 750% and between January 2021 and January 2022 it increased by a further 180%. Whilst Bitcoin has recently dropped to a 15 month low: Bitcoin Volatility Drops To 15 Month Low; What This Could Mean. If we are to establish a value for the purposes of division on a specific date then the moving target syndrome makes it incredibly difficult. Hetty has observed that;
“what could seem to be an advantageous settlement one day, could be a very disadvantageous one next. It may be fairer for the court to order that the crypto holding itself is shared in specific percentages so that each party then shares the risk and reward that may follow.”
Finally, if crypto is property, then it must be subject to taxation, and crucially advice must be taken for individual circumstances. When parties separate, the transfer of crypto assets between spouses is like any other asset for HMRC’s purposes: that transfers between one spouse to another is only free from Capital Gains Tax liability up until the end of the tax year in which the parties “separated”.
Crypto assets received from employers as part of a non-cash payment or bonus scheme are still subject to income tax and national insurance contributions. If parties have a business which owns crypto currency and they have agreed that it will be transferred as part of their settlement, other taxes may apply, including corporation tax, corporation tax on chargeable gains, income tax and VAT. Crypto assets values must be converted into sterling for inclusion on tax returns, so forensic lawyers will have another opportunity to seek out crypto asset holdings if they are not otherwise disclosed or obvious.
Love them or hate them, the world’s fascination with Crypto looks set to continue with an estimated 1 billion owners by the end of 2022 (Global Crypto Owners Near 300 Million, Predicted to Hit 1 Billion by the End of 2022). Crypto is no longer a fad and may in fact prove to be one of the most valuable assets in a divorce case. The days of piggy banks are numbered.
Our core observation though is that macro fundamentals are changing and therefore the leadership of portfolios will change with them. Investors should avoid investing using the rear-view mirror at times when the economic, and therefore profit fundamentals, are changing.
With the first quarter of 2022 over, and as I sit here collecting my thoughts and observations of what happened, and indeed what could happen in the future, the world is certainly a different place than at the start of the year!