The fluctuating cryptocurrency market and family law
Bitcoin reached a new record all-time high on Thursday 14th March, reaching over $73,700; the surge in price follows the introduction of the recently approved Bitcoin ETF issued by the likes of Blackrock and Fidelity. This has widened the pool of investors by offering an opportunity to gain direct access to the digital asset without the need for a cryptocurrency exchange or wallet. We’re yet to see if an Ethereum ETF will hit the markets.[1]
The crypto market has u-turned following its crash in 2022 triggered by the FTX collapse, which saw Bitcoin then trading at less than $16,000; many thought the bubble had burst and the market would not recover.
In over a month, the crypto market welcomes its next ‘halving event’ which occurs every four years. It sees the reward for those who mine Bitcoin cut in half in order to control its supply.[2] It is speculated that this may lead to further price fluctuations. Some traders predict a further increase in the price as a result – the crypto market is certainly one to watch over the coming months.[3] But what do these fluctuating markets and developments mean for cryptoassets in divorce cases? What happens to cryptoassets in a divorce generally and what obstacles do the assets pose?
What happens to cryptoassets during a divorce?
Cryptoassets, including the likes of Bitcoin, Ethereum and NFTs (non-fungible tokens), are subject to the duty of disclosure in divorce proceedings. This means that they are treated just like other assets: they must be disclosed to the other party and the court. Failure to do so will result in the non-disclosing party being in contempt of court. Depending on the facts of the case, they can be considered an asset that is available for distribution between the parties.
How are cryptoassets valued during matrimonial proceedings?
As is evident, cryptoassets are subject to volatility; their price can dramatically fluctuate, meaning they can be difficult to value during proceedings. It may be left to the judge to determine the price by considering valuations if the parties are unable to agree themselves. When valuing cryptoassets in matrimonial finance, the starting point (and usually the end point) is to ascertain the market value through valuations on exchange websites, such as Binance and Coinbase. Caution must be exercised to ensure that valuations are not distorted by market changes – daily valuations can therefore be used for each hearing and in negotiations to reflect its actual price.
As we have seen, the crypto market has shifted. The rising price of cryptoassets is certainly an advantage that a party negotiating their finances may want to exploit. Parties would be well advised to obtain up-to-date valuations to reflect today. Still, it is fundamentally important that regular valuations are used ongoingly, especially since the unfortunate backlog in the courts means that cases are not progressing as quickly as one would hope. Today’s prices might not be as relevant by the time that negotiations or court proceedings are finalised.
During proceedings, if an order for sale is given (which compels the parties to sell the cryptoassets as part of a financial settlement), the price will be particularly important. Parties will want to arrange the sale date to maximise the proceeds available for division – for those looking for a clean break, the idyllic sale date might be just round the corner.
Another concept which parties in proceedings should be alive to is ‘staking’ – the process whereby users lock in their cryptoasset holdings in the crypto network to support its operations, sometimes in return for a reward of additional coins. This can essentially be seen as an income for a party, particularly where cryptocurrency is held in substantial sums. It can provide an opportunity to earn higher ‘interest rates’ than what might typically be available in traditional money markets. If a party’s cryptoassets are locked into the network, however, removing them early in the event of an order of sale may mean the rewards (and additional income) are lost.
What other obstacles do cryptoassets cause during proceedings?
Cryptoassets are intangible, (not capable of being physically touched) and ownership of the assets may generally be anonymous. These factors combined with a lack of a conventional centralised ownership register of the assets means they can be difficult to trace. The distributed ledger technology that they run on facilitates swift transfers of the assets between worldwide jurisdictions, thereby making them difficult to recover. The starting point in tracing the assets is to look at how the assets are held; for example, whether they are mined or purchased. If they have been purchased on an exchange such as Binance or Coinbase, the transactions might be identifiable on a bank statement. It may also be possible to obtain an order from the court which compels an exchange to disclose information on the holdings, which we have seen with Coinbase.
It might be possible to link unusual transfers or cash withdrawals from a party’s bank account with cryptoasset purchases. Forensic accountants can be instructed to analyse the physical laptop or pc itself, but a search order would be required to do so. These orders are rare in the family court but are available where evidence is produced that the non-disclosing party holds digital assets.
Cryptoassets may prove more challenging to trace where a technique such as ‘mixing’ is used; this is where cryptocurrencies are traded with those of others, resulting in a pool of mixed cryptocurrencies, making it more difficult to trace back to the original owner. Forensic experts can be engaged to track the assets but the costs of doing so are high; they must be balanced against the likelihood of success in tracing them and whether the asset holds any meaningful value.
How can Vardags help?
Vardags are well versed in dealing with complex assets, including the likes of cryptocurrency – we represent our clients by liaising with financial experts, obtaining accurate valuations and working alongside our specialist in-house financial forensics team to investigate and trace assets in matrimonial proceedings. We engage with cryptocurrency experts in the profession who can assist with valuing, tracing and presenting persuasive arguments in negotiations.
We offer free initial consultations for prospective clients – don’t hesitate to get in touch to see how we can help.
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