Cryptocurrencies, such as Bitcoin & Ethereum, have been rapidly becoming mainstream in the last couple of years. We saw a massive boom in their evaluation during the Covid-19 pandemic – with more and more people buying crypto assets.
In other words, the more people have cryptocurrency holdings – the higher the likelihood of it being involved in a divorce. So, in this blog, we’ll help you prepare to deal with cryptocurrency and what to expect.
Continue reading to find answers for:
- What is cryptocurrency?
- What current laws are applicable to crypto assets in a divorce?
- How are crypto assets problematic during a divorce?
- What happens if your spouse tries hiding crypto assets?
What is cryptocurrency?
HMRC defines crypto assets as cryptographically secured digital representations of the value of contractual rights that can be transferred, stored, and traded electronically.
That was a mouthful.
In other words, crypto assets (can be referred to as cryptocurrency or tokens), is a digital currency that is not reliant on any central authority e.g., the Bank of England. It has no physical form.
Transactions and owner accounts (can be referred to as wallets) are also mostly anonymous – there is no connection to ‘real’ financial institutions and that means it’s completely decentralised.
What current laws are applicable to crypto assets in a divorce?
Crypto assets are categorised as financial assets. As such, they must be disclosed in Form E. Which both parties must fill out with the full transparency of their financial assets.
If one of the parties tries to hide their financial assets, in this case – cryptocurrency, they can face huge fines or even imprisonment in severe cases.
How are crypto assets problematic during a divorce?
Looking at cryptocurrency in divorce, two key issues arise:
- Non-disclosure of crypto assets – attempts to hide it from the court
- Valuation issues – determining how much crypto assets are worth to decide on how to divide, transfer, or compensate for them.
Dealing with non-disclosure of crypto assets
As it’s a common practice in divorce financial settlement, all assets (including crypto and NFTs) must be disclosed in Form E. Although, the issue is that crypto assets are made to be hard to trace – but, crucially, not impossible.
Due to this reason, we can see a lot of cases where a spouse with crypto assets tries to hide them from the court. And even if you suspect your ex-spouse is hiding assets – it can be hard to prove. In contrast to traditional bank accounts, there won’t be a paper trail. Instead, there is an encrypted blockchain, which records transactions but doesn’t use names.
So, the most accurate way to uncover hidden crypto assets is to find instances where they interact with the traditional financial systems (which use pound sterling, euros, dollars, etc.).
One of the more effective methods – is to discover a bank statement which shows the initial investment into crypto assets. Alternatively, showing recent purchases with cryptocurrency or conversions from cryptocurrencies to ‘real’ currencies can work as well. This includes bank accounts, as well as platforms & businesses which deal with crypto assets.
In other words, you need to uncover the slightest details to prove your claim. Which can open the flood gates and allow you to ask the court to issue formal orders. For example, the court can order your ex-partner to disclose financial assets going back 2-3 years or even to when it’s expected the crypto assets were purchased – instead of the usual 12 months.
Valuation issues with crypto assets
Moreover, if you succeed in proving your ex-spouse is failing to disclose their cryptocurrency holdings – you need to prepare to face another difficulty. Finding a fair evaluation of the assets for both parties.
Cryptocurrency is notoriously known for its severe fluctuations in price. The difference in the value of crypto assets can be drastic weeks apart, not to mention months or years.
For example, let’s compare Ethereum prices a year apart:
- 4th August 2021 – 1 Ethereum = £1,962.64
- 4th August 2022 – 1 Ethereum = £1,333.53
That’s a difference of £629.11. And let’s say your ex-spouse was holding 100 Ethereum – that’s a staggering £62,911 in lost value.
Why is this so important? Because divorce hearings may go on for 6-12 months, sometimes even years. And if the agreed valuation at the beginning is drastically different from the valuation at the final hearing – it becomes hard to make a final decision.
Even if both parties agree on evaluation – the court is then faced with difficulties of cryptocurrency in divorce. Whether the crypto assets need to be divided or does one party need to be compensated?
Additionally, with cryptocurrency being a relatively new thing – a lot of professionals lack expertise and understanding of how to deal with situations involving crypto.
Cryptocurrency is hard to keep a track of – what happens if my spouse tries hiding it?
If your ex-partner has failed to disclose crypto assets, the first step should be speaking with your solicitor. You should then try working out how much is being hidden. Try remembering what your ex-spouse mentioned about cryptocurrency during your marriage or whether you’ve proof of their assets.
Any evidence can prove to be crucial in convincing the court to issue an order to further disclosure of financial assets. For example, instances where your ex-spouse purchased items/assets without a clear explanation of where the money came from – can be used as a good starting point to gain more evidence.
Furthermore, inquiring with simple questions can prove to be more beneficial than you would expect. Questions like ‘where did you get the money to buy X?’ can uncover new financial evidence.
One way to approach this is your solicitor can ask the court to make a formal order to your ex-spouse. This asks for a formal answer to questions: has he/she owned any crypto assets before; and can he/she provide bank statements of the period during which it’s suspected he/she invested in crypto assets?
The most important thing you can do to avoid any issues with cryptocurrency in divorce is to disclose them in Form E. Although, you can’t force the opposite party to follow the law.
So, if your ex-spouse is hiding their crypto assets, make sure to inquire about legal advice and approach the search for evidence in the most appropriate way.