In the past couple of years, divorcees and their lawyers have increasingly faced a new challenging issue when going through a divorce: the reporting, disclosure, and valuation of cryptocurrency in a divorce.
What Are Cryptocurrencies?
Cryptocurrencies are currencies that only exist in digital form that utilize cryptography to help make transactions and ownership secure and they are designed to act as a medium of exchange. Cryptocurrencies allow individuals to transfer funds between one another without any intermediary or custodian and can be used to purchase goods, services, other assets, or simply store value.
Most cryptocurrencies are generally decentralized in nature and do not rely on any party such as a central bank to be issued. Indeed, one of the core principles is that the supply of the currency should not be managed, altered, or issued by a third party and it should operate based on what has been pre- programmed. Most cryptocurrencies utilize a technology known as ‘blockchain’ to help keep track of transactions safely and securely and also allow users to see a complete history of all transactions that have ever occurred.
How Are Cryptocurrencies Treated for Legal Purposes?
While divorce law throughout Canada and the United States don’t make specific mention of what should happen to cryptocurrency during a divorce, lawyers and experts in the field widely recognize it is an asset that does need to be reported when going through a divorce. The legal status and classification of cryptocurrency vary depending on the jurisdiction.
While some European countries treat it the same as government-backed currency, that isn’t the case Canada or the United States. Canada tends to treat cryptocurrency as a commodity while it’s generally treated as property in the U.S. While there are plenty of exceptions to these generalizations, what is clear is that in needs to be reported as an asset during divorce proceedings.
This, in turn, begs quite a few questions.
Given That the Value of Cryptocurrency Fluctuates So Widely and Quickly, How Can These Assets Be Fairly Valued?
Assessing the value of cryptocurrency assets can be challenging because the value of the assets can vary across mediums and exchanges that they are traded on, plus the cryptocurrency may not be directly traded with a country’s national currency but rather with other cryptocurrencies or national currencies. Generally speaking, the Fair Market Value (FMV) will need to be calculated. There is no single correct way to calculate FMV; the best thing to do is just try to be as rational and reasonable in your calculations as possible, and be prepared to defend your calculation method if confronted.
A more challenging issue is that the FMV of the cryptocurrency assets will almost certainly increase or decrease, perhaps significantly, throughout the proceedings. If the FMV of cryptocurrency holdings are $40,000 USD at the outset of proceedings, a settlement is then reached stipulating $20,000 be provided to the spouse, but by the time the distribution occurs the value of the cryptocurrency has declined to $10,000 then insisting on the original $20,000 simply isn’t possible in many cases. There are a few possible ways to deal with this conundrum to ensure fair distribution of assets:
a) The applicable portion of the assets should be distributed in their current form (cryptocurrency).
b) The cryptocurrency should be sent to an intermediary who liquidates the assets and distributes fairly to both parties accordingly.
c) If the value of the cryptocurrency assets increases or decreases, the settlement amount can be increased or decreased proportionally.
How To Know if an Individual Fails To Declare Cryptocurrency Holdings? If Declared, How Can One Be Sure All Holdings Were Fully Declared?
People who own cryptocurrency assets are seldom completely quiet about it. While some are more vocal than others about their investments, spouses and close friends generally have an idea of assets and investments held just as with other asset classes. Once it is known that an individual possesses at least some cryptocurrency assets, digital forensics experts are able to assess if there’s any other crypto assets held by an individual and can proceed to track it.
Cryptocurrency assets cannot be tracked by traditional means as they exist outside of the traditional financial system, however, cryptocurrencies generally have publicly viewable transaction histories, which allow digital forensics experts to track transaction history, holdings, and ownership.
If a Spouse Is Un-Cooperative, Fails To Report, or Fails Give Up Possession of Cryptocurrency Assets How Can They Be Seized?
First, we ought to recognize that the vast majority of individuals going through a divorce will not knowingly elect to hide or misreport cryptocurrency assets however there are still potential legal consequences as well to help further deter people from doing so, including criminal fraud.
Seizure of Assets
Before cryptocurrency assets can be seized, it first needs to be determined exactly what assets are held by the individual, which requires the help of a digital forensics expert. Once it can be determined which assets an individual holds, and where those assets are located, a court may be able to order the repossession of assets.
However, repossession of assets, even when ordered by a court will not always prove successful in some cases depending on where the assets are located and how cooperative the spouse is.
When an Individual Does Give Up Possession of Cryptocurrency, Who Do They Give It to and How Does That Party Sell or Distribute Those Assets Fairly to Both Parties?
If a party is not able or willing to pay the other party directly, the assets would be sent to a custodian who would handle the distribution or liquidation of assets, similar as to what can happen in the event of bankruptcy or receivership.
Is This Something Most People Need To Be Concerned About?
At this time, most people don’t understand the basic principles of how cryptocurrencies work, even fewer people own them, and only a very small percentage of people have a significant amount of cryptocurrency holdings. Furthermore, the prices of most cryptocurrencies have fallen over the past 12 months.
Bitcoin (BTC) for example was trading as high as $19,783 in December 2017 but is trading around $3,700 as of January 2019 (when this article was originally written) and $7,317 as of December 2019. The decline in price has caused interest to wane and has deterred people from investing due to fears the price may decline further, but even at the $3,700 price point, it still represents a massive increase from the price Bitcoin was at in early 2017 and years prior.
Market Sentiment
The declining price and reduced interest amongst the general public has led fewer people to use cryptocurrency as a means of hiding assets or money when going through a divorce, but there is still reason for concern. Many people do expect cryptocurrency prices to rebound at some point, although people aren’t sure when or if prices will decline significantly further first.
Stablecoins
Even if prices continue to decline significantly, utilizing cryptocurrency to hide assets during a divorce is still a highly effective and novel idea. This is because some cryptocurrencies known as ‘stablecoins’ that are pegged or backed to different assets. For example, Tether (USDT) is pegged to the price of the USD; it is almost always trades for $1 USD or extremely close to it. However, unlike USD held in a bank account, Tether cannot be seized by traditional means.
There are plenty of other stablecoins out there as well, such as Digix(DGX), which is linked to the price of one gram of gold. These cryptocurrencies will likely continue to hold their value even if the price of Bitcoin and other cryptocurrencies decline, meaning individuals can put money into cryptocurrency without having to worry about a decline in value.
Conclusion
The percentage of cases where cryptocurrency in a divorce is presenting a serious problem during divorce is quite low; less than one percent of cases right now, but in the future as younger more technically-savvy people become older, it’s likely this problem will become far more common, especially if cryptocurrency becomes more mainstream and more widely adopted.
Note: Nothing in this article is to be construed as legal, financial, or tax advice.