What is cryptocurrency and what makes it unique?
Cryptocurrency is a digital asset that enables users to move currency without requiring a banking institution and often avoid extensive charges and fees. Cryptocurrency has several features that differentiate it from other conventional assets in Family Law proceedings, particularly relating to the ownership of the asset. As cryptocurrency is dispersed across a wide network of computers, there is no consistent or formal third party (such as a bank or regulatory body) that can be subpoenaed in order to find out information about an individual’s cryptocurrency assets. In addition, ownership is based on possession of a private key rather than an owner’s registered identity. This means that whomever has access to view and deal with a particular store of cryptocurrency is much more crucial. Cryptocurrency is often viewable in an electronic ‘wallet’ which displays the balance for each ‘coin’ that is owned. Often the wallet can be accessed using a password (for example a combination of random words) or using a USB-like key with a pin.
What are the most common cryptocurrencies?
The most notable cryptocurrencies are as follows: Bitcoin, Ethereum, Tether USD, Binance Coin, Cardano, Dogecoin, Ripple, USD Coin, Polkadot and Uniswap. This list is based on global market capitalisation, or the total value of all coins of that type of cryptocurrency. There are additional cryptocurrencies that originated in Australia such as Bata.
It can be incredibly difficult to ascertain the ownership of any cryptocurrencies held by your former partner.
As set out by Rule 13.04 of the Family Law Rules 2004 and Regulation 24.03 of the Federal Circuit Court Rules 2001, Family Law proceedings require parties to provide full and frank disclosure of matters that are relevant within their proceedings. Cryptocurrency can easily be categorised within the items that are meant to be disclosed, so parties have an obligation to provide information and documents about any cryptocurrency they have. However, if a party refuses to disclose that they have cryptocurrencies, it is possible that the other party may never know that their former partner has any such assets. Even if known, it can be difficult to prove that a party has cryptocurrency assets if the passwords or keys have been lost or retained by the other party following separation.
The first step is to ascertain whether your partner has cryptocurrencies. If you happen to know or suspect that your former partner has cryptocurrencies, the second step is to find out how much cryptocurrency they have before you can move to the third step of placing a dollar value on those assets.
Why is the value of cryptocurrency important?
An important consideration in Family Law proceedings is the extreme volatility of cryptocurrency in terms of its value. There are instances where the value of a particular cryptocurrency has experienced swings of up to 20% in a single day, or up to 80% in the space of a month. As discussed below, the Court has some ability to account for the manner in which cryptocurrency is an asset that can appreciate or depreciate dramatically within a given period, for example during a relationship or after separation. However, the law in this area is still developing.
The ownership of cryptocurrency over a long period means that parties may possess significant unrealised capital gains which may incur a large amount of tax payable on sale of the asset. Although considering the value of assets at separation is a sound method in many instances of dividing an asset pool, cryptocurrency carries a much higher risk of extreme value depreciation or appreciation. Timing is also particularly important, as the time frame between separation and agreement could mean an 80% drop in value or a 500% increase.
How can the value of cryptocurrency be determined?
If you have information on how much cryptocurrency your former partner has, the dollar value of cryptocurrency can be identified with reference to the prevailing market price on exchange. This is akin to other assets in Family Law where the market value is used to assign value to an asset in the property pool. There is a large number of high-volume exchanges operating which should provide a very reliable source of valuation, as long as you have information about the amount of cryptocurrency owned.
If your former partner will not disclose how much cryptocurrency they have, the Courts have a range of approaches that they may employ in response. While it is not a common approach, Courts have the option to order that electronic devices be seized using an Anton Pillar Order, should parties request this and it is deemed appropriate. Likewise, adverse inferences may be drawn if there is sufficient evidence of a party using sums of money for uses that they refuse to disclose, however there is little case law on this occurring and the other party being awarded a higher percentage of the assets of the relationship. The value of cryptocurrency can be determined through options such as subpoenaing a collection of cryptocurrency entities but this is a difficult and drawn-out process as there are many entities that deal in cryptocurrency. For example, if a party uses a cryptocurrency exchange, it is possible to obtain exchange reports from that body but this can be a challenging process. Additionally, it is possible to track the expenditure of funds for cryptocurrency related purposes using the transactions displayed in bank statements, but this is only relevant in some instances. The Court may decide to made an adverse inference against a party and potentially award them a higher proportion of the assets of the relationship.
Can I be compensated for my partner putting funds into cryptocurrency? What if the value of the cryptocurrency is less than I think it should be?
Cryptocurrency can potentially be treated as a notional ‘addback’, where the value of the asset is ‘added back’ into the property pool. The case law surrounding this concept stems in part from examining the ‘source’ of the funds used for expenditures such as legal fees (NHC v RCH) or in this case cryptocurrency purchases. If the funds existed at the time of separation, both parties can be seen as having an interest in the way they were used post-separation and they should arguably be ‘added back’ to the pool (Powell & Christensen). It is important to note that add-backs are the exception to the rule as the expenditure of the assets of the relationship does not automatically result in an add-back (Omacini; Trevi & Trevi).
There are also instances where Courts may consider that funds should be added back if a party has acted in a manner designed to reduce the value of the assets in the relationship or where they have acted recklessly or negligently with the assets in a way that has reduced their value. Proving that a party has squandered funds through cryptocurrency or that the value of the assets has decreased can be challenging. However, in situations where a party has acted recklessly or in disregard of orders not to expend funds, there is a possibility that the Court may add back the funds. In these circumstances there is even some potential for the Court to add back the cryptocurrency at its original purchase price despite there being limited or no evidence about the current value of the cryptocurrency (Powell & Christensen).
Are there any examples in the case law?
In case of Powell & Christensen, the Wife asserted that the Husband had prematurely distributed funds by drawing monies from the joint account and investing them in cryptocurrency that he said had devalued over time. The Wife sought that an amount be notionally added back to the value of the cryptocurrency in order to restore the value to the original purchase price .
Website Content By: Melany Toombs
Melany formerly worked as a Legal Associate in the Family Court of Australia and is well-equipped with an understanding of complex parenting cases, particularly those involving questions of risk and what is in the child’s best interests. She has experience delving into unusual property matters involving superannuation and cryptocurrency.