How to identify and assess cryptoassets in divorce proceedings

Whether forming part of an investment portfolio, or collected as a hobby, in the right market, cryptoassets represent significant stores of value. With nearly one in ten British adults now owning some form of cryptoasset, from Bitcoin to NFTs, it has become increasingly important to be able to identify and address those type of assets in the context of divorce proceedings.

At the financial disclosure stage of family proceedings, Form E, there can be a concern that the other party will not be forthcoming or truthful in their disclosure. This can be heightened where relatively new and often misunderstood assets like crypto are involved and there can be a suspicion, for example, that these assets are being dissipated and/or hidden. Entries on bank statements may suggest cryptoassets have been bought or traded, but without identification of, and access to (via a private key) a crypto wallet, the exact holding or current whereabouts and value of any cryptoassets may be unclear. This is where the modern world and the more traditional world of family law can collide and creative solutions need to be considered to ensure clients are protected.

How are cryptoassets held?

There is common misunderstanding that cryptoassets are stored physically in a ‘crypto wallet’; however, in fact, they are held on (often public) blockchain networks. The function of a crypto wallet is instead to facilitate access to, and interaction with, the relevant crypto.

Each crypto wallet has its own address (a long string of numbers and letters) and holds its own set of keys: a ‘public key’, similar to a bank account number (that can be shared publicly) which is used to facilitate transactions; and a ‘private key’, the equivalent of a bank account password or PIN (and should be kept secret), which is essential for accessing the wallet and validating transactions. Crypto wallets can either be ‘custodial’, being hosted on crypto exchanges (Coinbase, for example), or ‘non-custodial’, where an individual themselves is responsible for it.

Can cryptoassets be held anonymously, and can they be traced?

In some respects, crypto is in fact quite transparent: the balance and transaction history of a particular crypto wallet is information readily available on a public blockchain. However, crypto’s reputation for secrecy perhaps comes from the fact that, unlike a bank account, there is no obligation to have a real name and postal address associated with a crypto wallet; the owner of a wallet can, if they wish, remain anonymous. This anonymity can present a challenge when attempting to accurately locate and prove a party’s ownership of relevant cryptoassets.

In some cases, anonymity is not an issue and where the existence and location of a party’s crypto wallet is disclosed in family law proceedings, a tracing expert can be instructed to produce a report confirming crypto transactions associated with the wallet, and most importantly, its current balance.

A tracing report can be used to negotiate a fair settlement or be presented to the court if required as part of any financial proceedings prior to the second-stage hearing (the Financial Dispute Resolution hearing). This may aid negotiation and settlement or may be used at a final hearing so a judge can consider it and, if necessary, take it into account within a final financial order. This is an issue which, if relevant, will need to be highlighted early on in negotiations or court proceedings to ensure the necessary information is obtained and the asset protected if there are any transparency concerns around this asset.

Recent cases have also shown the UK courts are willing to treat cryptoassets as a form of property, and so if there is a risk of dissipation of a cryptoasset, for example, it may be possible to obtain a freezing injunction to prevent a transfer, or conversely to order a transfer to another wallet.

What can you do if you do not know the location of the crypto?

If the existence and location of a party’s crypto holdings is unknown, or there is some suspicion that the information provided in disclosure is not accurate, further investigations may be necessary. A detailed examination of bank statements, for example, may evidence interactions with a crypto exchange, indicating trading and/or the holding of a custodial wallet, which may prompt further questions. If there are still suspicions at that stage, it may be possible, with sufficient supporting evidence, to make an application to the court for a disclosure order against an exchange, to reveal the identity of the wallet’s owner. However, each case will turn on its own facts.

If it is not possible to identify with specificity the relevant cryptoassets and the other party is uncooperative, then the court can be asked to draw an adverse inference in the proceedings, as with any failure to provide full disclosure. These assets are extremely volatile, subject historically to wild swings of value, so care should be taken in how they are firstly valued and secondly dealt with in any division of assets. If they constitute the majority of the asset base, this may require considerable expertise and creative solutions including realising the value or holding with the risk of losing value depending on the circumstances of the case and the needs of the parties (and any children).

As potentially secretive and valuable investments, cryptoassets cannot be overlooked in the context of modern family proceedings. It is important therefore to seek advice from experienced legal specialists, who can advise on a strategic approach to ensure balance and fairness in any final settlement.

If you have concerns about cryptoassets in a divorce proceeding, please contact Laura Brown and Will Charlesworth.