In the last article we have walked you through the complications of cryptocurrencies when dealing with tax, estates and trusts, while today we illustrate what might happen when a divorce occurs and these virtual assets are subject to distribution among the spouses.
The issue of how virtual currency can be distributed after the breakdown of a marriage is equally as rampant and the main concern is the assets that are to be divisible between the couple.
The treatment of any asset within divorce proceedings can be highly complex, we set out the potential risks below:
Cryptocurrencies are virtual and are stored in the blockchain. There are no statements or any other evidence that set out the transactions in the account. The only evidence that may be obtained would be a screenshot of the wallet depicting the balance or exported worksheets of these transactions. These may not be a good real time picture of the existing value of the account. Furthermore, an individual may be in possession of several wallets, how can one be certain that it is a consolidated statement tracing all transactions? What if these cryptocurrencies are stored offline, will there be an issue of tracing the assets? Will a professional digital financial forensic need to be hired to ensure all virtual assets are disclosed?
As a result, to the potential concerns that may arise, and cryptocurrency is vulnerable to be easily hidden from the other spouse. Standard interrogatories and requests for production to obtain this information and documentation to the other party’s potential cryptocurrencies may need to be in place during the divorce.
The Issue with the Valuation of Cryptocurrencies
Due to the volatile nature of cryptocurrencies the value is hard to ascertain. This may prove to be a problem especially when dealing with worth of each party’s assets. There are several methods to possibly lessen the disputes regarding the valuation do not occur such as drawing up an agreement about the date to which the cryptocurrency is to be valued. Furthermore, these dates can be included in eventual prenuptial agreements that may exist in some marriages.
This issue similarly may arise in the process of estate planning: therefore, another document to ensure valuation is advised to be in place when dealing with cryptocurrency, as it will avoid disputes to the worth of the estate when distributing the assets to the beneficiaries.
The Risk of Losing the Cryptocurrency
Lastly, there is a risk involved in dealing with the cryptocurrency where the end user does not receive the currency, then they must bear the consequences of an uncompleted transaction. When accessing the cryptocurrency there may be a requirement to potentially enter a memo or 16-digit hash. The failure of doing the above transactions may result in cryptocurrency being lost. This therefore arises the question to when the spouse is obliged to transfer cryptocurrency, if the other party incorrectly enters the code and misplaces the key, then who is to bear such loss?
Consequently, it may be useful to potentially introduce new clauses in the prenuptial agreement to account for such risks.
Cryptocurrencies in Prenuptial, Postnuptial, Separation and Other Marital Agreements
If cryptocurrencies are to be included in prenuptial, postnuptial, separation or other marital agreements, the definition of “assets” or “properties” in such agreements must be sufficiently wide to cover cryptocurrencies and/or digital assets. If the couple agrees that they will share cryptocurrencies in the event of a breakdown of their relationship, the agreement must state clearly the couple’s right of access to the cryptocurrencies and how the cryptocurrencies should be maintained, calculated and split.
All in all, cryptocurrencies can be a disputed issue in an ancillary relief claim. For instance, one party having the sole access and control to the cryptocurrencies might try to defeat the other spouse’s claim by causing the cryptocurrencies to be dissipated or not traceable. As a result of this, the other party would need to incur huge legal fees in taking out discovery action and forensic investigation against his or her spouse. Therefore, when divorce proceedings are about to or intended to begin or when there is dispute within the couple, one of the ways to protect such assets is to have the cryptocurrencies locked in a multi-sig wallet which requires three keys to be unlocked, one of which is under the custody of a trusted advisor.
However, this might result in inflexibility and add a layer of complications in terms of the daily management and investment of the cryptocurrencies. The bottom line is that you need to assess your risk with proper advice and conduct a balancing exercise between protection vs flexibility when handling cryptocurrencies before making an informed decision.
All of the aforesaid will require professional lawyers to assist you with the planning process. Our team at Hugill & Ip has extensive experience in dealing with Hong Kong family laws – so kindly get in touch with us to find out how we can help.
This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.