I suspect my spouse owns cryptocurrency. What does this mean for my divorce?
An important decision last month from the Court of First Instance, In the Matter of Gatecoin Limited [2023] HKCFI 914, has recently ruled that cryptocurrency is ‘property’. This case involved a winding up action concerning a Hong Kong company which operated a cryptocurrency exchange platform. One of the questions before the court was whether cryptocurrency is ‘property’ which is relevant to asset division in divorce proceedings. Despite the recent bad press, it is a fact that cryptocurrency is widely used and can have significant value. This ruling clarifies its status within the law.
The case also includes a useful summary of the main features of cryptocurrency for those who are not familiar. For instance, cryptocurrency can only be transferred from one user to another through a cryptocurrency network, and the transfer can only be initiated and approved by the owner of that cryptocurrency. Some cooperation or a court order will therefore presumably be required for a transfer of wealth. Also, blockchain is a publicly available ledger containing a record of all transactions made in respect of that cryptocurrency and a user can trace a cryptocurrency from its creation all the way through to each transaction it has gone through. This would suggest that disclosure should not be as difficult as perhaps originally perceived. In addition, every transaction recorded in the blockchain is unique which should make tracing and identifying the transactions easier.
However, the legal definition of ‘property’ has caused some doubt as to the status of cryptocurrency. “Property has been defined as (a) money, goods, choses in action and land; and (b) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition”. [Interpretation and General Clauses Ordinance Cap 1].
In most jurisdictions it has been accepted that cryptocurrency is property as it was definable and because:
- the public key allocated to a cryptocurrency wallet was readily identifiable and sufficiently distinct and capable of being allocated uniquely to an individual account holder;
- it was identifiable by third parties in that only the holder of a private key was able to access and transfer the cryptocurrency from one wallet to another;
- it was capable of assumption by third parties in that it can be and is the subject of active trading markets where (a) the rights of the owner in that property are respected, and (b) it is potentially desirable to third parties such that they want themselves to obtain ownership of it; and
- It has some degree of permanence or stability as the entire life history of a cryptocurrency is available in the blockchain.
Disclosure of cryptocurrencies
How does all this affect divorce cases? During divorce proceedings, each party must provide full disclosure of their “income, earning capacity, property and other financial resources’1 . Failing to provide full and frank disclosure may place parties in contempt of court, risking a fine and even potential imprisonment. ‘Property’ for the purposes of matrimonial legislation [s2 MPPO] means ‘any real or personal property, any estate or interest in real or personal property, any money, any negotiable instrument, …debt or other chose in action, and any other right or interest whether in possession or not”. It is therefore useful to have the High Court confirm that ‘property’ would therefore include holdings of any and all cryptocurrencies. It also found that, as cryptocurrency was ‘property’, it could be held on trust.
It is important to ask the right questions at an early stage of the disclosure process. Open questions relating to the existence of any crypto assets, online accounts with exchanges, or the location of any digital currency wallets need to be asked. Cryptocurrency account addresses and exchange statements should be provided to evidence holdings.
There may be indicators of undisclosed cryptocurrency, based on disclosure already given, or from a party’s knowledge. There may be wealth that seems incommensurate with the sources of income and assets held, necessitating further disclosure. If the required disclosure is not forthcoming or does not evidence the purchase of cryptocurrency, it may be necessary to seek an Order from the Court for specific disclosure from the party suspected of holding the investment or even from relevant third parties.
If there is evidence of dissipation it may be possible to seek a Court injunction freezing the assets of the other party and, if necessary, seeking to cover cryptocurrency exchanges so that the investment cannot be traded. It may be necessary to take steps to physically secure the means of storage on which the private codes needed to make up a unit of cryptocurrency are stored, to prevent transfer or even destruction of the means of storage. The order may specifically preserve any computer, USB device or other form of device where the private keys to the cryptocurrency may be recorded and held.
Valuation of cryptocurrencies
Cryptocurrencies may be volatile, particularly if they are not pegged to a real currency. This makes valuation a particular issue for the court when it comes to ruling on a final financial award, and for family practitioners advising their clients. Bitcoin is a good example of this. Their value has risen and fallen sharply over time.
The value of cryptocurrencies at the date of financial disclosure could be significantly different from the date of settlement or a court hearing, and significantly different again at the date of implementation. At the very least a long-term view of pricing will be required, and expert evidence may be needed to assist the court.
Dealing with digital-related assets split
If the crypto asset is divided between the parties, the risk or benefit of changes in value are shared. However, with its very specific market and specialised trading platforms, not everyone will want to take on a significant cryptocurrency investment. It may be more likely that one party retains all the cryptocurrency, offsetting it against another asset. This could be problematic in the likely event of fluctuation: what if one party walks away with real estate worth HK$50 million and the other with HK$50 million in cryptocurrency but the value of that currency drops significantly the very next month? Or they become an overnight billionaire? It is an established principle that where price fluctuations can be anticipated as part of the natural function of a type of asset, the court will not be prepared to entertain re-opening a case which is now ‘closed’ even when the price fluctuations prove to be extreme (whether for better or worse). In the event a hearing has concluded but an order is not yet made, or where an order has been made but not implemented, arguably there may be some scope to revisit the terms of the order. Legal advice should be sought urgently if this occurs.
Where disclosure is not an issue and where parties have reached a mutually agreeable settlement, a crypto asset is just another asset that will need to be divided between the parties. In other situations, it is important that the right questions are asked and that the courts take into account, when deciding the final ancillary relief award, the unique volatility of a crypto asset and a party’s financial risk appetite to own crypto if they have not owned any crypto assets previously.
Crypto assets are still poorly understood by many people, particularly those who have not been following the meteoric rise and prevalence of these assets. It is all the more important therefore to instruct lawyers who appreciate the difficulties that they pose in terms of disclosure and in reaching a fair settlement.
For further information, please contact:
Samantha Gershon, Partner, Withersworldwide
samantha.gershon@withersworldwide.com
Footnote
1 – [s7 MPPO cap 192]
