Recently in the Family Court, the judge had to decide on questions of non-disclosure of crypto investments and whether the crypto investments by the husband amounted to ‘wanton’ or ‘reckless’ spending and whether the subsequent losses should be added back into his side of the ledger at their investment value, not at the current value. The value had decreased over only 8 months from February to October 2022 by 50% to about HK$1million.
Crypto investments present a particularly challenging aspect of discovery, the process by which lawyers ascertain the value of each parties’ assets. Both parties are obliged to give full and frank disclosure of everything they own, no matter where in the world it is situated and what form it takes, for the family court to find a fair outcome in the financial division of their assets. Family lawyers are used to considering securities portfolios, pension schemes, trusts, corporate structures and a variety of investments which are not always straightforward, but cryptocurrency investments are particularly opaque.
The wife in this case argued that the husband had failed to make a full and frank disclosure and the information relating to the cryptocurrencies were “indecipherable, informal, missing key information, or related to unknown accounts”. She accused him of failing “to provide a detailed list of his holdings in various crypto accounts, or any reliable evidence to support his claimed value.” The court reminded practitioners and parties to litigation that there was a duty, not only to be “full and frank” but also to be clear and that, if the asset structure is complex, there was a duty to provide “even fuller and franker” exposure and explanation of the assets. If there was any suggestion of non-disclosure and hiding assets, adverse inferences could be made against that party and, when in doubt, the Judge would err on the side of the claimant and against the alleged non-discloser.
Crypto or virtual currency is a new area of asset and investment, totally unlike traditional paper money or stock trading.
Here, the Judge acknowledged that “crypto or virtual currency was a new area of asset and investment, totally unlike traditional paper money or stock trading”. It did not exist in physical form and was not backed by a central authority, such as a national bank and so there was no central authority to manage its value. The Judge was of the view that “the novelty and complexity of cryptocurrency, in terms of how it operates, trades and values, cannot be underestimated”. There was, therefore, even greater necessity for clear disclosure to be given. She commented that many of the documents were incomprehensible containing meaningless codes of alphabets and numerals and she did not believe anyone would have a clue as to what was meant by the indecipherable codes, ‘let alone relate them to any crypto investments”.
She went on to provide helpful guidance on the level of disclosure a party should make in respect of cryptocurrency investments in the Form E (financial statement disclosing each parties’ financial position) which should include:
- the account number or user ID or other identification that would relate him to the relevant crypto account and crypto wallet;
- a comprehensive transaction report for 12 months prior to the disclosure;
- a duly dated colour photograph of the crypto wallet depicting the balance or current value of each crypto account; and
- a brief explanation as to the basis of the valuation of each crypto account.
She expressed the hope that the Form E would be updated to reflect the development of virtual or crypto products, which is in fact the case as the Form E is currently under review.
Although the Judge was clearly critical of the husband in this case for failing to provide clear disclosure, she was not of the view that the investments were “wanton” or “reckless”. The wife, in putting together her argument that the husband was capable and an opportunist, interested in new technologies, undermined her other argument that this type of investment was atypical of the husband and therefore wanton and reckless and the loss should be ‘added back’ into his side of the ledger. The law in this area is generally that the spouse takes the other spouse as she finds him and that it is not possible to “take advantage of his good characteristics while disavowing the bad ones”. In this case, the investment suffered a loss due to the volatility of the market and it could not be said that making a bad investment decision was a wanton and reckless dissipation of the assets. It was not akin to gambling. This has to be in line with the Hong Kong government’s clear encouragement of such investment development, as evidenced by the rollout of the licensing regime for crypto exchanges which came into effect on 1 June 2023. For further information on this development, please see the article on “Crypto exchanges – dual licensing regimes“.
From this case, it is clear that the genie cannot be put back into the bottle and family courts, practitioners and clients must find a way to properly disclose the value of these relatively new assets, which will be taken into account, as with other volatile investments, as at the date of the trial.
For further information, please contact:
Jocelyn Tsao, Partner, Withersworldwide
jocelyn.tsao@withersworldwide.com
