Crypto Divorces | What are Bitcoins in Divorce | Cryptocurrencies and Family Law

Irina Baranova

“Bitcoin. It’s “everything you don’t understand about money combined with everything you don’t understand about computers…”

– John Oliver

Introduction

When marriages are at a breakdown, one of the major obstacles to peaceful parting of ways is division of assets. With the recent proliferation of virtual assets, the issue of how virtual assets (e.g., Bitcoins, Cryptocurrencies, NFT Artworks, etc.) can be distributed after the breakdown of a marriage is equally as rampant in today’s matrimonial dispute resolution landscape, often exacerbating an already painful and complicated breakup.

“Ah, yes, divorce… from the Latin word meaning to rip out a man’s genitals through his wallet.”

– Robin Williams

The Disclosure Process

“Divorce is one of the most financially traumatic things you can go through… Money spent on getting mad or getting even is money wasted.”

– Richard Wagner

In Hong Kong divorce proceedings, the standard disclosure process for family assets is done by both parties completing Financial Statements called “Form E”, which is a sworn statement that will be exchanged and filed into court. Disclosure is not limited to Hong Kong-owned assets. Overseas assets is required to be disclosed as well.

Unfortunately, it is not unheard of for parties to attempt to hide assets from their respective spouses especially in acrimonious divorce proceedings. Prima facie, cryptocurrencies may appear to facilitate this process.

Whilst cryptocurrencies and blockchains are not an entirely anonymous system, given the fact that this space is still largely unregulated, the identity of the user is usually harder (but not impossible) to trace.

Traditional Recourse when Dealing with Hidden Bitcoins & Cryptos

“Alimony is like buying hay for a dead horse.”

– Groucho Marx

With the proliferation of cryptocurrencies nowadays, parties are ever more likely to deal with ex-spouses holding virtual assets in some form.

That having been said, just like any other class of asset, the Family Court retains discretionary powers to decide how to distribute virtual assets. Although virtual assets (by their nature) may be harder to value than more traditional assets the likes of stocks and shares, this does not prevent the Court from determining a valuation for the purposes of making a ruling on ancillary relief matters.

Can I Trace Hidden Cryptocurrencies?

One of the biggest misconceptions about wealth held within the blockchain is the anonymous myth. It should be noted that bitcoins and cryptocurrencies are far from ‘anonymous’ (though it has features to enable traders to trade with pseudo-anonymity) as to obtain virtual assets, there is an ‘entrance’ or ‘access point’ into the digital space that IS traceable.

It will be important to identify these potential ‘access points’ for determining the value of cryptocurrencies. That said, the volatile nature of virtual assets could very well mean that such assets may dissipate overnight. Assessing the value of Bitcoins for the purposes of asset division will require special care and sensitivity to the nature of cryptocurrencies

Issues with Valuation of Cryptocurrencies

“If you can’t Handle my 90% drops you don’t deserve my 800% Gains”

– Digital C Prints

Considering the volatile nature of cryptocurrencies, proper valuation of such assets is often hard to ascertain which is especially a problem when assessing the value of the matrimonial pot. Of course, parties may reduce such risks when criteria of valuation can be agreed upon (either during the course of the divorce proceedings or in the event of an existence of a nuptial agreement).

Risks of Mishandling of Acquired Cryptocurrencies

Last but not least, even where an agreement/ruling is eventually reached with respect of division of virtual assets, it is crucial for end users to have the proper access protocols in handling the assets in place. Afterall, the owners of any virtual assets must bear the risks associated with the asset, including but not limited to:

  1. Incomplete transaction (with unforeseen liabilities);
  2. Underlying pegged valuation (e.g. rug pull scenario);
  3. Market volatility (e.g. by the time one liquidate the asset, it might become valueless).

End users should also keep in mind that when accessing a virtual asset, there may be requirement to enter a 16-digit hash, failing which may result in the cryptocurrency being lost. The question then begs the scenario 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?

Conclusion

Divorces can be extremely costly. More so when virtual assets are involved due to its uncertainty and volatility. In order to avoid the headache as outlined above, it is essential to be familiar with the nature and workings of cryptocurrencies when they are involved.

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