Cryptocurrency is treated as an asset for property settlement purposes. However, there can be some significant issues around how to find it, and how to value it, which we will explore here.
After a de facto or married couple separate, there is a process of dividing all of the assets, superannuation and debts referred to as “property settlement”. Given the rise of cryptocurrency and digital assets, we expect these issues will be increasingly prevalent in family law property disputes, particularly if regulation increases consumer confidence and we see increasing investment in digital assets in future.
While we will now explore some of the issues which can arise, despite the difficulties, we urge caution about putting such assets in the “too hard basket” in property settlement.
Identifying the asset
Cryptocurrency can be much harder to identify as unlike other assets, there is no easily accessible central database or list you can search to find if someone owns cryptocurrency. For example, to identify if someone owns real estate, we can search public land title databases, an interest in a company will be registered with ASIC and superannuation information can now be easily obtained from the ATO if the matter is in proceedings. Cryptocurrency is therefore much harder to identify. However, that doesn’t mean we give up before we start.
“Disclosure”
Each party has an obligation to provide full and frank disclosure of all assets, superannuation and debts, even during negotiations. There is an exchange of financial documents involved in this process and this is often referred to as “disclosure”.
A party can be requested to disclose information and documents regarding the holding of cryptocurrency and other digital assets. If a party doesn’t disclosure the existence of cryptocurrency, there might still be clues in the financial documents we do obtain. For example:
Bank statements may show transfers out of an account to purchase cryptocurrency from a bank account or credit card; or
Tax documents may show a declaration of income from cryptocurrency assets, or a deduction may have been claimed for depreciation.
Following the breadcrumbs
If we know where to start look, there are some options which we can consider such as;
Seeking Orders from the Court for specific or more extensive disclosure;
Issuing a subpoena to compel an organisation or body to provide documents or information; or
Seeking ex parte Orders for the seizure of documents or equipment. This means applying to Court without the other party being notified and the Court Ordering the seizure of items such as computers, laptops, hard drives or any other device. Once a device is seized, a forensic investigation might shed some light on the cryptocurrency.
Valuing cryptocurrency
If it is established that one party owns cryptocurrency, establishing a value for this asset can be tricky. This is not simply because there can be no central market or exchange for some cryptocurrencies, thus identifying the market value presents with significant challenges, some cryptocurrencies can fluctuate wildly in value in a short period of time.
Assets do change in value during property settlement, for example shares can fluctuate, bank balances and credit card balances may change regularly too. We can:
a) Reach an agreed value based on an average value or balance; or
b) use the value on a particular day.
With low level fluctuations, a fair outcome may still be achieved between the parties using these method as any variation is often not significant in the context of the entire property pool (which may include high value assets such as home equity and large superannuation interests). With large fluctuations, there are risks with this approach that a proposed property division is significantly inaccurate.
Other options?
Selling an asset is one way to determine the value. An added benefit is that the liquidated value can then easily be divided between the parties, however;
1. The potential value of the currency may mean one party wishes to retain the
currency as an asset which they hope will appreciate in future, rather than sell it as
a present, low value;
2. The particularly cryptocurrency may not be able to be sold or exchanged easily; or
3. Selling at a profit may mean the party or parties may be liable to pay Capital Gains
Tax and therefore the sale will have tax implications.
Value in the face of non-disclosure?
In one case where there was insufficient disclosure from the Husband regarding the cryptocurrency he purchased, the Court used the value of the funds applied to purchasing cryptocurrency as the relevant value and proceeded to make Orders on that basis. (Powell and Christensen [2020] FamCA 944). Whether the value was higher or lower is not known, however, the Court was able to make a decision so that there could be finality on the matter.
A note of caution though, in that case there were other assets in the property pool from which the other spouse could obtain her entitlement in settlement. Where a significant proportion of the property pool is applied to purchasing cryptocurrency, or the value of the cryptocurrency is likely to be very high in the context of the total property pool.
Problems with jurisdiction
If the body through which cryptocurrency is purchased or exchanged is based overseas, this can pose problems in that it may be beyond an Australian Court’s reach. For example, the process for issuing an international or overseas subpoena becomes much more complicated and may not be possible, depending on the jurisdiction.
In Australia, family law orders are made in personam or against a person. The Court make an order against a person in the jurisdiction of Australia, however they might still only have limited options with respect to assets which are overseas. If a regulator or regulatory body commences action against a company or business overseas in another jurisdiction, not only could that have a devastating effect on a cryptocurrency holding or value, it could be difficult and costly for any recourse to be pursued by a spouse party in another jurisdiction.
What if there is no cryptocurrency?
What if a party thought they were purchasing cryptocurrency, but it turns out there is none? Scams are on the rise according to ASIC and the ACCC (see links below).
Cryptocurrency which has disclosed may be lost, or it may lose all value, if for example, a company or exchange has collapsed or been targeted by a regulator. A forensic investigation might be needed to obtain some clarity about the situation.
If there is a loss, consideration could be given to whether there has been “wastage” of an asset by one party and the wasted value being “added back” to the entitlement of the party who wasted the asset. However, this is not a straightforward area and the Court may still decline to take this step.
Summary
Property settlement is about each person obtaining a fair (or “just and equitable”) outcome. If one party has an asset which isn’t included, or not properly valued, then it could lead to one party not receiving a fair outcome.
Identifying and valuing digital assets may be more difficult than traditional assets, however it is no less important. For low level investors who only applied a small amount of funds to purchase cryptocurrency (compared to the value of other assets, like houses or superannuation), the cost of extensive investigations into these holdings could seem disproportionate. However, there could be an asset of significant value which has been missed if merely passed over.
We hope this has been a helpful exploration of this area. If you have any questions or wish to explore any of these issues further, please don’t hesitate to contact us to speak to a lawyer.
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