An important decision in April from Hong Kong’s Court of First Instance, in the matter of Gatecoin Limited, ruled that cryptocurrency is “property,” a development that is relevant to asset division in divorce proceedings.
Cryptocurrency can only be transferred from one user to another through a cryptocurrency network, with the transfer initiated and approved by the owner. Cooperation or a court order is required for a transfer.
Blockchain is a publicly available ledger that records all transactions made in respect of cryptocurrency. A user can trace cryptocurrency from its creation through to all its transactions. Every transaction recorded in the blockchain is unique, which should ease tracing and identifying the transactions. In most jurisdictions, it is accepted that cryptocurrency is property.
Disclosure of Cryptocurrencies
How does all this affect divorce cases? In divorce proceedings, each party must provide full disclosure of their “income, earning capacity, property and other financial resources.” Failure to provide this may place parties in contempt of court, risking a fine or even potential imprisonment. “Property” for the purposes of matrimonial legislation 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 useful to have the High Court confirm that “property” includes holdings of cryptocurrencies and can be held on trust.
The right questions should be asked early on in the disclosure process relating to the existence of crypto assets, online accounts with exchanges, or the location of any digital currency wallets. Cryptocurrency account addresses and exchange statements should also be provided.
Indicators of undisclosed cryptocurrency could be based on provided disclosure, or from a party’s knowledge such as wealth incommensurate with the sources of income and assets held. If disclosure has not been provided voluntarily, it may be necessary to seek an order for specific disclosure from the party or third parties suspected of holding the investment.
With evidence of dissipation, it may be possible to seek an injunction to freeze the assets of the other party, if necessary, to cover cryptocurrency exchanges so that the investment cannot be traded. It may necessitate steps to physically secure the means of storage on which the private codes are stored, to prevent transfer or destruction of the means of storage. The order may preserve any computer, USB or other device where the private keys to the cryptocurrency are recorded and held.
Valuation of Cryptocurrencies
Cryptocurrencies may be volatile, particularly if they are not pegged to a real currency. This makes valuation an issue for the court when it comes to the final financial award, as well as for family practitioners advising their clients. Bitcoin is a good example of this: its value has risen and fallen sharply over time.
The value 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 possibly expert evidence to assist the court.
Dealing with Digital-related Assets Split
When crypto assets are divided between the parties, they share the risk or benefit of changes in value. Because of the specific market and specialized trading platforms, not everyone wants to take on a cryptocurrency investment. One party may retain the cryptocurrency, offsetting it against another asset. Problems may arise in the likely event of fluctuation – one party could walk away with real estate worth HK$50 million and the other with HK$50 million in cryptocurrency. The value of that currency could change significantly the very next month – they could become a billionaire overnight. An established principle is where price fluctuations can be anticipated as part of the natural function of a type of asset, the court will not be prepared to reopen a case now “closed,” even when the price fluctuations prove to be extreme (better or worse). If a hearing has concluded but an order is not yet made, or been made but not implemented, arguably there may be some scope to revisit the terms of the order.
Where parties have reached a mutually agreeable settlement, a crypto asset is just another asset needed to be divided between the parties. In other situations, it is important that the right questions are asked, and 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.
As crypto assets are still poorly understood, it is important to instruct lawyers who appreciate the difficulties arising in terms of disclosure and in reaching a fair settlement.
Samantha Gershon, Partner, and Philippa Hewitt, Senior Knowledge Lawyer, Withers