The rise of cryptocurrency and digital assets in family law disputes

Whether you understand how it works or not, cryptocurrency is a growing asset that is disrupting societal traditions. With the rise of cryptocurrencies and other digital asset ownership comes various implications in family law proceedings, particularly during the process of quantifying and dividing property pools containing these types of assets.

Special Counsel Fraser Bax and Solicitor Yehanka Ranasinghe outline the complexities cryptocurrency can add to a family law dispute, the tax implications and what the future holds in this space.

What is cryptocurrency?

Cryptocurrencies are digital currencies that operate independently of a central bank or government. Despite existing for over a decade, there has been a steep rise in interest in cryptocurrencies (especially Bitcoin and Ethereum) over the past five years. Like conventional methods of payment, cryptocurrencies can be used to pay for the exchange of goods and services online and can also be held for long periods as an investment. However, unlike conventional assets the decentralised features of cryptocurrency create unprecedented issues when trying to establish ownership and value.

Disclosure of cryptocurrency in family law proceedings

Rule 6.01 of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021 provides that each party to a proceeding has a duty to the Court and to each other party to give full disclosure of all information relevant to the proceeding, in a timely manner. However, typical approaches to obtaining disclosure of cryptocurrency holdings may be ineffective and instructing experts to value it and other digital assets is still a newly developing practice.

One significant hurdle for parties who are trying to obtain information about their former partner’s cryptocurrency holdings is that there is no bank or regulatory body that can be subpoenaed to provide information or documents about an individual’s cryptocurrency assets. Even if you are aware your former partner owns such assets, it may be difficult to prove if they withhold information, due to cryptocurrency being held in encrypted ‘wallet’ systems.

Ownership of cryptocurrency is not based on the individual’s registered identity, but on encrypted keys. For example, Bitcoin implements a ‘wallet’ system which uses sets of encrypted public and private keys for security. Whoever holds the private key can generally access and make transfers from the wallet. Whilst public keys may be freely disclosed, it will not contain any personally identifiable information about the owner of the wallet (much like a bank account number). Therefore, people who hold and spend cryptocurrency can often remain anonymous and enter into transactions by giving out a public key or address, which does not identify them. Tantamount to the use of a physical wallet or holding physical cash, only the owner of the wallet is privy to the value and location of the cryptocurrencies, unless this information is specifically shared by the owner.

It is important to get on the front foot if you suspect your former partner has an interest in cryptocurrency. When appropriate documents are disclosed evidencing the value of a party’s cryptocurrency holdings, it is simply another asset in the balance sheet; however, if parties are not forthcoming with disclosure, the usual issues created by non-disclosure are exacerbated. Statements evidencing the wallet holdings of a party are key documents that can be used to substantiate the value of a person’s cryptocurrency. Some exchanges will also produce end of year statements. Spending that is inconsistent with the amount of funds in a person’s bank account might be indicative of undisclosed cryptocurrency. In some circumstances a Court may order that an electronic device be seized under an Anton Piller Order, which permits a party to seize the property of another without notice.

Valuing cryptocurrency in family law proceedings

Recent market trends have shown that cryptocurrencies remain volatile assets, which makes ascribing a value in a family law dispute context particularly difficult. By way of context, the price of Bitcoin fell by almost 30% in one day in May 2021.

Despite existing for several years, the case law on issues relating to cryptocurrency and its value is limited. The issue was addressed in Powell v Christensen [2020] FAMCA 944. In this case, one party had purchased cryptocurrency in contravention of an order that restricted them from dealing with or disposing of property, as well as with their own funds. The other party sought the cryptocurrency be reckoned at its original purchase value, arguing that it be notionally ‘added back’ to the property pool. The party who purchased the cryptocurrency argued the value of it had decreased significantly since the time of purchase but did not disclose any documentation to support his case. The Court found there had been deliberate non-disclosure as to the apparent decrease in value and so the purchase value should be found to represent the current value. The Court also noted the cryptocurrency purchased from the restricted funds should be subject of an add back to restore and protect the pool.

Tax implications

Despite the anonymity of holding cryptocurrencies, owners should not assume that profits from cryptocurrency transactions are not taxable or subject to capital gains tax (CGT). Only capital gains made from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. If cryptocurrency is acquired as an investment, CGT may need to be paid on disposal. Broadly speaking, cryptocurrency is a personal use asset if used to purchase items for personal use or consumption but not considered a personal use asset if the cryptocurrency is kept or used mainly as an investment, in a profit-making scheme or in the course of carrying on a business. This distinction is important in family law disputes when establishing the property pool to be adjusted.

To determine whether there has been a capital gain or loss from each CGT event, records of each cryptocurrency transaction must be kept. Non-disclosure in this regard is another example of the difficulties faced by a party in a family law dispute if their former partner refuses to share such information, that can significantly hamper their ability to quantify the property pool available for adjustment.

What does the future hold for cryptocurrency and digital assets in family law disputes?

It seems very likely that there will continue to be a sharp rise in the ownership of digital assets beyond the use of just cryptocurrency. Recently there has been a significant spike in the number of people owning non-fungible tokens (NFTs). These are one of a kind digital assets that are stored on a blockchain, which is a form of digital ledger operating on a decentralised network. There are endless items that NFTs can represent including collectibles, art, music and even tickets to real-world events. There are already billions of dollars’ worth of NFTs circulating around the world with many having significant value. Much like cryptocurrency, NFTs will continue to play a larger role in family law disputes in the future.