First published by Today’s Family Lawyer on 8th September
Mining on the moon: The Luna-cy of crypto costs in matrimonial financial proceedings
The pandemic-driven explosion of interest in crypto currencies has led the family courts in England and Wales to consider how to deal with these incredibly volatile assets in financial claims on divorce. It is now more likely than ever that one or both parties in a divorce may have holdings in at least one cryptocurrency (to say nothing of the more arcane forms of crypto assets, such as non-fungible tokens or ‘NFT’s). As crypto is now sufficiently mainstream that advertisements for individual currencies and crypto trading platforms can be seen on London Underground advertisements, enthusiasts no longer breathe an air more rarefied than Northern Line smog.
However, as with any gold rush, not all prospective crypto investors will ultimately become fabulously wealthy, and while devotees like to say the value of their chosen coin will go “to the moon”, there is certainly no guarantee that a miss will still land among the stars.
For the spouse that suspects their soon-to-be ex-partner has crypto holdings, this poses an increasingly difficult analysis of risk versus reward at the outset of matrimonial finance proceedings. Each party to the divorce is required to disclose all assets in their name, but lawyers are seeing an increasing number of cases in which parties have sought to conceal crypto from the eye of the court, which can be much easier with this class of assets than with traditional investments, requiring a potentially costly forensic exercise by the searching party’s solicitors.
If a spouse suspects that the other side is not disclosing crypto assets, the primary consideration at the outset should therefore be a cost benefit analysis of the legal fees that would be incurred in attempting to locate and value any prospective hidden crypto before embarking on the exercise.
Step one: gold mine or costs minefield?
The first problem with hidden crypto assets is the process of establishing their existence, which may entail a lengthy troll through bank statements to locate transactions to potentially obscure trading platforms or via PayPal. These transactions can be as small as only a few pounds, which, depending on how they have been invested, may now be worth exponentially more, but this is naturally not guaranteed. Most firms conducting such an exercise would charge at hourly rates for this task, so there could potentially be enormous costs for clients very quickly in conducting a search of their own.
There is alternatively a growth industry of forensic crypto investigators with specialist knowledge in tracking and tracing these assets, using the public ledger which records all transactions in crypto, but these will charge fees of their own for conducting their investigations and producing a report.
If evidence of crypto ownership can be found, the searching spouse will then need to present the non-discloser with a questionnaire designed to draw out disclosure of the asset and its current value. Depending on the nature of the evidence (for example, if there are multiple transactions requiring investigation) the cost of drafting questionnaires could also be extensive, to say nothing of the other spouse’s costs of answering. There is the additional risk that extensive questionnaires for transactions which transpire to be irrelevant could lead the searching spouse to be criticised later in any proceedings.
The next hurdle is to establish the value of any hidden crypto assets. This is a notoriously difficult exercise, as the value of all cryptocurrency assets fluctuates wildly on a daily (if not hourly) basis. The reason for this is that ultimately, the value of a crypto asset is usually more or less contingent on the belief that investors have that it is in fact worth something. This effectively makes the value of cryptocurrencies or assets a self-fulfilling prophecy that can just as easily plummet if the belief in their value suddenly disappears.
A very well publicised recent example of this is the total collapse of the cryptocurrency Luna and its linked “stable coin”, Terra. Terra was intended to remain at a certain value (approximately $1 USD) in order to provide a baseline of consistency to which the more volatile Luna coin was linked. However, once the value of Terra dipped too low below the $1 mark, panic ensued, triggering a mass sell-off of the more valuable (but also more volatile) Luna coin. This in turn triggered panic amongst investors in unrelated cryptocurrencies, sending the entire market into chaos in early May 2022. After reaching an all-time high value per coin of £90.73 in April 2022, the value of Luna at the time of writing (September 2022) is now £0.0001 – not just a decrease, but an almost total elimination of value.
Episodes like the Terra/Luna collapse make clear the risk of pursuing these incredibly volatile assets for the searching spouse. It is not hard to imagine a scenario in which significant costs had been incurred in pursuing the other side’s Luna investment in March 2022, only to see the value of the asset evaporate overnight with nothing to show for the effort and fees expended. In the months following the collapse, further tremors across the crypto currency markets have seen almost all popular coins decrease in value, so this risk is not limited to a handful of risky investments, but a feature of the broader asset class.
The context of the modern family courts
While the recent Terra/Luna fiasco is a particularly striking example, family lawyers have cautioned clients of these risks since the ascent in popularity of crypto assets began. As of early summer 2022, there are additional reasons for caution as recent developments in the family courts have compounded the potential risks for searching spouses.
The first of these is the introduction of no-fault divorce, which, whilst certainly welcome, requires that parties wait 20 weeks from the date that the application for a divorce is issued before applying for the first of two divorce orders (the Conditional Order). This order, which must be made before any final financial order can be approved by the court, is only the first step in finalising the divorce. The second divorce order (the Final Order) can then only be applied for no earlier than six weeks after the Conditional Order has been made.
As a consequence of this new timeframe, even if the crypto-holding spouse discloses their assets up front and negotiations proceed quickly, resulting in a financial order which is approved in the six weeks between the Conditional Order and the Final Order of divorce being made, parties face a minimum timeframe of six-and-a-half months after the application is issued before they may receive any crypto assets awarded to them in the financial proceedings.
It is not difficult to imagine how much the value of those assets may have fluctuated during that period (at the time of writing, Bitcoin is trading at c.£17,250 per coin, down from c.£32,900 six-and-a-half months ago in mid-February 2021). What this means is that even with the most transparent engagement with the disclosure process, parties may find that the agreements that they have made differ wildly in practice from their intended outcomes.
The other compounding factor from the family courts is that in recent months, there have been renewed calls from the higher levels of the judiciary against parties incurring disproportionate costs in divorce proceedings, particularly on so-called “fishing expeditions” to hunt for assets. In addition to higher costs resulting in a smaller pot left over to divide once all is said and done, there is therefore an increased risk that spouses unreasonably pursuing non-existent or not very valuable assets may also be subjected to orders to pay the costs of the other party. While costs are not awarded to the “winner” of an argument in family cases as in the civil courts, there is a real risk that searching spouses may find their attempts to leave no stone unturned met with not one but two legal fee bills to pay.
Conclusion
There is no simple answer to the question of what a spouse should do if they suspect that the other side has crypto assets which they are not disclosing. Next steps will be case specific, and will depend on whether the existence of the crypto asset is already known to the party or whether they only have a suspicion that it exists.
However, given the wild fluctuations in value across all forms of crypto currencies this year, even if it can be shown that a non-disclosed crypto investment exists, parties should consider carefully whether it is likely to be worth enough to counterbalance the potential costs of first locating and then determining its value (and, in all likelihood, obtaining repeated updating valuations throughout the negotiation process as the assets value will fluctuate). The most important thing for searching parties to bear in mind – as with dealing with any non-disclosing spouse – is the need for proportionality, and to consider whether taking a moonshot at finding hidden crypto is worth the rocket fuel needed for lift-off.
Catherine Campbell, solicitor, and David Lillywhite, partner, at Burgess Mee Family Law
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