If you’re currently going through divorce (or dissolution) proceedings and you are planning on formalising your financial arrangements through a financial remedy order or consent order, you will need to disclose everything you have in order for the court to judge whether it's been separated fairly. So how does cryptocurrency factor into this?
As I’ll explain in more detail below, cryptocurrency is a digital currency and is therefore classed as an asset. I’ll briefly explore what cryptocurrency is and how it relates to a divorce financial settlement, implications of this, some potential red flags and places to find additional help.
What is cryptocurrency?
In its simplest terms, cryptocurrency refers to digital currency, which is an alternative form of value created using encryption algorithms and without the need for third-party confirmation (ie. a bank). Rather, than a bank verifying that someone has enough funds for a purchase, cryptocurrency is based on peer-to-peer transactions. These occur through sharing passwords connected to ‘digital wallets’, which in turn are used to store cryptocurrency. Digital wallets can be stored on mobile phones or computers and can be used to buy commodities.
Cryptocurrency transactions are documented through something called a ‘blockchain’, with each new transaction representing a new ‘block’ hence its namesake. A record of these transitions is held permanently through a complex network of computers, making it almost impossible to manipulate.
As another form of payment, anyone can buy or sell cryptocurrency or can send or receive it, however, they must have access to an account that supports digital currency transactions (digital wallets). Whilst the assumption is often that cryptocurrency is privacy-focused, and therefore anonymous, many are completely trackable. However, cryptocurrency can also be obtained through a process known as ‘mining’. This is problematic as it’s then difficult to render where it originally came from.
There are essentially two markets for cryptocurrency:
- The traditional exchange approach is where you buy and sell assets through a regulated entity like Coinbase.
- The decentralised marketplace.
The most well-known types of cryptocurrency are Bitcoin, Litecoin and Ethereum, however, there are countless more that enter the market daily.
Cryptocurrency is renowned for being extremely volatile in terms of its fluctuating value, both regularly and abruptly. There can be a lot of variety, particularly given the recent birth of ‘Non-fungible tokens’ (NFTS) and equity-based projects.
Before I explore the implications of cryptocurrency and divorce, I will briefly outline how finances are typically dealt with in a divorce financial settlement.
What is a divorce financial settlement?
If you are planning on getting divorced, there are typically three things you need to sort out:
- The divorce: this is procedural and involves submitting the legal paperwork necessary to finalise your divorce.
- Child arrangements: these can be made informally between the couple and acknowledge what will happen with your children once you separate.
- Financial arrangements: these can be formalised once divorce proceedings have reached the Conditional Order (formerly known as the Decree Nisi) stage and refer to the divorce financial settlement.
In order for your divorce to be finalised, you need to have completed and submitted the divorce application. If you made a sole application or your divorce was issued before the introduction of No-fault divorce (6th of April 2022), you will need to wait until your spouse has returned the acknowledgement of service form before proceeding. After the 20-week reflection period built into the No-fault system, you can submit your Condition Order (formerly the Decree Nisi) application, once granted you will receive a certificate stating you are entitled to divorce. At this point you can submit a consent order (optional) and then six weeks and one day after the Conditional Order (Decree Nisi) pronouncement date, you can submit your Final Order (formerly the Decree Absolute) application. Generally, no court attendance is necessary and you can make your application for divorce online. Once you receive your Final Order (or Decree Absolute) certificate you are legally divorced, however, you may wish to formalise your financial arrangements prior to this.
There is absolutely no requirement to formalise these, and in general, couples are encouraged to resolve these matters between themselves rather than involving the court. In the event that there are disputes that cannot be resolved with the assistance of a divorce specialist or mediator, then a court application can be made and a judge will ultimately determine the arrangements.
This refers to dividing the matrimonial assets between you in order to determine who gets what in a fair manner. These are usually formalised through a consent order (if you agree), or via determination by a Judge at court (if ultimately you cannot agree). You can get help making these arrangements through coaching or mediation.
Why do you need to formalise your financial arrangements?
Whilst it is optional for couples to formalise their financial arrangements through a consent order, it’s important to note that divorce doesn’t prevent financial claims in the future. If you finalise your divorce and then win the lottery the very next week, there remains the risk of a claim against you by your ex-spouse. A financial court order will usually contain a clean-break clause that prevents future claims (outside of those agreed upon in the terms of the order).
Another point to consider is whether you wish to share your pension. Without obtaining a financial order, a pension share would not be possible. You can read our guide on pensions or our pension sharing order FAQs for more information.
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How does cryptocurrency affect your divorce financial settlement?
In short, cryptocurrency represents a new asset class. The usual starting point for the division of assets is a 50/50 split, however, there may be reasons why a couple depart from this. Traditionally, if a couple is formalising their financial arrangements through a consent order, it is at their discretion how they wish to split their assets, such as property or pension, however, the court needs to assess whether this has been fairly decided.
What is a consent order?
You can submit a draft consent order to the court if you are able to agree to your financial arrangements. This application is comprised of various documents which should be drafted by legally trained specialists, such as amicable. Whilst the court is not there to interfere, a judge must ensure that your agreement is fair given multiple factors such as need, children’s welfare, earning ability, financial needs and length of the marriage.
In order to determine if a consent order is fair, the court is required to know what assets and debts there are. These are assets and debts in both joint and sole names. Only when you know what the assets are and their value, can you then look at what is a fair division. This is demonstrated to the court through a financial disclosure (Form E or Form D81).
Cryptocurrency and financial disclosure
As explained above, full financial disclosure is required, in order for the court to determine whether your financial settlement is fair. There are potentially several issues in terms of cryptocurrency and financial disclosure, as highlighted below:
- The fluctuating value of cryptocurrency (which is different to that of a property for example). The value used for negotiation purposes may be very different just a week later
- Undervaluing cryptocurrency
- The decentralised marketplace
- Private coins - such as Monero
- Lack of knowledge in the legal space
- The court will not entertain ‘fishing expeditions’ to identify whether someone has deliberately hidden, or undervalued cryptocurrency. There would need to be a firm basis behind such a belief.
Can you split the cryptocurrency in a divorce financial settlement?
In theory, yes, but there is a duty of care in doing so. The easiest path might be selling and splitting the value, as opposed to transferring a portion to the other person. If a spouse is not ‘crypto savvy’, then understanding the value, and how to use it, may restrict its worth to that person.
What red flags should you look out for?
- A spouse previously mentioned having cryptocurrency, however, failing to list it in their financial disclosure
- A spouse who deliberately undervalues the cryptocurrency they have - maybe attend a session with a third party jointly, to understand its worth.
- A spouse who is willing to split their cryptocurrency as part of the settlement, however, is unwilling to explain it to their spouse
The ownership of cryptocurrency is increasingly common. We can also make the assumption that it’s not likely to go anywhere, anytime soon. As it is an asset that has value, it should be treated like any other asset and it is absolutely considered part of the matrimonial pot, potentially open to division. As clarified above cryptocurrency is a volatile and unique asset where many individuals may need assistance with the functioning and understanding of it, especially in how it relates to your divorce financial settlement. This may be in determining its value or protecting yourself against any potential red flags. If you have any questions about the above, you can speak to an amicable expert today to see if we can help you further.
Where can you find help?
- Book a free 15-minute consultation with an amicable expert
- Visit New Kids on the Blockchain