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Vardags Family Law Essay competition 2023/24 | Nia Gabunia

Nia Gabunia - IE University, Spain

Byte by Byte: Navigating Digital Assets in Family Law

A Comprehensive Analysis in the Context of England and Wales

Abstract

Embarking on a comprehensive exploration, this analysis navigates the intricate landscape of digital assets within the realm of family law in England and Wales. From cherished heirlooms to complex cryptocurrency portfolios, the digital age brings a slew of challenges and opportunities. This investigation necessitates a nuanced understanding of traditional legal principles intertwined with the dynamic evolution of digital currencies. The story revolves around classification, recognition, and valuation, all set against the backdrop of an ever-changing legal landscape.

From the complexities of divorce proceedings to the critical domain of legal safeguards, which includes prenuptial agreements and estate planning, the exploration delves into the multifaceted terrain confronting family lawyers and individuals alike. Highlighting the critical task of securing digital assets not only during ones lifetime but also after their death, the conclusion considers the future trajectory, emphasizing the critical need for adaptability in legal frameworks and a constant interplay between traditional principles and innovative strategies.

Keywords:

Digital assets, family law, cryptocurrency, divorce proceedings, legal safeguards, prenuptial agreements, estate planning, cybersecurity, England and Wales legal landscape, valuation challenges, evolving legal frameworks, and legislative responses.

Introduction

In the ever-changing landscape of family law, the digital age has brought a slew of new challenges and opportunities, and as the digital landscape continues to transform the way we live, love, and leave legacies, this paper investigates the legal complexities of digital assets in the context of English and Welsh family law.

As our lives become more intertwined with the digital world, the legal principles that govern familial relationships must evolve to account for the distinct characteristics of digital assets. This analysis delves into the complex terrain that family lawyers and individuals face, from asset classification and recognition to valuation. The story unfolds against the backdrop of a shifting legal landscape, emphasizing the importance of adaptability in order to accommodate the dynamic evolution of digital currencies.

The complexities explored range from divorce proceedings to the critical domain of legal safeguards such as prenuptial agreements and estate planning. Importantly, the discussion extends beyond individuals lifetimes, acknowledging the importance of securing digital assets after death. This introduction lays the groundwork for a thorough examination of the relationship between traditional legal principles and innovative strategies as family law confronts the challenges and opportunities presented by the digital age.

Understanding Digital Assets and Currencies

In the realm of digital assets and currencies, the dynamic landscape of financial holdings has undergone a significant transformation, ushering in a host of new challenges and opportunities.

Defining Digital Assets

Digital assets, as implied by the term, encompass items held in digital or electronic formats. Digital assets, as the term implies, are items held in digital or electronic formats, including documents or data stored on electronic devices such as personal computers, tablets, or data storage devices. It is critical to emphasize that these assets have no physical presence and exist only in intangible form. Digital assets, such as digital files, records, domain names, crypto-tokens, and non-fungible tokens, have become essential components of peoples financial portfolios.

Digital Currencies and Cryptocurrencies

When examining digital assets, digital currencies often take precedence in discussions. Unlike traditional currencies, they are stored in digital currency wallets rather than personal bank accounts and traded on digital trading platforms. It is critical to distinguish between the terms "digital currencies" and "cryptocurrencies," as they represent distinct concepts. Digital currencies operate within a centralized framework, with regulation coming from a central location, such as a bank. We frequently use digital currencies in our daily lives, such as when making online purchases or using services like PayPal or Western Union.

Cryptocurrencies are a subset of digital currency distinguished by cryptographic security and decentralization, with network regulations set by users rather than a centralized entity. Bitcoin, one of the most well-known cryptocurrencies, fits into this category. It is capable of being used to purchase goods and services in the same way that traditional currency can. Furthermore, bitcoins can be transferred and traded between bitcoin users.

Since the inception of cryptocurrency in 2009, the prevalence of crypto assets has grown, making it a more common encounter for family lawyers. According to a study conducted by the Financial Conduct Authority in August 2022, 9% of adults in the UK, or 4.97 million people, own cryptocurrency. In the case of AA v Persons Unknown [2019], the High Court recognized crypto assets, such as Bitcoin, as property because of their definable nature, identifiability by third parties, potential assumption by third parties, and a degree of permanence. Despite this legal recognition, family lawyers frequently regard cryptocurrency as a novel and mysterious asset, eliciting suspicion and uncertainty.

Legal Recognition of Crypto Assets

The Law Commission suggests that digital assets should be regarded as a new third category of personal property, emphasizing the need for a flexible legal framework that accommodates the evolving nature of these assets. Their final report, released on June 28, 2023, is a significant step toward addressing the complexities of this ever-changing legal landscape.

The Law Commission proposes three soft indicia to determine whether an item qualifies as a digital asset: it is composed of data represented in an electronic medium, it exists independently of persons and the legal system, and it is rivalrous, which means that its use or consumption by one person may prejudice another.

Challenges for Family Lawyers

The elusive nature of bitcoin and other cryptocurrencies presents a formidable obstacle for family attorneys. While it is clear that cryptocurrencies should be included in the broader asset pool, the absence of comprehensive and transparent disclosure creates a unique barrier. Unlike bank accounts, which can be easily linked to their owners, cryptocurrency ownership lacks this clarity. Notably, bitcoin ownership, for example, evades subpoena, with proof of ownership typically stored in a digital format on a persons mobile or laptop device.

Concurrently, family lawyers face a similar challenge in determining the value of cryptocurrency. In contrast to traditional financial markets, where a universally recognized entity establishes standardized valuations, the cryptocurrency landscape lacks such consensus. Prominent exchanges like Coinbase, Kraken, and Bitstamp occasionally assign different values to the same cryptocurrency. The intrinsic volatility of cryptocurrencys value adds another layer of complexity. For example, consider the value of one bitcoin on January 1, 2021, which Coinbase recorded at $38,200 before rising to $49,270 by January 10. Further, the volatile nature creates significant challenges, particularly in the context of property settlements. Unlike more stable assets such as stock or real estate, the value of cryptocurrencies can fluctuate dramatically from one day to the next. Navigating property settlements with significant cryptocurrency holdings necessitates meticulous care and attention.

Divorce in the Digital Era

Divorces can be messy, but in the age of pixels, they can become even messier. Given that cryptocurrencies are legally classified as "property" in England and Wales, they can be transferred between parties during divorce proceedings via a property adjustment order under s.24 of the Matrimonial Causes Act 1973. This recognition creates a framework for the fair distribution of cryptocurrency assets in divorce settlements.

The preliminary stage in the asset division process during a divorce necessitates both parties to transparently disclose all aspects of their financial holdings. The United Kingdoms legal framework underscores the significance of comprehensive financial disclosure, encompassing both traditional and digital assets. Within the Form E, digital assets, like other forms of property, must be divulged. In the evolving landscape of digital finance, disputes over these digital assets have become commonplace in divorce proceedings, necessitating a nuanced understanding of their nature, valuation, and accessibility.  Nonetheless, if a spouse chooses to conceal assets using cryptocurrency and refrains from disclosing them, cryptocurrencies present challenges in terms of tracking and verifying ownership, and the decentralized nature of cryptocurrency complicates matters even more, as directing a subpoena to a single authority for compelling record disclosure becomes difficult, as previously discussed.

Bringing in a forensic accountant can be a strategic move in this situation, as well as in cases where there is a significant discrepancy in financial figures or a misalignment between reported income and disclosed finances. These financial detectives can sift through records to uncover potential cryptocurrency investments or hidden assets. On another front, additional forensic experts may have the ability to extract key information, whether public or private, directly from a spouses electronic devices. This dual approach can improve the investigations effectiveness in resolving complex financial scenarios.

Upon determining the value of cryptocurrency assets, the division process follows the same principles as other assets. This division can be achieved through lawyer negotiation, mediation, or within the court system.

After determining the value of cryptocurrency assets, the next step is to distribute them fairly, which is similar to how other traditional assets are divided. This division can be resolved through negotiations facilitated by legal professionals, alternative dispute resolution methods such as mediation, or, if necessary, formal legal proceedings in the court system.  Each approach seeks to ensure a fair and equitable distribution of digital assets in divorce or separation proceedings.

Further, cryptocurrency assets can be factored into the calculation of alimony or spousal support, especially when their contribution significantly influences the overall financial landscape of the parties involved.

Legal Safeguards in the Digital Matrimonial Landscape

Navigating the complexities of the digital era necessitates a comprehensive approach to asset protection in todays matrimonial landscape. Prenuptial and postnuptial agreements, estate… as well as other essential legal documents, play an important role in addressing the complexities of defining, managing, and protecting both traditional and digital assets in modern marriage.

Prenuptial Agreements

Prenuptial agreements, also known as prenups, have emerged as critical tools for couples embarking on their matrimonial journey in the age of the digital footprint. It has become necessary to include provisions relating to digital assets in these agreements. These provisions define the terms of engagement with digital assets, which range from jointly owned online accounts to cryptocurrencies and digital heirlooms. Given the dynamic and evolving nature of these assets, it is critical to have clarity on how they should be treated and divided in the event of divorce.

The treatment of pre-existing assets, particularly cryptocurrency holdings, requires careful consideration. Generally, assets acquired prior to marriage, including cryptocurrency holdings, are considered separate property and cannot be divided during divorce. However, when these assets are retained and undergo substantial appreciation in value throughout the marriage, complexities arise. In such scenarios, spouses may assert claims to a share of the increased value.

To navigate these complexities and address potential disputes ahead of time, a prenuptial agreement must be strategically implemented. A well-drafted prenuptial agreement not only protects the original investment, but it also outlines specific provisions for dealing with asset appreciation during the marriage. This strategic approach is particularly vital in the domain of crypto and digital assets, where even a modest initial investment can evolve into a substantial financial entity.

Postnuptial Agreements

Postnuptial agreements entered into after marriage add to the legal framework that governs the complexities of asset management. These agreements allow couples to specify the terms of asset division, spousal support, and other financial issues after marriage. They are critical for couples to adjust their financial arrangements to changing circumstances, taking into account the changing nature of digital assets and financial situations.

Estate Planning and Asset Distribution and

Aside from prenuptial and postnuptial agreements, other important legal documents come into play. Estate planning documents, such as testamentary documents and powers of attorney, are critical for determining how assets, including digital ones, will be distributed and managed in the event of disability or death.

Recognizing the significance of including cryptocurrency in ones estate plan and testamentary papers is crucial to mitigating the risk of such losses and ensuring a seamless transition and accessibility for heirs or beneficiaries. Digital assets not explicitly outlined in a will become integral components of the residuary estate, transferring to the entitled beneficiary. In the absence of a valid will, these digital assets, like the rest of the estate, follow the intestacy rules, passing to the rightful inheritor.

Cybersecurity Concerns

Cybersecurity concerns add an additional layer of complexity to the digital landscape, not only in life, but also after ones death. Safeguarding digital assets from unauthorized access, ensuring the privacy of sensitive information, and establishing protocols for secure digital asset management become imperative considerations within the inheritance framework.

Naturally, individuals tend to link cybersecurity apprehensions with external entities like companies or government agencies rather than envisioning potential threats within family dynamics or between spouses. Yet, in the modern landscape, where digital assets are intrinsic components of familial wealth, it is imperative to shield against cyber threats. Cybersecurity concerns must extend to encompass potential threats within the familial sphere.

The fate of digital assets upon an individuals death hinges on the presence of a private key. Without this key, access to a crypto asset becomes impossible. In essence, if one passes away without providing a means for locating and utilizing the private key, their cryptocurrency is effectively consigned to a state of digital unavailability. Despite the asset technically remaining within the deceased individuals ownership and the private key being a cryptographic component, the cryptocurrency becomes lost and beyond reach.

In safeguarding the accessibility of cryptocurrency assets after ones demise, individuals often employ various strategies. One common method is the physical documentation of cryptographic keys. This may involve writing down the key on paper and opting for secure storage, such as placing it in a bank vault or a safe-deposit box. Alternatively, some individuals utilize specialized services like cryptocurrency banks or multi-signature wallets.  These services provide mechanisms for designated individuals to access the cryptocurrency account in the event of the account holders passing, ensuring a systematic and secure approach to managing digital assets after death. With this, certain digital accounts provide the option to designate a legacy contact or an inactive account manager authorized to oversee your account if you become unable to do so.

V.Conclusion and Future Perspectives

The comprehensive examination of digital assets in family law in England and Wales reveals a multifaceted landscape marked by legal advancements, challenges, and the critical role of legal instruments. The nuanced treatment of digital currencies and assets as recognized property necessitates sophisticated legal strategies, particularly in divorce proceedings with numerous disclosure and valuation complexities.

As we look to the future, the trajectory of digital assets in family law has important implications. The Law Commissions recommendations highlight the importance of adaptability in dealing with the dynamic nature of digital assets in marital contexts. The incorporation of cybersecurity concerns into inheritance frameworks complicates matters, necessitating robust strategies for secure asset management that extend beyond an individuals lifetime. The future of the legal landscape in England and Wales, which is shaped by precedents and ongoing legal developments, promises a continued interplay between traditional legal principles and innovative strategies.

The legal community is at the forefront of this evolution, ready to navigate the complexities of this new field and ensure that digital assets are effectively integrated into the broader field of family law.

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