Vardags Family Law Essay competition 2024/25 | Hannah Craig

Hannah Craig - University of Law

Blockchains and breakups: the influence of cryptoassets on divorce settlements

Introduction

The rise of cryptocurrency and blockchain technology is fundamentally transforming the current economic landscape, which has inevitably created new legal challenges. In the past year there has been a significant rise in cryptocurrencies like Bitcoin, which reached a market cap of $132 billion (1) and political figures like Donald Trump embracing cryptocurrencies (2) adding complexity to financial matters. This has introduced unique obstacles for the family courts when applying the traditional principles set out in the Matrimonial Cause Act 1973, namely in asset identification, valuation and enforcement. This essay will explore the impact crypto assets are having on the family law system and how the family courts are adapting to these challenges in divorce settlements.

What are crypto assets?

Cryptocurrency was defined as a ‘digital means of financial exchange’, (3) by a research briefing published by the Commons Library in 2023,(4) with transactions operating entirely electronically and through a decentralised system known as blockchain technology, with no central authorities overseeing the currencies.(5)

Despite the growing popularity and use of cryptocurrency there is no clear statute legally recognising crypto as property. In absence of clear statutory guidelines, recent case law has provided guidance defining some cryptocurrencies as property.(6) Notably, in Vorotyntseva v Money-4 Limited,(7) the High Court ruled in favour of treating cryptocurrency as property by granting a freezing order against a company holding the cryptocurrency. Birss J commented that cryptocurrency should be accounted for as property, (8) setting the precedent as to how courts should engage with digital currencies. Similarly, Bryan J concluded that a crypto asset could be considered as property in AA v Persons, (9) arguing that a crypto asset met the four criteria required to qualify an asset as property, set out by Lord Wilberforce’s in National Provincial Bank v Ainsworth.(10)

The current law for asset division

The family court’s powers over matrimonial assets in financial relief proceedings are set out primarily in the Matrimonial Cause Act 1973, which outlines the orders available to create an optimum outcome for all parties involved, (11) with the welfare of any children being paramount. (12) The statutory guidelines are paired with the common law system which allows for large judicial discretion in family law matters,(13) inclusive of financial proceedings.

In determining the outcome in such proceedings, the courts must consider the points highlighted under Section 25(2) of the MCA,(14) which aim to consider a broad number of factors. The factors vary from the financial needs and obligations post-divorce,(15) highlighted in Needs v Needs, (16) to family welfare contributions,(17) with both finical and non-financial contributed being weighted equally, as established in Charman v Charman.(18) The guidelines further require that both conduct and potential financial losses from the divorce be considered in the order. The courts exercise statutorily conferred judicial authority granted under Section 23 and 24 of the MCA, which set out the orders available. Section 23 covers maintenance pending suits, periodical payments and secured periodical payments,(19) whereas Section 24 covers capital orders, including property adjustment, order for sale and pension sharing. (20) These orders will be used when addressing cryptocurrency in financial proceedings, but only when the courts recognised the cryptocurrencies as property, otherwise the law cannot apply.

Subsequently, the current law sets out a relatively clear and comprehensive framework for the courts to follow and outlines factors to consider when exercising their discretion in awarding divorce settlement orders. However, the law does not fully accommodate for cryptocurrencies, posing increasing difficulties in implementing financial orders as crypto becomes adopted more extensively. The lack of statute recognising cryptocurrency as property creates difficulty in asset division, particularly in relation to valuation, disclosure and enforcement. As the use of cryptocurrency evolves and becomes more integrated into the financial systems and personal wealth portfolios, the challenges will only intense, highlighting the need for legal frameworks to adapt.

Legal challenges in dealing with crypto assets

While recognising cryptocurrency as property under the statutory scheme would enable the family courts to apply the principles in Section 23-25 with more ease, the legal problems posed by crypto go beyond legal recognition.

The primary challenge that the courts would face during divorce proceedings would be establishing the value of crypto assets. Cryptocurrencies are renowned for fluctuating values and price volatility, making it difficult to value assets using the current economic structures designed to value fiat currency. Without the courts being able to value the asset, they are unable to make appropriate orders, or alternatively the assets may change value significantly throughout the proceedings. For instance, the market value of a single Bitcoin was around $100 in 2013 and grew to $40,000 in 2021 before dropping down to roughly $23,000 in 2022.(21) This illustrates the volatility of the market, particularly as bitcoin is a the most recognised cryptocurrency.

Another challenge that arises is that cryptocurrencies are not tied to a single jurisdiction, due to the decentralised nature of the technology, presenting difficulties in disclosure. In order to access a crypto asset, two keys are required. One is a public key which can work like an email address and the other is private which appears as a string of letters of numbers.(22) The private key is essential in managing personal crypto assets and is not controlled on a centralised register, unlike other digital assets,(23) instead the transactions made are public on the blockchain.(24) However, this private key does not directly link to an individual’s personal details, therefore without experts these assets are arguably near to impossible to track. Despite the system having powers to order disclosure, through statute and legislation, the current format does not account for the tracking of cryptocurrency assets. Therefore, without the supporting framework to ensure transparency and fairness when dealing with crypto assets, it leaves parties vulnerable to fraud during these proceedings.

Solutions and future directions

The challenges faced by the emergence of cryptocurrency is a mounting to a global issue being tackled with by nearly every sector. The Law Commission published a report on the 28th June 2023 with their recommendations to government, stating that the common law system was sufficient in recognising digital assets, including crypto assets, but recommended legislation to confirm the existence of the category and remove any uncertainty.(25) The UK government has since introduced the Property (Digital assets etc) Bill into Parliament in September 2024,(26) which acts upon the recommendations of the Law Commission, recognising digital assets as personal property under statute. The government has further announced that they have accepted the recommendation to set up an expert group to provide guidance on technical and legal issues which relate to digital assets.(27) The introduction of the Bill illustrates the steps that the government are taking to facilitate better legal structures surrounding cryptocurrency, whilst maintaining flexibility under the common law. This will impact divorce financial proceedings as there will be more certainty in allocating cryptocurrency as personal property, allowing the family courts to apply the already established MCA framework.

Nonetheless, the new Bill does not change the nature of cryptocurrency and does not resolve issues posed by hiding assets and disclosure. Although divorces may be amicable, in the event that one party does hide their crypto assets, financial forensic experts can be used to track and identify such assets. Furthermore, with the ever-growing landscape of the digital age, further education and support should be required to practitioners to ensure family lawyers can advise clients on financial matters concerning crypto assets confidently.

Conclusion

The rise of cryptocurrency and blockchain technology has introduced significant challenges to the traditional principles of asset division in divorce settlements. While recent movements, such as the Property (Digital Assets etc.) Bill, indicate progress in recognizing crypto assets, there remains a need for further reform to address the complexities these assets introduce. As the legal landscape evolves family law must adapt to the increasing prominence of digital assets, with a stronger emphasis on education and awareness for practitioners. The future of divorce settlements in the digital age will ultimately depend on the legal system’s ability to integrate emerging technologies, such as cryptocurrencies, into existing frameworks for asset division, ensuring fair and comprehensive solutions.

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Bibliography

(1) Blockworks, ’Bitcoin ETF Tracker’ https://blockworks.co/bitcoin-etf accessed 31 December 2024

(2) Financial Times, ‘Donald Trump’s crypto embrace overshadows new EU digital asset rules’ by Nikou Asgari https://www.ft.com/content/ad8f30ff-50fb-4a5f-a193-baa279e9f0cd accessed 31 December 2024.

(3) Steve Browning and Philip Brien, ’Research Briefing: Cryptocurrencies’ (House of Commons Library, 22 February 2023) https://commonslibrary.parliament.uk/research-briefings/cbp-8780/ accessed [10 November 2024]

(4) Steve Browning and Philip Brien, ’Research Briefing: Cryptocurrencies’ (House of Commons Library, 22 February 2023) https://commonslibrary.parliament.uk/research-briefings/cbp-8780/ accessed [10th November 2024]

(5) Steve Browning and Philip Brien, ’Research Briefing: Cryptocurrencies’ (House of Commons Library, 22 February 2023) https://commonslibrary.parliament.uk/research-briefings/cbp-8780/ accessed [10th November 2024]

(6) Vorotyntseva v Money-4 Limited [2018] EWHC 2596 (Ch) and AA v Persons Unknown [2019] EWHC 3556 (Comm)

(7) Vorotyntseva v Money-4 Limited [2018] EWHC 2596 (Ch)

(8) Vorotyntseva v Money-4 Limited [2018] EWHC 2596 (Ch) [para 13]

(9) AA v Persons Unknown [2019] EWHC 3556 (Comm) [para 59]

(10) National Provincial Bank v Ainsworth [1965] 1 AC 1175

(11) Rob George and Sharon Thompson and Joanna Miles, Family Law (5th edn, OUP 2023) ch 6 (p 356)

(12) Matrimonial Causes Act 1973, c 18, s.25(1)

(13) Rob George and Sharon Thompson and Joanna Miles, Family Law (5th edn, OUP 2023) ch 6 (p 362)

(14) Matrimonial Causes Act 1973, c 18, s.25(2)

(15) 5 Matrimonial Causes Act 1973, c 18 s.25(2)(b)

(16) Needs v Needs [2000] 2 FLR 1216

(17) Matrimonial Causes Act 1973, c 18, s.25(2)(f)

(18) Charman v Charman [2007] EWCA Civ 503

(19) Matrimonial Causes Act 1973, c 18, s.23-s.23(1)(b)

(20) Matrimonial Causes Act 1973, c 18, s.24-s.24B

(21) Hedera, ’Fiat vs Crypto’ (Hedera, 2024) https://hedera.com/learning/fintech/fiat-vs-crypto accessed 31 December 2024.

(22) (Coinbase.com) accessed 24 November 2024

(23) Family Law Week, ’Cryptocurrencies and Cryptoassets: Freezing Orders, Disclosure Orders and the Instruction of Experts’ (Family Law Week, 26 May 2022) https://www.familylawweek.co.uk/articles/cryptocurrencies-and-cryptoassets-freezing-ordersdisclosure-orders-and-the-instruction-of-experts/ accessed [24 November 2024]

(24) Bitcoin.org, 2023) https://bitcoin.org/en/protect-yourprivacy#:~:text=All Bitcoin transactions are public,privately by each user’s%2 0wallets accessed [24 November 2024]

(25) Law Commission, ’Digital Assets’ (Law Commission, 2023) https://lawcom.gov.uk/project/digital-assets/ accessed 31 November 2024

(26) Law Commission, ’Property (Digital Assets etc) Bill Introduced into Parliament’ (Law Commission, 2024) https://lawcom.gov.uk/property-digital-assets-etc-bill-introduced-into-parliament/ accessed 31 November 2024

(27) Law Commission, ’Property (Digital Assets etc) Bill Introduced into Parliament’ (Law Commission, 2024) https://lawcom.gov.uk/property-digital-assets-etc-bill-introduced-into-parliament/ accessed 31 November 2024

Books and statutes

• Rob George, Sharon Thompson, and Joanna Miles, Family Law (5th edn, OUP 2023) ch 6, p 356
• Rob George, Sharon Thompson, and Joanna Miles, Family Law (5th edn, OUP 2023) ch 6, p 362
• Matrimonial Causes Act 1973, c 18, s.25(1)
• Matrimonial Causes Act 1973, c 18, s.25(2)
• Matrimonial Causes Act 1973, c 18, s.25(2)(b)
• Matrimonial Causes Act 1973, c 18, s.25(2)(f)
• Matrimonial Causes Act 1973, c 18, ss.23–23(1)(b)
• Matrimonial Causes Act 1973, c 18, ss.24–24B.

Articles and online resources

• Blockworks, ’Bitcoin ETF Tracker’ https://blockworks.co/bitcoin-etf accessed 31 December 2024
• Financial Times, ’Donald Trump’s crypto embrace overshadows new EU digital asset rules’ by Nikou Asgari https://www.ft.com/content/ad8f30ff-50fb-4a5f-a193-baa279e9f0cd accessed 31 December 2024
• Steve Browning and Philip Brien, ’Research Briefing: Cryptocurrencies’ (House of Commons Library, 22 February 2023) https://commonslibrary.parliament.uk/research-briefings/cbp-8780/ accessed 10 November 2024
• Hedera, ’Fiat vs Crypto’ (Hedera, 2024) https://hedera.com/learning/fintech/fiat-vs-crypto accessed 31 December 2024
• Coinbase.com, ’What is a Private Key’ https://www.coinbase.com/en-gb/learn/crypto-basics/what-is-a-private-key accessed 24 November 2024
• Family Law Week, ’Cryptocurrencies and Cryptoassets: Freezing Orders, Disclosure Orders and the Instruction of Experts’ (Family Law Week, 26 May 2022) https://www.familylawweek.co.uk/articles/cryptocurrencies-and-cryptoassets-freezing-orders-disclosure-orders-and-the-instruction-of-experts/ accessed 24 November 2024
• Bitcoin.org, ’Protect Your Privacy’ (Bitcoin.org, 2023) https://bitcoin.org/en/protectyourprivacy#:~:text=All Bitcoin transactions are public,privately b y each user’s wallets accessed 24 November 2024
• Law Commission, ’Digital Assets’ (Law Commission, 2023) https://lawcom.gov.uk/project/digital-assets/ accessed 31 November 2024
• Law Commission, ’Property (Digital Assets etc) Bill Introduced into Parliament’ (Law Commission, 2024) https://lawcom.gov.uk/property-digital-assets-etc-bill-introduced-into-parliament/ accessed 31 November

Cases

• Vorotyntseva v Money-4 Limited [2018] EWHC 2596 (Ch)
• AA v Persons Unknown [2019] EWHC 3556 (Comm)
• National Provincial Bank v Ainsworth [1965] 1 AC 1175
• Needs v Needs [2000] 2 FLR 1216
• Charman v Charman [2007] EWCA Civ 503