Fighting over the kids, the house and now their crypto
Divorce in a digital world: Navigating crypto valuation is now in play in the division of matrimonial assets
WHILE divorcing couples tend to battle over the division of traditional matrimonial assets – such as the family home, car, bank accounts, Central Provident Fund monies and company shares – we now see an increasing number of couples fighting over digital assets, including cryptocurrencies and non-fungible tokens (NFTs).
In a sign of the times, a Singapore court decision last month considered assets held with a BlockFi account, a Binance account and a Tokenise Xchange account to be matrimonial assets.
Despite hits to crypto confidence, and regulators’ warnings about the inherent risks of cryptocurrency investments, a recent survey conducted by the Independent Reserve Cryptocurrency Index indicates that 44 per cent of Singaporeans hold at least 10 per cent of their portfolio in cryptocurrency, and 46 per cent invest up to S$1,000 per month on cryptocurrency.
Catch me if you can: Finding the crypto
How can a divorcing spouse locate the crypto? In divorce proceedings, parties are required to make full disclosure of their assets. However, hiding or dissipating one’s assets in order to avoid disclosure is a common problem.
While one party may trade in crypto, the other party may have only a rudimentary understanding of it. Gaining financial education of digital assets would equip a spouse to trace and identify crypto assets, which may be matrimonial assets, and identify red flags that the other spouse has not come clean.
Bitcoin and Ether are, by now, household names. However, there are other crypto assets which also take the form of tokens stored on a blockchain, and may have monetary value.
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To identify possible crypto assets, one should try to obtain information about the other spouse’s blockchain wallet addresses and/or third-party cryptocurrency exchange accounts, as these are typically used to hold crypto.
While divulging a blockchain wallet address or public key before a divorce may simply affect one’s pseudonymity regarding that address, requiring parties to disclose their private keys during divorce proceedings may raise security concerns.
For example, a private key landing in the wrong hands would allow the holder to transfer assets out of such wallets. Once a party has disclosed their blockchain wallet address or public keys in proceedings, this is arguably sufficient to allow the receiving party to verify historical on-chain transaction information published on the blockchain ledger. Compelling disclosure of private keys would add nothing to the enquiry and be unnecessary for disposing fairly of the dispute. There may of course be “off-chain” transactions involving, for instance, a simple exchange of private keys, which would not be published on the blockchain ledger. Such transfers would warrant further investigations with the assistance of experts.
Cryptocurrency exchanges observing Know-Your-Customer (KYC) procedures are likely to maintain information and documents about the identity of their account holders. A divorcing party may apply for court orders requiring Singapore-based or Singapore-incorporated cryptocurrency exchanges to disclose documents and information about the other spouse’s account ownership and transaction details. There is an added layer of complexity in obtaining discovery orders against cryptocurrency exchanges which are incorporated and operate outside of Singapore, as foreign laws may come into play.
The versatility of crypto
Families fighting over digital assets should be aware that aside from using cash or credit cards to fund crypto purchases, the other spouse may carry out peer-to-peer transfers, or may transact with other forms of crypto as opposed to cash. Such peer-to-peer or crypto-for-crypto transactions may not show up in bank statements and looking at them alone may be insufficient for tracing and identification.
Further, peer-to-peer transfers may be carried out at an undervalue, signalling potential “off-book” arrangements.
A spouse may also have collateralised their crypto holdings using DeFi platforms in return for interest. Interest earned may be considered by the Family Court as part of the asset pool, or else, income or financial resources available to the spouse.
“Not your keys, not your coins”: Theft, loss and mistaken transfers of crypto
“Not your keys, not your coins,” goes the popular phrase around cryptocurrency ownership. Unlike lost ATM passwords and digital banking passwords which may be recovered, lost private keys or seed phrases are typically irrecoverable, and signal a loss of the asset. Such is the quandary of crypto’s unique and oft-lauded technological underpinnings.
In addition to the theft or loss of keys, the very real prospects of cryptocurrency exchanges or custodian service providers going bust may also cause one to lose access to crypto holdings. These spell trouble for the average retail investor, who may not have taken steps to protect their assets.
How does one tell if someone is speaking the truth or lying when asserting they have “lost” crypto due to lost or forgotten private keys or theft? How might one know whether the person alleging loss or theft has taken reasonable steps to safeguard their crypto? And indeed, what do reasonable steps to safeguard crypto entail? For instance, must a party take steps to transfer crypto to their cold or mobile wallet instead of leaving them in a cryptocurrency exchange account?
The price is (not) right: Navigating cryptocurrency valuation
The courts are no strangers to valuing volatile assets. Valuations are typically based on the open market price ascertained as at or as close as possible to the date of the ancillary hearing.
However, given that cryptocurrencies have generally been far more volatile than US equities on the S&P 500 index, it remains to be seen how the courts will deal with the valuation of cryptocurrency. For example, Bitcoin transacted at about S$22,000 in November 2022, and is now hovering just above S$38,000, representing a 73 per cent increase in a period of five months.
My gain is your loss, and your gain is my loss?
How should family law treat gains and losses in crypto investments?
If one spends and loses big on crypto despite their spouse’s objections, should the courts treat this as financial irresponsibility akin to habitual gambling and reduce his share of matrimonial assets? Or should it be treated as normal investment losses to be borne by the family?
There are two schools of thought.
First, it may be argued that the spouse has acted recklessly or negligently by “gambling” on crypto, and should therefore be responsible. One would point to repeated cautions by the Monetary Authority of Singapore that investing in cryptocurrencies is highly risky and unsuitable for retail investors.
Conversely, it may be argued that crypto losses are no different from other types of investment losses, and should be shared by both spouses – a spouse should not be penalised for mere misjudgment in investment decisions. Had the crypto investments yielded gains, the objecting spouse would seek a share of such gains.
A holistic approach when assessing cryptocurrency losses may involve looking at the amount spent and lost on crypto; the nature and risk profile of the crypto asset involved; the family’s assets, income and expenses; whether the other spouse knew about such investments, and if so, if there had been any objections.
Gazing into the future
How should crypto gains acquired by one spouse be treated if a couple split up? Should the Family Court apply the same treatment given to lottery winnings in divorce cases?
In a 2019 decision, the Singapore Court of Appeal decided that lottery winnings were matrimonial assets which should be divided. There was a presumption that both spouses made equal contributions unless the spouse who purchased the winning lottery ticket could show that the ticket was bought with a view to benefiting only themselves and not for the family to share in the windfall.
The division of digital assets, not just cryptocurrency, presents unique challenges for individuals in family disputes, their lawyers, as well as the courts. Despite these challenges, justice can still be served within our legal landscape.
The writers are from Drew & Napier. Hoon Shu Mei is a director and Alex Goh, associate director.
Copyright SPH Media. All rights reserved.
