Jessica Rush: Divorces can take months, or even years, and this can be a real problem if the value of cryptocurrency is changing wildly
Jessica Rush is a solicitor at the Howard Kennedy law firm.
Crypto can be a minefield in a divorce, especially now its value has plummeted.
If you or your ex-spouse holds crypto, it can be a shock to see how far it has tumbled, especially if you did not know about, or agree to, family money being used to buy it in the first place.
There are some issues around crypto which have not been tested in the courts yet, but they are still subject to the same principles of divorce law as any other assets, so below we look at some pitfalls.
If your ex bought the crypto, should they suffer the loss after recent falls?
Cryptocurrencies are incredibly volatile. Depending on how much was bought, this might mean there is less to be divided on divorce following recent falls in value.
You might feel that your ex should bear that loss – but there’s a high threshold of ‘recklessness’ that has to be met for the courts to find that the money ‘wasted’ should be added back into the pot of assets available to be divided.
That said, when it comes to crypto there is no specific court ruling on this yet.
Of course, your ex-spouse might be willing to take their crypto because they believe it will do well in the future – presumably that is why they bought it in the first place.
In that case, they might want more than 50 percent of the on-paper value of the assets because they are taking on a greater risk.
Whether this is a good argument will depend on lots of factors, such as your needs and the other available assets.
Can you refuse to accept crypto held by your ex in a divorce settlement?
Many settlements are achieved outside the court arena, using alternative forms of dispute resolution.
It is up to you whether you want to make cryptocurrency a redline issue (you won’t take any of it), split the risks (you take half each), or seek a greater share of other assets as a sweetener for taking on the lion’s share of the risk.
If you are risk-averse, it may suit you to let your ex-spouse take on the riskier assets and for you to take more secure assets.
If you really cannot agree, you will have to go all the way to a final hearing where a court will decide for you, but this poses the problem of valuation.
Crypto can be a minefield in a divorce, especially now its value has plummeted
How is crypto valued in a divorce, and at what point is it set?
The value will most likely be set on the date of a final hearing, or if settlement is achieved through negotiation the date of the most recent round of updating disclosure.
There is a duty to provide ongoing updating disclosure throughout the process.
This is because any assets you are dividing are likely to fluctuate in value over time, and during a long divorce there may be several points where the parties reassess what is available.
Divorces can take months, or even years, and this can be a real problem if the value of cryptocurrency is changing wildly.
Imagine you own four bitcoins, and you started your divorce process on December 31, 2021 – they were worth £139,964 then, enough money to buy a property in some parts of the country.
You negotiate and reach an agreement with your ex-spouse on May 4, 2022, and you agree to take all of the cryptocurrency. At that point, four bitcoins were worth £125,975.
This agreement is sent to the court and becomes a final court order on May 13, 2022. Then the bitcoins would have been worth £95,335, just 68 percent of the value when you started the process.
Now, the value of that cryptocurrency may go back up, but if you need to cash out your investment to buy a new property after your divorce, you could be really stuck.
Here, the drop in value could make the difference between being able to buy a home outright after a divorce and needing a mortgage.
When negotiating, you need to think about the practical implications of your bitcoins’ fluctuating value.
What if your cryptocurrency wallet has been frozen, or even lost to fraud?
Again, the consequences will depend on the facts.
Assets which have been lost and cannot be recovered are not available to be divided on divorce but may be subject to an add-back claim, which means they are added back into the pot to be divided and go to the person who ‘lost’ them – again, it’s a high threshold for this claim to succeed.
It is very possible you would need to discount the lost crypto altogether.
If a wallet has been frozen but there is still a valuable asset to be recovered, then this is still an asset for the purposes of divorce, but if recovering that value is a long-shot then this is a risk that might need to be accounted for for in the final settlement.
A more important question might be whether you can verify whether the freeze or fraud has actually taken place.
In a divorce, both parties have a ‘duty of full and frank disclosure’, so you can seek evidence of this if you are not sure your ex-spouse is telling the truth.
What if you accepted crypto in your divorce settlement but now the value has plummeted?
It is possible for a court to set aside a divorce settlement, if new events occur shortly after it was made which invalidate the key assumptions of the order.
There is no set timescale for new events to be taken into account, as it is all arguable and depends on the circumstances.
Any events need to be ‘unforeseen and unforeseeable’. However, losing lots of value on your cryptocurrency may not be enough.
Currencies such as bitcoin have experienced big rises in value as well as big drops, so there’s a good chance a court would say that extreme fluctuations were foreseeable.
That’s not to say there is no chance of setting aside a financial settlement because the crypto market dropped or even completely failed, but it would be a high bar to clear and very fact-dependent.
Factors like the proximity to the final settlement, your ability to meet your basic needs like housing after the drop, the other assets available to you, or the allowances already made in the final settlement for the risk of crypto might all play a role.
However, you can vary maintenance to your ex-partner or children if the change in the cryptocurrency market has a significant impact on your finances.
What should you do if your divorce involves cryptocurrency?
If you or your ex-spouse have something complex like cryptocurrency to divide in your divorce you should look for advice from a lawyer with relevant expertise.
If you are unsure, before instructing a solicitor, you can always ask whether they have dealt with crypto before, and how the drop in value will affect their advice.