Virtual Assets and Divorce

by Winnie Chow and Jennifer White

What are ‘virtual assets’?

Virtual assets are a hot topic in today’s financial circles, with many people attempting to evaluate their use in modern society. However, many people are unaware as to how virtual assets work, and particularly, how they can be evaluated and divided in marital disputes.

Virtual assets are encrypted digital assets, with one of the more popular subsets being cryptocurrency, like Bitcoin. Cryptocurrency, therefore, does not exist in the real world and is, instead, purely virtual. Each individual’s crypto holdings are stored on what is known as a ‘blockchain’, a digital ledger that is used to record transactions across many different computers. ‘Blockchain technology’ allows users to make transparent peer-to-peer transactions. Crypto assets are exchanged on platforms where users trade real money for ownership of a ‘coin’ and the owner of a Bitcoin is given a ‘private key’. These transactions are secured through the algorithm within the blockchain. There are many synchronized records all showing exactly who owns what and exactly how much of each digital asset.

As blockchain stores information in digital format, the way in which information is recorded makes it almost impossible to hack, or change. Unlike the banking world, there is no ‘central figure’ or ‘authority’, so Bitcoin users are in control of sending and receiving money themselves. This allows for anonymous transactions to take place, and it is the notion of anonymity which appeals to many users.

A new way of investing

Over recent years, virtual assets have exploded in popularity and become somewhat of a global phenomenon, representing a seismic shift in the financial markets. What was once a hobby has now become a main investment method for many people and, whilst some only have small holdings, others are holding hundreds of millions of dollars in virtual assets. Virtual assets are ‘high risk, high reward’ and, as the value of cryptocurrency rises, for example, those who have invested in it have become extremely wealthy. However, these added layers of wealth can cause complications on divorce when it comes to division of assets. Equally, it can plummet, as seen in recent times, with some cryptocurrency shedding up to 70% of its value from its all time high in November 2021, which can cause great losses to a family’s capital. This may not be known to the other spouse, given the highly anonymous transactions and paperless trail.

Virtual assets in divorce

Virtual assets are like any other assets in a divorce. How they are treated and whether they should be shared between the spouses will depend on the factual matrix of each case. Given their extreme volatility, virtual assets can add certain complexities in the context of divorce proceedings. Despite having a quantifiable economic value, crypto assets, for example, may require frequent valuations owing to their propensity to suddenly crash or spike in value. They also may attach tax obligations if they are sold or split on divorce.

Hiding virtual assets

One of the first steps towards negotiating a marriage settlement is for each spouse to present a full and frank disclosure of their assets. What happens when one spouse is hiding virtual assets? Due to their very nature, crypto assets can very easily be hidden, especially when one party is familiar with the crypto market and the other party has little, or no, knowledge of such investments. This imbalance in knowledge can make it difficult for separating spouses to know specifically what to look for, and how to look for it, particularly when the other spouse has secretly invested in the crypto market.

However, as cryptocurrencies’ popularity has soared, it has also resulted in growing awareness so that divorcing spouses, and their lawyers, are becoming more astute when assessing a party’s financial disclosure, knowing what queries to ask, and when to get the forensic experts in.

What to look for?

As with trying to uncover any type of non-disclosure, the cost of uncovering potential hidden virtual assets can be substantial because forensic experts may be required. How much money one wants to spend on this type of exercise depends on how much money one thinks may be hidden, and the general quantum of the family pot and available resources to fund the exercise. Uncovering significant hidden assets can substantially impact a person’s financial future and it can be the difference between a modest and a generous final divorce settlement. However, because there is no centralized way to prove ownership of virtual assets, by design, they are tricky to identify.

Forensic experts may be required to scan bank statements, for example, for payments to cryptocurrency exchanges. They may also need access to electronic devices, such as laptops and iPads, to see whether any transactions correspond with possible investments in crypto. Experts will also be alert to certain log-in details and ‘wallet’ addresses that may signify crypto asset ownership.

How are virtual assets split on divorce?

Just like any other asset, virtual assets can be divided on divorce by splitting the account, transferring the asset to one spouse on an exchange, or by selling the asset and dividing the proceeds. Leaving it up to the Court to decide how the asset should be split can cause its own set of problems as the Court may not be used to dealing with virtual assets and determining ownership and value can be problematic. Of course, there is also the delay, given the congestion in our family courts.

This is where pre-nuptial agreements dealing with ownership of virtual assets can be useful. As crypto disputes are becoming more mainstream in the context of divorces, virtual assets are hot topics in pre-nuptial agreements. Anyone holding virtual investments is advised to seek legal advice as to how such assets can be protected and whether their virtual investments can be ringfenced on divorce. This avoids lawyers having to determine ownership and value, and a clear pre-nuptial agreement can define who owns the virtual assets, and how they are to be managed during the marriage and shared (or not) on divorce.

For more information on financial settlements in divorce, or pre-nuptial agreements in general, please contact the team at info@crb.com.hk.

This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with above.

CRB is a Family Law Firm practicing in areas of divorce, children, nuptial agreements, collaborative practice and mediation in Hong Kong.