We are seeing an increase in matters featuring “digital assets” in family law. The most prominent of those is cryptocurrency.
What is cryptocurrency?
Cryptocurrency is a form of digital currency, i.e. digital money. There are two defining features of cryptocurrency:
- Cryptocurrency utilises blockchain technology. Each “block” is a digital ledger containing information such as the timestamp and transaction data created when the block was published. These blocks are then chained together, and each new addition to the change reinforces the legitimacy of the ledger.
- Cryptocurrency is a decentralized form of currency, in that no one entity controls the creation or dissemination of the currency. For example, if you wanted to transfer money to pay a bill or to a friend, this would ordinarily go through the bank. A transfer of cryptocurrency can be done directly. Further, as our Reserve Bank controls the way Australia currency is disseminated, with an eye on inflation and interest rates, cryptocurrency is ”mined” and is a finite resource.
How is it stored?
Cryptocurrencies, much like their physical counterparts, are stored in “wallets”. Each type of cryptocurrency will have its own wallet. There are two types of wallets: hot and cold.
Hot wallets are connected to the internet and therefore easily accessible. This gives rise to increased risk of hacking.
Cold wallets are not connected to the internet and are storage devices similar to a USB. These are generally more secure.
Discovery – gathering information about cryptocurrency assets
While cryptocurrency might seem hard to pin down, it’s worthwhile remembering that most people buy into cryptocurrency using an ordinary electronic transfer. For this reason, if a party is not forthcoming in providing disclosure covering their cryptocurrency holdings, it’s a good idea to request their bank statements and scan these for the names of any Australian exchanges.
Once you’ve got the documents relating to the party’s accounts on a cryptocurrency exchange, it’s a worth requesting the “wallet address” for each wallet held. This information will allow you to see the transaction history for each wallet on the public blockchain.
Cryptocurrency as part of a family law property settlement
Cryptocurrencies are often volatile, so it’s important to obtain current valuation data. Real-time values can be easily translated into Australian dollar values using tools online such as coinmarketcap.com
Cryptocurrency is an investment like any other and selling cryptocurrency triggers a Capital Gains Tax event.
Both the volatility and the potentiality for a CGT liability should be taken into account when structuring the division of assets in a matter featuring cryptocurrency holdings.