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Digital assets in family law property settlements

Family & Relationship Law

The nature of property changes over time. When the Family Law Act was introduced in 1975, its drafters could never have contemplated that people would have owned assets in 2021 such as cryptocurrency, non-fungible tokens or other digital assets. Digital assets are becoming far more common in family law property settlements, and as family lawyers, we are very familiar with the nature of digital assets and how they are dealt with by the courts. As the name suggests, digital assets are those that are held digitally or electronically. They include documents or data that are stored on digital devices such as personal computers, tablets or data storage devices. As such, they are not tangible. They cannot be seen or touched, yet may be very valuable and are included in the asset pool available for division between parties in the event of a breakdown of their relationship.

Digital assets and currencies explained

When considering digital assets, digital currencies are often front of mind. Again, as the name suggests, digital currencies exist in electronic form. Wikipedia defines digital currencies as "a balance or a record stored in a distributed database on the internet, in an electronic computer database, within digital files or within a stored-value card." Unlike traditional currencies, they are stored in digital currency wallets as opposed to personal bank accounts. They are exchanged through the use of digital trading platforms.

The terms "digital currencies" and "cryptocurrencies" are not interchangeable; they are separate concepts. Digital currencies are centralised, meaning that the network is regulated in a centralised location, such as a bank. We all use digital currencies every day when we purchase goods online or use PayPal or Western Union. Cryptocurrencies are a form of digital currency that is secured by cryptography and decentralised, with the network regulations determined by the users. They are a specific sub-category of digital currency.

Cryptocurrencies use blockchain and a decentralised ledger, meaning that no one individual or supervisory agency controls the actions in the network. Unlike digital currencies, cryptocurrencies are completely transparent, however ownership of the asset can be anonymised. Although everyone is able to see any and all transactions made and received by any user, as all transactions are stored in the central public blockchain, the identity of the user may not be known, which may be problematic for parties to a family law litigation and require significant discovery skills on the part of their lawyers.

There are a number of cryptocurrencies in existence, however the most well-known and recognised is Bitcoin. Other less commonly known cryptocurrencies include Ethereum, Ripple and Litecoin. Bitcoin was invented in 2008 by an unknown person or group of people calling themselves Satoshi Nakamoto. It started in 2009 when the open-source software was released. Bitcoins are registered to bitcoin addresses in the blockchain. Creating a bitcoin address requires the user to pick a random private valid key linked to the relevant address. The only evidence of ownership is this private valid key; if the user loses this digital key, their bitcoins are lost and cannot be retrieved. Bitcoins (and other cryptocurrencies) are stored in a digital wallet along with the private valid key.

Bitcoin can be used to purchase goods and services in the same way as cash. Bitcoins can also be sent and traded to other bitcoin users.

Disclosure

The anonymity of bitcoin and other cryptocurrencies is a challenge for family lawyers. There is no doubt that cryptocurrencies are an asset that ought be included in the asset pool. In the absence of full and frank disclosure however, the discovery of one party's interest in cryptocurrencies presents a new challenge to family lawyers. Unlike bank accounts that are easily linked to the owner, the ownership of a cryptocurrency is not so evident. Bitcoin records cannot be subpoenaed, and records of ownership are usually stored digitally in a person's mobile or laptop device. Statements are not forwarded in the mail or likely to be stored in hard copy and easily accessed by the other party. Ownership of bitcoin can be traced through banking records and by looking for transactions related to the acquisition of cryptocurrency. All cryptocurrency is initially acquired through the use of traditional currency and can be traced that way, save and except if the party has been gifted cryptocurrency or paid in cryptocurrency for the provision of goods or services.

Documents that could be sought as part of the discovery process would include the following:

  • screenshots that show the current balance of each cryptocurrency in each digital wallet, exchange or cryptocurrency account
  • a ledger of all transactions for each wallet, exchange or cryptocurrency account
  • copies of bank statements and credit card statements that reflect transactions for each wallet, exchange or cryptocurrency account
  • copies of any brokerage account statements
  • list of any purchases of goods and/or services through the use of cryptocurrency.

Value

The other challenge for family lawyers is ascertaining the value of cryptocurrencies. Unlike the stock market and currency exchange markets, there is no one universally recognised entity that values cryptocurrencies. The three largest cryptocurrency exchanges, Coin Base, Kraken and Bitstamp, sometimes assign different values. The value of cryptocurrency is also volatile. For example, on 1 January 2021, the value of one bitcoin according to Coin Base was $38,200. By 10 January that had increased to $49,270. It is impossible to predict what the future value of bitcoin may be.

This extreme volatility poses problems when approaching a property settlement. What may have substantial value one day, may not the next – unlike shareholdings or a real property. Great care needs to be taken in approaching a property settlement where a significant asset held by the parties is in the form of cryptocurrency.

Non-fungible tokens

Another form of digital asset which has attracted much interest in recent times are non-fungible tokens (NFTs). NFTs are a unique form of digital asset. They can be anything from an artwork, to a photo, video or piece of music. Whereas copies of those artworks or photos can be shared, a non-fungible token gives ownership of that digital asset. As with cryptocurrency, a record of who owns what is stored on a shared ledger in blockchain. NFTs can also contain smart contracts that may give the artist, for example, a cut of any future sale of the token.

For instance, "Disaster Girl" is one of the most familiar memes of recent times - it is a picture of a little girl taken by her father in front of a burning building that formed the basis of countless memes. Very recently the girl in the photograph (now a young woman) sold the original copy of the photo as a NFT for half a million dollars. The owners of the popular YouTube video "Charlie Bit My Finger" have recently announced that they intend to auction the video as an NFT. NFTs are likely to grow in popularity as people use them to acquire unique artworks, photographs and the like.

The system of property settlement in Australia is flexible and broad to encompass classes of assets that not only exist as at the current date, but those that may not have been created or contemplated as yet. It will be fascinating to see what types of assets parties are holding in the near future.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

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