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  • Disclosure Of Cryptocurrency Assets In Divorce Financial Settlement Proceedings

    Disclosure Of Cryptocurrency Assets In Divorce Financial Settlement Proceedings

    Cryptocurrency assets may be in trouble in terms of increasing fraudulent activity and volatile market values but experts are firm – digital assets are not a fad and the market is continuing to grow. It is approaching a total capitalisation of $1 trillion and the number of people trading in cryptocurrencies is increasing year on year. For divorcing couples, especially those who are high-net-worth (HNW) disclosure of cryptocurrency assets is becoming increasingly commonplace. Therefore, when negotiating a financial settlement, you need to ensure your Divorce Solicitor is experienced in cryptocurrency assets.

    Cryptocurrency remains a mystery to many of our family law clients, therefore, in this article we deep dive into the various legal matters crypto assets can raise in divorce financial settlement proceedings.

    What is cryptocurrency?

    Cryptocurrency is a digital currency that can be used to purchase goods and services (the UK beauty retailer Lush takes crypto as a form of payment on its website). When Argentinian football superstar, Lionel Messi transferred to French club Paris Saint-Germain, he received part of his $30 million package in cryptocurrency. You can also invest in cryptocurrency assets in the form of purchasing the currency directly or investing in crypto funds and companies. Crypto assets can take different forms, for instance non-fungible tokens (NFTs) which can represent different property for instance digital art.

    Where is cryptocurrency kept?

    Cryptocurrencies are managed using blockchain technology which means they are outside of the central banking and financial system, albeit subject to anti money laundering laws. Therefore, no ‘currency’ actually exists. Instead, cryptographic keys are stored in ‘wallets’ which are managed by a centralised crypto exchange (CEX).

    This may sound confusing, however, it is no different than notes and coins which are worthless in themselves (as paper and metal) but have a value attached which can be used to purchase goods and services.

    Do cryptocurrency assets have to be disclosed in family law proceedings?

    Cryptocurrency is considered an asset in family law proceedings and therefore must be disclosed. The Courts have considerable powers at their disposal to seek disclosure and value cryptocurrency assets, although their volatile exchange rate can make this a challenging exercise.

    One of the attractions of dealing with cryptocurrency assets is that transactions can be made anonymously, or in the case of Bitcoin, the most well-known cryptocurrency, pseudonymously. This can lead to disputes where one spouse believes the other is hiding cryptocurrency assets in order to keep them out of the divorce financial settlement.

    Can cryptocurrency assets be traced?

    As there is no centralised ownership register for cryptocurrency assets a specialist forensic expert may need to be instructed to establish where such assets are held and their approximate value. In theory crypto assets are represented by an immutable record on blockchain, but given the number of cryptocurrencies that have been lost by hacking or just not been accounted for there is an argument to say not all blockchain systems are failsafe.

    If there is evidence that your spouse is engaging in cryptocurrency transactions in order to hide or dispose of the assets so they do not become part of the financial settlement, your Divorce Solicitor may be able to obtain a freezing order. Case law in recent years supports the principle that cryptocurrency is a form of property. This will prevent them from dealing with or disposing of their cryptocurrency assets for as long as the injunction is in place. The order can be extended to cover not only your spouse but also any CEX that may facilitate potential transactions.

    What if cryptocurrency assets cannot be traced?

    If it becomes clear that the assets cannot be found despite the best efforts of forensic experts, your Family Law Solicitor may be able to persuade the Court that the assets do in fact exist by providing evidence such as bank statements or tracked wallet transactions showing dealings in cryptocurrency. If your Solicitor’s argument is successful, the Family Court Judge, after considering all the factors under section 25 of the Matrimonial Causes Act 1973, may award you a larger share of the overall matrimonial assets ‘pot’ after taking into account the approximate value of the undisclosed cryptocurrency assets. Additionally, persuade the court that any financial settlement is not on a ‘clean break’ basis allowing the opportunity to recover further income or assets as evidence of crypto assets materialise.

    Concluding comments

    Although cryptocurrencies have technically been around since the 1980s (with Bitcoin coming into play in 2008) they are unregulated in most economies. This, along with the speed of crypto transactions, and the ability to trade anonymously with some currencies means that when it comes to tracing undisclosed cryptocurrency assets in family law proceedings, it is vital to instruct a Solicitor who has not only experience in dealing with this type of asset, but the necessary expert forensic contacts who can conduct effective traces.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect the law in place at the time of writing, 19 January 2023. This article does not constitute legal advice. For further information, please contact our London office.

  • Financial services and markets bill: How the UK might become a new Hub for crypto

    Financial services and markets bill: How the UK might become a new Hub for crypto

    Does The Financial Services and Markets Bill have the Crypto Factor?

    Regulation or innovation? One question on everyone’s lips is whether these terms are mutually exclusive in the world of cryptocurrency. At present, there is a backdrop of considerable uncertainty: war impacting the distribution of key commodities such as grain; UK recession; UK currency falling in value against the dollar; and a deteriorating standard of living. This pattern is reflected globally, with 45 countries facing inflation rates of over 15%.

    The crypto horizon looks particularly gloomy when one also considers the sudden and catastrophic crash of FTX last November. With an estimated $8 billion in losses, this episode undoubtedly gives crypto skeptics renewed ammunition for criticism. 

    Yet, the UK government is set on transforming Britain into ‘a global hub’ for crypto. Indeed, last July the Financial Services and Markets Act (FSMA) was introduced to Parliament. 

    The original Bill and its subsequent amendments are indicative of government attempts to chase the tails of this rapidly changing technology. It also largely mirrors progress taken on the continent, demonstrated by the EU’s Markets in Crypto Asset regulation.

    Financial Services and Markets Act: The Initial Changes

    The original version of the FSMA set out plans to recognise stablecoins as a valid form of payment, giving the Financial Conduct Authority (FCA) the power to regulate them. Those stablecoins capable of effecting payments, namely ‘digital settlement assets’, are to be brought within the Bank of England’s regularity perimeter. 

    The FSMA also clearly defines ‘digital settlement assets’ and gives HMT the power to amend this definition. This is of particular importance, as it ensures the legislation will keep pace with rapidly developing technology. 

    Further Developments

    Further amendments to the FSMA, made in November, will broaden the remit of the FCA’s powers if passed into law. Andrew Griffith explained that the changes ‘amends the Financial Services and Markets Act 2000 to clarify that the powers relating to financial promotion and regulated activities can be relied on to regulate crypto assets and activities relating to crypto assets.’ 

    At present, the FCA’s power extends to ensuring that cryptoasset firms are employing effective anti-money laundering (AML) and financial crime procedures. However, these changes mean that cryptoassets will be treated, and thus regulated, in a similar way to shares and other more traditional securities. 

    What does this mean for cryptoasset firms?

    This regulation would essentially lead to a ‘levelling-up’ for cryptoasset firms when it comes to their compliance obligations.

    As a result, firms that are offering services relating to cryptoassets will likely require FCA authorisation. This means that any firm operating crypto exchanges, supplying investment advice or custody services in relation to cryptoassets will need to be fully registered with the financial services regulator in order to operate legally in the UK. 

    Those firms who are already registered and subject to the FCA’s AML regime must go through a separate registration process. This is because full authorisation under the FSMA will potentially mean that firms will be subject to all rules laid out within the FCA Handbook, not just those under the AML regime. Notably, this could include the Financial Ombudsman Service rules on complaints. 

    The FCA’s new powers will enable a much broader regulation of cryptoasset firms, including restrictions on advertising and selling in the UK market. This is due to a move to append ‘including where an asset, right or interest is, or comprises or represents, a crypto asset’ to Section 21 of the Act.   This represents an extension to the financial promotions regime, as Section 21 prevents the advertisement and promotion of investment activities by unregulated firms. 

    Any firms violating these rules and engaging in fraudulent activities involving cryptoassets will be at risk of fines and/or other penalties at the behest of the FCA. 

    What does this mean for consumers?

    One of the FSMA’s overall objectives is to ensure greater protection for those engaging in crypto-related services and investments. Indeed, it will undoubtedly consign more power into the hands of the consumer.

    In order for crypto to flourish meaningfully, this legislative certainty is indisputably necessary. In 2022, the Financial Lives Survey indicated that around 3 million UK consumers have already invested in cryptoassets. The FSMA will ensure greater business certainty, attracting even more investment and creating more jobs in the sector. The Act has had its second reading in the House of Lords on 10th January, and is currently going through the Upper House’s committee stage, after which there will be the report stage and third reading before the Bill reverts to the Commons for further debate. Royal Assent is expected in spring/summer this year.

  • Crypto Fraud: High Court Provides Legal Solutions

    Crypto Fraud: High Court Provides Legal Solutions

    The Courts in England and Wales have long been renowned as stable, specialist institutions in which companies can litigate complex commercial matters. The recent cases of Jones v Persons Unknown [2022] EWHC 2543 (Comm) and LMN v Bitflyer Holdings Inc [2022] EWHC 2954 (Comm), illustrate that the Judiciary is alive to the need to provide legal remedies in crypto fraud cases, including in situations where the identity of the fraudsters are difficult or impossible to discover.

    What is crypto fraud?

    Crypto fraud is where criminals dishonestly trick people and/or companies into parting with their cryptocurrency and/or assets via fraudulent transactions. 

    Examples of crypto fraud include:

    • Gaining access to a crypto wallet through phishing, smishing, and vishing. The cryptocurrency is then transferred to the fraudster’s account via several transactions, making it difficult to trace the funds and fraudsters.
    • Using social media platforms to advertise high-return investment or mining opportunities and asking for payment in cryptocurrency.
    • Targeting people who have been previously scammed and offering to find the funds in return for payment in cryptocurrency. The funds and the service provider then disappear.

    Jones v Persons Unknown

    In Jones v Persons Unknown, the Claimant had been fraudulently convinced to transfer the equivalent of £1.54 million in Bitcoin to a fake crypto-investment platform. The stolen Bitcoins were tracked to a wallet associated with the company Huobi, a Seychelles-based cryptocurrency exchange. 

    The case of LMN v Bitflyer Holdings Inc saw hackers access and transfer millions of dollars of cryptocurrency from the Claimant’s computer systems. The cryptocurrency transfer was traced through 26 recipient exchange addresses. Investigations showed that these exchanges were all operated by one of the Defendants or companies belonging to the same group.

    How do the decisions in Jones v Persons Unknown and LMN v Bitflyer Holdings Inc benefit victims of crypto fraud?

    It is important to remember that cryptocurrency is almost completely unregulated in the UK and its legal status varies widely around the world. Furthermore, cryptocurrency cases involve technology that is constantly evolving, and the market is enormously volatile.

    The High Court in Jones v Persons Unknown provided several case law ‘firsts’ when handing down its decision, including:

    • Creating a constructive trust between the cryptocurrency exchange to which the stolen Bitcoin was traced and the victim of the alleged crypto fraud. Although in the case of Wang v Darby [2021] EWHC 3054 (Comm) the court indicated that digital assets could, in principle, be held on trust but on the facts the Court ruled against one.
    • Making an order against the perpetrators of the fraud and the cryptocurrency exchange for the delivery up of Bitcoin.
    • Delivering the summary judgment by NFT airdrop directly into a crypto-wallet.

    The decision to impose a constructive trust between the exchange and the Claimant followed the ruling in AA v Persons Unknown [2019] EWHC 3556 (Comm) where the Court held that crypto-assets are in fact “property” for relevant purposes. The Court followed Lord Wilberforce’s opinion in the House of Lords in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (HL) at 1247–1248, where he said: “Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.” 

    Following this AA decision, the well-established legal principle that a Claimant’s proprietary interest can be enforced by way of the imposition of a constructive trust in cases where property or money stolen or obtained by fraud is traceable in equity could be applied to litigation involving crypto assets. Many other common law jurisdictions have followed a similar approach although there are exceptions: The Court of Appeal of Singapore has expressly not decided whether cryptocurrencies are a type of property see Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 02. 

    In LMN v Bitflyer Holdings Inc the Claimant wanted the Court to allow it to have access to the Know Your Client data and other anti-money laundering information held by the 26 exchanges so it could resume its tracing of the misappropriated Bitcoin.

    The Court granted information orders against foreign cryptocurrency exchanges requiring:

    1. the supply of information and documentation to help identify those who hold accounts into which stolen cryptocurrency was allegedly transferred, and 
    2. where the misappropriated funds had ended up.

    These decisions assist victims of stolen cryptocurrency to trace the funds and, if a constructive trust can be established, be reimbursed by an exchange. These are incredibly powerful weapons in civil litigation involving crypto fraud as some cryptocurrencies such as Zcash and Monero provide anonymity for the sender, receiver, and holder of the funds. Bitcoin and Ether are pseudo-anonymous which is why an Information Order for disclosure of Know Your Client and anti-money laundering data is so powerful as it can reveal the identity of the people involved in the fraudulent transactions.

    What are the plans to regulate cryptocurrency in the UK?

    The Treasury is finalising plans to implement rules to regulate the crypto industry. These will include setting limits on foreign companies selling into the UK, provisions for how to deal with the collapse of companies, and restrictions on the advertising of products. The collapse of the cryptocurrency exchange FTX seems to have spurred Whitehall into urgency regarding this matter.

    The powers will be part of the Financial Services and Markets Bill, which at the time of writing is passing through the House of Lords.

    For victims of crypto fraud, the crucial step is to contact an experienced Solicitor who can advise on how to trace what has happened to the funds and apply to the Court for necessary Orders, Injunctions, and decisions to protect and restore the cryptocurrency to its rightful owner.

    Note: The points in this article reflect the law in place at the time of writing, 05 January 2023. This article does not constitute legal advice. For further information, please contact us.

    1. Since 2021 Ether transactions can be made anonymously – What is ether (ETH)? | ethereum.org