Digital assets and divorce - preparing for the future

Developing awareness and understanding of the multitude of ways in which families hold their wealth is an essential part of being a family lawyer. As wealth profiles evolve, so do our strategies for dealing with them in the context of divorce, with digital assets being one of the most fast-moving new areas of interest in recent years. 

'Digital asset' is a term which may cover a wide array of resources – including cryptocurrency, NFTS, permissioned blockchain systems, voluntary carbon credits, in-game digital assets, digital files and potentially social media accounts (which for some is a valuable source of income/benefit). In the context of dividing up the family finances on divorce there are various stages to go through: identifying the assets the family owns or has an interest in; establishing their value; determining (either by agreement or court order) how they should be divided; and finally (in some cases) understanding how to enforce a court order against those assets. The approach to digital assets is no different, but their unique characteristics can require specialised treatment at each stage. 

Sometimes, during proceedings, it may be necessary to try to freeze assets to prevent dissipation in advance of a determination, and in those circumstances, preparation is essential – as is a good understanding of the implications of a freezing order to avoid unnecessary losses. The market volatility of digital assets means that thwarting the ability to cash-out could have significant consequences. 

When it comes to identifying any assets, there is a duty to provide full and frank financial disclosure as part of the financial process on divorce. Where there are concerns that there may be additional undisclosed digital assets, we are experienced in forensically scrutinising the information we have, investigating and asking the right questions to obtain more information, working through publicly available ledgers or crypto exchanges, from whom we may be able to obtain third party disclosure, and instructing experts in the digital field to investigate any areas of concern. Forensic analysts use the latest software tools and are expert at scouring data, identifying patterns in transactions, and retrieving information that is publicly available but which is impenetrable to most.

Family courts have investigatory powers and are experienced in their search for family assets. In the absence of disclosure, judges can and do make robust findings as to what is likely to be available. The law is clear: a person should not be in a better position as a result of refusing to provide the information. As Lord Sumption said: 'judges exercising family jurisdiction are entitled to draw on their experience and to take notice of the inherent probabilities when deciding what an uncommunicative [spouse] is likely to be concealing'.

When negotiating, or asking a Court to determine, how to share digital assets, it's important to consider any restrictions in cashing out or transferring those assets. What is their risk profile? Is that going to be shared, or are you looking at cashing out the other spouse's claims, leaving one spouse with the digital assets while the other receives other assets? If so, is a £ for £ analysis appropriate, or should a discount apply? These are all questions to have in mind when formulating strategy and settlement options.  

In any financial case, we must always think about potential enforcement issues (in the event an agreement isn't adhered to, or an order not complied with) and because digital assets are a different category of property, some enforcement options are not available e.g., third party debt orders are not available for cryptocurrencies (not being money) and neither are charging orders unless the crypto-tokens were in some trust-based custodial intermediated holding arrangement. 

Save for those restrictions, dealing with digital assets is very similar to any assets on divorce. The Law Commission's Report on digital assets had only relatively minimal recommendations for law reform in the area, finding that our common law (determined by judges rather than legislation) has been sufficiently fluid and flexible to react and respond to changes in types of assets. However, it recommended that, to the extent that common law reform development is not realistic, then targeted statutory law reform should be introduced. The Law Commission also recommended a panel of industry-specific technical experts to provide non-binding guidance on the complex and evolving factual and legal issues relating to control involving certain digital assets.

The final recommendation certainly rang true for us – we have found debating the issues with other professionals and sharing knowledge to be invaluable and have recently worked with others to deliver seminars on the topic:  Kate Landells, together with lawyers from Switzerland, Malta and Geneva, spoke to the International Academy of Family Lawyers; and I (Alex) joined forces with peers at Brewin Dolphin, Payne Hicks Beach and Grant Thornton to discuss the digital implications on divorce for TL4 – sharing ideas with experts in asset recovery and investment. Since then, the first reading of the Property (Digital Assets) Bill took place on 11 September, and the second reading is due to take place on 6 November 2024. This short Bill seeks to ensure digital assets are included within the definition of property by confirming that 'a thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither— (a) a thing in possession, nor (b) a thing in action' and, according to Justice Minister Heidi Alexander’s will mean that the technology sector 'can maintain its position as a global leader in crypto assets and bring clarity to complex property cases.'

The Law Commission also recommended a panel of industry-specific technical experts to provide non-binding guidance on the complex and evolving factual and legal issues relating to control involving certain digital assets.

Encountering new types of assets and new ways of creating or holding wealth, is all part of what keeps family law interesting. Staying connected, and sharing knowledge and experience with others, ensures we are at the forefront of not just legal but financial developments and their practical implications for our clients.