Cryptocurrencies, Discovery and Financial Statements

One of a family lawyer’s main duties is to have their client’s back when it comes to financial consequences of marriage and separation, whether it’s a cohabitation agreement, a trial, or an application to vary support because of a change of circumstances. Reasonable precautions to probe and investigate the parties’ financial affairs, including investments and business activities, are almost always required. And sometimes proactive measures are needed to protect assets pending distribution by agreement or court order.

The law has evolved, both substantively and procedurally, to equip lawyers with a variety of tools to ensure honest financial disclosure—from simple financial statements and discovery procedure, to more coercive compliance levers like restraining orders, caveats, and threats of consequences for misrepresentation or deception. Most of the time family lawyers across the country do a good job canvassing financial circumstances. Mostly family lawyers ask the right questions. And most know when to call in the experts if the matter involves valuation of real estate, pensions, or businesses (quite common), or more rarely chattels, including art, collections and antiques. 

But do you know what you would do if you encountered the words “bitcoin” or “assorted cryptocurrencies” in the assets part of a financial statement? Or perhaps I should rephrase… do you know what you will do?

There is cause to question whether the checklists we rely on, the assumptions underlying the financial statements we use, and the compliance levers we know, are going to be enough in the days ahead. Because even if you have not encountered this new asset class yet, the chances are you will soon.

There is a tidal wave approaching, and I suspect that very few family lawyers are prepared for it. Recently, a couple of stories caught my attention. Both focus on the challenges UK law firms are facing over virtual currencies like bitcoin in divorce cases. Here is one from Fortune posted today. Here is another from Vice News from a little over a week ago.

The essential dilemma is that while the value and popularity of the cryptocurrency asset class has exploded, directions from the courts and within the legal profession on how to deal with virtual currencies is sorely lacking. The Vice News’ source states:

Depending on when investments were made, the value of these assets will have exploded in the last 12 months. The price of bitcoin, the most high-profile cryptocurrency, went from $1,000 at the beginning of 2017 to an all-time high of $20,000 in mid-December — before losing much of that gain in recent weeks.

According to Royds Withy King, one case they are dealing with involves an investment of £80,000 ($112,000) in November 2016. The company says that same investment was worth £1 million in December 2017, and is currently worth £600,000.

“This presents a real challenge when valuing cryptocurrencies. Valuations will have to be carried out a number of times during the divorce process as the case progresses,” Chitroda said.

The real world, not-at-all-funny question of how to do a valuation on such a volatile asset brings to mind a joke I read:

A boy asked his bitcoin-investing dad for 1 bitcoin for his birthday.

Dad: What? $15,554??? $14,354 is a lot of money! What do you need $16,782 for anyway?

The challenges are not limited to valuation. Discovering the existence of cryptocurrency assets held by a party is the first hurdle. But while tracing cryptocurrency assets at a forensic level can be a costly nightmare, one thing the legal profession needs to start turning its mind to is much more basic: the checklist of questions posed to a party on examination, or clarified upon review of a financial statement, should now start including basic questions about what cryptocurrencies that person owns or has owned, how many wallets they control, which exchanges they use or have used to purchase or trade cryptocurrencies, what ICOs they have participated in, whether they hold any exchange-issued vouchers that give them rights to access funds on exchanges, whether they have claimed tokens from hard forks, etc.

If you’re not convinced that this is a priority for your family law practice yet, let me lay out a few trends that are emerging: 

  • In an October 2017 survey conducted in the US by Harris Poll, over 2,000 adults were asked for their sentiment on bitcoin:
    • While only 5% of people age 65+ said they would prefer $1,000 worth of bitcoin over $1,000 in US government bonds, 43% of male millennials preferred bitcoin.
    • While only 4% of millennials owned or used to own bitcoin, 48% of all millennials agreed it is a positive innovation in financial technology.
    • 41% of male millennials were likely to buy bitcoin in the next 5 years.
    • 42% of all millennials agreed that most people will be using bitcoin in the next 10 years.
  • On top of that, consider that Coinbase, one of the easiest ways for North Americans, including Canadians, to buy into cryptocurrencies, “grew from a monthly unique user base of just 407,000 in January 2017 to a monthly unique user base of 4.3 million by December 2017 – more than a tenfold increase.”

Even if those Coinbase growth stats were from the peak of the crypto bubble FOMO, it would be foolhardy to think that those who flock to crytpocurrencies won’t someday be sitting in the chair across from you in an XFD.

You should expect that the millennials you will be dealing with tomorrow will have assets a lot different than what you’re used to dealing with in a family law matter. They will likely have shifted from traditional stocks and bonds, or even RRSPs, to a diverse bevvy of cryptocurrency options like bitcoin.

One last reflection on this topic, before I turn it over to whoever else wants to comment, is that we should watch out for the traps that our standard financial forms (at least in BC) could lead to. The Form F8 used in BC is not well suited to dealing with cryptocurrency assets:

  • It asks for the value of “other” assets to be stated in equivalent dollar values.
  • The forms are presumed to be good enough if completed within 28 days of a significant change of value.
  • Meanwhile price fluctuations in cryptocurrencies mean that a shrewd party could opportunistically state the price of their cryptocurrency holdings during a convenient dip, while the average value of the underlying assets could be many points, even 40%, higher.

– Find Nate Russell on Twitter


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