Cryptocurrency is one of the latest assets confounding even the most senior family law litigators. As crypto becomes more commonplace, the issue of valuing and dividing crypto assets will become more common in the context of family law. You don’t have to be an expert on cryptocurrency to know how to value or divide it.
Evidence of Cryptocurrency Assets
Crypto assets are nontangible digital coins/tokens that are stored in crypto wallets. There are 2 main types of wallets, secure online wallets or cold wallets.
Cold wallets are the most secure type of crypto wallet. They look like USBs or portable hard drives. To access the data, a private key (aka a password) is needed to decrypt it. Cold wallets are preferred as they have less risk of being hacked.
Since cryptocurrencies are decentralized, you do not have the same security or protections that you’ve come to expect from conventional banking institutions. If someone were to hack into your online wallet, gain access to your cold wallet, or if your private key was lost/stolen, the contents of your wallet would be lost and there is no one to call to help you recover it.
The substantial security risks with disclosing the details of a crypto wallet were discussed in MMD v JAH, 2019 ONSC 2208. The Court stated at para 141 that “…There is a greater risk of prejudice to the Respondent if he is required to produce [disclosure related to his cryptocurrency investments] in an unredacted form which could compromise the security of this substantial asset”. To mitigate the potential risks, the Court allowed the Respondent to serve partially redacted documents. There are few cases in Canada that speak to the issue of crypto assets, but it is likely that similar security measures will be made available to crypto investors to protect their assets when having to legally disclose same.
Valuation of Cryptocurrencies
Cryptocurrencies are volatile making it more difficult to value. Compared to traditional currencies like the Canadian Dollar, cryptocurrencies have a much smaller number investors. As a result, a group or individual holding a large amount of crypto coins could influence the value of a crypto coin if they were to sell. Just like tangible assets, even if the value of the crypto asset were to plummet you would still have the same number of coins/token in your online or cold wallet (i.e. if you held 100 Bitcoins and the value dropped to $0 overnight, you would still have those 100 Bitcoins – they would just be worthless). So, how do you value a crypto asset when its value bounces all over the place?
- Sell! Sell! Sell! – selling the asset is the most accurate way to value crypto. Once converted into a traditional currency, proceeds can be divided proportionately amongst the parties; or
- Specified date/time – the parties could agree or the Court could order that the value of the crypto asset be set as of a specific date/time; however, the potential risk remains and the asset could gain or lose value immediately thereafter.
Division of Cryptocurrency Assets
As provided in the above (a) and (b), division of crypto assets is relatively simplistic once there is an agreement on how the assets are to be valued. If sold, the sale proceeds can be divided amongst the parties. If the parties choose to set an exact date/time to value the crypto assets, the value of that asset can be calculated into the parties’ net worth and divided traditionally.
Looking for more family law information/tips like this? Check out our on-demand program: Family Property Problems for Paralegals (On-Demand).
Guest Author: Brittany Koenig | Presenter: Family Property Problems for Paralegals (On-Demand)
The information contained herein is general information only. It is not intended to be a substitute for legal advice. If you need legal advice, please contact a lawyer.