Cryptocurrency and Divorce – Dividing Digital Currency
Jan 25, 2023
Lawyers specializing in family law are increasingly handling cases involving cryptocurrency. Cryptocurrency was once a specialized asset that a few people dabbled with, but it’s estimated that around 13% of Canadians now own Bitcoin. And that’s just one of the many available currency options.
Two landmark legal cases were decided in Ontario courts in the past two years which shed light on cryptocurrency in divorce cases.
What is Cryptocurrency?
By now, most people have heard of cryptocurrency, even if they have never purchased any themselves. Cryptocurrency is a “digital” or “virtual” currency. Unlike standard currency like the Canadian dollar, cryptocurrency is not typically issued by a central governing authority. In addition, it does not exist in any physical manner. Instead, cryptocurrency lives on decentralized networks and is stored in digital wallets.
Some of the most exchanged cryptocurrencies in Canada are Bitcoin, Ethereum, Binance Coin, and Solana.
Many people purchase cryptocurrency either to diversify their money holdings, or an investment. Some advantages of cryptocurrency are that it is easy to use for online transactions, and provides a higher level of anonymity for users.
As an investment, cryptocurrencies can be volatile, gaining and losing value rapidly as users buy and sell their stake in the currency.
In the eyes of the law, it is uncertain whether cryptocurrency should be treated as a commodity (a product that is bought and sold), a security or investment (like a stock or bond), a digital asset (like a file on a computer), or currency (like money in your wallet). This means lawyers specializing in family law need to closely monitor the case law to help provide expert counsel to their clients on this emerging issue.
Two landmark legal cases were decided in Ontario courts in the past two years which shed light on cryptocurrency in divorce cases.
How is Cryptocurrency Divided After a Divorce?
Most people understand that when a married couple divorces, their property is split up between the two parties. And while it seems like it’s a 50/50 split, lawyers specializing in family law know that the rules around property division are not quite that simple…or fair.
When a married couple separates, one of the first things they must do is equalize the value of their property. This means adding up their total property acquired during their marriage and subtracting their debts (such as credit card debt, mortgages and car loans).
The value of property purchased during the marriage is divided between the two parties. For property owned by one spouse prior to marriage, only the increase in property value is shared.
When dividing up some property like a home, the assets are valued as of the date of separation. If cryptocurrency is treated like this, and the value is greatly increased or decreased after separation, it could leave one partner feeling like they got an unfair deal.
Cryptocurrency is Property
Many cases heard in courts recently have clearly considered cryptocurrency as family property to be divided like any other asset. These include Kostrinsky v Nasri, 2022 ONSC 2926 and M.M.D. v J.A.H., 2019 ONSC 2208 any many others where cryptocurrency is clearly included as part of equalization payments.
However in both cases, the value of assets was a critical part of the dispute.
Value of Cryptocurrency to be Divided
In M.M.D. v J.A.H. the respondent disclosed a value for the cryptocurrency, but would only provide redacted documents showing value. The reason? Providing full disclosure may open the asset up to be stolen. In the decision, the judge cited a greater risk to the respondent should unredacted documents be required, than value to the applicant to receive the unredacted documents.
In Kostrinsky v Nasri, the applicant claimed that the respondent was hiding cryptocurrency that had been purchased using her credit card. Using the data from her credit card transactions, the applicant provided a probable current value of the cryptocurrency that had been purchased. The respondent admitted to purchasing the cryptocurrency, but disputed the valuation.
The respondent did not provide any evidence to back his claim, so the applicant’s valuation of the cryptocurrency asset was accepted by the court.
Cryptocurrency and Anonymity
As previously noted, many users prize cryptocurrency because of the anonymity of the transactions. While transactions made with cryptocurrency are completely public and can be seen on the “blockchain”, the users behind the transactions are hidden.
So cryptocurrency anonymity is a two-sided coin – both public and private. And institutions are getting better at tracing cryptocurrency purchases and exchanges, meaning that anonymity may not be a given. That being said, the perceived anonymity of cryptocurrency made it attractive to people wishing to hide their money from authorities or their spouses.
Kostrinsky v. Nasri shows how cryptocurrency purchases can be traced via credit cards and other banking records, and alternative methods of calculating the value can be accepted by the court.
The Value of Cryptocurrency Should be Openly Disclosed During a Separation
While the treatment of cryptocurrency in the law is still being fully explored, the implications are clear: cryptocurrency is property that must be disclosed and divided during a divorce.
Despite the anonymity of cryptocurrency transactions, there is a paper trail – and increasingly a digital trail – that can be followed. The purchase of cryptocurrency can be tracked through credit card and bank records. Purchases made with cryptocurrency may not be as anonymous as initially believed.
The best advice from lawyers specializing in family law is to be honest and transparent when disclosing all your property.
Kelly D. Jordan Family Law Firm: Lawyers Specializing in Family Law
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