Injunctions, Anton Piller Orders and New Money – Risks in Family Law Matters when dealing with the Blockchain

The legal industry has traditionally been reluctant to adopt change. However, the increased technical literacy of our clients demand that we familiarise ourselves with new forms of property including virtual assets and cryptocurrencies managed on the Blockchain.

Risks in Family Law Matters when dealing with the Blockchain

The Blockchain, at its heart, is a ledger that reliably stores and transfers data across the internet in real time without intermediaries. In our dealing with property settlements for parties holding cryptocurrencies or other virtual assets, we can encounter difficulties in determining whether such assets should be considered part of the asset pool for division and how they should be valued.

The exchange of cryptocurrencies on the Blockchain is much like exchanging cash. There is sometimes no personal information that immediately identifies the buyer or seller on the ledger and the user can remain anonymous. In addition, transfers on the Blockchain have no daily limit nor do they incur bank transaction fees. Further, the transfers are instantaneous and can be transferred from one legal jurisdiction to another jurisdiction somewhere else in the world seconds later. Unfortunately, these characteristics of cryptocurrencies can make them safe havens for unscrupulous spouses seeking to hide assets.

Cryptocurrencies bring the added problem of their value due to their volatile fluctuations in value. For family law purposes, this means that the value of any cryptocurrency held by a party is likely to change daily through the course of negotiations and proceedings. As with any other asset, the holder of cryptocurrency will be keen to have it valued at its lowest (or ignored altogether as though it were of no value at all) and the other party will wish for it to be valued at its highest. It may be necessary to seek advice from an appropriately qualified financial advisor on the advantages and disadvantages of seeking to retain, as part of their share of assets in a final settlement, another asset within the pool with more predictable value rather than seeking to retain a portion of the cryptocurrency itself which may have the potential to provide significant returns but also comes with significant risk.

What to look for

If you suspect that your former spouse owns cryptocurrency, consider looking out for the following:

1. Assets that have been acquired with no paper trail (which would indicate they may have been purchased using virtual currency);
2. An initial withdrawal from a traditional savings account to purchase cryptocurrency followed by a lack of recorded activity thereafter (to indicate that there may be a cryptocurrency holding);
3. Web search browser history that indicate frequent visits to websites that accept bitcoin or other virtual currencies as payments;
4. The names of services related to the use of cryptocurrencies appearing on bank statements;
5. The acceptance of virtual currency as payments for services and products on the other party’s business website; or
6. Massive spikes in power bills and expenditure on sophisticated IT equipment which seems unrelated to the ordinary course of business (mining cryptocurrencies on the Blockchain require significant computing power and consumes huge amounts of electricity).

What Legal Action to take?

When assisting clients who suspect that the other party may hold cryptocurrency, one route available is to request disclosure directly from the other party about their cryptocurrency and other virtual asset holdings. Because of the anonymity associated with transacting with cryptocurrencies, it is not difficult for an individual to go undetected if they choose not to report cryptocurrency related income or transactions. As such, the normal disclosure channels in family law proceedings such as seeking taxation returns and bank statements may not be indicative of a parties’ true income or asset position.

In the absence of full and frank disclosure a possible tool is the issuing of Subpoenas to third parties. Because cryptocurrencies operate outside the conventional banking system, there is no actual holder of the asset to issue a subpoena to. As such, a subpoena could be issued to companies providing cryptocurrency related services (such as Coinbase which facilitates cryptocurrency transactions between merchants and consumers) if it is suspected that the other party may be using that service. Alternatively, it may be appropriate to issue a subpoena to a business in which the other party has an interest if it is suspected that the business trades in cryptocurrencies.

However, seeking disclosure or issuing Subpoenas may alert and cause a party to move a virtual asset beyond reach. As such, it may be more appropriate in these circumstances to seek urgent freezing Orders (to preclude that party from transacting on the Blockchain from the date of filing) and seizing Orders (to seize the appropriate hardware and software require to determine the value of any cryptocurrency holding).

These Orders should be very carefully drafted and sought together with Orders appointing a cryptocurrency IT expert to:

1. Analyse bank statements to determine the point at which traditional asset was converted into a virtual asset;
2. Analyse other data such as a spouses email to determine what, if any, transactions have taken place;
3. Break into hardware that has been seized to determine whether there is evidence in the device of cryptocurrency dealings and where virtual currencies are or may be held;
4. Provide guidance to the Court as to how the spendable balances of wallets are calculated and where they can be spent; and/or
5. Obtain independent evidence to assist in the valuation of cryptocurrency holdings.

Simplifying Family Law using the Blockchain

The use of Blockchain could be revolutionary for all industries. From a family law perspective, the Blockchain has the capability to provide secure and transparent recordkeeping of assets. Over time, the digitation of asset holdings may mean that determining an individual’s asset wealth will be easier than ever before.

Another possible future use of Blockchain technology in family law is Smart Contracts. The Blockchain can store and run computer code wherein the terms of a contract are written into lines of code. This would enable the Blockchain to process the actual transaction itself. However, there are likely to be limitations on the use of Smart Contracts, not the least being the requirement for strict compliance with the Family Law Act. Marrying smart self executing contracts with the Common Law may prove troublesome.

To dismiss the Blockchain as a passing fad would be a mistake. Banks are currently heavily investing in Blockchain technology to keep pace with a technological development which is essentially attempting to undermine their business model and reason for existence. A minefield of new regulation by the Government regulators such as ASIC, APRA, the ATO and AUSTRAC is growing as the wealth developing within the virtual currency and Blockchain space grows at an enormous rate . The sooner we accept this new reality and the more we know about the direction in world commerce and human interaction, the more likely we are able to work within the new environment, provide the best service possible to our clients and work towards achieving just outcomes in property settlements.