The Emergence of Cryptocurrency
The growing ubiquity of electronic communications over the past two decades has had a profound impact on the way we practice law. No longer are we sending letters to opposing counsel by mail or courier; rather, emails ping back and forth at lightning speed. More than just impacting the practice of law, however, the subject matter has changed enormously as a result of technological advancement. We are now confronted with another major leap forward in the way business is conducted and money changes hands as a result of an innovation that has flooded the media and public consciousness: decentralized cryptocurrency.
Blockchain cryptocurrency allows the anonymous transfer of money without oversight or control of a governing body. Cryptocurrency is decentralized, meaning that it is not regulated by a central authority like a traditional currency, and new units and transfers are recorded in a general ledger known as the “block chain”, which is stored in multiple computer systems. The blockchain can be viewed by anyone, but attributing transfers to any individual is difficult or impossible as transfers are identified by address (a series of letters or numbers) rather than by name. A person can have multiple addresses. Transfers of cryptocurrency can be made between individuals or through a cryptocurrency exchange. Some well-known cryptocurrency exchanges include Coinbase, Binance, Bittrex, Kaken, Bitfinex.
A remarkable feature of cryptocurrencies is that they can be “mined” from the system which is programmed to award new bitcoins to miners who solve highly complex math problems. Mining operations utilize computers to mine new units and receive deposits of cryptocurrency into accounts.
The Division of Crypto Assets in Family Law Proceedings
There is no question that cryptocurrency constitutes property which, if it meets the criteria for “family property” pursuant to s.85 of the Family Law Act, S.B.C., C. 25, would be subject to division upon marriage breakdown. Further, mining operations that result in the acquisition of new units could be quantified and included in a payor’s income for the purpose of calculating child and spousal support pursuant to the Federal Child Support Guidelines and the Spousal Support Advisory Guidelines.
Due to the anonymity afforded to cryptocurrency miners, and the fact that the record of transactions is decentralized, obtaining disclosure of cryptocurrency holdings and income-generating activities will prove to be a major challenge for family lawyers for the foreseeable future. In many cases the only way to show that the spouse has undisclosed cryptocurrency holdings will be to look for evidence such as a pattern of spending that exceeds disclosed income, and then ask the court to draw an adverse inference or to impute income to the payor. However, it is not uncommon for a payor to depress their spending until property division and support have been set by agreement or court order.
The valuation of cryptocurrencies also poses a substantial challenge. The exchange rate of cryptocurrencies is extremely volatile, making pinpointing the market value on any particular date a challenge. Values can change on an hourly basis. In British Columbia family law, the relevant date for valuing property for the purposes of property division is the date of the agreement or trial, pursuant to s.87 of the Family Law Act. One can imagine the difficulty of determining market value of a cryptocurrency where the value has changed several times in one day.
Cryptocurrency Earnings and Support Payments
An even greater difficulty arising from the volatile exchange rates is determining the quantum of income to be attributed to a payor who mines cryptocurrency or receives cryptocurrency as income. Without a stable exchange rate, how can the courts determine the quantum of income for the purpose of calculating child and spousal support? Section 17(1) of the Federal Child Support Guidelines provides that a court may determine a payor’s income that is “fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.” However, while the court has the legal authority to make a determination, how to go about it in practice will be quite a challenge for our courts.
As the legal world struggles to catch up, cryptocurrency will continue to pose challenges for many areas of law, including tax law and contract law. British Columbia family lawyers will be watching to see how the courts handle cases with cryptocurrency as their subject matter.