What unites Gene Simmons, the 2022 Kazakhstan unrest, and a meme of a Shiba Inu dog?
The answer is cryptocurrency – and perhaps more specifically, crypto volatility - although you would be forgiven if you just muttered …sorry, what? under your breath. For those not immersed in the crazy world of crypto, the technicalities of it, and the culture around it, can be baffling. However, with the financial world abuzz with the news of the latest fall in value for cryptocurrencies, family lawyers need to be alive to how this could affect their practice.
So, BTC, ETH, BNB: WTH? Cryptocurrencies present a potentially huge, and increasingly common, issue for family lawyers. However, we are largely in unchartered territory when a financial settlement involves a chunk of crypto.
How should crypto assets affect a financial settlement?
The concept of departure from a 50/50 split of assets in a divorce to reflect the greater risk or volatility of one party's assets is a familiar one. For example, one party might walk away with the family company, which comprises more than half of the matrimonial pot on the schedule of assets, and the other might get the family home with no other compensation for the lesser value. Although this would be an unequal division on paper, the value of a company is often tied to changeable variables and requires work to keep going, whereas real property tends to appreciate steadily over time. Thus, a departure from equality is sometimes justified.
However, cryptocurrencies are incredibly volatile investments. 1BTC (i.e., 1 bitcoin, the most popular cryptocurrency) peaked at £49,838 on 8 November 2021. As of 26 May 2022, its value was £22,994.81 and has mostly continued to fall throughout June. The fluctuation is massive, although it is still a large return for investors who invested in the low points of January 2019, when 1BTC could be bought for just under £3,000. For the lucky (or savvy) investor, the returns could be huge; for the unlucky, Bitcoin's recent plummet may have wiped out a significant portion of their net worth.
It is not for a family lawyer to be offering anything approaching financial advice. If a party's wealth is tied up in cryptocurrency, then it is for a financial adviser to be giving an opinion of whether to sell or hold. However, we cannot ignore that if one party is keeping the cryptocurrency portfolio, and the other is holding on to assets with a more stable fiat value, then there may be a significant difference in the risks with those assets.
Where one party (statistically the husband) has invested in crypto, it is probable that this is because they have formed their own views on the risk vs reward of their investments, and they may want to keep it. Therefore, the scenario in which family lawyers should be exercising more caution is one where a transfer of cryptocurrency is being relied on to meet a party's needs. For example, let's say the husband holds a portfolio of 4BTC (for the purposes of this illustration, I'm ignoring any tax liability to make the numbers straightforward). If the exchange of Forms E was on 31 December 2021 this would have been worth £139,964, according to Google Finance's calculator. However, if the FDR was listed for 4 May 2022, 4BTC was then worth £125,975. If the agreement is for the wife to have the bitcoin in order to meet her housing needs, this is already worth significantly less than the value on the Form E.
More alarmingly, by 13 May, that bitcoin was worth £95,335 – and any family lawyer will know that the only thing more volatile than the value of crypto is the timescale for the court to return a sealed order. By the time the wife has the order in hand and a decree absolute, the bitcoin which formed the basis of her housing fund is worth 68% of what it had been at the exchange of Forms E.
The obvious solution here is that when representing a party whose needs must be met from a pool that includes crypto, the drafting must produce a settlement linked to a fiat currency and make provision if any sale or transfer of crypto falls short of meeting those needs. Where a client will actually be walking away with an award comprised of cryptocurrency, family lawyers should be thinking carefully about the warnings they need to be giving. When in doubt, bring in the IFA!
Could cryptocurrency volatility be a Barder event?
Onto a stickier question: let's say our parties perfected their settlement on 8 November 2021, and the husband kept the 4BTC, which were on that day worth £199,352. The husband needed this to buy a house, but by 13 May he realised that he could not cash in the Bitcoin for what it had been worth in November. Can he appeal to set aside the settlement, on the basis this is a Barder event?
Under the case of Barder v Barder [1987] 2 FLR 480 a financial order can be challenged if new events have occurred which would invalidate the fundamental assumptions on which the order was made, generally within a fairly short period of time after the order. When considering cryptocurrency, we should draw a distinction between two possible scenarios, a tumble in value and a collapse of the market entirely.
The courts have previously considered whether a significant price fluctuation can be sufficient to revisit an award. The case of Cornick v Cornick (No.1) [1994] 5 WLUK 358 saw the value of the husband's shares increase fivefold shortly after the final order, meaning the wife's 51% award of the matrimonial pot represented only 20% shortly afterwards. The court refused to reopen the initial award, on the basis that the new event needed to be 'unforeseen and unforeseeable'. The result is that natural price fluctuation is not going to be sufficient to meet the bar for a Barder event, even if that fluctuation is dramatic. Bitcoin has experienced an enormous rise in value since its dip in 2019, and so its volatility should be well within the purview of any reasonably informed investor. The husband in our case is probably going to struggle to show this is a Barder event, although the courts may have more sympathy if he is left completely unable to rehouse himself.
But what if the current cryptocurrency 'meltdown' becomes full-on collapse, or if the family's assets are heavily invested in a coin that fails completely (as the stablecoin 'Luna' recently has)? Would that be 'unforeseeable'? Unless I'm to be credited with outlandish macroeconomic fantasies, the fact I'm asking the question suggests no; by the time divorce lawyers start speculating on potential consequences, the jig is probably up, foreseeability-wise.
There are certainly those who believe in crypto's staying power, however, and who do not think a collapse likely. Would the fact that a complete collapse of the crypto markets seems unlikely at the time of making the order make the subsequent wipe-out of any value in a family's crypto assets a Barder event?
Perhaps it would, although recent case law around the 2020 Covid pandemic suggests that it would be a very high bar to clear. The case of HW v WW [2021] 3 WLUK 692 held that the Covid-19 pandemic was outside the realm of normal market volatility and could be a Barder event, but on the facts, an experienced businessman who was aware of developing world events at the time of the order in March 2020 could not claim that the impact of the pandemic on his printer business was unforeseeable, even though the extent of that impact had not been foreseeable. A collapse of the crypto markets might have a similarly drastic effect on the wealth of anyone who has invested heavily in them – arguably more so, if there is little chance of later recovery – but any prospect of a successful appeal on Barder principles would be highly fact-dependent.
What Next?
A client who has found themselves at the sharp end of crypto-volatility may be better off considering whether they could seek a variation or set-aside on other grounds, rather than spend the time and costs testing the question of foreseeability in the courts, although this would, of course, depend on the individual case. Cryptocurrency has been hailed as a life-changing investment, but also derided in some quarters as little more than gambling. But whether crypto is here to stay, or the market crashes entirely, investment in cryptocurrency is worth billions and there will be plenty of families whose net worth will be affected by these assets of unprecedented volatility.
It will be an unenviable task for the lawyers who needs to explain the world of crypto to a court – a world of reddit-based finance, of ugly-monkey NFTs, of blockchains, of decentralized platforms and stablecoins. Still, if the lawyers at the Wagatha Christie trial can spend a day getting to grips with how Instagram stories work, then anything is possible.
Nothing in this article should be taken as financial advice. The opinions expressed by linked articles are for the reader's information only and do not necessarily reflect the opinion of the author or Howard Kennedy.
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