Digging for gold

Five years since its creation, bitcoin has apparently attracted about US$500m of investment five years since its creation. Not bad for a virtual currency with a starting value of nil, launched by someone (or a group), known only by the pseudonym Satoshi Nakamoto.

Unlike traditional currencies, bitcoins are not issued by a central bank or backed by any government, and there is no regulated monetary authority involved with all the rigour they demand. In its simplest form, bitcoin relies on the peer-to-peer networking of its users’ computers, who engage in a procedure known as mining (mathematically generating bitcoins).

We are told that ‘bitcoin’ is now harnessing its power and pushing into the financial mainstream with some forecasters predicting that it could one day replace traditional money and serve as a single global currency, thereby avoiding foreign exchange costs and bank charges.

Some see this as attractive as there are zero or minimal fees associated with the transfer. However, there is only a finite number of bitcoins that can be produced, which some believe is the reason why it is being hyped and likened to a rare diamond.

Seeing is believing

Part of the draw is that a transaction is much swifter than the traditional banking and third-party payer
methods. Taking this alongside the
fact that if your wealth is held in bitcoins, it can, in theory, be accessed anywhere in the world where there
is an internet connection.

For those specialising in financial remedy proceedings, questions such as whether the court has right of access to a spouse’s bitcoin wallet should come as little surprise. The complexity and obscurity means that it appeals to those with a more ulterior purpose in mind, namely shielding assets from due process.

Bitcoins have an air of invisibility. They facilitate anonymous and untraceable dealings as only the transactions are recorded whereas the identity of the party is encrypted. It also allows transfer of funds on a worldwide basis purportedly outside the courts’ reach therefore circumventing sanctions restricting dealings with particular individuals or jurisdictions.

Transactions can occur directly between the system’s participants at almost zero cost, without the need for a regulated or trusted third party or any other intermediary. They are irreversible once committed to a permanent and fully public record.

Full and frank

In financial proceedings during divorce, both parties are expected to give ‘full and frank’ financial disclosure, which relates to both facts and documents. This ongoing duty of disclosure extends until proceedings are concluded and applies to all family proceedings. It was even considered in Burns v Burns [2004] EWCA Civ 1258 to what extent this ‘duty of candour’ in financial remedy cases extended to a period after the order has been made.

The process of disclosure usually begins with an exchange of financial statements in form E. The second stage occurs with the preparation of one or more questionnaires.

In addition, the court may, on its own initiative or on an application by one party, order the other side to clarify any areas that are in dispute or where matters are unclear. Where this is still not good enough “the court may order ‘specific disclosure’, which is an order that a party must:

• disclose documents or classes of documents specified in the order;

• carry out a search to the extent stated in the order; or

• disclose any documents located as
  a result of that search.”

Although the financial statement may not specifically refer to the disclosure of bitcoins, or indeed the concept of a digital or virtual currency, the obligation to provide full and frank disclosure is nonetheless covered by statute.

Family lawyers may now be faced with considering specifically during the disclosure process whether there has been any digital banking service used, and applying measures to investigate virtual currencies during the disclosure process. There is no reason why such a disclosure order could not be obtained from the English courts.

Trail of bit-crumbs

Of course, the issue of one spouse being secretive and failing to disclose assets is not new, but the methods afforded to those in trying to do so are evolving. While each party signs a statement of truth confirming that the disclosure made is true, if one party is prepared to hide assets, they are unlikely to worry about the promise to the court. Bitcoins may provide such an individual with
the strategy to turn this temptation
into reality.

Following a paper trail would be the first port of call. Converting assets into bitcoins may leave a trail of crumbs including transfers from bank accounts. However, once made, the trail often turns cold as it is usually impossible to prove the bitcoin ownership. So, it is probable that detailed analysis of bank statements will be necessary when
faced with a potential bitcoin investor in matrimonial proceedings.

Where business assets are involved, matters become increasingly more difficult, especially when trying to demonstrate that the business was paid in bitcoins without any invoice. Crafty investigations must ensue, such as seeking to establish whether the business allows for the purchase of
their goods and services using bitcoins.

When faced with a deceptive spouse, the result is often an application under the Matrimonial Causes Act 1973 section 37. For the court to make an order, it has to be “satisfied that the other party to the proceedings is, with the intention of defeating the claim for financial relief, about to make any disposition or to transfer out of the jurisdiction or otherwise deal with any property, make such order as it thinks
fit for restraining the other party from so doing or otherwise for protecting
the claim”.

Safeguarding freezing orders

In UL v BK [2013] EWHC 1735 (Fam), Mostyn J took the opportunity to summarise the key principles and safeguards in relation to freezing orders, namely that: “[51] (iii)...the applicant must show, by reference to clear evidence, an unjustified dealing with assets (which would include threats) by the respondent giving rise to the conclusion that there is a solid risk of dissipation of assets to
the applicant’s prejudice.

“Such an unjustified dealing will normally give rise to the inference that it is done with the intention to defeat the applicant’s claim...(iv) The evidence in support of the application must depose to clear facts. The sources of information and belief must be clearly set out.”

Where there has been a finding or findings of fact that there was material non-disclosure during the original process, the following point has been reasserted in Gohil v Gohil (no.2) [2014] EWCA Civ 274: “[81] Within any Livesey v Jenkins evaluation, as Ormrod LJ in Robinson v Robinson [1982] 1 WLR 786 makes plain, ‘the power to set aside arises when there has been fraud, mistake, or material non-disclosure as to the facts at the time the order was made’. The task of the court therefore is to determine whether there has been material non-disclosure.

“There will usually be, again as Ormrod LJ spells out, ‘issues of fact
to be determined before the power to set aside can be exercised’. A judge conducting an application to set aside
an order for material non-disclosure must therefore, in the absence of admitted non-disclosure, conduct a
fact-finding exercise and make a finding of material non-disclosure, Until such a finding has been made, any power to set the original order aside does not arise.

“[82] It is trite to state that any finding of fact as to material non-disclosure must be based upon the usual requirements for the evaluation of admissible evidence within the parameters established by the burden and standard of proof and the requirements of a fair trial.”

So, the mechanism to bring those spouses tempted to trust their fate and assets into the virtual currency world to deprive their spouse of their marital entitlement is not out of the reaches and ramifications of the court.

As with all attempts to hide assets, craftiness in one’s investigative ability is key. Therefore, it remains to be seen whether the virtuality of bitcoins means such attempts to trace the assets will result in a dead end.

Mei-Ling McNab is a partner in the family team at Brachers