How to trace digital assets in property relationship splits

Tracing property after a relationship split can be a difficult and complex process. When those assets include crypto currencies and other digital assets, as is increasingly the case, identifying, tracing, and valuing those assets can become the stuff of nightmares.

The courts have already concluded that digital assets are property, and relationship property at that. In 2020, in Ruscoe v Cryptopia our High Court determined that crypto is property within the s 2 definition of the Companies Act 1993. And in 2019, in Beck v Wilkerson Judge Laurence Ryan accepted that crypto was “obviously relationship property assets”.

But some cryptocurrencies called “private coins”, such as Monero and Verge, are designed to be very difficult to trace. A partner who knows what he or she is doing can make it nigh impossible for the funds to be found.

Ownership of digital assets such as cryptocurrencies is becoming increasingly common. Last year, a survey by the Financial Markets Authority found that 10% of New Zealand’s population held crypto.

The two big issues, says James Swarbrick, director at

Swarbricks Lawyers, are identifying/tracing the assets and then valuing them. “The identification and tracing is [usually] the most difficult part.”

Family lawyer Kesia Denhardt, a partner at Stace Hammond, says relationship split cases involving crypto are increasingly coming across her desk. “When I sit down with clients, it has become a permanent fixture in my tick-box list to ask if there is crypto.”

Swarbrick, who presents about this topic on the Ako Legal Platform, says the lack of understanding by clients and lawyers alike can be an issue.

The good news is that identifying and tracing crypto assets is more jigsaw puzzle in many cases than dark arts. Unlike the early days of cryptocurrencies, people tend to buy the assets with bank funds and credit cards, leaving a paper trail.

Most blockchains, the ledgers recording where the crypto is held, are entirely transparent and auditable, so long as clients and their lawyers have the right information such as exchange account statements or cryptocurrency addresses,

Continued on page 04

Continued from page 03 says Swarbrick.

In theory, crypto should become a side-plot in wider negotiations or proceedings in relationship property cases, Denhardt says.

That’s not to say that lawyers and their clients can always track down the crypto assets, especially where one party is oblivious to their existence or the other determined to hide them.

“While the issues of disclosure and valuation are not unique to digital assets, they can pose particular difficulty in this space, given its anonymous and unconventional nature, and volatile market,” she says.

Becoming more transparent

Crypto acquired in the early days after the invention of Bitcoin in 2008 was difficult to trace because it was mostly obtained by mining to create new coins, for which the miner is rewarded. Early peer-to-peer transactions were direct from one user to another, which enhanced crypto’s reputation as being secretive.

As usage increased, so too did third-party services and regulation. In particular, for relationship property, using bank funds to buy crypto became common.

Anti-money laundering and counter-terrorist financing (AML/CFT) laws have also made the job of family lawyers easier, says Swarbrick. “The majority of people who are using these assets will be coming through regulated exchanges, and there will be records of buying and selling via bank accounts,” he says.

Identity and disclosure

Unlike other forms of property, crypto purchases can easily go undetected in a relationship, says Denhardt. “One spouse could be purchasing crypto on their phone while sitting right next to the other, without their knowledge.

“It’s very easy then for the former partner or spouse to deny any existence [of crypto].” However, they may fold if a lawyer knows the right questions to ask. A lot of people assume that lawyers know very little or nothing about crypto and other digital assets.”

The first step is to find out whether there is crypto in existence, Denhardt says. “How much is held, how it is held and when was it acquired?”

Former spouses may deny its existence. “That’s a real issue particularly [for] women who are often kept out of the financial discussions. It’s yet another reason that both partners in a relationship should be aware of their finances.”

Denhardt always asks clients if the other partner suddenly has a new source of funds over and above a salary or has talked about crypto in happier times. If her client remembers his or her former partner being interested in crypto, her ears prick up. One shred of evidence may be all it needs to pull the crypto into the picture.

Bank statements can be good for that, with most purchases these days being made with credit cards or transfers into trading accounts. If the party has been honest with the Inland Revenue Department, then tax returns can help as well.

Once a small amount of evidence has been obtained, then targeted questions can be put to the other party, rather than the catch-all vague inquiry as to whether there are any other assets in existence not already identified, says Denhardt.

“Tailored questions serve a dual purpose,” she adds. “First and foremost, they plainly bring a lawyer closer to identifying any such assets. But second, they send a message to the other party that the lawyer knows what they are doing, which may mean they are less likely to make attempts to conceal.”

From there, discovery is one tool for identifying assets that one party might be seeking to hide.

Transparency

Former partners may, when they buy crypto, be seeking to benefit from the privacy and anonymity of the investment, Denhardt says.

The paradox there is that many crypto investments will be held on a mainstream crypto exchange, she says. Even if the investments are not linked directly to a name, all transactions on the blockchain are public and recorded, enabling the digital trail of data to be followed using tools designed for this purpose.

Forensics

In cases where there is no bank or IRD evidence, another option is to make a detailed search of the family home, looking for hard drives, or written strings of alpha-numeric characters or random strings of words, which might be private keys, a type of password. Other helpful information is login credentials for exchanges and transaction IDs. Being aware of crypto apps on the other party’s devices can also be helpful.

“If we can identify that someone’s bought, say, $1,000 [of crypto assets] from this exchange on this date, then you can request the account statements on the exchange, and you’ve got the addresses.

“If you give me an address, I can then plug that address into block explorers. That will tell you this address holds this amount, and it will show you all the transactions associated with that address. It’s all there in the open,” says Swarbrick. From there, a process can be followed. Several websites and tools allow people to follow the blockchain transactions. “With one or two pieces of information, you can triangulate things quite easily.

“You’ve just got to know what you’re looking at. I think it would be good for lawyers to learn a little bit around how to do that.”

It can be trickier but not impossible to identify and trace

Continued on page 05

Continued from page 04 assets held in “cold wallets” on off-line hard drives. That’s the Cayman Islands bank account or money-under-the-mattress equivalent of crypto, says Denhardt.

Cost/benefit

In situations where other avenues have borne no fruit, there are forensic tools as well as experts who can assist in a tracing exercise, Denhardt says. In that situation, clients need to consider the cost/benefit equation of tracking assets that may not exist or may not be found.

“Sometimes you’ll go down that path and spend huge sums of money, and there’s nothing there that they can find. Then you’ve spent more than you’ve gained,” she says.

“Where suspicions turn out to be unfounded, and either a small amount or no crypto is identified, a client may have already dipped into a reasonable proportion of the settlement they are set to receive.”

Valuation

Valuation is the other stumbling block with relationship property splits involving crypto assets such as currencies and NFTs [non-fungible tokens] which are assets akin to digital artworks. The volatility of crypto makes valuation a moving target.

Then it comes down to timing the settlement. The current state of the market may favour one partner over the other, says Swarbrick. Overseas, he says, there have been cases where judges have taken an average over a period to determine valuation.

At the easier end of the scale is Bitcoin and other frequently traded currencies, where prices are readily available. NFTs are more difficult because they may not be as liquid.

One option is to liquidate all the crypto assets at a certain date, says Denhardt. Or the assets can be split across two wallets, so both parties receive identical allocations. Otherwise, it’s a matter of deciding how and when the assets should be valued for division.

Anticipating divorce

Denhardt is sometimes approached by clients who are contemplating leaving a partner. She recommends they gather and collate any information they can get their hands on about digital assets their partner might hold.

That can be difficult. But looking for bank statements or hidden accounts can help, along with evidence of any crypto apps on their partner’s devices. ■