Caroline Park
Recent figures reveal that the average age for divorce in England and Wales is now 45 years old, which means that millennials are rapidly reaching this unwelcome milestone.
As a generation which has been defined by technological change and a disruption of norms, millennials’ lifestyles, and consequently their asset bases, often look very different from those of the generations who preceded them. In particular, digital assets are a phenomenon that the family courts are having to grapple with increasingly frequently.
Crypto is by now well-established – Bitcoin was established in 2009 – and there are now more than 21,000 cryptocurrencies. Despite the publicity around the collapse of crypto, the sector retains a dynamic global presence. As has been the case since crypto’s earliest days, investors in the space remain disproportionally represented by the younger generations.
As the wealth transfer continues from baby boomers to Generation X and on to millennials, this trend is likely to grow, and the busy London divorce courts will need to move with the times in dealing with this growing asset class. This is especially true as London remains a key destination for HNW and UHNW families, and crypto assets are statistically the preserve of the more affluent.
Despite the burgeoning prevalence of crypto, there are still no reported judgments in England and Wales dealing with crypto assets on divorce. This does not mean that divorce lawyers have not had to contend with the issue. Much of the discussion within the profession has focused on the challenges of tracing and identifying these assets and concerns about non-disclosure and the potential for hiding crypto holdings from view.
Recent volatility in the value of crypto and the so-called “crypto winter” has now brought other issues beyond disclosure into sharper focus. It is simple for the courts to say – as the Commercial Court has in a line of reported decisions - that crypto can be treated like any other property.
In the context of divorce, however, this stance belies some of the difficulties which arise principally in relation to (i) how to value such assets; and (ii) how to divide them between spouses on divorce.
Traditional valuation methods, which put a figure on assets at the point of financial disclosure and which then update these valuations ahead of trial, might suffice where assets are relatively stable, but crypto does not play by the same rules as listed securities, private equity interests or real estate.
Price volatility often means that, in the time between a divorce trial finishing and judgment being handed down, there is the potential for very significant changes in asset values.
As such, the established practice of Judges using a settled asset schedule, which summarises and quantifies all the family’s assets when determining how assets should be divided on divorce, is unfit for purpose in the face of such fluctuation. These valuation issues feed into the second major issue in divorce cases involving crypto: which party will keep the crypto on divorce?
Trying to offset value, where one party keeps the crypto and the other keeps an equivalent value of other assets, creates the potential for real unfairness. An alternative is for the court to order the sale of crypto and share the proceeds equally once liquidated and therefore crystallised. While this might feel fairer, such action has the potential to result in significant losses depending on movements in value.
Courts often end up falling back on a well-established principle in English divorce law known as Wells sharing, deriving from a 2002 case in which the Court of Appeal found that fairness in the division of assets on divorce might be achieved by a fair distribution of “the copper-bottomed assets and illiquid and risk-laden assets”.
Superficially, this approach of dividing the crypto equally and in specie so each party retains their own crypto portfolio sidesteps the issues of valuation but, especially in crypto cases, it is rarely popular with either side. Well-established methods for valuation and division are thus being strained by this newer type of digital asset.
The UK government has set out a goal of making this jurisdiction a global hub for digital assets and the Law Commission has been tasked with reporting later this year on reforms to the law on digital assets. There can be little doubt that divorce and family law is one area of the law that will need to deal with these developments, and our millennial clients will rightly demand the issues receive the proper attention and scrutiny they deserve.