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Cutting Through Complexity

Cryptocurrencies in Financial Cases

28th February 2018

Haroop Ahluwalia, Solicitor in our Family team looks at the cryptocurrency excitement and how it could impact proceedings.

The end of 2017 saw an explosion in popularity and circulation of cryptocurrencies. Whatever your take on them, it’s clear that bitcoin, ethereum, litecoin and others are now valuable commodities in their own right. What is less clear is exactly how they would fit into existing practices in financial remedy proceedings.

For those who decided the news in 2017 was simply too depressing to watch or read, so missed the numerous pieces on cryptocurrencies, here is a little rundown of what they are. They are digital or virtual currency designed to work as a medium of exchange. They use technology known as cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. So, essentially they are a new, digital, form of money.

Governments and large banks have been somewhat reticent to jump on the cryptocurrency bandwagon, citing concerns about transparency and control, so we are still someway away from the stage where they are a universally accepted form of currency. However this hasn’t stopped investors, both institutional and individual, from speculating on the price of various cryptocurrencies, creating a new sort of commodities market.

So, theoretically, holdings in bitcoin or similar coins shouldn’t pose too much of a problem in financial remedy cases. They have a pound sterling value quoted on various exchanges, and while the price fluctuates wildly, this is in essence no difference from fluctuations seen with stocks and shares.

Of course things are rarely this simple, and issues will arise in cases of non-disclosure. The first question would be how to identify that a cryptocurrency purchase has been made. It’s essential to remember that if someone has purchased a cryptocurrency, the transaction will have had to originate from a standard bank account.

For example, one might visit a cryptocurrency exchange (Cex.io and Coinbase are two of the more popular ones) open an account with them, deposit pounds in the account and then use this to purchase, for example, bitcoins. So, the initial transfer will show up on the purchaser’s bank statement, which will indicate that they have at least intended to purchase cryptocurrencies recently, and enquiries can be made from there.

An analysis of bank statements will however not be useful when the initial purchase was made many years in the past (bitcoin started in 2009) or the holder of the coin has “mined” them (think of mining as the digital process of printing notes). This is when things start to get a little tricky, as the whole point of, and some say the problem with, cryptocurrencies are that the transactions aren’t tied to a user’s identity. However, all transactions are recorded on a public ledger (known as the blockchain) so theoretically someone’s identity could be gleaned from an in-depth analysis of this ledger. The operative word here is theoretically, because this analysis will no doubt be time consuming, costly and potentially fruitless. So before an analysis is undertaken, one should really be fairly confident that something substantive is going to be revealed.

Interestingly, in November last year the US Inland Revenue Service secured a victory of sorts against a cryptocurrency exchange (the aforementioned Coinbase). This ruling required Coinbase to hand over certain details of account holders who had bought, sold, sent or received the equivalent of $20,000 in one year, between the years 2013 and 2015. So as cryptocurrencies, and the exchanges where they can be bought and sold, become more mainstream, one would also expect them to more readily brought under the powers of the courts. For now though, it is very much a case of staying alive to any changes or developments in the nascent world of crytopcurrencies, which could have a potentially significant impact on the outcome of a financial remedy case.

The contents of this update are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this update. © Mundays LLP 2018.

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