Preparing your Practice for the Crypto Revolution: What Every Family Lawyer Should Know

cryptocurrency what every family lawyer needs to know toronto

In the coming years, family lawyers will need to acquaint themselves with the basics of Bitcoin and other cryptocurrencies. Cryptocurrencies are revolutionizing the way we exchange currency, challenging our conception of what it means to “own” money, and forcing us to re-examine the role financial institutions and central authorities will play in our systems of commerce.

Treating cryptocurrencies as some sort of a passing fad feels like an ill-advised rejection of the future.  Some have likened the advent of cryptocurrency in the 21st century to the introduction of paper currency in the 11th century. As such, family lawyers need to be aware of the growing role cryptocurrencies will play in the personal finances of the Canadian public in the coming decade.

The culture of cryptocurrency is in direct conflict with the foundational principles of family law.  Cryptocurrencies are designed to evade government oversight and obviate the need for financial intermediaries. Anarchists, political dissidents and criminals were some of the earliest adopters of cryptocurrency because it offers the kind of anonymity and privacy traditional banking systems cannot provide.

While the statutory schemes governing family-law are built around traditional systems of finance, there is still plenty a competent family lawyer can do to protect their client’s interests in the age of cryptocurrency.

Here’s a primer on what all family lawyers should know:

Why should family lawyers care about this?

Family lawyers need to become familiar with cryptocurrencies because real money is at stake.  According to the Financial Post, a single Bitcoin, worth nothing eight years ago, is going for over $15,000 CAD as of February 20, 2018.  Even though opinions vary on the viability of Bitcoin as a long-term investment, cryptocurrencies are emerging as a legitimate alternative to fiat currencies. There are hundreds, if not thousands, of digital currencies in “circulation,” some of which are fetching serious money on the open market.  A failure to account for this asset could cost a client a significant amount of money.

What distinguishes cryptocurrency from other financial assets?  

The “Blockchain” concept forms the structural backbone of Bitcoin and many other cryptocurrencies.  A Blockchain is a digitized, decentralized public ledger of all cryptocurrency transactions in a peer-to-peer network. A series of chronologically ordered transactions form a “Block” which is subsequently added to a growing “Chain”. Rather than relying on a central government to print currency, and/or a bank to facilitate transactions, the process of adding “Blocks” to a “Chain” serves to authenticate and verify transactions by creating a record that cannot be changed.

Unlike bank and investment accounts, cryptocurrency holdings are not in anyone’s name. Rather, cryptocurrency is exchanged between cryptographically generated addresses that contain no identifying information about the individual(s) in control of these addresses. Users exercise control over cryptocurrency found on the public ledger through their access to a private key associated with a specific address.

The address found on the public ledger will start with the number ‘1’ and resemble something like this: 1F1tAaz5x1HUXrCNLbtMDqcw6o5GNn4xqX

A private key will always start with the number ‘5’ and will resemble something like this:  5E1tAaz6x1HUXcCNLbtMDqcw6o5GNn4xqX

What should a family lawyer look and ask for?

 Family lawyers must get into the habit of incorporating cryptocurrency into their requests for financial disclosure.   All family lawyers should strive to have the opposing side disclose the public addresses under their control. Once the public address is known, the process for adding this asset to party’s Net Family Property is straight forward. All a family lawyer would have to do is access the public ledger online and convert the information into Canadian dollars. Determining the values on the date of marriage and date of separation will not be complicated because there will usually be, much like a stock quote, a historical record for the cryptocurrency in question.

Here is a screenshot of a tool a lawyer can use to get a record of transactions and updated balances for each address on the public ledger:

Figure 1: The address searched above was 1F1tAaz5x1HUXrCNLbtMDqcw6o5GNn4xqx and the balance as of February 20, 2018 at 09:25: 46 is 18.05539813 Bitcoins. Tools such as BitRef are invaluable to family lawyers because they allow them to track the balance on specific dates (for example, date of separation and date of marriage). Moreover, the record of transactions may provide insight into whether a party is receiving cryptocurrency as a form of payment, information that will help a court make determinations about a party’s income for the purposes of calculating child support and spousal support.

Secondly, many users store their digital currency in what is known as a “Wallet”. Rather than keep a record of every private key and public address under their control, cryptocurrency owners are gravitating to user-friendly software applications which allow them to securely manage their cryptocurrency holdings. Most wallets are in not in anyone’s name, rather they are assigned a unique ID number which will take the form of something like this: b4cc1730-7178-4ead-b535-dc4c593cb7b0.

Moving forward, family lawyers must be diligent about requesting the opposing side to disclose any cryptocurrency wallets in their possession.

Here is an example of dashboard from the popular wallet application, Blockchain:

Figure 2: As you can see, the dashboard provides a snapshot of the balances of each cryptocurrency (Bitcoin, Ethereum, Bitcoin Cash) stored in the wallet at any given time, converting the values into real dollars.  Furthermore, the dashboard will also provide a historical record of each respective cryptocurrency stored in the wallet, which will make the process of determining values on the dates of marriage and separation simple and easy.  As cryptocurrencies grow in popularity, snapshots of wallet dashboards, as seen above, will become fixtures of financial disclosure briefs.

Here is a screenshot of the window a user will operate to add funds to their wallet:

Figure 3: All a user needs to do to add funds is to copy and share an address on the public ledger (notice how the address starts with the digit ‘1’, as mentioned earlier). Once the address has been copied, the wallet will update the balance to account for the value associated with the copied address. Family lawyers must always remain alert to the fact that it is possible not all of the user’s cryptocurrency is stored in one wallet. The party may have additional wallets under their control, and/or have decided to not copy and share addresses to any wallet whatsoever.

What should a family lawyer do if a party will not disclose their cryptocurrency?

Many cryptocurrency users will initially acquire this asset through an Interac e-Transfer or bank wire. If a family lawyer suspects the opposing side is not being forthright about the cryptocurrency under their control, they should examine the opposing side’s bank records for any payments to cryptocurrency exchanges.

Cryptocurrency exchanges provide their members with a platform to manage the buying and selling of different types of cryptocurrency (wallets only provide users with a platform to store the currency already in their possession). Members of an exchange can only access the platform once they have registered for an account.  Some of the more popular exchanges in Canada now verify the identities of their members by requiring that they submit a passport, driver’s license or some other form of personal identification before they are permitted to buy and sell.

Once a family lawyer is aware that monies have been transferred to a cryptocurrency exchange, they should immediately request disclosure of the party’s account history, which will provide a summary of all trades, deposits and withdrawals made with that account.

Here is a screenshot of a dashboard from the popular cryptocurrency exchange, Coinsquare:

Figure 4: Much like a wallet, a cryptocurrency exchange dashboard will provide a snapshot of the balances of each currency managed by the exchange at a given time. Users can fund their accounts through Interac Online, Interac E-Transfers, money orders, bank drafts and wire transfers.  These money transfers will often provide a paper trail that a family lawyer can follow to uncover undisclosed cryptocurrency.

Here is a screenshot of digital currencies available for purchase through the Coinsquare exchange:

Figure 5:  Once the account has been funded, the user is free to purchase any quantity of any currency offered by the exchange.

In the event a party refuses to cooperate with a disclosure request, family lawyers should seek a Court Order requiring the cryptocurrency exchange to turn over all documentation and information associated with that account.  Coinsquare, for example, is a registered Canadian Corporation and is therefore, subject to Canadian Law.

Final analysis

Many cryptocurrency users are financially sophisticated, tech savvy and uniquely adept at preserving the secrecy of their financial affairs.  For family lawyers to properly address the issue of cryptocurrency, they must become conversant in the terminology and gain a practical understanding of the tools and applications cryptocurrency owners use to manage their holdings.  Disclosure of public addresses, wallets and exchange accounts are just some of the ways family lawyers can ensure cryptocurrencies do not compromise the integrity of claims arising from the breakdown of marriages and common-law relationships.

Cryptocurrencies are here to stay. It is time family lawyers start learning how to decipher the message.

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