Let’s face it, we all have heard about cryptocurrency, but can we all say we know what it is?
What is cryptocurrency?
Cryptocurrency is a digital or virtual form of currency that uses cryptography in its transactions. It is one of many kinds of digital or virtual crypto assets.
Common forms of crypto assets include cryptocurrency, tokens, and coins. Cryptocurrency is just one of such crypto assets. It may or may not be backed by a physical asset.
In its purest use, cryptocurrency allows persons to make payments to each other through an online process. The cryptocurrency is stored in a wallet and transactions takes place between wallets. To ensure that the transactions are secure, the online process uses encryptions – a method to covert the transaction into a secret code.
The transactions use an online ledger that is open to the public, called a blockchain, and each transaction is recorded and stored on the ledger. The online process to transact is not instantaneous and so it is common for many incomplete transactions from other persons to swirl around waiting for the online process to complete. It is here where the transaction is part of an encryption process that requires verification to confirm and complete it. Once a transaction is confirmed, then it will form part of a block that is added to a chain of blocks. Once a complete chain of blocks has been processed, then the transaction is completed.
It is the encryption process that remains secret which the public cannot see on the ledger with various transmissions occurring behind the scenes to verify the transactions. Furthermore, the ownership or identification of the person transacting on the cryptocurrency can be masked or be anonymised. This is another aspect of the encryption process that is so appealing to its users.
Hot wallets and cold wallets for cryptocurrencies
Hot wallets or hot wallet storage means the online place or platform where a party’s crypto asset is stored with various personal security features.
Cold wallets or cold wallet storage means using an offline place or platform where a party’s crypto asset is stored with various personal security features. It can take on many forms, including even a piece of paper. The purpose of a cold wallet is to limited access and it can be highly secretive.
Family law and cryptocurrency
Cryptocurrency is largely treated as an asset for property settlement purposes and therefore it will form part of the net asset pool for division between separated parties. However, we recognised that depending on the degree of control a party may have over the cryptocurrency, it could be treated as a financial resources and therefore interact differently with the net asset pool for division between separated parties.
Each party to a family law matter must identify and provide the relevant information concerning any assets they own or have a beneficial interest in, together with their value. Given that the owner or person who has a beneficial interest in the cryptocurrency can be masked or be anonymized, it will become a vital exercise in the initial stages of a separation to obtain the relevant records of that ownership or beneficial interest. Information can be stored on an electronic device or an online platform (hot wallet) or offline (cold wallet), so acting quickly is crucial.
Information, which is usually captured in documentation, can be presented in a variety of ways. This can include:
- obtaining private security keys and identifiers on the cryptocurrency platform;
- obtaining the balance and records of wallets – including any hot and cold wallets;
- obtaining a ledger of the transactions;
- obtaining copies of any bank account statements that can reflect those transactions with each wallet, or interactions with each wallet and the bank account;
- some accounting applications can extract the information from the cryptocurrency platform, or other sources used by the party, and present that in a manner that complies with the requirements for the Australian Taxation Office; and
- obtaining a list of goods or services paid for with the use of cryptocurrency.
The value of the cryptocurrency fluctuates wildly. Unlike other investments from which value may be ascribed to with reference to a recognised market, calculation/method, or market regulator; there is no intrinsic value or universal market to work from when it comes to cryptocurrency. The value is derived simply from what a person is prepared to pay for it. This kind of approach to determining the value makes cryptocurrency vulnerable to speculative dealings.
At times, an independent third party may be engaged to determine the value of the cryptocurrency or aid in tracing the cryptocurrency with reference to the transactions that have occurred over time.
About the Author: Stewart is a senior family lawyer at Lynn & Brown Lawyers. Stewart has a wealth of family law knowledge and experience. His pragmatic approach in dealing with matters enables his clients to make informed decisions.