Canada: Control-Alt-Disclosure: Disclosure Challenges Of Crypto Assets

Also authored by: Waseem Shahatto

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It is an undeniable reality that the growing popularity and prevalence of crypto assets (such as cryptocurrencies and non-fungible tokens ["NFTs"]) will increasingly impact how individuals manage their finances, prompting questions and concerns related to financial disclosure of these illusive assets in the family law context. While limited court decisions provide some insight into how non-disclosure of cryptocurrencies in separation proceedings may be addressed, many challenges remain in ensuring that parties are accurately disclosing their digital assets.

Brief Explanation of Crypto-Assets

Crypto-assets, are digital assets that rely on blockchain technology (a shared ledger) to facilitate the process of recording transactions and tracking assets across several computers that are linked in a peer-to-peer network. Crypto assets are decentralized, which means that they are not controlled by one single authority. While a decentralized structure allows more financial independence without governmental regulation, it is the reason why crypto-assets have no intrinsic value since they are not backed by any central authority, such as a financial institution, making them a volatile asset. Yet, individuals are still drawn to it as it's perceived to be a method to raise capital quickly through the internet.¹

The Importance of Accurate Financial Disclosure for the Purpose of Equalization

Fulsome and accurate financial disclosure is essential to resolving issues after separation. Generally, when parties separate, they are entitled to what is called the equalization of net family property. Each spouse is required to equally share the property accumulated throughout the marriage. Net family property is calculated by comparing assets and debts from the beginning of the relationship to the date of separation for each spouse. Each spouse adds up the value of their property less any debts on the date of separation. From this, they subtract the value of their property less any debts on the date of marriage. Save for some exceptions, the spouse with the higher net family property then pays the other spouse half of the difference. This is known as the equalization payment.

Accordingly, to ensure that both parties end up with what they lawfully deserve in terms of property equalization, each spouse must provide the other with accurate proof and details of their respective assets and debts, such as money in bank accounts, investments, business interests, credit cards, etc. While this may sound manageable, it is reliant on the spouses complying with their financial disclosure obligations. If a spouse is not forthcoming or if they have taken steps to hide some of their assets, the necessary disclosure for the purpose of equalization will be difficult to achieve.

Issues of Crypto-Assets in the Family Law Context

While crypto-assets are accounted for like all other assets when parties are equalizing net family property, their unique structure and novelty create a significant problem in family law proceedings. In M.M.D. v. J.A.H., Justice Nakonechny stated that cryptocurrency is "clearly a volatile, emerging, intangible source of wealth which the courts will have to grapple with more frequently in future."²

Significantly, crypto trades are not necessarily linked to an identity, which provides anonymity for users. This anonymity is a major issue as it creates significant disclosure concerns that may have a negative impact on valuations and equalization payments. Owing to its unique structure, it is impossible to identify the owner of a crypto-asset without knowing the owner's unique passcode. This affords a dishonest party an opportunity to hide their assets in family proceedings through investments in crypto-assets. To complicate the matter further, the technological knowledge gap that may exist between the dishonest party and their ex-spouse, counsel involved, or even the Court may mean that the dishonest party's failure to provide proper disclosure of their crypto assets may go unnoticed. Also, given that there is no third-party entity (such as a financial institution) that can be contacted to ascertain that the crypto-assets disclosed, if any, are fulsome and accurate, a dishonest party has significant latitude to manipulate and hide their crypto-assets.

A party using crypto to hide their money has become so common that lawyers in the United States of America have now begun hiring "crypto hunters" (investigators with special knowledge relating to crypto-assets) to track down digital assets in divorce proceedings.³ Unfortunately, there is already a series of Canadian cases in which the courts have had to deal with a spouse not disclosing their cryptocurrency holdings. However, not all is lost. Even though the courts may not be able to crack the defenses of the blockchain, they do have methods to even the playing field.

Remedying a Party's Non-Disclosure of Crypto-Assets

Non-disclosure has consistently been described as the "cancer of family law."⁴ It is something the family law courts take incredibly seriously and is highly discouraged.

Recent case law has shown that there are effectively two methods the courts can use to even the playing field when a spouse does not properly disclose their cryptocurrencies:

1. The first method is to order a spouse to disclose their cryptocurrency holdings. In M.M.D. v. J.A.H., the Applicant brought a motion to increase child support. The Respondent did not disclose his investments in cryptocurrency, and, as a result, the Court ordered disclosure of his cryptocurrency assets. In its decision, the Court did respect the security risks of ordering disclosure and, as such, allowed the documents to be in redacted form.⁵
2. The second method is to make an inference and attribute value to non-disclosed cryptocurrencies. This method was utilized in the recent British Columbia Supreme Court decision of M.W. v N.L.M.W.⁶ In this decision, the Respondent did not disclose evidence of his cryptocurrency holdings, which were reported to be in the range of $100,000.00, and claimed that all value was lost. The Court accepted that there may have been some losses but refused to accept the entire value was lost and attributed a value of $60,000.00 to the Respondent's cryptocurrency accounts.⁷

While both approaches may be effectively utilized by the Court, it is important to note that the Court's knowledge that crypto-assets exist is an essential prerequisite to be afforded such relief. Parties and their counsel must therefore be diligent to a dishonest party's activity with cryptocurrency; failure to do so will result in the dishonest party successfully evading their disclosure obligations.

Footnotes

1. For more information on crypto assets see: Catherine Rousseau, "Cryptocurrency Offerings in Canada: Why and How We Should Modernize the Securities Law Framework" (2019) 35 BFLR 63.

2. M.M.D. v J.A.H., 2019 ONSC 2208 (CanLII), at para 140.

3. For more information on the hiring of "crypto hunters" see: https://www.cnbc.com/video/2022/07/07/crypto-hunters-track-down-digital-assets-in-divorce-cases.html

4. Leitch v Novac, 2020 ONCA 257 (CanLII), at para 44.

5. M.M.D. v. J.A.H., 2019 ONSC 2208 (CanLII), at para 141.

6. M.W. v N.L.M.W., 2021 BCSC 1273 (CanLII).

7. M.W. v N.L.M.W., 2021 BCSC 1273 (CanLII), at para 361.