There are specific risks and qualities associated with digital assets such as NFTs, and these can be materially important if the owners of them become embroiled in a divorce case.

Such has been the rise of digital assets, for instance non-fungible tokens (NFTs), that perhaps inevitably, they are starting to feature in divorce settlements and legal tussles. (Unlike cryptocurrencies, which are identical units that can be exchanged and are therefore fungible, NFTs are not interchangeable.)

What specific issues are generated in law by digital assets, and in divorce and related cases? To discuss this are lawyers from Boodle Hatfield: Hayden Bailey, partner, and Alex Gamble, associate.

Hayden Bailey
 

Alex Gamble

The editors are pleased to share these views; the usual disclaimers apply. Email tom.burroughes@wealthbriefing.com if you wish to respond.

Decisions about succession planning are often undertaken later in life. However, thinking about these issues earlier has benefits, particularly considering cryptocurrencies and non-fungible tokens (NFTs) which present specific challenges as their popularity grows but regulation struggles to keep pace.

Factoring in volatility
Whilst their "outsider" status is seen by devotees as an inherent strength, these assets are undeniably volatile and this doesn't always mesh with long-term investment strategies. For example, bitcoin has witnessed over eight 50 per cent corrections in its 15-year existence. Yet, bitcoin has recovered from each correction to new all-time highs, including most recently, $73,000 in March 2024. 

This volatility means that the price at the time of an owner's death might be significantly higher than the price which is realised when sold. In that case the amount of inheritance tax will not change, and the executors will need to find a way of selling the remaining crypto (and other assets) to pay the inheritance tax.

A question of ownership
Another risk is more practical. There is no centrally-controlled registry recording ownership of the asset. Unlike a share register, crypto assets and NFTs are owned by whoever has the private key to unlock the digital wallet containing the assets – whoever holds the key to the wallet controls the asset. 

This decentralisation creates problems for executors of wills, given their legal duty to manage the deceased’s assets. The executors may not be aware of the assets or, if they are, they may not be able to access them as they don't have the key. This could result in beneficiaries being short changed.

Therefore, an important step is ensuring that one's personal representatives know about the assets. Preparing an inventory with access instructions will be invaluable for one's executors, and including guidance with a lasting power of attorney should be considered too. 

A will becomes publicly available following the grant of probate, and so it is important that any sensitive information (e.g. how to access virtual assets) is kept in a separate document.

While cryptocurrencies are the most discussed digital assets, it is important to recognise that "digital assets" encompass a vast array of items. There are over six billion smart phone users across the globe, and photos and data held on these devices or on ‘the cloud’ should not be forgotten. 

Investigating crypto in divorce
Given the intractability of crypto assets, they can present significant complications in a divorce. 

The family court will take account of all the parties' assets in whatever form. Crypto assets are treated like cash and the court may make orders for crypto assets to be transferred or sold with the proceeds divided between the parties accordingly. 

The only way in which cryptocurrency can be protected in the event of a divorce is via a prenuptial agreement, but even these are not immune to the wide-ranging powers of the family courts in England and Wales and the overarching rule that financial awards be “fair.”

Parties are obliged to make a full and frank disclosure of their assets when making a prenuptial agreement but, for those suspecting a nefarious spouse of concealing crypto assets, it can be difficult to get to the bottom of whether any such assets exist and how much is held at any time. 

There are forensic accountants who can help to trace entries into and exits from cryptocurrencies from or into fiat currency, but this is not a straightforward exercise.  
 
Non-disclosure is punished severely by the family court, including (in rare cases) imprisonment. The court also has the power to reopen divorce settlements if it can be proven that either party failed to disclose his or her assets so those concealing cryptocurrencies may come a cropper.