Geoff Costeloe and Karin Webster
(June 23, 2022, 11:12 AM EDT) — With the expansion of use and adoption of cryptocurrencies, NFTs (non-fungible tokens) and related assets, digital assets will inevitably become tied up in family law disputes. These sorts of digital assets are handled in the same way as other family/matrimonial property.
The first step in any family property matter is the identification of all property, before moving on to understanding, valuation and division/distribution.
One of the major differences with digital assets is the unique way that the assets held by a party can be verified. There is no central authority to turn to independently obtain information relating to the holdings of an individual.
In a traditional file, a request is made for bank statements from the other side, and an order could be sought to obtain the information directly from the financial institution. It is also possible to see debits/credits to other accounts that may lead to the discovery of other assets or accounts.
“On-chain assets” have no such equivalent. The goal is to establish a process for discovering where those on-chain assets are.
If a lawyer has a proper understanding of how blockchains function, they can provide a more accurate and up-to-date form of asset identification than traditional disclosure and accounting. Rather than only receiving a statement that sets out what has occurred in previous months or quarters, on-chain analysis can allow real-time observation of assets, allowing a faster response should assets begin to move or be liquidated.
Every transaction on popular blockchain networks such as Bitcoin and Ethereum is permanently stored on that network’s blockchain. There is no way for a participant to avoid this as it is fundamental to how blockchains operate and verify transactions. It is possible then to complete digital asset identification directly “on-chain.”
A variety of services called “block explorers” allow users to look up the current balance of every address on a network. This allows a lawyer to see the “live” assets being held by the opposing party. Transactions can be itemized out to interrogate exactly what activities the other party is undertaking, what income has been earned, and what purchases may have been made with the on-chain assets.
An obvious challenge with this approach is identifying what addresses are held by the other spouse/partner. There is no limit to the number of addresses an individual can have. Splitting assets across multiple addresses is, in fact, a recommended form of security for many digital asset holders. If the opposite side refuses to disclose all of their addresses, it is futile to use block explorers to try to ascertain holdings.
In such cases, it is still possible to seek out address information through the registered crypto exchanges (exchanges). Exchanges allow Canadians to convert their Canadian dollars to cryptocurrency and their cryptocurrency to Canadian dollars. These exchanges are classified as money service businesses and are heavily regulated. Opening an account with them will require the user to provide their identification and social insurance number. Therefore, requests could be made for all accounts held by the other party with an exchange, as of course some parties will not voluntarily disclose, and is not necessarily captured in the current wording of the Alberta Notice to Disclose form.
A court order for production can be served on the exchanges and requests made for information. When drafting such an order, a lawyer should ensure that details for cryptocurrency withdrawals are also requested. This will list the movement of digital assets from the exchange into a blockchain address, which can then be audited by the lawyer directly on chain. Their further investigation should yield a full identification of assets. Expertise in auditing in this space is rapidly developing and can also be explored by lawyers for litigation support.
While some of these steps may feel alien or technically complex for lawyers who are used to practising with traditional banking and finance, once lawyers become comfortable with this new paradigm, they will find that these new technologies actually provide a more transparent and more responsive approach to tracking and accounting of property.
Geoff Costeloe is an associate at Lindsey MacCarthy LLP. He regularly engages with digital asset holders, DAOs (decentralized autonomous organizations), and developer teams that require legal advice relating to tax, liability, incorporation and operation among other matters.
Karin Webster is a partner at Lindsey MacCarthy LLP. She focuses on the negotiation and mediation of family law issues. Webster is a mediator, current co-chair of the Association of Collaborative Practitioners (Calgary), and a dispute resolution officer at the Alberta Court of Queen’s Bench.
Originally published in The Lawyer’s Daily.