There are said to be nearly 23,000 cryptocurrencies with total market capitalisation valued in the trillions of dollars and this is a market that is only likely to continue to grow. Cryptocurrencies are notoriously volatile and often described as untraceable, presenting unique challenges, not least for lawyers. Their volatility is such that the 10,000 BitCoin price paid for pizzas in the first recorded real world transaction in 2010 means the pizzas cost, at today's valuation, in excess of $3bn. And whilst this volatility may create problems for owners of cryptocurrencies, their other attributes including potential difficulties with tracing, can be a virtue for those wishing to hide assets, for example from the family law divorce courts.
Digital assets potentially raise a number of difficulties in family law - and no doubt also other - proceedings, including:
1. Disclosure - Unquestionably there is an obligation to disclose the ownership of digital assets within financial proceedings upon divorce, though there is a potential tension here given the principle of privacy afforded to investors and the difficulty tracing such assets. If the owner has used a digital exchange, it might be simpler to trace with the assistance of a digital forensic expert (with the court's permission) but there is no requirement to use such an exchange.
2. Valuation - The extreme volatility of cryptocurrencies also create difficulties in family proceedings and numerous updating valuations may be required.
3. Preservation and enforcement - Given their nature, it is difficult both to freeze cryptocurrencies to protect them from disappearing whilst proceedings are ongoing and also to enforce against in the event of non-compliance with an eventual award.
In recognition of the growing market in digital assets and the above (and more) consequent legal difficulties that arise, the Law Commission was tasked with how to address such digital assets. It has just published its final report which makes various recommendations to assist with their recognition and protection. Although the recommendations do not offer all the answers yet, they take significant and welcome strides towards a system that ought eventually to be appropriately equipped to tackle them.
The main recommendations are:
1. Legislative change to recognise a third category of asset that has evolved in common law to cover "digital objects". In addition to a chose in action and a chose in possession, the Law Commission recommend a statutory footing for this new category of personal property that is neither a thing to be possessed nor a right to take action and it sets out the three qualities that such property should possess to qualify within this new category.
2. A panel of industry specific technical experts should be established to provide guidance on the difficult issues as they evolve in relation to this new category of assets, for example control i.e. how such assets are accessed and used.
3. Work on the securitisation and collateralisation of cryptocurrencies upon the advice of a multi-disciplinary team that will be established with a view to creating a statutory framework that will allow for digital objects to be dealt with in such ways. It is recognised that this is a significant project but an important one given the widespread demand for such reform.
Within this new framework - and armed with leading experts to advise on and evolve the position - it is hoped that the law can start to keep pace with the fast-moving and challenging consequences these categories of digital assets create. However, it is clear it will still take significant further time, resources, combined brain-wracking and legislative change to reach that point.
Our recommendations for reform and common law development aim to create a clear and consistent framework for digital assets that will provide greater clarity and security to users and market participants.