Division of cryptocurrency in the context of property division in divorce

Cryptocurrency is a form of digital currency that has gained significant influence on modern times, but a generalized understanding of its essence remains a subject of research. Although the topic of cryptocurrencies is not new, their importance in our lives is constantly increasing. As of January 2024, the legislation of Ukraine regarding the regulation of cryptocurrencies remains undefined, in particular in the context of the division of property upon divorce.

The draft Law “On Amendments to the Tax Code of Ukraine and other legislative acts of Ukraine regarding the regulation of circulation of virtual assets in Ukraine” was registered in the Verkhovna Rada of Ukraine on November 7, 2023, but its adoption and implementation is delayed. Also, there are two other bills that propose changes to this Law. Such ambiguity regarding the regulation of cryptocurrencies creates significant difficulties in resolving legal disputes regarding the division of property between spouses.

According to the MiCA International Regulation, which will enter into force in the European Union on December 30, 2024, general rules for the circulation and storage of cryptoassets are established. Since Ukraine has prospects of becoming a member of the EU, this regulation may have direct application on its territory.

The question of whether cryptocurrencies can be recognized as property remains open. Legislation defines them as virtual assets, but the legal concept of “cryptocurrency” remains undefined. In this context, the Civil Code of Ukraine recognizes virtual assets as digital things that can be the object of the right of joint property of spouses.

When dividing property, the question of whether a cryptocurrency can be divided depends on its nature. For example, Bitcoin, Etherium, Tether belong to interchangeable tokens and can be divided between the participants of the division without losing the intended purpose. On the other hand, NFTs are indivisible digital things, so they can be allocated to one spouse and the other given monetary compensation.

How to establish or prove the presence of cryptocurrency in the second spouse

To establish the fact of the presence of cryptocurrencies in the second spouse and clarify all important aspects related to this, it is necessary to refer to the technical characteristics of storage and circulation of digital assets. In particular, cryptocurrencies can be stored on crypto exchanges (which are known as “hot” wallets) or on hardware “cold” wallets. The legislation specifies that the ownership of virtual assets is confirmed by the presence of an access key to them in accordance with the requirements of the law or a court decision.

If the second spouse owns virtual assets, but hides it, then proving the fact of their ownership becomes very difficult, especially considering the size and value of these assets. The most objective indicator may be the presence of a hardware “cold” wallet, but access to assets without a special password known as a “seed phrase” will be impossible.

The declaration of a person performing public functions can also reveal and confirm the presence of virtual assets of the second spouse, if he is the subject of the declaration. In addition, in the process of judicial distribution of the property of the spouses, plaintiffs can turn to private detectives who already cooperate with law enforcement agencies and can help in fixing the presence of virtual assets.

During the court proceedings, the parties may request information from crypto exchanges about the presence of a spouse’s wallet on the exchange and a statement of transactions. If the crypto exchange is not registered in our country, the court can send a mandate to provide appropriate legal assistance to the court of the country in which the exchange is registered.

In order to protect the rights and fair distribution of the property of the spouses, measures can be taken, such as blocking assets on the crypto exchange or applying to the court to impose a seizure on the crypto wallet. To do this, it is enough to submit an appropriate petition to the court with evidence (for example, screenshots from the exchange’s mobile communications or letters to e-mail) of the existence of a wallet on a certain exchange, for example WhiteBit, HTX or Binance.

How to determine the value of discovered virtual assets?

There comes a time when the court granted the request to secure the claim and the plaintiff received a decision to block the assets in the account of his partner on the crypto exchange. However, the question arises: how to determine and confirm before the court the value of these assets, especially given the great volatility of the latter?

In case of division of cryptocurrency, which is common property, the court must establish its value at the time of the case.

To date, there are no forensic experts in Ukraine who could confirm the current value of cryptocurrency. However, one of the possible methods of proof of value can be screenshots from mobile applications of crypto exchanges or other cryptocurrency exchange services.

The situation with so-called “stablecoins” can be much simpler, since they are tied to fiat currencies. For example, the USDT token is pegged to the US dollar and reflects its current value in the form of a token. Accordingly, the value of other cryptocurrencies can be determined by studying the graph of the ratio of such crypto currency to USDT on a certain date, after which the determined amount of USDT is converted to the US dollar, and then the received amount of the US dollar to the Ukrainian hryvnia.

Thus, if the question of the division of cryptocurrencies comes before the court, the court can determine their value at the rate of the National Bank of Ukraine of the corresponding fiat currency, in accordance with the above chain.

How are virtual assets detected in criminal proceedings?

Reports of corruption scandals and cryptocurrency arrests in criminal cases are becoming increasingly common in the media. This shows that virtual crypto-assets, despite the lack of clear legal regulation, already play an important role in legal processes.

Thus, it is possible to use the experience of criminal proceedings to solve the issue of the division of cryptocurrencies. Article 170 of the Criminal Procedure Code of Ukraine provides for the possibility of seizure of virtual assets that have become the subject of an investigation.

This norm is valid and applied in practice. In the Unified Register of Court Decisions, you can find numerous decisions on the seizure of assets on crypto exchanges as part of criminal proceedings. The same rules can be useful in civil procedural law to ensure the claim and evidence.

In addition, the Asset Management and Investigation Agency (ARMA) has developed guidelines for the identification, search and seizure of cryptocurrency assets in criminal proceedings, although this document is not publicly available. Currently, discussions are ongoing between the law enforcement agencies and ARMA regarding the preparation of proposals for amendments to the legislation on the management of seized assets. This is important for civil court cases as well, as it is possible that in the future courts will have their own crypto wallets to hold disputed cryptocurrencies until the case is resolved.

Judicial practice

So far, there is no information about any court case in Ukraine, where the court would make a decision on the division of cryptocurrency in kind between spouses. However, there are several cases where this aspect has been considered.

For example, in civil case No. 953/4882/23, a former spouse applied to the court for the division of joint property, including cryptocurrency. In this particular case, ownership of the cryptocurrency was determined through the declaration of the asset. However, at the time the case was considered, the cryptocurrency had already been sold, so one of the parties demanded the division of the received funds as joint property.

The court of first instance decided that the funds received for the sale of cryptocurrency belong to the personal property of the defendant. The case is currently on appeal.

In fact, there is still no sufficient judicial practice in Ukraine regarding the division of cryptocurrency between spouses, and especially decisions of the Supreme Court.

In general, the situation with the legal regulation of cryptocurrencies in Ukraine remains uncertain, and it is possible that these issues will be resolved for a long time. The main challenges are gathering evidence, preserving disputed property and enforcing court decisions. If Ukraine joins the European Union, the Ukrainian legal system will undergo significant changes, which may lead to the emergence of new rules and practices in this area. Until regulatory regulation is not sufficient, lawyers can actively use opportunities to create interesting judicial precedents.

If you intend to divide crypto-assets with your spouse, contact our family lawyers, we will provide advice, develop tactics and implement them in life.