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Family Law in the Digital Age: Equalization and Digital Assets

Family Law in the Digital Age: Equalization and Digital Assets

By:

Posted November 8, 2021

The world of digital assets is always expanding and evolving.  Digital assets include anything from photos and videos to data accounts and cryptocurrency.  The new kid on the digital asset block are NFTs or non-fungible tokens.  While some of these types of digital assets may not be familiar to the mainstream yet, family lawyers need to educate themselves about these assets.  When spouses are separating, the value of digital assets, as with other asset types owned by a spouse, should form part of any equalization calculation.  The challenge facing family lawyers is understanding these assets and then addressing some of the issues they raise in the context of family law.

While there are many types of digital assets, two types that are gaining in popularity are cryptocurrencies and NFTs.

Cryptocurrency is digital money, in the form of fungible tokens or coins.  While there are more than 4000 types of cryptocurrencies, Bitcoin and Ethereum (Eth) are two of the most popular cryptocurrencies.  Currently one bitcoin is worth $45,500 USD and one Eth is worth $3,300 USD (September 11, 2021).  These are highly volatile currencies so in the context of a separation the valuation date can have a significant impact on an equalization payment.  The asset may be very valuable on the valuation date and may drop significantly in value by the time a settlement is reached.  Family lawyers will need to grapple with these potentially large fluctuations in value.

Non-fungible tokens are digital certificates in the blockchain.  For example, digital artwork is saved and traded on the Ethereum network.  The value of an NFT can range from very little to millions.  As an example of how valuable these assets can be, a package of 101 “Bored Ape Yacht Club” NFTs sold for $2.4million USD at a Sotheby’s auction.

Cryptocurrency and NFTs are held in a digital wallet.  Metamask is an example of a popular digital wallet.  In order to access the wallet you need a password and secret phrase made up of 12 words.  If you forget your password and lose the 12 words, you will have lost access to the digital wallet forever.

While there is no question that cryptocurrencies and NFTs form part of the equalization calculation, these assets provide challenges for family lawyers.  One of these challenges is disclosure and determining what types of documents or proof needs to be requested.  Unlike with regular bank or investment accounts, you can’t necessarily just turn over a statement with the date of separation value.  When dealing with these digital assets, lawyers will need to have a basic understanding of how these assets are recorded in order to understand what disclosure to request. Examples of disclosure that might be requested is screenshots of the balance of cryptocurrency in the wallet.  A search of bank statements would e-transfer records to and from a digital exchange platform, another indication of what funds have been transferred to a cryptocurrency.

Valuing these assets will also provide another challenge.  As noted previously, the value of these types of assets can fluctuate widely or may be unknown.  What is the value of an NFT being held in a digital wallet for example?  What evidence can be adduced as to the value?  Is expert evidence required regarding the value?  All of these are interesting questions that family lawyers will be faced with more and more often as the kinds of assets gain in popularity.

This blog post was written by Kate Wright, a member of the Family Law, Wills and Estates and Estate Litigation teams.  She can be reached at 613-369-0383 or at kate.wright@mannlawyers.com.

 

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