Divorce In The Digital Age In Singapore And Hong Kong: Crypto And NFTs As Matrimonial Assets? – Fin Tech

Two recent decisions of the Singapore High Court
pertaining to digital assets have been eye-catching. In CLM v
CLN, [2022] SGHC 46, the High Court decided that
cryptocurrency holdings were ‘property’ and could be
subject to proprietary injunctions. In Janesh s/o Rajkumar v
Unknown Person (‘CHEFPIERRE’), [2022] SGHC 264, the
High Court came to a similar decision, albeit in the context of a
Non-Fungible Token (“NFT“).

These decisions have sparked very substantial interest in
digital assets in the legal industry, and may represent the latest
frontier of potential new law-making. As a result, we have often
been asked how are digital assets treated in Singapore
family law?

In Hong Kong, we are still eagerly awaiting the first published
Family Court Judgment relating to digital assets but as we are
seeing more and more families holding digital assets, as in
Singapore, we are also often asked how they are treated in family
law.

Matrimonial assets

In Singapore, only ‘matrimonial assets’ are subject to
division post-divorce. The term ‘matrimonial asset’ is
defined in section 112(10) of the Women’s Charter, as:

“… any other asset of any nature acquired during the
marriage by one party or both parties to the marriage,
…”

This definition is, of course, subject to exceptions that we
will not discuss in this article. It is notable, however, that this
definition is very broad. It encompasses any
asset of any nature acquired during the marriage.

Notably, the definition of ‘matrimonial asset’ does not
use the word ‘property’. ‘Matrimonial assets’ thus,
arguably, do not need to satisfy the four requirements which were
discussed in CLM v CLN which have to be met before a thing
can be considered ‘property’.

The Family Court in Singapore is thus used to dividing, as
matrimonial assets, things which we would not commonly regard as
‘assets’. A 2002 decision of our Court of Appeal confirmed
that stock options that have not yet been vested can be
divided as matrimonial assets. Choses in action i.e.,
intangible legal rights have also been divided as
matrimonial assets as long as they have value.

It would thus come as no surprise that digital assets are widely
accepted in Singapore family law to be matrimonial assets that can
be divided. In UTL v UTM, [2019] SGHCF 10, the Family
Division of the High Court held that a Bitcoin holding was a
matrimonial asset that was subject to division. We note, further,
that neither party appeared to dispute that a Bitcoin holding was
in principle liable to division the dispute was over
whether that particular Bitcoin investment still existed or had
already been liquidated.

Thus whilst there are, at present, no reported decisions
discussing whether digital assets fit the definition of
‘matrimonial asset’, it appears to be accepted by the
Family Justice Court that digital assets with value can indeed be
liable to division post-divorce. The recent decisions in CLM v
CLN and Janesh s/o Rajkumar v Unknown Person
(‘CHEFPIERRE’) would only strengthen this view.

In Hong Kong, parties have a duty to disclose their worldwide
assets whether they are liquid or illiquid so that it can be
determined whether they are matrimonial assets. Digital assets will
definitely be assets that need to be disclosed by a party so that
they can be taken into consideration by the court when the assets
are distributed.

Injunctions

Accordingly, and consistently with CLM v CLN and
Janesh s/o Rajkumar v Unknown Person
(‘CHEFPIERRE’), proprietary injunctions (e.g. freezing
injunctions) over digital assets can also be granted in divorce
cases.

The Family Court is, however, averse to granting proprietary
injunctions as a matter of course in divorce proceedings. A
proprietary injunction will not be granted except as a last resort,
in a situation where there is a clear risk of dissipation, and
where the injunction is necessary to protect the claimant’s
interests in the division of assets. This is also bearing in mind
that the risk of dissipation alone will not be sufficient
to warrant an injunction, since it is established that the Court
can notionally return dissipated assets to the pool for division to
vindicate an aggrieved party’s interest in the pool of
assets.

Likewise, in Hong Kong, the Family Court, will not grant an
injunction lightly, but if there is evidence of dissipation, it may
be possible to seek an injunction to freeze the assets of the other
party and, if necessary, seeking to cover for example
cryptocurrency exchanges so that the investment can not be
traded.

Challenges

Although it is almost trite in Singapore family law that digital
assets can be liable to division, they nevertheless pose
challenges. These challenges are, namely, (1) disclosure, and (2)
valuation. Thankfully, these are not challenges that are
novel and unique to digital assets, and there are solutions.

The same challenges of course exist in Hong Kong family law but
as in Singapore, there are solutions.

Disclosure of digital assets

Cryptocurrency is widely used to transact on online black
markets because it allows the parties to the transaction to remain
anonymous. Cryptocurrency holdings are held through electronic
‘crypto wallets’ which are often untraceable to the owner
of the wallets without engaging a specialist expert and expending
very substantial time, effort, and money.

Thankfully, in the divorce setting, the problem is often the
opposite one i.e., not ascertaining the owner of a crypto
wallet, but instead ascertaining whether a person owns a crypto
wallet or not. This is a less problematic issue because digital
asset holdings these days are often purchased using
traditional currency. The days where substantial valuable
cryptocurrency could be acquired by ‘mining’ are to
the authors’ best (but still layman) knowledge behind
us. Given that digital asset holdings are usually acquired using
traditional currency, the purchase of digital assets can usually be
traced from bank account statements. This trace, if detected, can
form the basis for a train of inquiry that can itself be the basis
of discovery or interrogatories in the Court process.

We would recommend if there is a prospect that
substantial digital asset holdings have not been disclosed
that the aggrieved party engages specialist forensic accountants to
assist with the tracing.

In Hong Kong, during divorce proceedings, each party must
complete a financial statement known as a Form E to provide full
disclosure of their means, both capital and income. There is a duty
to provide full and frank disclosure of assets and financial
resources, including holdings of any and all digital assets. If
holding cryptocurrency, addresses such as Bitcoin addresses and
exchange statements should be provided to evidence holdings.

If this disclosure has not produced what is believed to be the
true extent of the digital holdings, the right questions need to be
asked relating to the online accounts with exchanges, location of
digital wallets etc. There is the opportunity to do this via legal
correspondence, questionnaires and specific discovery applications.
Failure to provide full and frank disclosure will place parties in
contempt of court risking a fine and even potential
imprisonment.

Valuation

Digital assets are notorious for being highly volatile in
valuation. 1 Bitcoin was worth USD7,887 on 11 March 2020. It had
lost one-third of its value just 4 days later, on 15 March 2020,
coming in at USD 5,165. Its value more than tripled in 9 months,
and 1 Bitcoin was worth USD 18,245 on 11 December 2020. One month
later on 10 January 2021, it had doubled in value again to USD
40,256. This level of volatility is seen across almost all classes
of digital assets not just Bitcoin. Not many traditional
assets see this level of volatility maintained consistently over
long stretches of time.

The default rules in proceedings for division of assets in
Singapore are that the pool of assets is (1) identified at
the time of the Interim Judgment, but (2) valued at the
date of the hearing of the ancillary matters. Given that fully
contested ancillary matters proceedings often take a year
(sometimes more) to complete, a pool of digital assets could be
valued very differently at the start and at the end of the
proceedings. The specific date of the hearing could also
cause a windfall to one party or the other, given that digital
assets can fluctuate in value very substantially over very short
periods of time.

This can be mitigated in two ways.

Firstly, the digital asset holdings can be divided in
specie, instead of its value being divided. For
instance, if a pool containing 2 Bitcoin is divided equally between
the former spouses, each party will obtain 1 Bitcoin, instead of
one party retaining 2 Bitcoin and the other party being paid the
monetary value of 1 Bitcoin. This, however, only works with
fungible digital assets (e.g. cryptocurrency) and may not work with
NFTs.

Secondly, the digital asset can be subject to an ‘if and as
when’ division order. This means that the value of the digital
asset is divided only when it is sold. Such an order will align the
parties’ interests in maximising the proceeds of sale
of the digital asset. Safeguards will, however, have to be put in
place to ensure that the ‘if and as when’ division order is
not frustrated by the owner of the digital asset retaining the
digital asset indefinitely as may be the case if a valuable
NFT is retained purely for clout.

If the digital asset is divided between the parties, the risk or
benefit of changes in value are shared. However, with its very
specific market and specialised trading platforms not everyone will
want to take on a significant digital asset/investment. It may be
better for one party to retain the digital asset offsetting it
against another. What though if one takes real estate worth
US$10million and the other takes digital assets wort US$10million
and the value of the digital asset crashes the following week. Or
alternatively, they become a billionaire the following month. In
Hong Kong, it is established law that where price fluctuations can
be anticipated, as part of the natural function of a type of asset,
the court will not be prepared to entertain the re-opening of a
case that is “closed” even if the price fluctuations are
extreme. Legal advice should be sought urgently if the hearing has
concluded but the order has not been made yet or the order has not
been sealed as then there may be scope to revisit the terms of the
order.

Conclusion

Digital assets have for some time frustrated lawyers. The
position has been clarified somewhat in the 2 recent decisions in
CLM v CLN and Janesh s/o Rajkumar v Unknown Person
(‘CHEFPIERRE’).

Thankfully, in the arena of family law, the relatively broad
definition of ‘matrimonial asset’ and the development of
the law of division of choses in action have resulted in
the widely-accepted mentality that digital assets are indeed liable
to division. The challenges posed by digital assets are also
not unique to digital assets.

It is, perhaps, for these reasons that we have yet to see a
highly-publicised decision on the treatment of digital assets in
divorce. In our view, there is less controversy over whether
digital assets can constitute assets for division in the context of
divorce proceedings. Parties may instead require greater
professional assistance for the tracing of such digital assets.

There is the common fear that an ex-spouse may attempt to
withhold information or lie to conceal their assets. The Hong Kong
Family Court is well aware of and experienced in dealing with such
behaviour and has adopted robust measures to disincentivize
anyone’s attempt to engage in non-disclosure of any asset which
includes digital assets. Any belief that one can hide assets of any
nature in divorce including digital assets is misguided. This
approach is similar in Singapore.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.