Adv. Yonatan Kanir and Adv. Tomer Niv || December 2018
Introduction
This article is the result of several meetings and conversations between its authors, in the wake of which we have endeavored to connect two different worlds, while juxtaposing family law with the new world.
The Bitcoin has already been around for nine years, and as time passes, it appears increasingly unlikely that it will fade from the world. As the old money is slowly replaced by the new money, a generation of digital capitalists has arisen – entrepreneurs and investors who have made enormous profits as a result of the global trend. The "new" capitalists, who are also marrying, establishing spousal relationships based on trust with their partner, shared intentions, and reciprocal economic investment, need to know how to manage their digital wealth, since this this money shall also come under legal scrutiny the moment a crisis erupts in the relationship.
While the digital currency industry is the subject of a lively socio-economic discourse, there is one area that concerns most of us, yet the discourse surrounding it is virtually non-existent – the management of family digital capital and the financial relationship between spouses.
Bitcoin's attributes[1]
The Bitcoin is described in literature as being, inter alia, "an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party"[2].
The transactions between the parties are undertaken through "a cooperative chain which is used in proving work in order to manage a public ledger that records transactions" called a blockchain. The Bitcoin is designed to transfer value between the users in a secure and anonymous way, without physical existence, without a central body that controls the currency and its supply, and without the need for intermediaries and a central body to clear the transactions.
The most popular way to measure the Bitcoin's value is quantitatively relative to the value of the American dollar. Its value in this sense is determined in accordance with the supply and demand curves, as manifested on the trading floors in which Bitcoin can be bought and sold between people using ordinary money, which is called a "fiat"[3].
Bitcoin has many features that set it apart – It is pseudo-anonymous, that is, on the one hand , the personal details of the users are not stored anywhere in the blockchain, but on the other hand, the register is public and all the Bitcoin transfers are visible to everyone[4].
There is no central controlling body, and no structure of a company or organization. It is kept exclusively by the person who holds it and only that person controls where to transfer the Bitcoin.
It is global and can be transferred to any person anywhere in the world, with no difference in commissions[5].
It is limited in quantity and deflationary, in contrast to a fiat which may be printed without limitation. The final quantity of the Bitcoin is restricted by its code and ultimately stands at 21 million Bitcoin. Moreover, the new Bitcoin creation process is gradual and measured. Every ten minutes on average 12.5 new Bitcoins are added to the system, and this quantity decreases every four and a half years. Its restriction is necessary in order for its value to be maintained over the years[6].
It is accessible. All that is needed in order to hold and use Bitcoin is a smartphone and an Internet connection.
It is secure and unchangeable. The Bitcoin key creation process and the signing of transfers from one wallet to another engenders absolute certainty that the sender owns the Bitcoin and is not an imposter. During the mining process the wallet from which the Bitcoin was sent is verified (with the aid of the signature on the transfer), as is the actual existence in the wallet of the quantity of the Bitcoin that was sent. The transaction cannot be erased, altered or retracted[7].
It is transparent, and this attribute creates the trust, security and stability required in order for the Bitcoin to fulfill its function as sustainable universal money[8].
The legal situation of digital currencies in Israel
There are only three companies in Israel which trade in digital currencies[9]. One of the reasons for this is the banks' policy regarding compliance with the Prohibition of Money Laundering and Financing of Terrorism Law and management of the risks deriving therefrom, which was introduced following the Bank of Israel's announcement in 2014 concerning the potential risks posed by digital currencies such as Bitcoin[10]. However, since the Bank of Israel's announcement there has been regulatory progress in Israel.
In August 2016, the Knesset enacted the Supervision of Financial Services (Regulated
Financial Services) Law, 5776-2016[11] (hereinafter: "the SFS Law") which prescribed that a financial asset may be, inter alia, a virtual currency[12] and listed the permitted trading activities under the new provision of virtual currency services license[13]. In May 2018 the Capital Market, Insurance and Savings Authority, in collaboration with the Money Laundering and Terror Financing Prohibition Authority, published the draft Money Laundering Prohibition Order (Credit Services Providers' Identification, Reporting and Recordkeeping Obligations for Prevention of Money Laundering and Terror Financing)[14].
In addition, in the area of taxation, since January 2018 any Israeli citizen wishing to trade digital currency for shekels is obliged to pay 25% capital gains tax on profits made during the same tax year[15].
In conjunction with and despite all of the foregoing, the legal system has not established any detailed and specific regulation of the digital currencies industry in the area of family and personal status law. In the next chapter we shall examine a number of substantive questions, some of which we shall answer and others we shall leave open until the legislator has its say.
[1] Thanks to Yigal Dreerman for his contribution to this article.
[2] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System.
BITCOIN (October 31st, 2008) https://bitcoin.org/bitcoin.pdf [ translated into Hebrew by Mani Rosenfeld].
[3] Money which is underwritten by the State.
[4] Dael Shalev – Bitcoin and your economic future, 62 (2018) (hereinafter: "Shalev").
[5] Shalev, supra. Footnote 2 on p.65.
[6] Ibid., p.72.
[7] Ibid., p.71.
[8] Ibid., p.69.
[9] Bits of Gold Ltd, Bit2C Ltd and Bit Ventures Ltd.
[10] "Notice to the public regarding possible risks in decentralized virtual currencies (such as Bitcoin)" (Bank of Israel Press Release, 2014)
[11] Supervision of Financial Services (Regulated Financial Services) Law, 5776-2016, Statute Book 1098.
[12] See section 11A (7) of the SFS Law.
[13] See section 11A of the SFS Law.
[14] Draft Money Laundering Prohibition Order (Identification, Reporting and Record Keeping of Credit Services Providers for Prevention of Money Laundering and Terror Financing (Amendment), 5778-2018.
[15] "Taxation of activity through decentralized payment (known as: "virtual currencies") Tax Authority Directive 2018/05 (2018).
Reflections and challenges regarding Bitcoin from the perspective of family law in Israel[1]
Spouses who were married in a valid marriage according to Israeli law are subject to an explicit rule[2], according to which future rights are part of the matrimonial assets which must be balanced upon dissolution of the marriage[3], including intangible assets which are defined as "an identifiable, nonpecuniary, incorporeal asset"[4]. Intangible assets are often held and managed by one of the spouses only, and the other spouse usually knows nothing about them. The economic significance is economic disparity, information disparity and tremendous strength of the spouse who holds the intangible assets to trade in, transfer and conceal them.
Regarding future rights, we have found ourselves in a Kafkaesque situation. While the Family Courts are (still) often and at length preoccupied with characterizing intangible property and the definitions of "goodwill" and "career assets", "the commercial train" already left the station long ago.
Evidence of this disparity can be found in a 2017 judgment of the Rishon LeZion Family Court[5], which was the first to address the question of how to divide vested options between a couple who had separated. The husband contended that the rights should be balanced as of the date of the separation, when the value of the options was low, while the wife maintained that that the options had to be balanced on their vesting date, in the expectation that by then their value would have skyrocketed. The Court accepted the wife's position and held that the rights would be divided according to their value on the vesting date. This judgment addressed a specific issue, from which we have arrived at a perpetually evolving station – digital currencies from a family law perspective.
The manifold difficulties in giving digital currency a clear economic value
We have focused our attention on the foregoing judgment with good reason[6], since in a certain sense, unvested options (in relation to which the Court made no ruling at all) held by one of the spouses can be seen as Bitcoin currency which was acquired during the marriage, while in the event of separation the questions which arise are the nature of the rights the spouse who does not hold the "joint" digital currency and what guarantees he has that the value of the currency shall be equitably divided.
Anyone chooses to invest his money in purchasing Bitcoin sees this as a long-term investment, and in a certain sense the investment in it by the couple from their joint funds amounts to realization of the dream. On the day of separation, how can the spouse who has no control over the Bitcoin wallet be protected? How is the value of the Bitcoin to be determined for the purpose of dividing it between the couple? And how shall the digital currency actually be divided?
Consensual solutions – How do we protect the jointly owned Bitcoin?
Until the long-awaited time arrives when means of protection and enforcement shall be prescribed in express statutory provisions, the solution is in our hands.
A hot and substantive recommendation to any couple who trade in virtual currencies is to ensure that they draw up a financial agreement or alternatively that they make a specific arrangement in writing dealing exclusively with the digital currency conundrum, which shall stipulate "the rules" as the couple see fit and shall answer most of the open questions should a dispute arise – who is to hold the currency, who shall hold the private key, when shall the currency be sold, how, in what amounts and by what mechanism shall the currency be divided, a BMBY mechanism between the parties, which of the spouses should be given the –
While there is no doubt that even such an agreement cannot provide a full 100% answer to the various risks and chances, it shall unquestionably define the expectations threshold and greatly reduce the points of friction. The drawing up of a financial agreement per se is tantamount to an insurance policy that the spouse who holds the currency cannot repudiate the existence of the currency as a matrimonial asset.
Case law solutions – Look for the treasure (and it seems you will never find it)
And if we have progressed well so far, with the spouses cooperating at the time of drafting the agreement, from an understanding and recognition that in the valuation of the currency everything is visible and placed on the table, we shall now speak about a situation in which the Bitcoin currency was acquired during the marriage, but only one of the spouses actually holds by himself the digital wallet and only he has access to the Bitcoin currency, and upon
the breakdown of the marriage he prevents access to it or claims that it no longer exists.
The security of the currency and its attribute of anonymity are all well and good from a commercial perspective, however, in the context of the financial relationship between spouses, the currency's attribute of transferability enables litigants to use it as an easy means of concealing their capital. While records cannot be changed and currency transactions without the owner's clearance cannot occur in the case of Bitcoin, how can the division of the currency actually be enforced, when the spouse who holds it hides all information about its existence or blocks access to it?
In order to understand the great complexity of the problem, we shall conclude by glancing at a ruling which was recently made by the Supreme Court[7], in which it was held that attorney-client privilege also applies in relations between spouses, when the legal service was provided for the specific person who hired the attorney's services and not for the other spouse. If this is so, what if the spouse gave details of the currency to his attorney as a trustee – how can the spouse get the information? This is a problematic reality which requires a specific legislative solution or an advanced ruling here and now[8].
Finally – Protect the currency
"In the Crypto world there is good news and bad news: The good news is that each of us is a responsible adult. The bad news is that each of us is a responsible adult".[9]
It is advisable to do meticulous due diligence before undertaking substantial transactions, to learn in depth about the keys of the wallets, their security and correct password management.
Since the start of 2017 an unrealistic sum of more than 10 billion dollars has been raised for blockchain and digital currency projects. Many intangible assets such as digital currencies have flowed into new hands of entrepreneurs and investors, who currently need to learn how to handle the capital which they have accumulated, without the legal system providing any clear answers in the matter.
The difficult questions which have also remained with us show that during the marriage, when love is flourishing and mutual trust is at its zenith, spouses who wish to invest in Bitcoin must sit with a lawyer and commit their reciprocal obligations to writing, including through the drafting of a specific financial agreement, if only to minimize risks and damages in the event of separation. It is also advisable to consult with security experts and prepare the digital currency wallet backups required.
[1] My thanks go to Advocate Dana Galanti from my firm for all her help in the writing of this article.
[2] Financial Relationships between Spouses Law, 5733-1973.
[3] Section 5(c) of the Financial Relationships between Spouses Law (Amendment No.4), 5733-1973, Statute Book 267.
[4] International Accounting Standard 38 Intangible Assets.
[5] Family Case 10339-03-12 S.Z. v. Y.Z. Ruling of Judge Fisher (2017) whose findings were upheld in Family Appeal 19796-09-17 (judgment given on 13.9.18).
[6] Ibid.
[7] In Family Appeal 9361/17 Plonit v. Ploni, ruling of Judge Mazuz (2018).
[8] We should clarify that this article does not address the laws of inheritance and the conundrum resulting from the deceased's possession of a digital wallet, without leaving clear testamentary instructions, a password or access.
[9] Shalev, supra. Footnote 2, p.167.