The impact of cryptocurrency on impecuniosity: Are you identifying digital assets?

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The impact of cryptocurrency on impecuniosity: Are you identifying digital assets?

Published 14 April 2022

Cryptocurrency is becoming more widespread and the way in which we bank and spend our money is changing. With many claimants pleading impecuniosity in credit hire claims and providing their financial disclosure for inspection, it is more important than ever that we understand how modern banking works. This is not only to ensure that we have full disclosure, but to also be confident that we can correctly assess the claimant's financial position.

In this article, we will consider how cryptocurrency may affect the visibility of the claimant’s finances and the impact they have on the claimant's impecuniosity status.

What is cryptocurrency?

Known as a digital currency, cryptocurrency sits on a decentralised network typically based on block chain technology. Being decentralised, the currency sits outside the control of the government and authorities, and is not linked to the banking system. Cryptocurrency can either be “mined” (whereby a network of computers validate the code sitting behind the block chain, in doing so earning the currency), or purchased from online exchanges such as Coinbase.

There are lots of advantages to cryptocurrency including faster and cheaper transfers, as well as enabling secure online transactions without the use of a third party intermediary such as a bank. Bolstered by the fear of an economic shutdown driven by the COVID-19 pandemic, Distributed Ledger Technology (DLT)  is gaining traction and is thought to be a significant future disrupter to many industries.  On the other hand, however, unbacked cryptocurrency (c.f stablecoins) is highly volatile, requires a significant consumption of energy to mine and, with ownership being harder to trace, is notoriously known to be used in criminal activity such as money laundering.

There are numerous types of cryptocurrency on offer, with differentiating features between each, however one such coin becoming a household name is Bitcoin. And so as cryptocurrency becomes more widespread, it is more likely that claimants may own these digital assets. 

Whilst the cryptocurrency purchased by the claimant will not sit in an account such as a typical current account in a bank, it is still held in an “account” per se, and is available to be viewed and statements provided for the same. The claimant could choose to retain their assets on the exchange where they purchased the currency (such as Coinbase), where they will have different “wallets” for each of the currency they have purchased. It is possible to simply transfer GBP onto the exchange, and retain it there without purchasing any cryptocurrency at all. Alternatively, a “ledger” can be purchased which essentially withdraws the currency from the exchange and stores it on a secure hardware wallet which looks similar to a memory stick. The effect of this would be that the claimant’s exchange account looks empty, but the funds would be available to view on their ledger.

Identifying cryptocurrency

Cryptocurrency will typically be purchased by making a bank transfer, or using a credit or debit card and should therefore be identifiable as a transaction on the claimant’s usual bank account statements. However, as opposed to looking like a transfer to another account, it is more likely to appear as an online purchase to a vendor. It is therefore essential that when reviewing the claimant’s statements, consideration is given to all financial transactions going in and out of the claimant’s account (as is best practice). If the reviewer of disclosure does not recognise a vendor’s name on statements, a simple online search for the transaction name should provide the wanted information as to who the transaction has been paid to. Alternatively, a direct request for clarification can be made to the opponent, or Part 18 questions put to them if appropriate.

Not only is cryptocurrency an asset, but it is considered to be a form of income and is therefore subject to tax liability. As such, any claimant withdrawing cryptocurrency from the exchange is required to declare their profits, and pay tax on the same if they meet the income tax threshold. It would be expected that a claimant in such a position would register with HMRC and report their profits using the annual self-assessment tax return. It therefore follows that, as the claimant is required to provide full disclosure, the defendant is entitled to sight of these tax returns.

What arguments can be raised?

If you’ve identified assets such as cryptocurrency, or other accounts that the claimant has failed to disclose, there are a number of avenues that can be considered to challenge the claimant’s impecuniosity plea:

Debarral Orders

Do we have a debarral paragraph in the Court Order that can be relied upon? Even if the order is not worded as a debarral, it may be an unless order, or the claimant may have failed to comply with the spirit of the order. As stated above, cryptocurrency can be a form of income and so must also be included in disclosure depending upon the wording of the order. It should be argued that these accounts, whilst not traditional, have lists of transactions, statements, and account balance information, which is akin to traditional bank and credit card accounts.

Breach of Practice Direction 16

By not pleading all of the relevant facts, including cryptocurrency and online accounts, the claimant would be in breach of Practice Direction 16 and so should be unable to rely upon impecuniosity and must seek relief from sanctions and disclose the accounts should they wish to pursue it. At the very least, there should be costs sanctions.

The claimant will likely have access to the funds

Does the claimant have access to the funds that they have transferred, or the cryptocurrency that they have purchased? If the claimant can withdraw these funds, consider whether it is reasonable for them to have done so to mitigate their losses. In respect of cryptocurrency, this is withdrawable however, it may take a few days to process. There are also potential tax implications, but as an income source these funds should be utilised if available.

The claimant could have utilised those funds

Consider whether you can raise the argument that the claimant should have utilised the funds that they were spending to have repaired/replaced their vehicle, or to have paid for hire on the open market. There will be a question of reasonableness surrounding the claimant’s access to these accounts, including how long it would take to access them. Even if not immediately available, there is no reason why a claimant could not withdraw funds into a traditional bank account to assist with hire.

Application for Disclosure

Online only accounts, and as financial assets, cryptocurrency, will fall within CPR 31.6 for standard disclosure in credit hire cases where the claimant is pleading impecuniosity. Whilst currently novel, cryptocurrency is likely to become more and more relevant. If cryptocurrency, or the online accounts, are spotted at an early stage and the claimant is refusing disclosure, an application can be made for specific disclosure under CPR 31.12.

The growth and popularity of cryptocurrency means that defendant credit hire practitioners need to be vigilant when investigating impecuniosity and be mindful that the claimant may have access to cryptocurrency which will impact their impecuniosity status. 

For further information on our expertise in this space please see our Blockchain and Cryptoassets page.

Authors

Helen Mason

Helen Mason

Birmingham

+44 (0) 121 698 5309

James Ellis

James Ellis

Bristol

+44 (0)117 918 2051

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