The impact of cryptocurrency on impecuniosity: do you identify digital assets?

Cryptocurrency is becoming more widespread and the way we collect and spend our money is changing. As many applicants plead impecuniosity in lease applications and provide their financial information 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 also to be sure that we can properly assess the applicant’s financial situation.

In this article, we will examine how cryptocurrency can affect the visibility of the applicant’s finances and the impact it has on the applicant’s impecuniosity status.

What is Cryptocurrency?

Known as digital currency, cryptocurrency relies on a decentralized network usually based on blockchain technology. Being decentralized, the currency escapes the control of the government and the authorities and is not linked to the banking system. Cryptocurrency can either be “mined” (whereby a network of computers validates the code behind the blockchain, thereby earning the currency), or purchased on online exchanges such as Coinbase.

Cryptocurrency has many advantages, including faster and cheaper transfers, as well as the possibility of secure online transactions without the use of a third-party intermediary such as a bank. Fueled by fear of an economic shutdown caused by the COVID-19 pandemic, Distributed Ledger Technology (DLT) is gaining traction and is seen as a significant future disruptor for many industries. On the flip side, however, unbacked cryptocurrency (cf stablecoins) is highly volatile, requires significant energy consumption to mine, and, ownership being harder to trace, is notoriously known to be used in criminal activities such as money laundering.

There are many types of cryptocurrencies offered, with differentiating characteristics between each, but one such coin is becoming a household name is Bitcoin. And so, as cryptocurrency spreads, it is more likely that claimants own these digital assets.

Although the cryptocurrency purchased by the applicant is not placed in an account such as a typical checking account at a bank, it is still held in an “account” per se, and can be viewed and statements are provided to this effect. The applicant could choose to keep their assets on the exchange where they purchased the currency (such as Coinbase), where they will have different “wallets” for each of the currencies they purchased. It is possible to simply transfer GBP to the exchange and hold it without buying any cryptocurrency at all. Alternatively, a “ledger” can be purchased which essentially withdraws currency from the exchange and stores it on a secure hardware wallet that resembles a USB drive. The effect of this would be that the applicant’s exchange account appears empty, but the funds would be available for viewing on their ledger.

Cryptocurrency identification

Cryptocurrency will typically be purchased by making a wire transfer or using a credit or debit card and should therefore be identifiable as a transaction on the applicant’s regular bank account statements. However, instead of looking like a transfer to another account, it’s more likely to look like an online purchase for a vendor. It is therefore essential that when reviewing the claimant’s statements, account is taken of all financial transactions in and out of the claimant’s account (as is best practice). If the Disclosure Examiner does not recognize a vendor’s name on the statements, a simple online search of the transaction name should provide the desired information about who the transaction was paid to. Alternatively, a direct request for clarification can be made to the opponent, or questions from Part 18 can be posed to them, if appropriate.

Not only is cryptocurrency an asset, but it is considered a form of income and therefore subject to tax. As such, any claimant who withdraws cryptocurrency from the exchange is required to declare their profits and pay taxes on them if they reach the income tax threshold. An applicant in such a position would be expected to register with HMRC and declare their profits using the annual self-assessment tax return. It follows, therefore, that since the plaintiff is required to provide full disclosure, the defendant is entitled to see these tax returns.

What arguments can be raised?

If you have identified assets such as cryptocurrency or other accounts that the plaintiff has not disclosed, there are a number of avenues that can be considered to challenge the plaintiff’s impecuniosity plea:

Exclusion orders

Do we have an exclusion paragraph in the court order that we can rely on? Even if the order is not worded as a prohibition, it may be an order unless the applicant has not complied with the spirit of the order. As noted above, cryptocurrency can be a form of income and therefore should also be included in the disclosure depending on the wording of the order. It’s worth pointing out that these accounts, while not traditional, have transaction listings, statements, and account balance information, akin to traditional bank accounts and credit cards.

Breach of Practice Direction 16

By not citing all relevant facts, including cryptocurrency and online accounts, Plaintiff would violate Practice Direction 16 and therefore should not be able to rely on impecuniosity and should seek relief from sanctions and disclose the accounts if he wishes to sue him. . At the very least, there should be cost penalties.

The applicant will likely have access to the funds

Does the applicant have access to the funds they transferred or the cryptocurrency they purchased? If the claimant can withdraw these funds, consider whether it is reasonable that they did so to mitigate their losses. With regard to cryptocurrency, it is withdrawable, but it may take a few days to process. There are also potential tax implications, but as a source of income, these funds should be used if available.

The plaintiff could have used these funds

Consider if you can make the argument that the claimant should have used the funds they were spending to repair/replace their vehicle, or to pay for an open market lease. There will be an issue of reasonableness surrounding the applicant’s access to these accounts, including the time it would take to access them. Even if not immediately available, there is no reason why an applicant cannot withdraw funds from a traditional bank account to help with hiring.

Disclosure request

Online-only accounts and, as financial assets, cryptocurrency, will fall under CPR 31.6 for standard disclosure in credit lease cases where the claimant pleads impecuniosity. Although currently new, cryptocurrency is likely to become increasingly relevant. If the cryptocurrency, or online accounts, are spotted at an early stage and the applicant refuses disclosure, a specific disclosure request may be made under CPR 31.12.

The growth and popularity of cryptocurrency means that defendants’ leasing practitioners must be vigilant when investigating impecuniosity and be aware that the plaintiff may have access to cryptocurrency, which will have impact on his impecuniosity status.