Cryptocurrencies from an insolvency perspective

Cosgrove Gaynard Solicitors

In the context of insolvency, insolvency practitioners now have to deal with a new class of “digital asset” which I expect will cause some difficulty in terms of tracing and identification of assets, particularly taking into mind that there are a number of privacy coins designed to specifically avoid tracking and, indeed, there are crypto exchanges registered outside of EU jurisdictions and therefore avoiding stringent privacy policies which you would expect in this jurisdiction.

It is probably clear that we believe
cryptocurrencies and blockchain technology are here to stay.

 

Simple statistics on Google search results
regarding the words “Cryptocurrency”, “Blockchain” and “ICOs” shows the intense
level of interest  with investors from
all over the world ready to discover the next big ICO or cryptocurrency in any
given country.

 

It has been described as a new digital
world order of kind but was does appear to be clear is that there is a new
digital world unfolding and in its most simplistic form, this allows for secure
money transactions to take place from one country to another in a matter of
seconds.

 

A lot of Governments have been slow to
recognise cryptocurrencies and, as such, there are still regulation and
legislative issues out there that need to be resolved. 

 

In the context of insolvency, insolvency
practitioners now have to deal with  a
new class of “digital asset” which I expect will cause some difficulty in terms
of  tracing and identification of assets,
particularly taking into mind that there are a number of privacy coins designed
to specifically avoid tracking and, indeed, there are crypto exchanges registered
outside of EU jurisdictions and therefore avoiding stringent privacy policies
which you would expect in this jurisdiction. 

 

You would expect that eventually insolvency
practitioners will seek to put a mechanism in place to allow them access to exchanges
or blockchain technology to investigate transactions from a forensic
accountancy perspective, however, how this plays out is yet to be determined.  I expect there will be significant resistance
to any such powers being granted given the whole basis for the invention of
cryptocurrencies was decentralisation.

 

For now, insolvency practitioners will have
to rely on the cooperation of a director or person in relation to declaring and
liquidating digital assets unless they can otherwise trace them through bank
accounts etc. 

 

Recent case law comes from Russia where an
individual who was declared bankrupt was ordered to provide information about
his cryptocurrency holdings.  However,
interestingly enough, a decision is yet to be made on whether the
cryptocurrency holdings of the bankrupt can be included in the bankruptcy
estate and made available to the creditor. 
Obviously our insolvency regime in Ireland is extremely different to
Russia, however, it is interesting to note that this is an asset class that
will have to be looked at in relation to defining whether it is actually an
asset or money or whether, indeed, insolvency rules apply or need to be changed
in relation to this new technology.

 

case,  insolvency has
shown quite a large number of issues in relation to this new crypto world.  In this case, there was an exchange that
entered administration after hackers stole approx. 850,000 bitcoins forcing Mt Gox
which was the biggest exchange for bitcoin at the time , into liquidation.  The trustees did subsequently recover some  of the bitcoins which were stolen and,
indeed, the sale of these bitcoins has in recent months been blamed for
volatility in the market and the fluctuations in bitcoin prices.

 

Interestingly enough, the value of the
estate in this case grossly exceeded the claims of creditors as they only
recovered the value of the coins they had at the time which was approx.. $550
per coin, however, on recovery the value was close to $1.5 billion.  In this case an interesting question arose as
to whether creditors had a proprietary claim in respect of the digital currency
or did they have a claim for the cash value of the bitcoin as at the date of
the insolvency as mere creditors. 

 

Unfortunately for creditors, under Japan’s
civil code the Court found that creditors could not have proprietary ownership
in the bitcoins on deposit and, as such, they were only entitled to the cash
equivalent at the date of the insolvency and this seems to have resulted in a
billion dollar windfall for the majority shareholder of Mr Gox. 

 

Some Mt Gox creditors have, we believe,
sought conversion of the bankruptcy proceeding into "civil
rehabilitation" under the Japanese Companies Creditors Arrangement Act which
 could result in a plan of compromise by
which creditors could recover a pro-rata share of their original holdings in
the form of bitcoin rather than yen, allowing them to benefit from the massive
appreciation in bitcoin value post-filing.

 

It is likely this issue will arise again
whether it be in Japan or in another jurisdiction whereby crypto owners will
seek to assert a proprietary interest to recover tokens held on an  exchange .

 

 

It may be that we will have to look to
current legislation to see if it is equipped to handle this new digital rising
and either way it is clear that this technology will create some new and
interesting issues for insolvency practitioners to overcome. 

If you're looking for more information on Fintech law and hiring a Fintech lawyer, please check out our Fintech law blog.


 

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