Are office holders able to weather the crypto winter?

04 July 2023

In a world full of automation, it comes as no surprise that even our currency has gone through a digital transformation. Whilst it can be generally accepted that such innovation is now a welcomed aspect of our daily lives; the ease of technology does not come without its challenges.

In 2009, the world was introduced to Bitcoin; the first decentralised cryptocurrency that sparked a new world of trading. Since then, we have embraced technology and now have access to over 9,000 other cryptocurrencies in the marketplace, of which more than 70 had a market capitalisation exceeding $1 billion.

Cryptocurrencies have not been without uncertainty and the idea of owning intangible assets has caused some confusion when it comes to ascertaining and dividing wealth. Despite the ambiguity, it is now widely accepted that cryptocurrency falls within the broad definition of Property and the elusive world of crypto is starting to come under siege of insolvency procedures.

Broadly speaking, if Crypto can be traced and secured, then it can be recovered on behalf of the creditors of an insolvent estate. However, this is easier said than done…

Asset recovery process

The unpredictable nature of crypto manifested itself in the worst slump in digital currency, resulting in the loss of billions of pounds and the introduction of ‘Crypto Winter’. This phenomenon is unfortunately not a singular event, but instead refers to periods of sustained lower prices of Crypto currency.

We witnessed one of the more sever Crypto Winters in 2022, with the collapse of TerraUSD and Luna, causing a crash for every major cryptocurrency in the first half of 2022. Since then, we have also seen crypto exchanges such as FTX and BlockFi file for bankruptcy.

Despite the shake in the market, it is clear that crypto is here to stay and office holders are left with little choice but to equip themselves in dealing with multifaceted recovery steps of digital assets.

Identification and ownership of digital assets

The initial process is twofold, identifying digital assets and understanding the ownership of those assets. If the insolvent party claims that they do not own any digital assets and there is little evidence to suggest ownership, the office holder may unknowingly overlook those potential assets. Ultimately, a question of commerciality, the decision to pursue digital assets will be dependent on the level of transparency of the insolvent party, the level of accessibility and how the assets have been stored.

Whilst the Crypto Winter shook the market, seeing a decline in the value of many cryptocurrencies, many still hold significant value. Office holders must work diligently with directors, officers of the company and any service providers in the liquidation to reduce the risk of dissipation.

Due to the nature of Crypto, assets can be easily transferred. Therefore, it is imperative that once the assets come within the knowledge of the office holder, they must be secured and the office holder must identify and work with the individuals holding the private encryption keys to the associated Crypto wallets. It also shouldn’t be assumed that all Crypto will be held on service/exchange-controlled accounts that the Liquidator controls the private key to. Crypto can be held on private addresses and the office holder should seek to move those assets beyond anyone that may have knowledge and access to private keys that could lead to assets being dissipated without the Ips knowledge.

Another difficulty faced by office holders will be reviewing the timing of transactions prior to liquidation. The Insolvency Act 1986 provides office holders with a wide scope of enforcement tools and as such, reviewable transactions will be at the forefront of the challenges faced by office holders due to the volatility and changing nature of the market. Thus, the following should be carefully considered:

  • The jurisdiction clauses within any T&Cs and the domicile of the “owner” of the Crypto assets. Thus, the office holder must be alert to the potential jurisdictional disputes that may arise.
  • Navigating recovery in a volatile market.
  • How to reduce market exposure while securing the best price they can for the assets that will be liquidated.

The challenges faced by office holders when dealing with digital assets will vary depending on the overall complexity behind the ownership and tracing of the assets. Where office holders are able to identify the ownership easily and have access to keys, the value may be realised more quickly and with less onerous investigations. The difficulty for office holders arise where assets held by third parties require balancing against any value realised against the time and cost of complex tracing.

This may then be balanced against the level of cooperation between parties and whether there is a commercial appetite to pursue claims, which will be driven largely by the perceived chances of recovery and identification of suitable parties from whom recovery can be made.

Third party funders may be available to finance such activities, however, will require a full cost-benefit analysis of the merits of the case and the chance of recovery. It is therefore paramount that office holders and all stakeholders involved with the liquidation obtain legal guidance and assistance with navigating and identifying all available options to maximise their returns.

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