Cryptocurrencies, like Bitcoin and many others, have being growing in popularity for several years, but have posed a challenge in several legal areas. This has included insolvency laws. After all, how can you include as an asset something that’s not only non-physical, but also anonymous?
However, English law has recently started trying to define cryptocurrencies as assets, so what does that mean for insolvency law?
The Problem with Cryptocurrency
Both the advantages and problems associated with cryptocurrency tend to derive from the fact that they use distributed ledger technology (DLT). This makes them decentralised, meaning that there’s no single person or entity in control, as there would be in a bank, for instance. It also means that, although accounts are open to inspection, those accounts are anonymous.
This is, of course, why cryptocurrencies are popular with criminals, since transactions are almost impossible to trace. However, even when legally used, it means that such assets have been difficult to define as possessions.
The two traditional types of possession are physical objects that can be exchanged and actionable processes, such as claiming a debt. Cryptocurrency assets aren’t a good fit for either, so both individuals and companies have been able to keep wealth hidden during insolvency proceedings. However, this is now changing.
Legal Moves on Cryptocurrency
In recent years, the UK Jurisdiction Taskforce (UKJT) has argued that cryptocurrency does in fact meet the existing legal definition of property — it’s definable, identifiable by third parties, capable of being transferred and reasonably permanent.
While this argument has no legal force, English courts have begun to use it as a guideline in making decisions. A landmark ruling came in 2019, in a case where a company was seeking to recover a ransom they’d paid in Bitcoin to cyber criminals. The court used the UKJT definition to grant an injunction preventing the defendants from moving the assets.
Since then, several other cases have returned similar judgements, recognising cryptocurrency assets as property that could potentially be seized by the court.
What Are the Implications for Insolvency and Debts?
Although the status of cryptocurrency in relation to insolvencies or debts hasn’t been tested in court, it seems likely that the rulings from the other cases would apply here. For example, if a company or individual has converted traditional currency into cryptocurrency in order to prevent it being seized, the Insolvency Practitioner may be able to reverse the transaction.
Another consequence is that cryptocurrency transactions may be treated the same as other types of transaction in cases where directors carry out wrongful or fraudulent trading on behalf of a company threatened with insolvency.
In spite of these precedents, cryptocurrency may in practice be difficult to trace and seize. However, if you believe a debtor who claims to be unable to pay is actually hiding their assets in cryptocurrency, give me a call to discuss whether there’s a good chance of pursuing your money in this way.