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Crypto and Insolvency Brochure

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13 Identifying and Accessing Cryptoassets Cryptoassets & Insolvency 13 Dooga Ltd (t/a Cubits) (Dooga) (2018) Administrators for the U.K.-headquartered cryptoasset exchange and storage facility confirmed in their progress report in June 2019 that although they had: i. located the digital wallet containing the company's cryptoassets; and ii. visibility on all transactions, they could not access the cryptoassets because they did not have access to the private keys. The currently appointed liquidators may require the assistance of the English Courts to secure access to the private keys so as to take control of the cryptoassets. 01 Philip Stephen Wallace (as liquidator of Carna Meats (UK) Limited) v. George Wallace [2009] EWHC 2503 (Ch) The High Court held that liquidators' powers of discovery under s236 IA86 can be used extraterritorially. Combined with the UKJT Statement, this decision may assist officeholders seeking to compel directors or others who might hold a private key to hand it over, even if such individuals are residents outside the U.K. The UKJT considers that private keys should be treated as information and as such s.236 IA86 (i.e., the ability to compel an individual to deliver up company books, papers or other records) will apply. 02 Cryptoassets may be practically impossible to trace without their private key. A DIP/IP will be unable to access, safeguard, transfer, or convert a company's cryptoassets without cooperation from the entity / individual responsible for storing a company's digital cryptoasset credentials. Digital credentials stored offline are at greater risk of loss and destruction and can prove more challenging for DIPs/IPs to locate. Where a cryptoasset holder (or suspected cryptoasset holder) refuses to co-operate, DIPs/IPs should take steps to freeze any identified cryptoassets to minimize the risk of the estate being dissipated. While (at least at this stage) there will be no bank to receive service of the order, it could be served on cryptocurrency exchanges. While third parties (e.g., banks and accountants) in "orthodox" insolvencies will usually cooperate with DIPs/IPs due to regulatory or reputational reasons or existing contractual relationships with the company, cryptoasset insolvencies (and the absence of certain pressure points) may not induce the same level of cooperation. Bankruptcy courts in the U.S. and IPs in the U.K. have a duty to consider the factors that contributed to an insolvent entity being unable to pay its debts, in particular the conduct and actions of directors or de facto directors. DIPs and IPs also have the power to set aside transactions and return assets / value to the insolvent estate. However, the makeup of blockchain transactions can make it nearly impossible to look back and track transaction sequences. Where necessary expertise to identify or locate cryptoassets is needed, a cybersecurity or tracing expert may be engaged to search for the digital wallet. The defining characteristics of cryptoassets can make it very difficult to establish their existence in the first place. Once identified, acquiring the private key and accessing the wallet may prove even more challenging. Finally, understanding the applicable legal and regulatory position will determine which cryptoassets fall within a bankrupt / insolvent estate and the obligations of the DIP/IP in relation to them.

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