Issue link: https://digital.shearman.com/i/1479657
PROPERTY OF THE ESTATE: Where a crypto exchange or platform enters insolvency proceedings, a key consideration will be whether the cryptoassets are property of the insolvent estate under r.1.2 Insolvency (England and Wales) Rules 2016, such that the customer is an unsecured creditor, or whether the cryptoassets are held on trust for the customer. DISTRIBUTING CRYPOASSETS / CRYPTOASSET PROCEEDS: If the cryptoassets form part of the insolvent estate, a further consideration will be whether creditors should receive the value of their admitted claim (or their lower entitlement based on estate realizations) in cash, or through a dividend-in-specie of the cryptoassets. CLAIM ASSESSMENT: Particularly where a cryptoasset class has been subject to significant price volatility, determining the appropriate value for a claim based on that cryptoasset will be a key consideration for an IP. AVOIDANCE POWERS: Liquidators and administrators have significant powers under the IA86 to challenge transactions effected in certain periods prior to insolvency (e.g., transactions at undervalue under s.238 and preferences under s.239). The officeholder will need to assess if there may be grounds to use such powers, and if so, the utility of doing so if the cryptoassets may be difficult to recover and/or the transaction counterparty difficult to trace. Key Legal Issues for U.K. Insolvency Proceedings Cryptoassets & Insolvency 16 While IPs often face an obstacle course of considerations, the complexities may be even more acute when dealing with a relatively niche asset class with minimal legal and regulatory safeguards (including judicial precedent) on which to rely. Similar to a case before a U.S. Bankruptcy Court (for which, see corresponding U.S. analysis on slides 27 – 32), the following issues may require determination in U.K. crypto-insolvencies: • whether the cryptoassets are property of the estate; • whether to realize the cryptoassets and distribute the fiat currency proceeds, or to distribute the cryptoassets themselves to creditors; • how to value claims linked to cryptoassets; and • whether there is scope to challenge transactions or actions taken in relation to cryptoassets prior to the commencement of the insolvency proceedings.