Issue link: https://digital.shearman.com/i/1479657
Property of the Insolvent Estate English common law and legislation recognizes that assets held on trust for a third party remain the property of that third party, and thus should not be made available for distribution to other parties (e.g., creditors in an insolvency). Therefore, whether assets are held on trust for third parties can affect the amount / value of assets falling within an insolvent estate, which can be particularly significant in the case of businesses such as crypto exchanges. Whether cryptoassets are in fact held on trust will require analysis of the terms on which they are held. Under English law, trusts can be expressly created or implied by the general law. For example, a crypto exchange could hold cryptoassets on behalf of its customers under an express trust created through the exchange's terms and conditions. Alternatively, the exchange could hold those cryptoassets under a constructive trust (a category of implied trust) if, for example, the cryptoassets were legally owned by the crypto exchange but it is shown that the exchange should really own the property on behalf of the customer (i.e., such that the customer retains the beneficial interest). The wider intricacies of trust law are beyond the scope of this paper, but unless an express trust relationship can be evidenced through documentation between the exchange and the customer, an IP managing insolvency proceedings in relation to that exchange could face difficult legal issues, some of which could potentially lead to litigation (see Lehman, MF Global, etc.). It also remains unclear whether cryptoassets held by an exchange platform on behalf of a beneficial creditor in an insolvency situation would be classified as client assets or segregated assets; the distinction can create significantly different outcomes for customers and will need to be considered on a case-by-case basis. If the cryptoassets are classified as client assets under the FCA's Client Assets Sourcebook (CASS) rules, they will be subject to an automatic statutory trust in favor of the customer from the time the exchange receives the assets. Furthermore, where assets are deemed segregated liquid assets, the IP will usually hold those assets until distribution is necessary, whereas non-segregated funds will be put into an "asset pool," and the IP will look to liquidate the cryptoassets and distribute in a fiat currency to all creditors (trade and customers etc.). It should also be noted that certain special administration regimes have different administration objectives to those prescribed by paragraph 3(1) IA86 and the categorization of assets as "client assets" can be significant in that context (for example, one of the administration objectives of The Investment Bank Special Administration Regulations 2011 is to ensure "the return of client assets as soon as reasonably practicable"). Cryptoassets & Insolvency 17 In Ruscoe v. Cryptopia Ltd. [2020] NZHC 728 the New Zealand High Court held, in a liquidation, that the cryptocurrency in question was property held in trust by the exchange for the benefit of account holders. The High Court distinguished a Singaporean Court of Appeal case, B2C2 Ltd. v. Quoine Pte Ltd., [2019] SGHC(I) 3, [2019] 4 SLR 17 [B2C2 (SGHC)], in which the Court of Appeal overturned the High Court's finding in that case that there had been a breach of trust, stating that there was insufficient intention to create a trust.