Issue link: https://digital.shearman.com/i/1479657
Valuation, Realization and Distribution While there is no certainty that an IP will acquire sufficient control over the digital assets and systems required to transfer, trade and subsequently make realizations in respect of cryptoassets, there is also a question of how creditors with accepted claims deriving from cryptoasset holdings should receive their distribution, e.g., should the distribution be in the form of the relevant cryptoasset or converted into the fiat currency applicable in the jurisdiction governing the proceedings (and if so, when would such conversion rate be determined)? Rule 14.21 of the Insolvency (England and Wales) Rules 2016 provides that a liquidator, administrator or bankruptcy trustee must convert all proofs of debt incurred or payable in a foreign currency into sterling at the applicable exchange rates prevailing on the date on which the relevant insolvency proceedings commenced. However, this will not apply to cryptocurrencies (or for that matter, other forms of cryptoasset) since they are not recognized as legal tender (the one exception being El Salvador, but since El Salvador allows automatic convertibility of Bitcoin into the U.S. Dollar, the U.S. Dollar could be used to determine the appropriate FX conversion rate for the purposes of the claim). In the absence of a Rule 14.21 equivalent, valuing claims linked to cryptoassets could present challenges for an IP. IPs will likely require external expertise to assist in helping them identify, collect in and preserve cryptoassets identified as property (or potential property) of the insolvent estate. Furthermore, realizing and/or distributing cryptoassets (or the legal tender proceeds derived from their sale) may be costly, complex and time-consuming. Care should also be taken when transferring cryptoassets. In the liquidation of Canadian currency exchange Quadriaga, cryptoassets were allegedly transferred to the wrong cold wallet, resulting in significant losses because the asset could not simply be returned. IPs should therefore take control of the cryptoasset immediately and transfer it to a devoted cold wallet. Finally, IPs will be cautious to avoid flooding the market when seeking to sell cryptoassets as their relative illiquidity, particularly at a time of heightened market volatility, could decrease the cryptoassets' value and negatively impact returns to the estate. An administrator or liquidator could therefore choose to seek creditors' permission under rule 14.21 of the Insolvency (England and Wales) Rules 2016 to divide cryptoassets in their existing form among the company's creditors according to their estimated value. Whether or not creditors elect to accept a dividend in specie of the cryptoassets, offering creditors this option could help protect the IP against claims that they sold the cryptoassets at a time or in a manner that resulted in lesser returns for creditors than might otherwise have been achieved (although the Court will always be slow to find against an IP, provided they took a reasonable approach in the circumstances). Cryptoassets & Insolvency 18 Where an insolvent entity has dealt in both traditional currency and cryptoassets, disputes relating to creditor entitlements, valuation, exchange rates and methodology of realization are likely to be exacerbated. An IP will also need to study the state of the market for the particular cryptoasset it is holding since: Not all cryptoassets are liquid, and as a result, they are subject to volatile deviations in market price; therefore, mistiming a liquidation / sale of a cryptoasset holding could expose the IP to criticism. 01 Were an IP to "flood the market" with a certain cryptoasset (with the objective to exchange it for traditional currency and subsequently distribute the proceeds), the value of that cryptoasset could be diminished. 02