Issue link: https://digital.shearman.com/i/1479657
Cryptoassets & Insolvency 20 As cryptoassets constitute property they can be used as security, such as to support a loan or other financial transaction. We expect to see an increasing use of cryptoassets as security as crypto products become more established and the sector becomes more regulated. The type of cryptoasset will determine the security options available, but the fact that they are all intangible assets has a significant bearing. • Charge: similar to other intangible assets such as bank accounts or shares, cryptoassets can be secured by way of a charge. • Mortgage: technically possible where a cryptoasset represents bearer securities (or other assets that can be secured by way of a mortgage). • Pledge: not possible because cryptoassets are not capable of being transferred by delivery of possession. • Lien: as with the case of pledges, the English Court of Appeal concluded that a lien could not be taken over intangible assets in Your Response Ltd v. Datateam Business Media Ltd. As with any lending arrangement, those financing or facilitating cryptoasset transactions will often look to protect their investment by taking some form of collateral over assets of the borrower. However, there are a number of considerations (and potential challenges) in relation to taking and enforcing cryptoasset collateral. A particular focus will be whether a transaction may fall within the scope of the Financial Collateral (No 2) Regulations 2003 (FCA Regs), either as a security financial collateral arrangement or title transfer financial collateral arrangement, such that it would benefit from the disapplication of certain statutory formalities in relation to the taking of security and the modification of insolvency law provisions. Certain cryptoassets (in particular, cryptocurrencies) could be viewed to fall within the definition of "financial instruments" in the FCA Regs and therefore be eligible financial collateral. However, the legal position is currently unclear. For example, in the context of security financial collateral arrangements, the requirement for the financial collateral to "be in the possession or under the control of the collateral taker or of a person acting on the collateral taker's behalf," could prove difficult to show within a DLT framework (in particular, note the discussion above regarding the unsuitability of the concept of "possession" to cryptoassets). Furthermore, in instances of enforcement, crypto creditors will frequently need to rely on the actions of others (e.g., where private keys held by different parties are required to transfer an instrument). As such, there is uncertainty as to whether (and if so, in what circumstances) the FCA Regs apply. We highlight some potential implications on the following slides. Security, Netting and Enforcement