FinTech

Crypto and Insolvency Brochure

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Introduction Cryptoassets have emerged from relative obscurity to become an increasingly significant and mainstream presence: in just five years the global market cap for cryptocurrencies rose from around $15bn to over $3tn at its peak in November of last year. This has fueled a prolific expansion of crypto- focused businesses (e.g., cryptocurrency exchanges, crypto payment gateways, custodian wallet providers) and has led to increasing numbers of businesses accepting crypto as a form of payment and/or holding it on their balance sheets. In this context, it is clear that "cryptoasset insolvencies" (for the purposes of this paper, we use this term loosely to refer to insolvencies / bankruptcies involving cryptoassets) will be an increasingly regular occurrence. However, the rapid growth of the asset class has left governments, lawmakers and regulators struggling to determine if and how existing legal and regulatory frameworks apply, or to the extent they do not, what additional laws and regulations may be needed. Therefore, it is important for insolvency practitioners (IPs), debtors-in-possession (DIPs), debtors, trustees, investors, financial institutions and intermediaries, businesses and their advisers to understand the technologies underlying cryptoassets and the evolving legal and regulatory framework (including any potential deficiencies). There have already been a number of high-profile insolvencies of crypto exchange platforms, and insolvencies involving other crypto-focused businesses (including those holding them as an asset, using them to pay creditors or accepting them as payment for goods / services) should rise in line with the growth of the asset class. As highlighted in this paper, the insolvency of such businesses will present unique challenges, testing "tried and trusted" operational processes, laws and jurisprudence. However, while the challenges are significant, so are the opportunities. Practitioners and advisers that allocate the time and resource to develop expertise in the sector will be well placed to secure key mandates and lay the foundations for future growth. Note: This paper focuses on the U.K. and U.S. position and references to IPs are to IPs acting in respect of collective insolvency proceedings (e.g., administration, liquidation), whereas references to DIPs and trustees are to DIPs and trustees acting in bankruptcy and insolvency proceedings. Cryptoassets & Insolvency 3 "Regulators in some jurisdictions will try to curtail activity in this space, but because of its nature as a peer-to-peer technology, that's a very difficult thing to do. It's far wiser for regulators to spend their time thinking about allowing crypto to interact with our traditional legacy financial system. That's a much better way for regulators then to get to know the technology and to get to know this asset class." HESTER PEIRCE COMMISSIONER, U.S. SECURITIES AND EXCHANGE COMMISSION "What's going to happen to Bitcoin? It's really unclear. The price is not just driven by the money- supply rule, it's driven by other speculative forces. That's why it's multiple times more volatile than the stock market." CAM HARVEY SENIOR ADVISER, RESEARCH AFFILIATES

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