Property of the Bankruptcy Estate (cont.)
Cryptoassets & Insolvency 30
Cryptocurrencies may also be characterized as "financial assets" subject to Article 8 of the UCC. Part 5
of Article 8 created a system of indirect securities holding based upon immobilization of legal title to
securities: the physical securities certificates are deposited at issuance with a central securities
depository (usually the Depository Trust Company), which maintains the physical certificates in its
vaults. The depository (called a "securities intermediary") then tracks the beneficial interest in the
securities (or more precisely the broker for the beneficial owner), which is called a "securities
entitlement," on its electronic books and records.
So, what is the effect of being classified as a "financial asset" under the UCC?
If cryptocurrencies can be deemed "financial assets" and crypto exchanges deemed "securities
intermediaries" under the UCC, then "all interests in that financial asset held by the securities
intermediary will be held by the securities intermediary for the entitlement holders, will not be property
of the securities intermediary, and [will not] be subject to claims of creditors of the securities
intermediary (except as provided in Section 8-511, which provides certain exceptions for secured
creditors). See UCC § 8-503(a). As a result, customers could receive treatment ahead of general
unsecured creditors with respect to the cryptoassets such customers have an interest in (shared on a
pro rata basis).
Section 8-511 of the UCC provides:
a) Except as otherwise provided in subsections (b)
and (c), if a securities intermediary
does not
have sufficient interests in a particular
financial
asset
to satisfy both its obligations
to entitlement holders
who have security
entitlements to that financial asset and its
obligation to a creditor of the securities
intermediary who has a security interest in that
financial asset, the claims of entitlement
holders, other than the creditor, have priority
over the claim of the creditor.
b) A claim of a creditor of a
securities
intermediary
who has a security interest in
a financial asset
held by a securities
intermediary has priority over claims of the
securities intermediary's
entitlement
holders
who have security entitlements with
respect to that financial asset if the creditor has
control over the financial asset.
c) If a clearing corporation
does not have
sufficient financial assets
to satisfy both its
obligations to entitlement holders
who have
security entitlements with respect to a financial
asset and its obligation to a creditor of the
clearing corporation who has a security interest
in that financial asset, the claim of the creditor
has priority over the claims of entitlement
holders.
The Coinbase User Agreement provides the
following below, which would fall under (iii) of the
definition of "financial asset":
UCC Definitions:
"Entitlement holder" means a person identified in the records of a securities intermediary
as the person
having a security entitlement
against the securities intermediary.
"Financial asset," means:
i. a security;
ii. an obligation of a person or a share, participation, or other interest in a person or in
property or an enterprise of a person, which is, or is of a type, dealt in or traded on
financial markets, or which is recognized in any area in which it is issued or dealt in as a
medium for investment; or
iii. any property that is held by a securities intermediary
for another person in a securities
account
if the securities intermediary has expressly agreed with the other person that the
property is to be treated as a financial asset
under this Article.
"Securities intermediary" means:
i. a clearing corporation;
or
ii. a person, including a bank or broker,
that in the ordinary course of its business
maintains securities accounts
for others and is acting in that capacity.
