Issue link: https://digital.shearman.com/i/1479657
Ownership Issues Cryptoassets & Insolvency 10 Given the rapid growth and complexity of the asset class, it is not surprising that cryptoassets and their core underlying technology are not completely understood. This is made more acute by the lack of legislation directly focused on cryptoassets and the relatively thin body of case law dealing with disputes in relation to them. Despite the intangible nature of cryptoassets, the English Courts have held that they can be characterized as "property" (although to date, such findings have only been on an interim basis). In the 2019 case of AA v. Persons Unknown, the Court confirmed that cryptoassets were a form of property (and therefore capable of being subject to a proprietary order) on the basis they met the four criteria of property established in National Provincial Bank v. Ainsworth [1965], namely definable, identifiable by third parties, capable in their nature of assumption by third parties and having some degree of permanence. DO CRYPTOASSETS QUALIFY AS PROPERTY? In 2019, the UKJT provided guidance through the UKJT Statement that cryptoassets are to be treated "in principle as property" on the basis that they have "all the indicia of property" and their intangible nature "does not disqualify them from being property." The UKJT Statement also concluded that cryptoassets fall within the definition of property for the purposes of s426(1) of the Insolvency Act 1986 (IA86). As such, IPs will have a duty to realize the value of any cryptoassets owned by the estate wherever possible. In order to do this, they will need to be able to identify, access, preserve, value and then distribute the assets. Cryptocurrencies are not recognized as legal tender in the U.K., but as noted on slide 6, security tokens are classified as "specified investments" for the purposes of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. In the U.S., in 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency is treated as property for Federal income tax purposes. The CFTC has classified cryptocurrencies as commodities as opposed to currencies. In the 2018 case Commodities Futures Trading Commission v. My Big Coin Pay, Inc., the U.S. District Court of Massachusetts held that the CFTC could regulate the cryptocurrency in question because it qualified as a commodity. The SEC has stated the view that many cryptoassets are securities. The legal status in the U.S. of whether cryptocurrencies are currencies or commodities poses complex challenges for bankruptcy courts, particularly in the context of asset valuation. In Hashfast Technologies LLC v. Lowe (In re Hashfast Technologies LLC), a 2016 case decided by the Bankruptcy Court for the Northern District of California, the court had to determine whether the debtor had fraudulently transferred its Bitcoin assets to another party, and if so, whether the transferee had to return the coins themselves or their value to the bankruptcy estate. If the court classified Bitcoin as a currency, the transferee would have been required to return the cash value of the Bitcoins, rather than the coins themselves. The court did not decide the issue but did make clear that Bitcoins are distinct from U.S. dollars.