Insolvency and cryptocurrency
Cryptocurrency has emerged as a revolutionary digital asset, disrupting traditional financial norms and garnering widespread popularity. This blog delves into the intricate relationship between cryptocurrency and insolvency, navigating through regulatory complexities, challenges posed during insolvency, and potential solutions. The recent insolvency case of FTX Token in the US serves as a stark reminder that understanding the nuances of cryptocurrency insolvency is not merely an academic exercise but a crucial requirement for sustainable growth in this dynamic sector.
Cryptocurrencies, such as Bitcoin, operate on a decentralized global network, facilitating peer-to-peer transactions without the involvement of traditional intermediaries like banks. The underlying technology, blockchain, ensures a secure and transparent ledger system. The term “crypto” signifies the use of encryption for securing communication, relying on cryptographic algorithms and key pairs for user authentication.
Crypto Assets: Property or Enigma?
The question arises as to whether crypto assets qualify as property under insolvency law. The unequivocal answer is yes. Insolvency professionals tasked with assessing asset value and bankruptcy courts must recognize the inclusion of crypto assets in the debtor’s portfolio. Access to the private key is essential for evaluating the value of the crypto assets, considering the volatile nature of the market. Without such access, controlling and assessing these assets becomes a challenging task.
A pivotal issue in insolvency law revolves around the classification of crypto assets as property. Upon examination, the affirmative response to whether cryptocurrency constitutes assets prompts a closer examination by insolvency professionals. Insolvency professionals must ascertain if the debtor’s assets fall within the realm of crypto assets, understanding the inherent volatility of this market. Access to the private key becomes imperative for effective valuation, as control and access would be otherwise challenging.
Another critical aspect pertains to the allocation of funds, weighing the choice between cryptocurrency and fiat currency. The impact of large cryptocurrencies must be carefully assessed during conversion, considering the potential devaluation associated with swift transfers. Once in the digital wallet of the insolvency professional, a structured approach involves requesting the exchange and sale of cryptocurrency, with subsequent transfer to the professional’s bank account. For cases involving overseas cryptocurrency holdings, adherence to provisions under the UNCITRAL Model Law is recommended to secure and facilitate the sale of assets.
Despite the growing prevalence of cryptocurrency, the Insolvency and Bankruptcy Code (IBC) in India does not explicitly recognize it as a form of asset or property eligible for insolvency proceedings. This omission introduces uncertainty and ambiguity for both cryptocurrency users and insolvency practitioners, particularly in situations where cryptocurrency-related businesses face insolvency or cryptocurrency is held as part of the assets, or when there are obligations associated with it.
Valuation of Crypto Assets
Jurisdictional variations add complexity to the treatment of crypto assets. While countries like the United States and the United Kingdom generally acknowledge crypto assets as property subject to seizure and distribution in insolvency cases, others, like Japan, lack a clear legal framework for handling crypto assets. These disparities underscore the need for a harmonized international approach to streamline the treatment of crypto assets in insolvency proceedings.
Unlike traditional assets with objective valuation criteria, crypto assets pose unique challenges due to their highly volatile and subjective nature. Determining their value within the context of insolvency becomes intricate, requiring insolvency practitioners to adapt and employ specialized methodologies.
The digital nature of crypto assets exposes them to vulnerabilities, including hacking and cyberattacks. Robust security protocols are imperative for insolvency practitioners to safeguard against potential theft or loss during the insolvency process.
Determining whether to maintain funds in cryptocurrency or convert them into fiat currency poses another significant challenge. The impact on large cryptocurrencies during conversion, given their rapid transferability, requires careful consideration. Once secured in the insolvency professional’s digital wallet, requests can be made to exchange and sell cryptocurrency, with necessary references to international provisions if assets are located overseas.
Regulatory Landscape
The regulatory scenario for cryptocurrency-related insolvency in India lacks clarity and consistency. The absence of specific laws or regulations defining and governing cryptocurrency has led to conflicting circulars from entities like the RBI and the Ministry of Corporate Affairs (MCA). The Supreme Court’s stance, emphasizing the legality of cryptocurrency, further complicates matters. The impending “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” adds another layer of uncertainty, as it aims to create a regulatory framework while potentially restricting private cryptocurrencies.
Challenges During Insolvency
Insolvency proceedings within the framework of the Insolvency and Bankruptcy Code of 2016 (IBC) in India encounter distinct challenges when cryptocurrency is involved. The IBC delineates assets broadly, encompassing both tangible and intangible, movable and immovable, current and non-current properties owned or controlled by the debtor. Similarly, it defines a claim as a right stemming from breach of contract, whether secured or unsecured, legal or equitable, and irrespective of its current status.
A primary challenge arises in the identification and valuation of crypto-assets during insolvency proceedings. The intricacies lie in the storage of cryptocurrency within digital wallets, accessed through private keys or passwords. Ownership and transfer hinge upon the verification and consensus of network participants maintaining the distributed ledger or blockchain. This intricate process makes ascertaining the existence, ownership, control, and value of crypto-assets a formidable task in the insolvency context.
Compounding matters, the enforcement and recovery of crypto-assets pose distinctive challenges. Unlike conventional assets, cryptocurrency resists easy seizure, freezing, or attachment by the insolvency resolution professional (IRP) or the liquidator designated under the IBC. Additionally, the irreversible and anonymous nature of cryptocurrency transactions further complicates efforts to trace and recover assets, particularly in cases involving third-party possession or fraudulent transfers.
Addressing these challenges requires a multifaceted approach. Engaging cryptocurrency valuation experts and blockchain analytics firms can enhance transparency in asset valuation. Collaboration with specialized crypto-asset recovery firms and law enforcement agencies is crucial for effective enforcement and recovery. Establishing specific legislation for the regulation and supervision of crypto-assets, along with industry-wide standards, is essential to adapt to the evolving technological landscape.
Conclusion
The intersection of insolvency and cryptocurrency in India demands a clear legal framework, recognizing cryptocurrency as a distinct asset under the Insolvency and Bankruptcy Code. Mechanisms for the identification, valuation, and recovery of crypto-assets must be developed. Additionally, enhancing the understanding of technicalities and implications among stakeholders is imperative for navigating this evolving landscape successfully.
To know more about us, visit our LinkedIn or Instagram page.
