Defining and Dealing with Digital Assets in Bankruptcy

In September last year, the US District Court for the District of Massachusetts gave a ruling to define bitcoin and other cryptocurrencies as commodities. Now it remains to be seen whether bankruptcy courts will follow this precedent when considering cryptocurrency in valuations and distributions.

There is continuing legal uncertainty concerning the approach towards cryptocurrency as an asset, however steps are being taken around the world which will help form a consistent approach. As a starting point, in the recent Tsarkov case in Russia, the Moscow Court of Appeal declared that cryptocurrency could be included in insolvency proceedings. Despite its unusual and intangible nature, it should still be considered simply as an asset of economic value and, as such, be included in any estate under scrutiny.

The Problem with Intangible Property

When someone files for bankruptcy, details of all assets and debts must be disclosed. Although bankruptcy protection for individuals can minimize the loss of assets, so allowing most debtors to keep their possessions, in general, the discharge of debts is exchanged for non-exempt assets. Up until recently, these assets would only consist of material possessions or money in one’s bank account. But, problems can arise when some assets are held as cryptocurrency.

Cryptocurrencies can sometimes be difficult to trace, an insolvent party can easily deny possession of them, and, even if they are rightly declared and tracked, some currencies may not be suitable for liquidation. They may not be publicly traded, or demand for them may be low. In these cases, without a genuine buyer, crypto assets are effectively worthless to creditors.

How to Classify Cryptocurrency

The exact type of property rights that should be granted to crypto assets in cases of bankruptcy and insolvency is also still undecided. However, an increasing number of institutions are now considering them as assets in their services and products. To overcome the difficulties in pinning down cryptocurrencies, the UK Financial Markets Law Committee are looking to create a new category of property. Cryptocurrencies would be known as ‘virtual chose in possession’ in order to reflect their nature as real and yet, at the same time, intangible property.

Solutions to issues surrounding the definition and treatment of cryptocurrencies are quickly evolving, and legal and financial institutions around the world are learning to deal with the intangible nature of cryptocurrency in long-established financial undertakings. Like banknotes and numbers on a statement, cryptocurrencies are simply another medium of exchange and, as such, will likely become widely accepted as assets in cases of bankruptcy and insolvency.

Image courtesy of 21 Cryptos