Crypto assets, such as cryptocurrencies and non-fungible tokens (NFTs), are increasingly treated as property under English law. While traditional assets fit neatly into the categories of “things in possession” or “things in action,” digital assets often fall outside these definitions due to their intangible nature.
Recognition as Property
English courts and legal bodies, including the UK Jurisdiction Taskforce and the Law Commission, have affirmed that crypto assets can be recognised as a form of personal property. This recognition is essential for their inclusion in a debtor’s estate during insolvency, enabling these assets to be identified, valued, and distributed to creditors.
Challenges in Treating Crypto Assets as Insolvency Property
Despite their recognition as property, crypto assets present distinct challenges for insolvency practitioners due to their unique characteristics.
Ownership and Control
Ownership of crypto assets is often evidenced by control of private keys, the cryptographic tools required to access and transfer the assets. Establishing ownership can be particularly difficult when:
- Private keys are lost or withheld by the debtor.
- Transactions occur pseudonymously on blockchain networks, obscuring the true owner.
In such cases, insolvency practitioners may need to employ forensic blockchain analysis to trace transactions and determine ownership.
Access and Liquidation
The ability to liquidate crypto assets depends on access to private keys. Without these, the assets cannot be transferred or realised for the benefit of creditors. Courts may issue orders compelling the debtor to disclose private keys, but enforcement can be challenging, particularly if the debtor claims they no longer have access to the keys.
Jurisdictional Issues
Crypto assets exist on global, decentralised networks, making it difficult to determine their legal location. This complicates questions of jurisdiction and the enforcement of court orders in cross-border insolvency cases.
Security Interests over Crypto Assets
Creating security interests over crypto assets is another complex area. Traditional mechanisms, such as registration or physical possession, are not directly applicable to intangible digital assets.
Control as Security
Security over crypto assets typically involves controlling the private keys associated with the assets. Legal agreements define the rights and obligations of the parties, but the lack of a centralised register for recording such interests can lead to disputes about priority and enforcement.
Proposed Reforms
The Law Commission has recommended the development of a bespoke statutory framework to facilitate the creation, operation, and enforcement of security interests over crypto assets. This could include the introduction of a centralised register for recording security arrangements, similar to the Land Registry for property.
Tracing and Recovering Crypto Assets in Insolvency
Blockchain Analysis
Blockchain technology provides a public record of all transactions, enabling insolvency practitioners to trace the movement of crypto assets. However, the pseudonymous nature of blockchain transactions can make it difficult to link an asset to a specific individual or entity.
Freezing and Recovery Orders
Courts can issue freezing orders to prevent the dissipation of crypto assets. In insolvency cases, these orders may extend to digital wallets controlled by the debtor. However, the decentralised nature of blockchain networks can complicate enforcement, as the assets may not be held in a jurisdiction where the order is recognised.
Fraudulent Transactions and Preferences
Crypto assets are often used in transactions that could be challenged in insolvency, such as preferential transfers or fraudulent conveyances. Establishing the nature of these transactions and recovering the assets requires careful examination of the blockchain record and associated documentation.
Proving Ownership and Title
Establishing ownership of crypto assets is critical in insolvency, particularly when there are competing claims.
Evidence of Ownership
Ownership is generally demonstrated by control of private keys. However, insolvency practitioners must also consider:
- Whether the debtor holds the assets in a personal or fiduciary capacity.
- Documentation or agreements supporting claims of ownership.
Challenges in Proving Title
The lack of physical or traditional legal markers for crypto assets can lead to disputes about ownership. Insolvency practitioners must navigate these disputes carefully, as errors could expose them to personal liability.
Practical Considerations for Insolvency Practitioners
Identifying and Securing Crypto Assets
Practitioners must take steps to identify crypto assets as part of the debtor’s estate, including:
- Reviewing financial records and transaction histories.
- Engaging blockchain forensic experts to trace assets.
Once identified, securing access to private keys is a priority to prevent dissipation or loss of value.
Engaging Legal and Technical Expertise
Given the complexities of crypto assets, insolvency practitioners should collaborate with legal experts and technology specialists to address issues such as enforcement, tracing, and valuation.
Adopting a Proactive Approach
As crypto assets become more prevalent, insolvency practitioners must stay informed about legal developments and best practices for handling these assets. This includes understanding the implications of proposed reforms and adapting processes accordingly.
Future Directions and Legislative Reforms
The growing use of crypto assets underscores the need for legal reforms to address their treatment in insolvency. Key areas for development include:
- Statutory Recognition of Digital Assets
A unified statutory framework would provide clarity on the legal status of crypto assets and their treatment in insolvency. - Centralised Register for Security Interests
A register for noting security interests over crypto assets would reduce ambiguity and enhance transparency in priority disputes. - Enhanced Enforcement Mechanisms
Developing mechanisms to enforce court orders against crypto assets, including international cooperation, would improve recoverability in cross-border cases. - Guidance for Insolvency Practitioners
Clear guidance on handling crypto assets in insolvency, including tracing, valuation, and liquidation, would support practitioners in fulfilling their duties.
Conclusion
The treatment of crypto assets in insolvency presents significant challenges, reflecting the unique characteristics of these assets and the complexities of existing legal frameworks. While English law has made strides in recognising crypto assets as property, further reforms are needed to address issues such as ownership, security interests, and enforcement.
For insolvency practitioners, handling crypto assets requires a careful balance of technical expertise, legal acumen, and practical judgment. As the use of digital assets continues to grow, their integration into insolvency processes will remain a dynamic and evolving area of law. Practitioners must be prepared to adapt to these changes, ensuring that the interests of creditors are protected while navigating the complexities of the digital economy.
