Business Finance

Practical Consideration of Cryptocurrency in Insolvencies

crypto

Introduction 

Just 5% of insolvency practitioners (“IPs”) said they had an “all or functional / work or understanding” of cryptocurrency in a recent INSOL International study.

So we look at some IP-related problems with over 4,000 forms of cryptocurrency, even with the continuing evolution of payment technology, Cryptocurrency Identification, How do I classify it, how to control it and market it; What’s the value?

Classification of cryptocurrencies

Cryptocurrencies are modern developments that do not easily fit with the standard meanings with many features:

Are they a currency as the name implies?

There are parallels between cryptocurrencies and cash – they can be traded with a (though non-universal and exclusive) group to produce goods and services.

A financial tool?

Once again, cryptocurrencies are securities-like, they can be exchanged on exchanges and their value is only dependent on requests.

However, until they are regulated by the FCA or other relevant regulatory authorities, they are not recognized by the government as a “financial instrument” (as defined by the Financial Instruments Markets Directive across the whole of the European Union).

Are they goods?

They can be purchased and sold with a legally-owned tender, exchanged with those small retailers that allow them.

The Banque of England made comments in the Financial Policy Committee Statement of March 2018 although it is currently unclear whether potential legislation or judicial treatment will classify them:

“Their values are currently too volatile to be commonly used as a currency or as a value shop, and they are inefficient exchange means with high transaction cost and settlement times long. In the United Kingdom, their use for payments is limited. 

They are not currencies but rather commodities. As reserves, however, they do not make any debts or leverage on potential income sources. They do not have an intrinsic value outside their current limits, and may therefore prove useless.”

Check for more information on tips for where to buy cryptocurrency.

Deals for insolvency cryptocurrency

So what problem might an IP experience if an insolvent property deals with cryptocurrencies?

How will cryptocurrencies be identified as company assets?

The starting point is information obtained from company directors so that the expertise of a practitioner depends to a certain degree on their life.

More details can be found in the books and records of the Company and in its accounts and stock/asset lists that may indicate that cryptocurrencies exist.

Other company documents can also help detect ownership of cryptocurrencies and encourage the IP to examine bank statements to recognize payments from business accounts to sites that buy/sell crypto assets.

How is a cryptocurrency regulated by IP?

Cryptocurrencies are held in the online banking-like electronic ‘wallets’ accessible by software that is open to the public and requires passwords for entry.

There is no public registry of cryptocurrency ownership and it will become difficult to classify ownership without external assistance thanks to cryptography that protects the privacy of cryptocurrencies and the identity of users.

Anyone who has access to the publicly available applications and passkey will be able to move or sell cryptocurrencies to other accounts without a record of the transfers.

This rightly causes concern for all IP companies that have encountered uncooperative directors and are quick to recognize and monitor cryptocurrencies.

How should you implement cryptocurrencies?

To realize cryptocurrencies, working knowledge will be required of the software and access to the exchange for that particular cryptocurrency.

As most applications should be machine and technology-friendly for people, IPs will need specialist agents to realize some benefit.

The origin, place, and value of the cryptocurrency cannot be easily determined with a non-cooperative director, and the IP will need to bear the cost of involving a forensic specialist without assurance that the realization from the cryptocurrency would return creditors’ value.

What value can be accomplished by cryptocurrency?

The value of cryptocurrencies is therefore extremely unpredictable and the cost attainable depends heavily on the transaction timing. For example, on Wednesday, 26 June, Bitcoin’s value fell from $13,880 to $11,200 just 15 hours later.

The time frame is therefore crucial if the crypto-asset worth is to be realized, and this raises the question that IPs can be criticized for selling at an undervalue.

The best-performing advice provided by a specialist will help minimize this risk, but it can create problems with the IPs extending insolvency waiting for the rising market.

Final remarks

These problems are currently only affecting the small number of companies / individual insolvencies investing in cryptocurrencies.

In the short term knowledge and basic working knowledge of cryptocurrencies given the relatively small scale of their use, should be appropriate unless an IP is designated for an estate where trading is the main business in cryptocurrencies. This will probably improve, however.

We expect a cryptocurrency to also become more prevalent in insolvencies with an increase in the prevalence of cryptocurrencies.

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