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Print articleNavigating Digital Assets in Insolvency
April, 2024 - Shoosmiths LLP
Earlier this month, the UK Joint Taskforce (UKJT)[i] formally launched the Legal Statement on Digital Assets and English Insolvency Law. The statement aims to provide clarity to critical legal questions regarding how digital assets are treated in any insolvency. Shoosmiths contributed towards the consultation for this legal statement through the Crypto Fraud and Asset Recovery network.
The event, chaired by Master of the Rolls Sir Geoffrey Vos, included contributions from the drafting team and industry experts who discussed the key findings of the Public Consultation and shared their insights from the Legal Statement.
Why is a legal statement needed?
Lord Snowden commented in his opening remarks that it’s the insolvency courts that serve as testing grounds for complex legal issues, however there is limited case law on this sector at present. Industry commentators then went on to support the need for a legal statement on the basis that clarity is essential for the digital asset industry to grow. Put simply, investors want to know “where their investment is safest”. In an industry without jurisdictional boundaries, the legal statement aims to provide much-needed clarity regarding how digital assets should be treated in any (English) insolvency.
As we grapple with the complexities of these assets, particularly in the wake of recent collapses, understanding their treatment within insolvency law becomes crucial, and puts the UK ahead in providing entrepreneurs with clarity on how these assets should be treated, if the worst should happen.
Our Key Takeaways
Adapting Insolvency Law for Digital Assets
- Crucially, the statement concludes that current insolvency law can be adapted to accommodate and apply to digital assets. This conclusion has been met with relief by industry professionals, echoing what firms like us have been advising clients for some time.
Digital Assets as “Property”….
- The legal statement confirms that digital assets fall within the definition of “property” under the Insolvency Act. Consequently, they are to be treated the same as other assets for the purposes of insolvency law.
- Some assets may be held on trust, depending on individual terms and conditions. This distinction affects their treatment.
- Given their status as “property” it is thought that digital assets can be subject to a floating charge.
…But not as “money”
- Digital assets are not a liquidated sum and so cannot form the basis of a statutory demand. However, as these assets gain acceptance as a form of currency, they could potentially form the basis of a statutory demand in the future, so watch this space!
Crucial Role of Asset Holding Terms
- Given digital assets can be “property”, the terms governing how digital assets are held plays a pivotal role in insolvency scenarios.
- Digital assets can potentially be subject to proprietary rights, however whether they are as a matter of fact is crucial for creditors:
- Proprietary Claims: If assets are held on trust, counterparties have proprietary claims. In insolvency, this means they can assert a claim to those specific assets.
- Unsecured Creditors: If assets are not held on trust, parties become unsecured creditors in insolvency proceedings.
- Insolvency Processes: Assets held on a proprietary basis cannot be included in certain insolvency processes (e.g., Company Voluntary Arrangements, schemes, Restructuring Plans), while unsecured assets can be compromised under these processes.
Officeholder Challenges
- A very welcome statement for those in the asset tracing community is that private key details fall within the scope of a Court order compelling disclosure under sections 234–236 of the Insolvency Act 1986. Liquidators can rely on these provisions to seek these details, including wallet addresses.
- However, as a word of caution for any practitioners disposing of digital assets – as with all other assets in an insolvent estate, there is a duty to obtain the best price reasonably obtainable.
Looking Ahead
Sir Geoffrey Vos highlighted that this legal statement is the third legal statement published by the UKJT. The UKJT is actively seeking feedback on the second paper, which addresses dispute resolution for digital assets. For practitioners across the digital asset sector, this presents an opportunity to engage and contribute to shaping the evolving landscape.
[i] the UK Jurisdiction Taskforce (UKJT) is an industry-led initiative, tasked with promoting the use of English law and UK’s jurisdictions for technology and digital innovation. The purpose of the UKJT is to clarify key questions regarding the legal status of, and basic legal principles applicable to, crypto assets, distributed ledger technology, smart contracts and associated technologies under English law.
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