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Cryptocurrency: Are Investors Putting Their Money Into Fools’ Gold?

Aug. 24, 2021, 8:00 AM

With the continuous talk around the topic of cryptocurrency, mixed perceptions are being felt among the general public. Some individuals are seeing cryptocurrencies as a genuine investment, while others view it, at worst, as a possible conduit to money laundering.

Negative ideas have surfaced relating to the deceitful characters who are turning people’s physical money into digital monopoly money deep in the dark web. But surely, it’s not all bad? Seeing the odd crypto-rich investor retiring on the back of their fortunes acts as an attractive advertisement for wannabe investors. This, along with high-profile public figures who are constantly speaking on the subject has inevitably done a lot to keep our interest levels high amid the skepticism.

Therefore, the question remains, is cryptocurrency merely hyped-up fools’ gold?

Notwithstanding the past few months, the cryptocurrency market has witnessed an astronomical increase in its value over time. As a result, people have transitioned their mindsets from seeing cryptocurrency as a salacious technique of money laundering to a serious contender for investment. Not only are there more novice investors now dipping their toes into the metaphoric water, but even large brands (such as Apple, Microsoft, Paypal, to name a few) are starting to accept cryptocurrency as a means of payment. As people continue to hop onto the cryptocurrency bandwagon, predictably, these assets are prevalent within insolvent estates. So, what does that mean for creditors of companies or individuals who have invested in cryptocurrency?

Because cryptocurrency is decentralized (untied to a country’s currency and unregulated) it is regarded as an easy means of defrauding people. However, that is not necessarily the case. All transactions are within the public domain, meaning ownership can be defined as it’s verified and traced. In addition, in a way everyone is accountable to everyone within the marketplace, because there’s not one definitive governing body. As a result, the transparency that is inherently associated with cryptocurrency is a widely accepted security feature.

There is, however, the requirement to learn new terminologies and understand a new process that may deter people from wanting to deal with it. Not only can this seem daunting for outsiders, but it poses a weighty barrier to entry. However, it shouldn’t be a reason to disregard what could possibly be an immeasurably fruitful asset pot.

Experts must now begin to change their standpoint on cryptocurrency, especially regarding company investments in insolvency or bankruptcy estates, and thereby adapt procedures for dealing with cryptocurrency more effectively. Solely dealing with traditional assets is now a thing of the past.

What difficulties do insolvency professionals have to deal with when working with cryptocurrencies?

As cryptocurrencies don’t follow the same rules as fiat currencies, or secured assets, things can get complicated. The ownership of cryptocurrency in insolvent estates depends on the applicable laws.

As cryptocurrency is widely seen as an asset, it’s troubling when people have challenged its application to being a part of the estate. As a result, the appointed insolvency practitioner must lay out a clear understanding when it comes to ownership in an insolvency situation. However, it will remain a common occurrence that administration of these cases will continue to face these types of complications. The key question for insolvency and liquidation-based courts: Is a cryptocurrency regarded as an “asset” under a debtor’s estate?

What are the best ways of dealing with cryptocurrencies within an insolvent estate?

The most important thing is to identify that a company has cryptocurrency investments. There are various indicators to look out for to help recognize whether the estate may own cryptocurrency.

Request more information from company directors, investors, and CEO’s—their responses can be very telling. Check the transfers to exchanges as indicated in company bank statements. Proceed to run key words such as “cryptocurrency” or “bitcoin” against the electronic records. Identify seed phrases in written company records.

Once it becomes apparent that the company holds cryptocurrency as an investment, the insolvency professional will need to take steps to secure and preserve it. As with any other asset, the insolvency professional will need to act swiftly to guarantee that the cryptocurrency is secured correctly. Identifying and then locating the key is a critical step, but the insolvency professional should consider that someone else may also hold a copy.

A prudent insolvency professional should transfer the cryptocurrency into her own secure wallet on behalf of the estate or to an agent. In the U.K., the new Financial Conduct Authority (FCA) legislation, cryptocurrency held on someone else’s behalf must be held by an approved agent, who could secure the assets properly, holding the assets offline and obtaining appropriate insurance.

However, what if it’s discovered that the company entered into a cryptocurrency transaction, but the asset isn’t held within its wallet? As with the dissipation of physical assets or cash, the transfer of cryptocurrency away from the estate could be considered an antecedent transaction. Further investigation would be required, as with any other claim, to review whether the insolvency professional can substantiate a claim to an evidential standard to be successful in clawing back the assets for the benefit of the estate.

After recovering cryptocurrency, how can it be realized?

It’s important to bear in mind that, exchanges have their own conversion rate, similar to that of a fiat currency. Since there is no interbank offer rate, there isn’t a definitive standard for what exactly that conversion rate is. As we have noticed throughout the last year, the rate has fluctuated radically, much to investors’ delight. In order to alleviate any condemnations and ensure the best price is being achieved for the asset, it would be prudent to compare exchanges and conversion rates. Alternatively, another option would be to place the cryptocurrency into an auction, which has an element of protection for the insolvency professional from any potential criticism as the value is simply the highest bid, rather than an exchange.

With cryptocurrency remaining a conversation on the lips of many, we’re likely to continue seeing a large shift towards it, particularly now with blue-chip companies expressing interest in cryptocurrencies. One positive aspect of cryptocurrency is the ability to trace it if you have the right skills and know-how. It’s not necessarily the fraudster’s dream that many think it to be. Thereby, insolvency professionals should be embracing the move toward cryptocurrency as a more prevalent asset class, instead of rejecting it. They should look to expand their training and understanding of the toolkits available to them, whether that is through normal recovery action of an asset or the tracing of assets leading to a claim for the benefit of the estate.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Rob Armstrong is a managing director for restructuring advisory and Jen Harrison is a senior manager at Kroll in London.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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