The Treatment of Digital Assets in Insolvency Proceedings

The collapse of crypto-exchanges and the increasing use of digital assets in many corporate transactions have led to numerous discussions about the treatment of digital assets in insolvency. While much of the academic literature in this area has focused on whether cryptocurrencies constitute property of the estate, our recent article provides a comprehensive analysis of the treatment of cryptocurrencies and other forms of digital assets in insolvency. 

The article starts by examining the different types of cryptocurrencies available in the market, and how the use of cryptoassets has evolved from facilitating payments (as was supposed to be the main purpose of Bitcoin) to serving as a potential investment (which has ended up becoming one of the most common uses of cryptocurrencies) or for fundraising purposes through Initial Coin Offerings.

Given that digital assets can be the object of many transactions, including purchase, sale, custody, and lending, the understanding of the nature and implications of digital assets in insolvency can be relevant for any firm, and not only for crypto-exchanges. Before embarking on this analysis, however, the article discusses how cryptoassets are classified from different angles, including law (particularly through the lens of property law and securities regulation), finance, and accounting. Moreover, such a holistic understanding of the nature of cryptoassets is combined with a comparative analysis that considers how different jurisdictions around the world deal with similar legal questions such as whether cryptoassets can be classified as ‘property’ or a ‘security’. 

When it comes to the treatment and implications of digital assets in insolvency, the article starts by discussing whether crypto-represented debt should count for the purpose of assessing whether debtors and creditors can initiate insolvency proceedings. It also examines the role and rights of the holders of digital assets in insolvency proceedings, and how the response to this question may affect key aspects of the procedure, including the fate of the insolvent firm.

Given the volatility of cryptocurrencies, one of the most critical questions that arises in an insolvency proceeding is how cryptoassets should be valued. For that purpose, it is important to analyse whether the debtor has cryptoassets that represent an asset, a liability, or both. For example, if a non-crypto firm has acquired cryptoassets as an investment, the value of the cryptoassets should be determined according to the general rules for the valuation of assets in insolvency. Therefore, this will generally require determining the market value of the cryptoassets. In most cases, however, or at least in cases involving the collapse of crypto-exchanges, the valuation of the cryptoassets will possess additional challenges given that they are often part of the debtor’s estate and the buyers of the cryptoassets will have a claim against the crypto-exchange. Therefore, the crypto-exchange will have a liability against the buyers of such digital assets. Thus, the crypto-exchange will have a liability that needs to be valued. Our article discusses how and when to conduct such assessment, and how different courts around the world have dealt with this question. 

The paper concludes by exploring other controversial questions that often arise in insolvency proceedings of companies engaged in crypto activities, such as the custody, recovery and realisation of digital assets. It also examines how cryptocurrencies can be used to engineer creative restructuring proposals. To that end, we discuss some innovative solutions adopted in reorganization procedures in various jurisdictions such as the United States and Singapore. 

The authors’ full article can be found here. 

Nydia Remolina is an Assistant Professor of Law at Singapore Management University. 

Aurelio Gurrea-Martínez is an Associate Professor of Law and Head of the Singapore Global Restructuring Initiative at Singapore Management University. 

Daniel Liu is a Partner in the Restructuring & Insolvency and Special Situations Advisory Practices at WongPartnership.