What is cryptocurrency?
Cryptocurrency (crypto) is a digital currency that is secured by cryptography and typically run-on decentralised networks using blockchain technology. Simply put, cryptography can be defined as the use of secure communications techniques that allow only the sender and intended recipient of a message to view its contents (Kaspersky). The use of blockchain makes crypto impossible to counterfeit and copy. The decentralised nature of the networks also means that crypto is free from government interference or manipulation (Investopedia).
Mainstream interest in crypto surged during 2021 with overall market investment surpassing $2tn. Powerhouses such as PayPal, Tesla and Visa have embraced crypto. The growing appeal for this sort of investment looks set to continue. AMC Cinema announced they are planning to accept crypto as payment (Engadget), and Bitcoin is becoming legal tender in the hyperinflation economy El Salvador (The Conversation).
What do crypto investments mean for the insolvency industry?
With the number of crypto investments rising, it is increasingly likely that Insolvency Practitioners (IPs) will be required to deal with such assets as part of the insolvent party’s estate. Initial enquiries as to whether the insolvent party holds crypto will be pivotal, particularly given the digital and decentralised features which make crypto easier to hide.
How can IPs secure crypto assets for the benefit of creditors?
The nature of crypto means the methods of securing the asset differ from traditional assets. However, this process can still be straightforward. Crypto stored on exchanges or wallets can be accessed using a unique key code, usually stored within the insolvent party’s books and records. Where crypto is held on the insolvent party’s behalf, recent legislation written by the Financial Conduct Authority (FCA) states that it must be held by an approved agent, capable of securing the assets properly, holding the assets offline and obtaining the appropriate insurance (The Fintech Times). As with more traditional investments, IPs will need to utilise their extensive powers in order to recover crypto assets for the benefit of creditors. Whether current officeholder powers alone will be sufficient to trace crypto assets, as they become increasingly common, remains to be seen.
How to make a realisation for the benefit of creditors?
Once recovered, crypto will need to be dealt with carefully, given its extreme volatility. IPs are likely to come under critique when disposing of crypto assets and will need to monitor fluctuations in price closely to avoid accusations of asset dissipation. Converting crypto to legal tender also comes at a price, as exchanges and wallets charge conversion fees which could significantly reduce funds available for creditors. Consequently, IPs will need to consider a range of exchanges and methods of realisation, including auctioning to the highest bidder, whilst anticipating likely fees to best protect the value for creditors.
How can we help?
The special investigations team at RSM, partnered with specialists in crypto, are uniquely placed when dealing with the realisation of crypto assets in order to maximise return to creditors. For more information on our crypto recovery capabilities and related services, please contact lead partner Mark Wilson.