Legal Status of Crypto Assets in Insolvency

Crypto assets, such as cryptocurrencies and nonfungible tokens (NFTs), are increasingly treated as property under English law. While traditional assets fit neatly into the categories of "things in possession" or "things in action," digital assets often fall outside these definitions due to their intangible nature. The team at Debt-Claims.com take a look at some of the key points of difference of Crypto assets.

Recognition as Property

English courts and legal bodies have affirmed that crypto assets can be recognised as a form of personal property. This recognition is essential for their inclusion in a debtor’s estate during insolvency, enabling these assets to be identified, valued and distributed to creditors.

Challenges in Treating Crypto Assets as Insolvency Property

Despite their recognition as property, crypto assets present distinct challenges for insolvency practitioners due to their unique characteristics.

Ownership and Control

Ownership of crypto assets is often evidenced by control of private keys, the cryptographic tools required to access and transfer the assets. Establishing ownership can be particularly difficult when:

Private keys are lost or withheld by the debtor.

• Transactions occur pseudonymously on blockchain networks, obscuring the true owner.

In such cases, insolvency practitioners may need to employ forensic blockchain analysis to trace transactions and determine ownership.

Access and Liquidation

The ability to liquidate crypto assets depends on access to private keys. Without these, the assets cannot be transferred or realised for the benefit of creditors. Courts may issue orders compelling the debtor to disclose private keys, but enforcement can be challenging.

Jurisdictional Issues

Crypto assets exist on global, decentralised networks, making it difficult to determine their legal location. This complicates questions of jurisdiction and the enforcement of court orders in cross-border insolvency cases.

Control as Security

Security over crypto assets typically involves controlling the private keys associated with the assets. Legal agreements define the rights and obligations of the parties, but the lack of a centralised register for recording such interests can lead to disputes about priority and enforcement.

Proving Ownership and Title

Establishing ownership of crypto assets is critical in insolvency, particularly when there are competing claims.

Evidence of Ownership

Ownership is generally demonstrated by control of private keys. However, insolvency practitioners must also consider:

• Whether the debtor holds the assets in a personal or fiduciary capacity.

Documentation or agreements supporting claims of ownership.

Challenges in Proving Title

The lack of physical or traditional legal markers for crypto assets can lead to disputes about ownership. Insolvency practitioners must navigate these disputes carefully, as errors could expose them to personal liability.

Practical Considerations for Insolvency Practitioners

Practitioners must take steps to identify crypto assets as part of the debtor’s estate, including:

• Reviewing financial records and transaction histories.

• Engaging blockchain forensic experts to trace assets. Given the complexities of crypto assets, insolvency practitioners should collaborate with legal experts and technology specialists.

To find out more, email: info@debt-claims.com

Please note that this article is for information purposes only and does not constitute legal advice.