Attitudes need to change concerning crypto assets, particularly in the case of insolvency writes Rob Armstrong, Managing Director, restructuring advisory, Kroll (a division of Duff & Phelps).
Like many areas of regulation, insolvency is grappling with the increasing mainstream use of crypto assets. Kroll’s Rob Armstrong unpacks the issues and how best to address them.
The word ‘cryptocurrency’ conjures pictures of deceitful characters stealing real-life money and turning it into monopoly money somewhere deep in the dark web. But what is it actually? And how should it be dealt with in an insolvent estate?
Cryptocurrency has enjoyed a drastic increase, particularly over the past year, changing perspectives from viewing it as a means of money laundering into a serious contender for investment. Novice investors are dipping their toes in the water, and even large brands (Starbucks, Amazon, Paypal, to name a few) are starting to accept cryptocurrency as a form of payment.
As more money is being converted into cryptocurrency, these types of assets are becoming more prevalent in insolvent estates. So, what does that mean for creditors of companies or bankrupts who have invested in cryptocurrency?
Because cryptocurrency is decentralised (it’s not tied to a country’s currency, nor is it regulated), it is viewed as an easy method of defrauding people. However, that is not necessarily the case. All transactions are public knowledge, meaning ownership can be verified and traced. Because there isn’t one controlling body, everyone is accountable to everyone. This transparency is a security feature in itself as it is difficult to hide in plain sight, as it were.
There is, however, a hurdle of learning new terminologies and understanding a new process. As a result, many people shy away from dealing with it. However, unfamiliarity isn’t a reason to ignore what could potentially be an immensely fruitful asset pot.
Finance professionals must now start to change their perspective on cryptocurrency, particularly about company investments in insolvency estates, and adapt processes to enable us to deal with cryptocurrency more effectively.
So, how should a cryptocurrency be dealt with in an insolvent estate?
First, how can we identify that the company has cryptocurrency? There are various indicators to look out for to help identify whether the estate may have a cryptocurrency, such as:
- Transfers to exchanges as indicated in the company bank statements
- Finding a USB key within the books and records of the company
- Running everyday key word searches such as “crypto” or “bitcoin” against the electronic records
- Identifying seed phrases written down within the company records
- Asking the directors
Once it becomes apparent that the company holds cryptocurrency as an investment, the insolvency practitioner (IP) will need to take steps to secure and preserve their investment. Just like any other asset, the IP will need to act quickly to ensure the cryptocurrency is secured correctly. Identifying and locating the key is a critical step, but the IP shouldn’t assume that someone else doesn’t have a copy of the key.
A prudent IP should transfer the cryptocurrency into a secure wallet of their own (on behalf of the estate) or to an agent. Under the new 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 the company entered into a cryptocurrency transaction, but the asset isn’t held within its wallet?
Just 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 IP can substantiate a claim to an evidential standard to successfully claw back the assets for the benefit of the estate.
How can cryptocurrency be realised once it has been successfully recovered?
It is important to note that much, like fiat currency, all exchanges have their own conversion rate. Because there is no interbank offer rate, there is no standard for what that conversion rate is. As we have seen in the last year, the rate has fluctuated drastically, much to the investors’ delight.
To mitigate any criticisms and ensure the best price is being achieved for the asset, it would be prudent to compare exchanges and conversion rates. Another option would be to place the cryptocurrency into an auction, which has an element of protection for the IP from any potential criticism as the value is simply the highest bid, rather than an exchange.
Given the increase in use and popularity of cryptocurrency, it is likely we will continue to see a huge investment shift towards it, particularly now with the backing of so many blue-chip companies.
It is not the fraudsters’ friend, as it can sometimes be thought, and is traceable if you have the skills and know-how in dealing with it.
IPs and other finance professionals need to embrace the move toward cryptocurrency as a more prevalent asset class and 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.
AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.