We’ve been sold on the idea that replacing our hard-earned cash with virtual ‘money’ is an acceptable proposition to put forward. Even though we’re seeing the odd crypto-rich investor retiring off their fortunes, the word cryptocurrency has become almost synonymous with unpredictability. It’s increasingly difficult to remain confident in the stability of the ever-fluctuating market. So, it’s as important as ever to ask ourselves; is cryptocurrency just fools’ gold? And in an insolvent estate, how should it be dealt with?
Rob Armstrong, Managing Director Restructuring Advisory, Kroll and Jen Harrison, Senior Manager, Kroll, share their thoughts on whether buying cryptocurrency is worthwhile or just an “investment into fools gold”?
Over time, and certainly in the past year, with good reason, cryptocurrency has changed by association from being a salacious method of money laundering to becoming a serious contender for a profitable investment. More and more novice investors are dipping their toes in the metaphoric 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. As a result, it’s important to explore what this really means for creditors of companies or bankrupts who have invested in cryptocurrency.
Because cryptocurrency is decentralized, in other words, it’s not tied to a country’s currency, nor is it regulated, it is widely 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 that remains of learning new terminologies and understanding a new process. As a result, many people shy away from dealing with it. This can seem daunting and is certainly a barrier to entry for some. However, it isn’t a reason to ignore what could potentially be an immensely fruitful asset pot. Professionals must now start to change their perspective on cryptocurrency, particularly in relation to company investments in insolvency estates, and adapt processes to enable us to deal with cryptocurrency more effectively. Gone are the days of solely dealing with traditional assets.
How exactly should cryptocurrency be dealt with in an insolvent estate?
First, it’s important to identify that a company actually has cryptocurrency investments. There are various indicators to look out for to help recognise whether the estate may own cryptocurrency. The first is through requesting more information from company directors, investors and CEO’s, their response can be very telling. Another way is to check the transfers to exchanges as indicated in the company bank statements. In addition, you can also proceed to run keywords such as “cryptocurrency” or “bitcoin” against the electronic records. Lastly, it’s important to identify seed phrases written down within the company records. By carrying out these ‘checks’, it should ultimately reveal whether or not a company has cryptocurrency investments.
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 with any other asset, the IP needs 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 it’s discovered that 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 be successful in clawing back the assets for the benefit of the estate. This can pose a significant hurdle as the investigation can be lengthy and thereby time-consuming.
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. In order 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. Alternatively, 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 and from such high-profile investors. It is not necessarily the fraudsters’ friend, as it can sometimes be thought, and is traceable if you have the skills and know-how in dealing with it, allowing for transparency throughout transactions. IPs 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.