On 8 April 2020, the New Zealand High Court in Ruscoe & Moore v Cryptopia Limited (in liquidation)  NZHC 7281 provided guidance concerning the categorisation and distribution of cryptocurrency assets in the liquidation of a company. Australian Courts have not yet examined cryptocurrencies in any detail, and certainly not in an insolvency context2, so it is likely that this judgment will be instructive to an Australian Court first charged with the task of dealing with cryptocurrency assets, given the similar (and in some instances identical) legal framework between the jurisdictions.
Cryptocurrencies, also known as virtual currencies or digital currencies, are a form of electronic money stored in a "digital wallet", but they do not physically exist as coins or notes, and are not considered legal tender. A cryptocurrency unit, such as a bitcoin or ether, are digital tokens, which are created from code using an encrypted string of data blocks, known as blockchain. "Digital wallets" have a public key and a private key, like a password or a PIN.
Cryptocurrencies can be bought and sold on an exchange platform using traditional money, but those platforms are not regulated. There are no protections against unauthorised or incorrect debits from the "digital wallet". Digital currency systems enable users to remain relatively anonymous, there is no central data bank such that if cryptocurrency or initial coin offering tokens are stolen there is limited or no recourse.
Ruscoe & Moore v Cryptopia: Cryptocurrency as property
The Court held in Cryptopia3 that cryptocurrencies are:
a type of intangible property as a result of the combination of three interdependent features. They obtain their definition as a result of the public key recording the unit of currency. The control and stability necessary to ownership and for creating a market in the coins are provided by the other two features- the private key attached to the corresponding the public key and the generation of a fresh private key upon a transfer of the relevant coin.
The Court also dismissed two arguments that sought to reject the categorisation of cryptocurrencies as "property". One argument that was advanced (and rejected as being a "red herring") was that the common law only recognises two classes of personal property, being tangibles and choses in action, and as cryptocurrencies are neither then they were not personal property4. The second argument that was advanced (and rejected as being "simplistic") was that cryptocurrencies were only a form of information and information was not generally recognised as a form of "property"5.
The Court held that the various cryptocurrencies:
- were held by the liquidators as "property" of the company6; and
- were at equity held on separate express trusts by the Company for all the accountholders7.
Cryptocurrency in insolvency administrations
There is an increased likelihood that cryptocurrencies will form an emerging part of insolvency administrations, such that insolvency practitioners will need to be cognisant of cryptocurrency as a particular class of asset (including how to identify their existence if not disclosed at appointment), promptly secure the cryptocurrency assets into a "digital wallet" controlled by the insolvency practitioner and also ensure the realisation of those assets in a volatile market.
Critically, and most importantly, insolvency practitioners will require the relevant public and private keys (the later only being known to the owner) to secure the cryptocurrency assets and associated co-operation from the directors of the Company or the bankrupt (which is not always available).
Practical Guidance for Insolvency Practitioners
Disclosure of cryptocurrency
Cryptocurrency, like any other asset, must be disclosed to an insolvency practitioner at the time of (or shortly after) their appointment. An insolvency practitioner would be well advised to specifically review disclosure by the company or bankrupt in relation to cryptocurrency assets and obtain electronic evidence to assist the insolvency practitioner's identification (and investigations into) cryptocurrency assets.
For example, potential evidence of ownership (proof of purchase) includes bank statements (transactions with keywords such as bitcoin, coin, crypto and e-currency), emails, mobile applications, QR codes, recovery seeds, internet browsing history and hardware, including review of electronic devices which may identify public and private keys.
Cryptocurrency will be easier to identify and trace if purchased through an Australian exchange. However, if cryptocurrency is purchased and sold in cash and peer-to-peer, it will be almost impossible to trace and realise. Several cryptocurrency analysis tools are available for insolvency practitioners, they include tools:
- to determine the exit points for the cryptocurrency and their respective domain addresses, such as, Numisite, Blockchain explorer, Chainalysis, Ciphertrace, Neutrino X Flow; and
- to identify the registrant of the domain owner, by way of, say, DNS records and Traceroute
Insolvency practitioners will require cooperation to confirm the nature of the transactions associated with the cryptocurrency. They may utilise their powers under the Corporations Act 2001 (Cth) and Bankruptcy Act 1966 (Cth) to compel the provision of public and private keys through third parties (for example, cryptocurrency exchanges if the currency is stored in the exchange's custodial or default wallet).
Taking control of cryptocurrency
Cryptocurrency can be traded and moved very quickly, so, if an insolvency practitioner becomes aware of the existence of cryptocurrency, it is important that it is secured as soon as possible. This is achieved mostly efficiently by obtaining the public and private keys to the cryptocurrency. Once the insolvency practitioner achieves "control" of the cryptocurrency, it can then be transferred to a "digital wallet".
Cryptocurrency is a volatile asset and should be realised promptly as its value depends on its popularity, how easy it is to trade or use, the perceived value of the currency and the underlying blockchain technology. The Australian Financial Security Authority states that any advice contrary to the immediate realisation of cryptocurrency together with the associated decision making should be carefully documented by any bankruptcy trustee8. If the insolvency practitioner holds onto cryptocurrency, it should be held in "cold storage", which is a way of storing the asset offline, away from internet access to avoid the risks posed by hacking in the online environment and to mitigate against the potential loss of the asset9.
Once held in the "digital wallet" of the insolvency practitioner, requests can be made to the cryptocurrency exchange to sell the cryptocurrency and transfer the proceeds to the insolvency practitioner's bank account. The sale of cryptocurrency is akin to the sale of shares through a share broker. If the cryptocurrency is located overseas, the insolvency practitioner should also consider utilising provisions under UNCITRAL Model Law to secure and sell the cryptocurrency (if necessary).
Ruscoe & Moore v Cryptopia Limited (in liquidation)
 NZHC 728
2 Although the NSW District Court was recently satisfied that a cryptocurrency exchange account could be used as "security" for legal costs in a defamation claim;
3 Ruscoe & Moore v Cryptopia Limited (in liquidation)  NZHC 728 at 
4 Ruscoe & Moore v Cryptopia Limited (in liquidation)  NZHC 728 at 
5 Ruscoe & Moore v Cryptopia Limited (in liquidation)  NZHC 728 at 
6 Ruscoe & Moore v Cryptopia Limited (in liquidation)  NZHC 728 at 
7 Ruscoe & Moore v Cryptopia Limited (in liquidation)  NZHC 728 at 
8 Dealing with cryptocurrency in a bankrupt estate;
9 Dealing with cryptocurrency in a bankrupt estate;
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.