How do we handle this new class of asset?
Encrypted digital currencies, known as cryptocurrencies, provide bankruptcy trustees with multiple challenges. These include identifying the asset, getting control of the asset, and most importantly, selling the asset for the benefit of creditors. In a word, it's complex.
Does a bankrupt have to disclose crypto assets?
Yes. Crypto assets vest in the bankruptcy trustee upon bankruptcy and must be disclosed in the Statement of Affairs (SOA), which is a sworn declaration about the examinable affairs of a bankrupt. The SOA does not include any specific questions relating to crypto assets, however two areas titled "Investments" and "Other Items of Value" (questions 30 and 37 respectively) would be appropriate places to disclose crypto assets.
Bankrupts who fail to disclose their crypto assets in the SOA, or to the bankruptcy trustee when asked, or who trade, transfer, or otherwise deal with their crypto assets after bankruptcy, may be committing offences under the Bankruptcy Act 1966.
Crypto assets acquired after a bankruptcy commences are after-acquired property and can be realised by the bankruptcy trustee.
How does a bankruptcy trustee identify crypto assets?
The absence of publicly available information or a national register means identifying crypto assets can be difficult. Usually, we identify these assets by simply asking the bankrupt. Where the bankrupt is not forthcoming, we typically find evidence of crypto assets in bank statements, emails, apps or browser history. However, cash trading or trading outside of an exchange can be very difficult to identify.
How does a bankruptcy trustee realise crypto assets?
Bankruptcy trustees require access to the 'public and private crypto keys' to identify the account balance. Bankruptcy trustees have powers to compel the bankrupt and third parties to provide this information, however it is complicated and expensive to enforce these powers in foreign jurisdictions. Compounding those issues is the time involved and the highly volatile market. There is considerable risk that the asset value might crash before it can be realised, but the opposite is also possible.
We do not gamble on market conditions, we realise the asset as quickly as possible.
In the first instance, we consider the commerciality of realising the crypto asset. If the likely cost of realising the asset is more than its value, we may take no further action. Where the asset is to be realised, the balance is transferred to the bankruptcy trustee's cryptocurrency wallet and then sold with the funds transferred to the bankruptcy trustee's trust account.
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.