Cryptocurrency and Insolvency

Cryptocurrency and Insolvency

By Drazen Kozaric, Special Counsel

Cryptocurrency is a type of digital money created from code by using encryption algorithms, which means that it can be used as currency and in virtual accounting systems. It is based on blockchain technology, which is mainly decentralised. This technology makes cryptocurrency nearly impossible to counterfeit or overspend. Since the invention of Bitcoin, cryptocurrency has now expanded to include a wide variety of other currencies, NFTs, and other digital assets.

Cryptocurrency can be traded anonymously and, because there is no national register, it may be difficult for a liquidator to find out whether an insolvent company has any cryptocurrencies and the location ofthose currencies. Another problem liquidators face is that some exchanges do not require traders to disclose their real names. Furthermore, cryptocurrencies can be held in a private wallet (digital or cold) which does not require the owner of that wallet to disclose any personal information. To access that wallet the owners need to have only a “key”, which is usually a unique digital password. This key makes it very easy to move the digital wallet and access it from any part of the world that has internet access. Italso allows any person with the key to send and receive cryptocurrencies without a third party.

Therefore to access such wallets and withdraw funds,the liquidators would need to know the key. It is worth noting that transferring from and to a wallet can be done in a matter of minutes, even when transferring large amounts of cryptocurrency.

Selling and buying cryptocurrency

Cryptocurrency can be bought and sold at cryptocurrency exchanges. The process for transferring, selling and buying cryptocurrency is fast and trades are mostly instantaneous. Therefore, liquidators should act promptly to locate these assets.

Identifying and locating cryptocurrency

Liquidators can use their powers under the Corporations Act 2001 (the Act) to take possession of cryptocurrencies owned by a company.However, identifying and locating cryptocurrencies may not be an easy task for a liquidator. The best place to start would be a review of the company’s bank accounts to identify transactions to and from cryptocurrency exchanges. Once a cryptocurrencyexchange has been identified, the

liquidator should immediately contact the exchange and request that all money and or the cryptocurrencies on the exchange be transferred to liquidator’s wallet.

A liquidator should also peruse emails, electronic files, hardware, mobile applications, internet browsing history and other documents for any evidence of ownership, a key to a wallet and cryptocurrency trading. Often times cryptocurrency exchanges send promotional emails to their traders and communicate with them via email. There may also be emails to and from cryptocurrency companies who are issuing those coins either through initial offering or staking.

Once a liquidator has been granted access to an exchange or a walletthey will be able to see all transactions from and to that account and identify potential voidable transactions.

A liquidator can also utilise cryptocurrency analysis tools to identify relevant transactions such as Chainalysis, Blockchain explorer and so on.

If the cryptocurrency exchange is located overseas, the liquidator may utilise provisions under UNCITRAL Model Law to secure and sell the cryptocurrency.

Once a liquidator obtains custody of any cryptocurrencies, they should consider whether to immediately sell them or wait for a bit longer, as fluctuations in cryptocurrency prices are significant and within days these assets can be worth considerably more or considerably less. It may be prudent to seek advice from an expert in the field before making a decision, although the market is very unpredictable. 

Cryptocurrency in Australia

In most countries, including Australia, cryptocurrencies have not been regulated and cryptocurrencies are not considered legal tender, and are not widely accepted as a method of payment.

The ATO estimates that over one million Australian taxpayers have traded cryptocurrencies in the last five years and that number keeps rising. Many crypto-assets and other digital assets are not considered to be financial products. Therefore, cryptocurrencyexchanges may not be regulated by the ASIC.

The Australian government has adopted a positive approach to the industry and isaiming to expedite regulations in relation to cryptocurrency, focusing on consumer protection and innovation. This is due to the fact that the industry has been expanding rapidly and an increasing number of financial institutions are offering their clients investments in cryptocurrency or cryptocurrency related companies. Thus, the Commonwealth Bank is currently testing cryptocurrency trading through its banking app.

Furthermore, ANZ recently minted $30 million of Australian stablecoins called A$DC, and National Australia Bank (NAB) is also expected to release its own stablecoin (linked to the Australian dollar).The governmenthas promisedintroduction of exchange regulations and custody arrangements in 2023 to signal the urgency of safeguarding customers’ funds.

Thelegislation will require registered exchanges to adopt Know Your Customer (KYC) processes for customers’ identification and verification, comply with annual reporting obligations and monitor and report large suspicious transactions.

Key takeaway

Cryptocurrenciesare rapidly expanding and with more and more people adopting cryptocurrencies, it is likely here to stay.

One of the key attractions of cryptocurrency is its ability to be traded and moved quickly and without third-party assistance. Therefore, liquidators should act fast to locate these assets and take possession of them by using their powers under the Act.

All transactions on cryptocurrency exchanges and in cryptocurrency wallets are recorded. So, the liquidators can use these mechanisms to identify potential voidable transactions and potentially locate all digital assets. If you have concerns about retrieving cryptocurrency assets or other digital assets when going through an insolvency, please contact our team to discuss your options.

This publication is provided for information purposes only and is not (and should not be relied upon as) legal advice. Each individual circumstances differ. Please contact us if we may help you with your circumstances.

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