Digital asset insolvency issues not insoluble for English law

United Kingdom

Digital assets may be new, but existing English insolvency laws and principles can deal with them. So finds the UK Jurisdiction Taskforce (UKJT) in its ‘Legal Statement on Digital Assets and English Insolvency Law, published this week.

Key takeaways include:

  • English insolvency law is entirely capable of application to scenarios concerning digital assets, including the technical and fact-specific issues that may arise.
  • Digital assets are capable of amounting to property for the purposes of English insolvency law.
  • When figuring out which country has jurisdiction, the English courts will use the tried-and-true "centre of main interests" (COMI) test for digital asset companies, just like they do for other types of businesses.  This remains capable of being applied even in the context of digital asset ownership and business.  In fact, application of the COMI principles in the context of digital assets could mitigate against complexities arising from cross-jurisdictional structures of digital asset businesses.
  • Digital assets are not yet treated as money England and Wales. This means that a claim to payment of digital assets alone cannot yet found a statutory demand. It also means that digital assets do not amount to foreign currency for the purpose of Rule 14.21 of the Insolvency Rules 2016 (which sets out rules for converting debts incurred or payable in a foreign currency into sterling). This does not, however, mean that claims for compensation in relation to digital assets cannot be made – it would involve taking a different approach in the context of insolvency than recovery of a debt claim for money.
  • However, because digital assets are capable of being property, a claim to recover digital assets from an insolvent person or company could still be a proprietary claim, depending on the particulars of how the assets were held (e.g. whether they were held on trust).
  • Insolvency practitioners must play by the usual rules when deciding whether to sell digital assets. For example, they need to act in good faith and get the best price they reasonably can. The UKJT recognises that volatile cryptocurrency prices can create challenges. It explains that insolvency practitioners could consider distributing digital assets directly rather than selling them for fiat or getting specialist advice early on.
  • Digital assets transactions can be unwound through avoidance actions. While the immutability of blockchain might make it technically impossible to reverse a specific transfer, a judge could still order a recipient to make an equal and opposite send back.
  • Insolvency practitioners have recourse to the same interlocutory, investigatory and enforcement powers for digital assets as they do for other types of property. In particular, they can apply to the court for an order that relevant private keys be disclosed.
  • The existing insolvency principles and rules are flexible enough to be applied to allocate shortfalls where digital assets of various persons have been pooled.  There is no need to change fundamentally the longstanding legal analysis of tracing, mixed accounts, and shortfalls, although the particular technological structure of the relevant assets may require consideration.  The Financial Conduct Authority’s client asset rules likely do not apply as digital assets are not money.

The UKJT Legal Statement on Digital Assets and English Insolvency Law can be found here.

With thanks to Tycho Orton for his contributions.