It is now widely accepted that cryptocurrencies fall into the definition of “property” under The Insolvency Act 1986 and as such Insolvency Practitioners, (“IPs”) have a duty to realise its value. It is therefore becoming increasingly likely that IPs will encounter these either as an asset to be realised or an asset to be distributed in a Members Voluntary Liquidation, (“MVL”).
The rise of Cryptocurrencies over the past few years has seen its perception move from one of the “dark Web” to that of a widely accepted and valid form of investment. An ever increasing number of multi-national companies such as Amazon, Paypal etc, are now accepting cryptocurrencies as payments, and the Bank of England is considering Central Bank Digital Currencies (“CBDC”).
Whilst the days of solely dealing with traditional tangible assets may not yet be in the past it is apparent that IPs need to be adaptable to new technology and terminologies and the new processes that these will bring and view these with an open perspective and adapt to enable these to be a beneficial part of an estate to be realised and distributed in an MVL.
As with any other Company asset in an MVL cryptocurrency should be disclosed in the Declaration of Solvency, however this may give rise to a potential problem in valuing any such assets. As there is no centralised interbank rate there is no standard for what a conversion rate should be. Additionally given the large fluctuations in rates seen over the last few years there is potential for criticism arising on the IP if they fail to secure a high exchange rate.
One way to reduce this risk could be to ensure that a variety of rates and exchanges are considered together with obtaining expert advice on the exchange. Alternatively the IP could look to place the currency in an auction, wherein the highest bid becomes the value rather than an exchange rate. It is unlikely that the sole asset in the MVL will be cryptocurrency and it may be prudent to review the Company records and liaise with the Director/Shareholder/accountant to ensure that the correct value is provided for in the Statement of Solvency.
The IP should also look to identify and locate the private key. Consideration should then be given to transferring the cryptocurrency to their own secure wallet on behalf of the estate or one operated by an agent.
New FCA legislation provides that holding cryptocurrency on behalf of someone else must be done by an approved agent, who can secure the asset offline and ensure the asset is correctly insured.
The IP should also work with all parties to decide the most appropriate course of action as to the distribution of the cryptocurrency, either remaining in its current form or converting to conventional currency. Again the IP should take the above steps to ensure that the maximum value is received and it is imperative that all parties are aware of the tax implications.
At all stages of considering, an MVL in particular where part of an estate comprises of Cryptocurrency, the Directors and Shareholders should take appropriate tax advice to ensure that their hard earned investments are not subject to higher tax rates than may be necessary. It is especially important to avoid some of the common misconceptions on the treatment of cryptocurrency by HMRC.
RPG’s specialist team of Insolvency Practitioners has expertise in dealing with all aspects of Insolvency and Business Recovery. Contact email@example.com for any advice. Daniel Prais, Director at RPG specialises in the tax treatment of cryptocurrencies and you can read his latest article here. https://rpg.co.uk/cryptocurrency-the-tax-perspective/.