Part of a series of articles examining the impact of digital assets in Insolvency Proceedings. In this article, Gareth Hunt, Insolvency Practitioner and Head of Business Recovery at RPG Business Recovery explains how digital assets can be located and included in asset recoveries as part of an insolvency estate.
When I first embarked upon my career in insolvency, the assets being considered in an insolvency were primarily big, yellow and had wheels. Now I need to be fully conversant in Bitcoins, Ethereum, Altcoins and NFT’s. But will they be as easy to track down as more tangible assets?
What are Digital Assets?
According to HM Government, “Digital Assets are a digital representation of value” whose ownership is proven by computer code. “Coins”, for instance, exist in name only. They are not controlled by any single entity or government, and transactions are recorded on a distributed ledger known as a blockchain.
Digital assets are now a regular occurrence in life as an Insolvency Practitioner due to the increasing trend for the assets of both companies and individuals to comprise digital assets such as cryptocurrency, Non-Fungible Tokens, (“NFT’s”) and Central Bank Digital Currencies (CBDC).
Many cryptocurrencies, such as Bitcoin and Litecoin, can be used as a medium of exchange for goods and services. They offer fast and low-cost transactions compared to traditional payment methods, including cross border dealings.
Can Digital Assets be located?
International insolvency laws provide robust and effective legal regimes for tracing and recovering digital assets that have been transferred across most borders. The likelihood of recovery of digital assets could be higher than in traditional insolvencies, as crypto exchanges are now obliged to divulge information, dependent on their location, about potentially defrauded sums. It may even be easier than having to a track down a potential fraudster and the assets!
Immediately upon appointment, the Insolvency Practitioner must quickly work with directors and any service providers involved in the liquidation to identify the existence of any digital assets, and their whereabouts. If the information is not freely given, it may be identified through a financial paper trail. For example, the IP may investigate whether the company has used third-party services such as cryptocurrency payment processors or trading platforms which may hold records or information related to the company’s digital asset holdings.
However, if the people holding digital assets are determined to keep them hidden, as with any other fraudulent concealment of assets, they may be successful.
Proof of ownership of Digital Assets
Proof of ownership also needs to be clarified. Are they in the name of the company or the director, and if the director, are they business assets or personal? These are all questions posed for non-digital assets as well as standard assets. but an extra veil could be anticipated.
Transfer of Digital Assets in an insolvency
Once identified and located, any Digital Assets that are held on private addresses (not, for example, service/exchange-controlled accounts) should be transferred to addresses that can be controlled by the Insolvency Practitioner. Failure to do so potentially enables others to move the funds without the Insolvency Practitioner’s knowledge, potentially opening the company directors up to a future claim of misfeasance. Digital assets need to be located and secured as soon as possible.
Maximising the recovery of Digital Assets in insolvency cases
Whilst they may appear complex in their nature and possibly difficult to recover, it is apparent that Digital Assets will form a regular part of insolvency procedures going forwards. It is likely that legislation will adapt further to aid in recoveries, but by taking the necessary steps and using the available resources, IPs with the knowledge of digital assets can still maximise recoveries for the benefit of creditors.
Meanwhile I am still seeing the challenge in an insolvency with assets that are big, yellow and have wheels!
Gareth Hunt and the RPG Business Recovery Team are always very happy to have an informal discussion with any businesses potentially in distress and to discuss options with them. It’s best to take advice as soon as possible when more options are likely to be available. Please call 0161 608 0000 or email info@rpg.co.uk to speak to an Insolvency Practitioner in Manchester for further information.
The team at RPG Chartered Accountants have many years of experience in dealing with the issues surrounding cryptoassets. You can read here Cryptoassets – RPG Chartered Accountants about the advice we provide to clients on tax matters relating to cryptoassets and the support we provide to businesses who trade with cryptocurrencies.
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