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Insolvency – Crypto

How is cryptocurrency treated as an asset in a bankruptcy proceeding in your jurisdiction?

While the Cayman Court has not yet had the opportunity to rule on the matter, it is highly likely that cryptocurrencies will be treated as property of the company which the liquidators are empowered to collect and which is to be applied in satisfaction of the company’s liabilities.

In this regard, it is instructive to look at the position under English law. In November 2019, The UK Jurisdiction Taskforce issued an opinion in which it determined that, although the classification would ultimately depend on the nature of the crypto-asset, in principle crypto-assets should be treated as property and that they had no doubt that they could be property for the purposes of the English Insolvency Act 1986. In the subsequent decision in Science Ion v. Persons Unknown, the English Court held that cryptocurrencies are capable of being property for the purpose of obtaining a Norwich Pharmacal order.

Also of interest is the decision in the BVI in the matter of Smith and Kardachi (in their capacity as joint liquidators of Torque Group Holdings Limited) v. Torque Group Holdings Limited (in liquidation) wherein the BVI Court determined that cryptocurrencies were to be considered an “asset” for the purposes of the BVI Insolvency Act 2003, notably the definition of an “asset” under the BVI Act accords with the definition of “property” within the English Insolvency Act 1986. Those definitions also closely coincide with the definition of “property” as stated in the Cayman Interpretation Law (1995 Revision). Based upon the foregoing, it is anticipated that the position in the Cayman Islands will likely be that cryptocurrencies will be treated as property falling within our insolvency regime.

Are there legal tools in your jurisdiction that can be used against exchanges to recover stolen cryptocurrency?

The Cayman courts have yet to make a decision concerning the freezing of or the recovery of cryptocurrency assets. However, we are quite confident that Cayman Islands investors/litigants will be able to use the standard and wide-ranging legal tools in the Cayman Islands against exchanges to recover stolen cryptocurrency.

One of the key legal tools that can be used in the infancy of a legal proceeding is a worldwide freezing order. The Cayman courts can grant worldwide freezing orders ordering a defendant, an unidentified defendant and/or third parties not to deal with, diminish or dispose of assets. The definition of asset encompasses informal control and the definition of owner extends to assets that are legally or beneficially owned. Worldwide freezing orders cover worldwide assets and will need to be recognised by the applicable foreign court for them to have effect outside of the Cayman Islands. Failure to comply with a freezing order that contains a penal notice is contempt of court and can be punishable with fines, asset seizure and imprisonment.

At the time the Cayman courts make the worldwide freezing order they will often make disclosure orders ordering the defendant to disclose their worldwide assets. The defendant will often have very limited time (i.e., two days) to disclose their worldwide assets by location and value.

To prevent a defendant, an unidentified defendant and/ or third parties from disposing of or diminishing the value of a specific asset, a claimant can seek a proprietary injunction from the Cayman courts.

A Norwich Pharmacal order can be obtained before an action is commenced against third parties that are unlikely to be defendants to the action and who could have relevant documents and/or information. These orders almost always contain an order prohibiting the third parties from disclosing the existence of the order to any other party.

A Bankers’ trust disclosure order is also available against third parties to assist claimants with a proprietary claim in tracing assets of the defendant.

How can the filing of a Chapter 15 proceeding be used in connection with a cryptocurrency exchange that is the subject of a foreign insolvency proceeding?

Provided it can meet the requirements of U.S. law, a cryptocurrency exchange could seek to utilise Chapter 15 proceedings the same way as other non-US companies that are subject to foreign insolvency proceedings. Commonly, Chapter 15 is utilised by such companies to obtain the benefit of an automatic stay which provides protection from creditors seeking to file lawsuits or tie up assets in the United States. Another common form of relief sought from the U.S. Bankruptcy Court is the ability to obtain discovery concerning the company’s assets, affairs, rights, obligations and liabilities.

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