A Global Guide for In-House Counsel: Doing business in a rapidly changing world

Insolvency – Crypto

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

Since the early 2010s, the use of cryptocurrencies has developed in the French economy through services allowing their purchase, sale or use as financial instruments.

French law was one of the first to legislate digital assets in France, establishing, for example, a legal framework for ICOS in the “Loi Pacte” of April 11, 2019.

Under French law, cryptocurrencies have no clear legal status and are not recognised as financial instruments. Thus, cryptocurrencies are currently not regulated.

The French legislator has not yet defined clear legal rules concerning the treatment of cryptocurrencies in insolvency proceedings. It is appropriate to proceed by analogy with the known mechanisms of French insolvency law adapted to the cryptocurrency system.

In the field of amicable and insolvency proceedings, the concept of cessation of payments is central to determine the severity of the difficulties encountered by a company to choose the most appropriate proceeding.

The state of cessation of payments implies comparing the quick assets of a company with its accrued liabilities.

The quick assets correspond to all of the company’s liquid assets and immediately realisable values.

Cryptocurrencies can be immediately converted into euros by reselling them on specific trading platforms. They should be taken into account in order to determine the available assets of a company and thus to assess its situation according to the criteria of the law on companies in difficulty.

Rather, cryptocurrencies are considered as intangible personal property that would be difficult for a creditor to use as collateral due to the significant fluctuations in their value.

Once the insolvency proceedings are opened, the insolvency administrator may proceed to the resale of the cryptocurrencies to finance the continuation of the company’s activity during the observation period. These assets may also be included in the scope of an assignment plan for the total or partial sale of the company.

French practitioners of insolvency law will have to learn how to handle crypto currencies while waiting for a precise legal regulation of these assets whose particularity lies in the fluctuations in value to which they are subject.

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

There is currently no specific criminal offence under French law that would punish fraudulent behaviour in cryptocurrencies and allow for the recovery of these specific stolen assets.

Nevertheless, hacking of cryptocurrency exchange platforms or crypto jacking can be punished according to general criminal qualifications.

Thus, hacking of cryptocurrency exchange platforms, essentially involving the falsification of private keys that allow one to “sign” a transaction and the introduction of malicious software, can be qualified as theft, or similar criminal offences.

As such, crypto-jacking can be punished by the French Penal Code, which punishes attacks on automated data processing systems, including fraudulent access or maintenance in this type of system.

The provisions punishing the action of hindering or distorting the functioning of an automated data processing system may also be applicable to this type of act.

However, since 2014, the French Criminal Code specifically criminalises another offence, unlawful data mining, with a sentence of five years in prison and a C = 150,000 fine, which is a heavier sentence than theft.

Furthermore, in the field of insolvency law, in order to recover assets belonging to the debtor and which have been misappropriated by a third party, the administrator or the courtappointed Receiver in charge of the proceedings could initiate actions for the reconstitution of the debtor’s assets against the third party.

The blockchain system allows for some traceability of transactions made with stolen cryptocurrencies.

Nevertheless, the success of such actions remains uncertain, given the lack of legal regulation that cryptocurrencies are currently subject to and their volatile nature.

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?

Under French law, if insolvency proceedings have been opened abroad against a debtor having assets in France, the effects of these proceedings in France vary according to the country in which they were opened.

When the proceedings are initiated in a Member State of the U.E, except Denmark, Regulation 2015/848 of 20th May 2015 applies. The opening judgment of a collective proceeding in a Member State is automatically recognised in all the other Member States of the European Union without having to apply for the exequatur of this opening judgment. It allows the French judge to recognise the validity of a foreign decision in France. Thus, once the insolvency proceedings have been opened in a Member State, the main procedure will have a universal effect and will include all the debtor’s assets.

If the assets located in another Member State allow for an establishment to be located in that territory, a secondary procedure can be opened in another Member State.

Then, a secondary insolvency proceeding can be initiated in all Member States where the debtor’s assets are located.

If insolvency proceedings are opened in a foreign country that is not a member of the European Union, and if they have not been the subject of an exequatur decision, they will not be able to produce any effect in France. The rule of suspension of judicial proceedings will not apply and creditors will be able to sue the debtor on the assets he holds in France.

On the contrary, the exequatur decision granted to a foreign judgment opening insolvency proceedings will allow the protection in France of the debtor’s assets as long as the law applicable to the foreign proceedings provides for a restriction on the creditors’ right to pursue the debtor.

As cryptocurrencies are considered as assets of the debtor, these solutions are applicable to them.