Insolvency law “entirely capable” of dealing with digital assets

Digital assets: Insolvency law can deal with them

English insolvency law is “entirely capable of convenient and sensible application to disputes concerning digital assets”, an expert panel has declared.

It said “increased turbulence in the digital asset markets” and “recent high-profile collapses of digital asset exchanges, platforms and funds” had highlighted the importance of robust insolvency processes to ensure fair and predictable outcomes.

In its third legal statement, this time on digital assets and English insolvency law, the UK Jurisdiction Taskforce (UKJT) of the LawTech Delivery Panel said the courts of England and Wales had “not to date had occasion to address in any detail” the application of English insolvency law concepts to digital assets.

“As and when such concepts fall to be applied by the English courts in resolving disputes concerning digital assets, important questions may arise as to the precise manner of their application to this new category of asset.

“Our view is that English insolvency law as it presently stands is entirely capable of convenient and sensible application to disputes concerning digital assets.”

The UKJT’s first legal statement, on cryptoassets and smart contracts, concluded in November 2019 that digital assets were capable of being ‘property’ as a matter of English and Welsh common law”.

The definition of property in section 436(1) of the Insolvency Act 1986 was “at least as wide, and likely wider” than the common law conception of property, the new statement said.

“Since it is now clear that digital assets are capable of being things to which property rights can relate as a matter of common law, we have no doubt that they fall within the wider definition of property in the Insolvency Act.”

However, digital assets were “not yet treated as money in this jurisdiction”, meaning that, although they fell within the statutory definition of ‘property’ for the purposes of the 1986 Act, a claim to such assets “will not (of itself) found a statutory demand”.

For the same reason, such assets did not amount to ‘foreign currency’ for the purposes of rule 14.21 of the Insolvency Rules 2016, which requires office holders to convert debts into pounds sterling.

Nevertheless, a claim to digital assets held by a company or bankrupt “can (in principle) be a claim to recover property”, depending on the “manner in which the assets are held”.

Sir Geoffrey Vos, Master of the Rolls, said in his foreword to the statement that the two previous statements – the second, in February 2023, was on the issue and transfer of digital securities – had been “well received and referred to with approval” in court decisions in England and Wales and other common law countries.

“One of the most pressing concerns of mainstream investors considering a digital investment strategy is uncertainty surrounding recovery of digital assets within an insolvent estate.

“The legal statement concludes, amongst other things, that digital assets fall within the definition of property in the English Insolvency Act 1986, and that proprietary rights can be retained to digital assets held by insolvent estates.”

The legal statement came after a public consultation launched in November last year.

The drafting team was led by Lawrence Akka KC, based at Twenty Essex, and David Quest KC at 3 Verulam Buildings, with Rory Conway, a partner at Linklaters, Hannah Crawford, a partner at Kirkland & Ellis, Alexander Riddiford, based at Essex Court Chambers, Ryan Perkins at South Square and Matthew Kimber from Matter Labs.

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