Practical steps for Insolvency Practitioners as crypto assets become more popular

Yesterday’s announcement from The Insolvency Service of their decision to appoint a Crypto Specialist alongside the proposed Property (Digital Assets Etc) Bill, marks an important acknowledgement of the rise in the popularity of digital assets. In this article, Nicola Rout examines the current landscape and offers a reminder of practical steps for Insolvency Practitioners as digital assets continue to gain traction.

The Insolvency Service appoints crypto specialist

This week the Insolvency Service announced their first appointment of a crypto specialist to advise on recovering digital assets, largely in the context of criminal cases and bankruptcies, having seen a 420% increase in insolvencies involving such assets in the last five years.

Andrew Small is a former police investigator and his role will be to provide specialist knowledge about the technology which governs how crypto assets operate, with a view to recovering them for the benefit of creditors.

What does The Property (Digital Assets Etc) Bill say?

The Property (Digital Assets Etc) Bill was put before the House of Lords in the last quarter of 2024 and focuses primarily on the ownership of these crypto assets and the property rights which may attach to them.  Settled case law from the nineteenth century has stated that only a “thing in possession” or a “thing in action” could be characterised as personal property. With the rise of crypto assets, block chain technology and non-fungible tokens, the case law has developed to recognise a third possible category of personal property whereby proprietary rights attach to something intangible. This position is set out in the Bill and seeks to give certainty and protection to people and businesses using this type of asset.

How should Insolvency Practitioners treat digital assets?

Insolvency practitioners (IPs) have always had to consider realising the property and assets of an insolvent company or individual as part of their duties and so this would also include taking crypto/digital assets into account. The ability to identify, secure and realise any digital assets for the benefit of the creditor group as a whole could have a significant impact on the pot available to them for distribution.  IPs will therefore have to be aware of how best to treat such assets.  This could increase the complexity of the matter thereby increasing the IPs’ costs.

Best practice for transactions featuring Crypto

As a practical step, IPs should ensure that they are including digital assets in any questionnaires with the directors to prevent currencies being sold quickly and thereby becoming a voidable transaction. Failure to secure such assets may also leave the IP vulnerable to challenge from creditors at a later date if it becomes apparent there was significant realisable value outside the more “traditional” assets.

Similarly when it comes to realising the digital assets, the IP is at the mercy of the exchanges as the pricing of crypto currencies can be volatile and so it may be better for the IP to hold such assets until such times as the currency increases in value.

Further, given crypto assets are classed as property, any transfers could also come under the provisions of the Insolvency Act 1986 around transactions at undervalue, preference or transactions defrauding creditors and so IPs should investigate any transfer of crypto assets as they would any other type of asset.

Conclusion

The appointment of Andrew Small reflects the fact that crypto currencies are no longer solely in the realm of “tech bros” but the need to recover such assets will become more and more crucial in insolvencies going forward, both for corporates and personal bankruptcies, as the Financial Conduct Authority suggest that 12% of the adult population of the UK holds some form of crypto asset, a figure which is only set to rise in the coming years.

For Insolvency matters, or to discuss any of the matters covered above, please contact Nicola Rout. Alternatively, visit our Corporate and Commercial pages to find out more about the services we offer.