The Role of Digital Assets in Bankruptcy
The digital revolution has transformed numerous aspects of our lives, and the financial sector is no exception. Cryptocurrencies, once a fringe interest, have now become mainstream, and their inclusion in bankruptcy proceedings is an increasingly pertinent issue. As digital assets such as Bitcoin, Ethereum, and countless others grow in value and adoption, how are they addressed during bankruptcy? This article delves into this complex issue, providing insights for both debtors and creditors.
Understanding Digital Assets
Before diving into their role in bankruptcy, it’s vital to understand what digital assets are. Cryptocurrencies, the most common form of digital assets, are decentralized forms of currency using blockchain technology. Unlike traditional assets, they don’t exist in physical form and are stored in digital wallets, often protected by cryptographic keys.
How are Digital Assets Classified in Bankruptcy?
The classification of digital assets in bankruptcy remains a subject of debate. However, in most jurisdictions:
- Digital assets are property: Similar to stocks or commodities, cryptocurrencies are typically treated as property rather than currency. This means they are part of the bankruptcy estate and can be liquidated to satisfy creditor claims.
- Value volatility: The value of digital assets can be highly volatile. This poses challenges when determining the bankruptcy estate’s worth, as the value of digital assets can change rapidly, even as bankruptcy proceedings are ongoing.
Challenges in Handling Digital Assets in Bankruptcy
Given the nature of cryptocurrency being property rather than currency, as counterintuitive as that may seem, as well as being highly volatile presents obvious challenges in the way that crypto assets are handled.
Locating and Accessing Assets
Digital assets are often protected by cryptographic keys, making them difficult to access. If a debtor refuses or is unable to provide access to their digital wallet, it can be nearly impossible for creditors or trustees to access these assets. In a situation where cryptocurrency assets are inaccessible, they are effectively nonexistent.
Cryptocurrencies operate globally. A debtor might hold digital assets on an exchange located in a foreign jurisdiction, adding complexity to the recovery process. The many chapters of bankruptcy are bound by federal law, which poses a unique challenge for a currency that exists for the express purpose of being independent of the legal structures of fiat currency.
Given the volatility of digital assets, valuing them accurately can be challenging. The price during the filing might differ significantly from the liquidation value.
Consider the overnight collapse of FTX and its native coin known as FTT. In a matter of days, FTT went from having some perceived worth to having absolutely none at all. How, then, is a bankruptcy proceeding supposed to assign value to the loss of those assets?
If the decision is made to liquidate digital assets, converting them into fiat currency isn’t always straightforward. Market liquidity and potential regulatory issues can pose challenges.
Legal Considerations and Recommendations
First, it bears repeating that bankruptcy is foremost a legal process, which means that hiring an attorney would be an effective strategy when considering bankruptcy, particularly if you own a substantial amount of crypto assets. Consider the following if you find yourself in this situation:
- Full disclosure: If you’re filing for bankruptcy and own digital assets, disclose them. Concealing assets can lead to charges of bankruptcy fraud.
- Consider converting assets: If you’re concerned about the volatility of your digital assets, consider converting them to a more stable form of currency before filing.
Putting it All Together
The world of bankruptcy is adapting to the rise of digital assets. Their unique characteristics pose challenges and considerations that both debtors and creditors must navigate. As the legal landscape continues to evolve, those involved in bankruptcy proceedings should remember the importance of a qualified bankruptcy lawyer being present.