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6 September, 2019
Facebook's recent proposal to institute its very own cryptocurrency, Libra, brings the status of these currencies into the limelight. With high calibre companies including Visa, PayPal, Uber and Spotify reportedly supportive of Libra, the circulation of cryptocurrencies is likely to become even more common. This poses new questions for insolvency practitioners.
What are cryptocurrencies and how do they work?
Cryptocurrencies are digital currencies. Their uses, and individual unit generation, are governed by encryption techniques. They are not stored in accounts in the same way as traditional currencies but rather in online ‘wallets’, with algorithms used as ‘keys’ to these wallets.
There are two main types of wallets: direct holdings and third party holdings. In direct holdings, individual users have direct access to the relevant wallet and keys. In contrast, the keys and wallets for third party holdings are recorded on behalf of an individual owner on a third party server.
Libra is a new type of cryptocurrency as it will have an exchange reserve pegged to a basket of currencies. In contrast, traditional cryptocurrencies, such as Bitcoin, have no backing and are governed by the market price. Both types of cryptocurrencies will still be free from the monetary policy intervention faced by regular currencies.
Issues Facing Insolvency Practitioners
There are four primary issues these currencies pose for insolvency practitioners.
1. Regulatory Compliance
ASIC has released new guidelines (ASIC Guidelines) identifying cryptocurrencies as potential 'financial products'. Interactions with these currencies will therefore be regulated by a raft of Australian laws. Insolvency practitioners will need to carefully navigate their compliance obligations, which may require seeking expert advice.
2. Identification of an asset
Ownership of cryptocurrencies can be relatively anonymous, making it difficult for insolvency practitioners to ascertain if a company holds a crypto-asset. Blockchain technology acts as a ledger identifying all cryptocurrency transactions, but the identity of who holds a cryptocurrency is not always discernible. It remains to be seen whether the Libra model and the new ASIC Guidelines will improve owner identification. Insolvency practitioners need to be alive to the possibility that there may be 'hidden' crypto-
assets available to creditors.
3. Taking Security over Cryptocurrencies
Taking security over crypto-assets is not straight forward. The Personal Property Securities Act 2009 (Cth) (PPSA) allows for security over currencies to be perfected by two methods: control and registration. Perfection by control must be over funds held in an authorised deposit-taking institution (ADI) account. Cryptocurrency wallets are by their very nature not an ADI account.
Perfection must therefore be by registration but it is unclear under which class crypto-assets should be registered. The ASIC Guidelines classify cryptocurrencies as 'financial products', which depending on their nature, may constitute an 'Intermediated Security' or 'Investment Instrument' under the PPSA. Insolvency practitioners should consider how a crypto-asset is being used and seek expert advice to ensure their security is enforceable.
4. Interacting with crypto-assets
Crypto-assets put insolvency practitioners' fiduciary obligations at odds: safely preserve a crypto-asset on behalf of creditors or allow it to be exploited for the maximum return? The most secure method of storing cryptocurrencies is offline, in a direct holding. Yet, if an insolvency practitioner stores crypto-assets in a direct holding, the assets are temporarily removed from circulation and therefore cannot be exploited to maximise returns for creditors.
Crypto-assets pose several challenges for insolvency practitioners. If Libra eventuates, these issues will become more common. Practitioners will need to brace for the challenges ahead and seek expert advice where necessary.
For further information please contact:
Michael Sloan, Partner, Ashurst
michael.sloan@ashurst.com
