What is cryptocurrency?

Cryptocurrency is a medium of exchange that is digital, encrypted and decentralized.

For the most part, cryptocurrency is used for investing or as a speculative instrument, however, it has, of recent times, been accepted as a form of currency by some companies for the purchase of goods and services.

Is cryptocurrency an asset in a bankrupt estate?

With cryptocurrency now becoming more and more common place, it is increasingly likely that cryptocurrency will form part of the pool of assets in which a bankruptcy trustee will be required to deal with upon appointment.

Like any other asset (such as cash and shares), a bankrupt’s interest in cryptocurrencies, on or after the date of bankruptcy will vest in the bankruptcy trustee as an asset in the estate, unless an exemption applies pursuant to s116 of the Bankruptcy Act 1966 (‘Bankruptcy Act’).

One such situation in which cryptocurrency is unlikely to vest with the bankruptcy trustee is where a bankrupt utilises income earned post-bankruptcy to purchase cryptocurrency to be used as a substitute to legal currency when purchasing goods and services.

At the commencement of a bankruptcy, a bankrupt must disclose to the bankruptcy trustee, any ownership or interest they may hold in cryptocurrencies. Failure to disclose such information may be deemed an offence under the Bankruptcy Act.

How can cryptocurrency be identified in a bankrupt estate?

As there is no national ‘register’ cryptocurrencies in Australia, additional diligence will be required by a bankruptcy trustee in identifying whether a bankrupt holds any interest in cryptocurrencies.

Upon appointment, a bankruptcy trustee should immediately obtain and review the bankrupt’s bank statements for any transactions which may be related to cryptocurrencies or cryptocurrency exchanges. Transactions which include keywords such as ‘bitcoin’, ‘coin’, ‘crypto’ and ‘e-currency’ are likely to indicate such an interest by a bankrupt.

In the event that an interest in cryptocurrency is identified, the bankruptcy trustee must seek and obtain the relevant public and private keys from a bankrupt. These keys will enable the bankruptcy trustee to conduct the appropriate investigations, as well as enabling the sale and realisation of the cryptocurrency, by the bankruptcy trustee, for the benefit of the bankrupt estate.

Should a bankrupt not be forthcoming with the provision of the public and private keys, the bankruptcy trustee may utilise the powers of the Bankruptcy Act (i.e. s77A, s81, and s130) to compel the provision of the public and private keys through third parties.

How is cryptocurrency realised in a bankrupt estate?

When cryptocurrency is identified in a bankrupt estate, the bankruptcy trustee must immediately take control of the cryptocurrency by transferring it to a ‘wallet’ held and controlled by the bankruptcy trustee themselves.

To transfer cryptocurrency to their ‘wallet’, the bankruptcy trustee must obtain the private key of the ‘wallet’ where the cryptocurrency is currently held.

Due to the high volatility of cryptocurrencies, once control is gained, the bankruptcy trustee will, in most instances, immediately realise the cryptocurrency for the benefit of the bankrupt estate.

Should the bankruptcy trustee deem it appropriate to instead hold the cryptocurrency, they must carefully document the basis for this decision and also store the cryptocurrency offline in ‘cold storage’ as the online environment is prone to hacking.

Should you or your client have any queries regarding cryptocurrencies and their treatment in bankruptcy, please contact our office for an obligation free discussion.

About the author

Benjamin Mitchell is a Senior Insolvency Accountant at HLB Mann Judd Insolvency WA. Benjamin assists the Partners with the many Corporate and Personal insolvency appointments managed by the HLB Insolvency team.

If you have any queries about insolvency matters, please feel free to contact the team on 08 9215 7900.

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