Cryptocurrency exchange FTX has filed for bankruptcy in the USA after the proposed bail-out by rival exchange, Binance, fell through earlier this week.
There are a number of novelties around insolvencies involving cryptocurrencies, just one of which is how to treat crypto-assets. Do they constitute security, are they commodities (i.e. assets), or are they currency? For the purpose of English law, the High Court has determined that Bitcoin at least (and, by analogy, likely other cryptocurrencies) are 'property', and would therefore form part of the insolvent estate of the company, unless they are held on trust or otherwise secured. Courts in other jurisdictions have been willing to adopt a similar approach, but it remains to be seen how the US courts will approach the assets in the case of the FTX bankruptcy.
Ownership of the assets will be another issue for the insolvency officeholder. Given to the notorious secrecy surrounding cryptocurrencies, it is almost impossible to trace ownership due to encryption and there are no public registers of ownership of crypto-assets. The insolvency officeholder will therefore require the cooperation of the person at the business holding the crypto-asset credentials in order to trace ownership, without which they will struggle to safeguard the assets or identify investors in the exchange. In an English insolvency, the officeholder has the power (under section 236 of the Insolvency Act 1986) to request information from officers of the company or anybody capable of providing information regarding the company's business, dealings and property. This will be crucial for insolvency practitioners dealing with insolvent estates involving crypto-assets, although the cooperation of foreign courts will likely be required where the relevant person is based overseas.
With over 1.2m FTX customers understood to be holding crypto-assets on the exchange, time will be of the essence to safeguard owners' investments and minimise losses.