Chimeras: what happens when the new wealth that cannot be found in the old legal framework is achieved in bankruptcy | Media Pyro


November 15, 2022 – With recent uproar over crypto-exchanges, the nature and status of crypto-assets under multiple legal systems can be tested, including those of the US, and England and Wales (E&W).

The rapid growth and complexity of cryptoassets, coupled with the lack of regulatory guidance, has created a level of uncertainty regarding the basic legal rights of cryptoasset holders. These issues are being hotly debated right now as courts, regulators and regulators decide the first wave of unregulated cryptoasset companies. This article addresses some of the key questions about unemployment in the United States and England and Wales.

How do you determine the ownership of crypto assets?

Position in the US

• As a general rule, most experts say that the ownership of crypto assets comes from the knowledge or control of the relevant private key, and other areas for security requirements.

• The Uniform Law Commission recently proposed a new section of the Uniform Commercial Code that governs how parties can transfer and acquire security interests in crypto assets, but it leaves a loophole. enough for other laws to create real estate.

Position in E&W

• In 2019, the UK Jurisdiction Taskforce determined that the owner of a cryptoasset is considered to be the person who obtains knowledge and control of the private key, under the rules of the private cryptoasset system (e.g. , the situation is different for crypto assets with multiple private keys or someone holding one key for another). This is supported by the Securities and Exchange Commission Act, which states that “power,” as opposed to “authority,” is the preferred principle to apply to crypto-assets (although it should be noted that control may not be indicating the legal status, for example, of a maintenance requirement).

• Being able to access the keys and have control over the cryptoasset is one of the biggest challenges for freelancers (IPs) assigned to run a freelance business that holds cryptoassets.

Are crypto assets part of the free world?

Position in the US

• All of the debtor’s assets at the time the bankruptcy case is initiated become estate assets.

• Recently, Voyager and Celsius, cryptoasset platforms that took customer deposits of cryptocurrencies for investment or payment, filed for bankruptcy in the US Bankruptcy Court for the Southern District of New York. In each of these cases there is considerable controversy over who “owns” a digital asset. The bankrupt foundation or the consumer? According to the nature of the possession of the property and the terms of use related to a base, the current law can establish a custody relationship, with the “buyer” still holding the right, a credit or debt relationship, with a title transfer agent. to the foundation, retaining only the claim to take or charge the property.

• In both cases, the countries stated that most of the crypto assets of the customers in them are irrevocable real estate – but in the form of distribution to creditors who have impact on the country.

• Non-US cases have shown that, even if the buyer has the right to in-kind distributions, there are a number of factors that can reduce the time or delay in obtaining distributions, including :

•the quality of the land records and/or credit standing on the buyer’s property;

•whether the fund is sufficient to manage the crypto assets; a

• conflicts of ownership.

Position in E&W

• Properly held, crypto assets are part of the free world.

• This general position is difficult if the cryptoassets are held on a crypto exchange. These crypto assets can, for example, be held for its clients under:

•a trust created from the terms and conditions of exchange; or

•a beneficial trust if, for example, the crypto-assets are legally owned by the exchange but the exchange shows that the property is for the buyer (i.e. to keep the buyer’s interest).

• Generally, if there is no trust relationship between the exchange and the customer, an assigned IP related to that exchange can face complex legal issues, some of which may lead to litigation (see Lehman, MF Global, etc.) .

• It is not yet clear whether securities held by a transfer for a beneficial debtor in bankruptcy are classified as client assets or segregated assets; Divorce can produce very different outcomes for clients, and should be considered on a case-by-case basis.

• Separately, if the crypto exchange or platform is involved in insolvency proceedings, it is generally considered that the crypto assets are property of an insolvent estate under r.1.2 Insolvency Act (E&W) 2016, by since the customer is an unsecured creditor, the cryptoassets are held on trust for the customer.

Other non-financial issues

Position in the US

The return of crypto-in-kind

• The general idea is that consumers who are entitled to a distribution from the bankruptcy estate will receive that distribution of money or the cryptoasset itself.

• If the buyer has an unsecured general claim, the borrower is under no obligation to return the crypto asset.

• In Voyager and Celsius, the house has expressed its desire to meet the customer’s claims, at least in kind, even if that distribution represents a land price to those who credit, rather than returning the customer’s property. This approach is effective in avoiding the risk of influencing market prices by liquidating or converting cryptoassets to fiat at a low market rate, and until today it has welcomed by customers.

• However, some argue that the distribution of crypto assets, which exceed the value of the beneficiary’s claims from the date of the petition, violates the US Bankruptcy Code, which requires settle claims in US dollars on the date of the petition.

Is crypto “money” under the Bankruptcy Code?

The US Bankruptcy Code contains strict protections for deposits and investments by debtors during bankruptcy. The U.S. Securities and Exchange Commission has recognized that this “or not” applies to crypto assets. In accordance with the Code’s strict requirements, treating crypto as currency allows borrowers to liquidate their crypto positions immediately upon issuance.

Position in E&W

Distribution of crypto assets / cryptoasset products

• If the IP acquires control over crypto assets, the main question is whether claims generated from cryptoasset holdings should be paid in crypto or converted to fiat currency and distributed. Currently, English insolvency law does not provide a concrete answer to this question because cryptocurrencies are not legal. In the Cayman Islands, investors of Three Arrows Capital were allowed to convert crypto assets into USD, USD Coin or Tether (which is pegged to USD).

• Identifying and/or distributing crypto-assets (the legal proceeds of their sale) can be expensive, difficult, and time-consuming.

• Determining the appropriate value of a claim on a cryptoasset can be a key consideration for any IP, especially where that cryptoasset class is subject to significant price volatility.

Are crypto assets subject to financial restrictions, and do certain crypto businesses/transactions benefit from UK safe harbor requirements?

• In the context of taking/fixing a security, the main question is whether the crypto assets fall within the scope of the financial obligations rules, so that the transaction can benefit from the exemption of certain legal conditions and changes in free legal provisions (for example, benefits from carve-outs, changes to cancellation terms and closing rules etc.). At this time it has not been tested, therefore, the legal basis is not clear.

• It is not yet clear whether crypto businesses and exchanges will benefit from the stability of the UK’s safe harbor and settlement rules, which protect the foundations of financial markets by eliminating some free legal terms.

Opinions of the author. They do not reflect the views of Reuters News, under the Privacy Policy, which is based on honesty, independence and freedom from reliance. Westlaw Today is owned by Thomson Reuters and independently operates Reuters News.

Sarah Coelho

Sara Coelho is a partner at Shearman & Sterling, in New York.

Alexander Wood

Alexander Wood is a partner at Shearman & Sterling, based in London.


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