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Novel issues facing Cayman insolvency professionals dealing with crypto assets

This year marked the tenth anniversary of the world’s first cryptocurrency, Bitcoin. Cryptocurrency emerged as a by-product of digital cash with the goal of creating a decentralised currency, which would allow users to anonymously transfer funds online without restriction. Despite its overwhelming success, the crypto market is still very much in its adolescence with little regulatory governance. This article provides an overview of some of the challenges facing Cayman insolvency professionals (IPs) when confronted with insolvent estates possessing crypto assets1.

Identifying, Realising and Controlling Crypto Assets

Identifying and obtaining control over crypto assets

It is important for IPs to understand how to deal with a crypto asset as the primary duty of an IP is to maximise the value of assets for the benefit of creditors. The first difficulty an IP will face will be to identify and obtain control of the crypto asset from the individual(s) in possession of the private key for the digital wallet. Crypto assets are typically held in a digital wallet, which can usually only be accessed through a private key. Without the private key, IPs will not be able to access the crypto assets in order to exercise control or realise their value. In most situations, IPs will therefore require the co-operation of an individual closely associated with the insolvent estate, such as a director or investment manager to access the wallet. The task of identifying the holder of the key will likely involve some investigation since the holder of the digital wallet is not always required to disclose their personal information and will often use pseudonyms. The importance of adequately protecting and securing control over a wallet was demonstrated by the high-profile insolvency of Canada’s biggest cryptocurrency exchange, QuadrigaCX. In that case, due to the untimely death of the exchange’s chief executive Gerald Cotten, approximately US$142m in Bitcoin and other cryptocurrency were locked in offline wallets that are inaccessible since Cotten had sole possession of the pass codes.

 

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Novel issues facing Cayman insolvency professionals dealing with crypto assets

 


Paul Smith
Partner, Head of Cayman Islands Litigation & Restructuring Practice

Cayman Islands   +1 345 814 7777


Róisín Liddy-Murphy
Attorney

Cayman Islands   +1 345 814 7371


Jordan McErlean
Associate

Cayman Islands   +1 345 945 3901


1 For the sake of brevity, this term will be used in this article to denote the myriad of digital currencies available (ie Bitcoin, Ripple, Ether, Dogecoin, Facebook Libra).

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