Crypto assets: A new line of enquiry and recovery for insolvency practitioners

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The media is brimming with articles on the rise of cryptocurrencies and digital assets. Whether it’s news on the rising value of Bitcoin, the acquisition of digital art for large amounts of money, the release of the latest Kings of Leon album as an NFT (non fungible token), or articles on people who have invested in cryptocurrency scams, crypto assets are taking center stage.

The South African Reserve Bank’s position on crypto assets remains as set out in their 2014 Position Paper on Virtual Currencies, and there are currently no laws or regulations specifically governing the use or trade of crypto assets in South Africa. Crypto assets are not legal tender in South Africa and there is no central registration system reflecting ownership of crypto assets. The South African Revenue Service requires that tax payers reflect their crypto assets in their tax returns and account for income produced in the trade of crypto assets and the SARB has issued directives that any offshore acquisition of crypto assets is subject to the discretionary annual allowance of R1 million for offshore investment.

As more and more South Africans dabble in buying crypto assets, and even companies begin to invest in crypto assets (see the Moneyweb articles of 18 March 2021 “SA firms start investing their cash in bitcoin”), there is a higher likelihood of insolvency practitioners being faced with crypto assets as assets of an insolvent estate which need to be dealt with.

Whilst these crypto assets may well be included in the asset registers of companies and declared in annual tax returns, the anonymous nature of the ownership of crypto assets means that there is an avenue for these assets to be hidden, not just from the regulatory authorities, but from liquidators and insolvency practitioners tasked with investigating, locating and realizing assets of insolvent individuals and companies.

There are challenges facing insolvency practitioners in regard to the tracing of crypto assets which are not declared, or which have been sold or transferred in contravention of the insolvency laws. Furthermore, the insolvent may not willingly provide the insolvency practitioner with the private key granting access to the crypto assets held in the insolvent’s private digital wallet, which may require the insolvency practitioner to approach Court for an order directing the insolvent to furnish the necessary private key and codes to the insolvency practitioner. Insolvency practitioners may well need to consider convening enquiries in order to interrogate insolvents and directors of insolvent companies in respect of the ownership and recovery of crypto assets in order to ensure that these potentially valuable assets do not fall through the cracks in insolvent estates to the detriment of the body of creditors.

Another potential area of concern for insolvency practitioners may be the question of the value of these crypto assets and when and how to realize such assets for the benefit of creditors without causing a loss to the insolvent estate (and potential liability for the practitioner as a result thereof). Once again, it may be necessary to approach the Courts in this regard in order to ensure that the insolvency practitioner does not attract any personal liability for the realization of these assets.

This area of potential asset recovery in insolvent estates needs to be borne in mind by insolvency practitioners when investigating the affairs, business and assets of insolvents and insolvent companies, and the Courts may well be faced with interesting litigation in the near future in respect of crypto assets owned by insolvents and insolvent companies.