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Freshfields Transactions

| 4 minutes read

Four key takeaways for restructuring and insolvency practitioners from the UKJT Legal Statement on Digital Assets and English Insolvency Law

On 17 April 2024 the UK Jurisdiction Taskforce (the UKJT), chaired by Sir Geoffrey Vos, published its Legal Statement on Digital Assets and English Insolvency Law

This is the third paper to be issued by the UKJT (the previous two tackling issuance of securities on blockchain based systems, and smart contracts) and addresses the application of insolvency law concepts to digital assets. The statement concludes that ‘English insolvency law as it presently stands is entirely capable of convenient and sensible application to disputes concerning digital assets’. 

The statement is to be welcomed as an effort to provide legal certainty within a continually developing digital asset market, an area that English courts have not yet had the opportunity to address in significant detail. Although non-binding, it provides useful clarification as to the treatment of digital assets in an insolvency and is likely to prove influential in informing judicial practice. In this blog, we outline some of the statement’s key takeaways.

Key takeaways

Digital assets are ‘property’ under insolvency law

The statement’s most important conclusion is that digital assets are property for the purposes of insolvency law. This builds upon the UKJT’s 2019 statement that digital assets were capable of amounting to property as a matter of English common law, which has since gained widespread judicial acceptance, and is unsurprising given the wide definition of property in the Insolvency Act 1986.

As a form of property, it follows that proprietary rights can therefore potentially be asserted over digital assets held by an insolvent company or bankrupt. The UKJT notes that whether such assets form party of the insolvency estate will be fact specific and depend on how the assets were held, for example on trust. 

Digital assets are not (yet) recognised as ‘money’ or foreign currency

The statement also finds that English law does not yet recognise digital assets as money. As a result, a claim for payment of digital assets cannot be used as the basis of a statutory demand or to wind up a company. This is because the UKJT notes that, properly characterised, such claims are for non-delivery and therefore result in a damages claim rather than constitute a debt for a liquidated sum. The UJKT’s view is that digital assets do not yet have the ‘general consent of mankind’ (as stipulated in the seminal 18th century case Miller v Race) to be accepted as money. This is because their value fluctuates against fiat currency, and there is typically no legal right to exchange an asset for a specific fiat currency. Yet, there is acknowledgement this position may change in the future as the usage of digital assets evolves. 

By extension, the statement concludes that digital assets are not ‘foreign currency’ for the purposes of Rule 14.21 of the Insolvency Rules 2016. This rule aims to remove foreign exchange risk and requires foreign currency debt to be converted to sterling at the exchange rate prevailing when a debtor enters insolvency proceedings. As the UKJT notes, its applicability is potentially of practical significance: given the pricing volatility of many digital assets, Rule 14.21 could materially affect creditors’ recovery. It might also avoid issues on distribution, for example if the value of a digital asset claim changes significantly between a first and second distribution. However, having concluded that digital assets are not ‘money’, the UKJT concludes that they cannot be ‘currency’ either and so the rules specific to foreign currency do not apply.

The COMI test is applicable to digital asset companies

The UKJT also provides useful guidance on how English courts will consider the question of jurisdiction in relation to a debtor which has dealings with digital assets. Many such assets rely on some form of distributed ledger technology, which by their nature may be thought to span multiple jurisdictions. 

The statement suggests that where international jurisdiction will be determined by reference to COMI, courts should continue to apply the well-established COMI test to digital assets companies as with other types of businesses. Instead of the location of the digital assets themselves, the UKJT emphasises that both the objective perception of the debtor’s commercial activities in relation to such assets and the way in which the debtor interacts with them are likely to strongly influence the question of COMI. The analysis is therefore fact specific: different factors will be at play in relation to an exchange, which is likely to operate from a single location, in comparison to a debtor principally holding digital assets, whose commercial activities may be more difficult to locate.

The statement does not tackle the question of how to establish the lex situs of specific digital assets (referring to previous decisions in Ion Science and Fetch AI that the location of a digital asset should be taken to be where the owner is domiciled).

Digital asset transactions can be avoided, but the remedies may differ in practice 

The statement also takes the view that the existing avoidance powers in relation to transactions at an undervalue, unlawful preferences and transactions defrauding creditors are applicable to dealings in digital assets. At the same time, however, the UKJT recognises that it may not be technological possible to restore the pre-transaction position and that the courts will have to adapt appropriate remedies. Many digital assets transfers are made using a form of distributed ledger technology such as blockchain, which by design are immutable. The UKJT, however, is confident that courts will be pragmatic in overcoming these obstacles by making orders that achieve the same result in practice, for example by ordering an equal and opposite transfer from the recipient instead of recovery of the original asset.