Regulation of cryptoassets is a hot topic, and it follows that part of that regulation addresses what happens on the failure of a crypto-business.
On 31 May 2022, UK Treasury published a consultation on managing the failure of systemic digital settlement asset (DSA) firms (including stablecoins).
Special administration regime
The proposal is to implement a modified Financial Market Infrastructure Special Administration Regime to address the failure of systemic DSA firms.
Although the consultation's focus is on stablecoins, it suggests that the regime could also extend to wallets or third-party service providers.
Additional objective
The proposal includes a new objective in the special administration for the return or transfer of funds and custody assets (including private keys).
Whether such assets are truly 'held' on behalf of clients, or whether clients simply have unsecured claims in an insolvency remains unclear, particularly where clients' cryptoassets are pooled and there is a deficiency due to hacks or fraud. The recent disclosure by the US's biggest crypto exchange, Coinbase, has brought the issue into sharp focus - clients' cryptoassets may not in fact be 'theirs' in the event of a crypto exchange's insolvency.
Key aims
The recent collapse of the stablecoin, Terra and extreme volatility in the market has seen cryptocurrency values fall and investor confidence shaken. The UK government hopes that its plans for a robust insolvency regime for certain distressed crypto situations will increase investor confidence in the digital market and encourage investment in the UK as a crypto-hub.
The consultation is due to close on 2 August 2022.
Find out more
To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.
