1 August 2022
Metaverse August 2022/2 – 1 of 3 Insights
With the fast development of digital assets, we will increasingly face the issue on how to deal with digital assets in insolvencies. The German Insolvency Code (“InsO”), however, is unprepared for this development which is why the legislator must address the issue immediately.
If we, for example, only consider the case that an insolvent debtor has applied for insolvency, the insolvency administrator will be obliged to review if the debtor is holding digital assets that could be liquidated/utilized to the benefit of the insolvency creditors. One might assume that the insolvency administrator may access these digital assets under the current InsO. Unfortunately, this assumption is false and needs to be addressed.
The first issue the insolvency administrator faces is the question of whether the digital assets are in fact part of the insolvency estate after the debtor applied for insolvency. Arguably the answer could be “no”. Among other conditions that need to be met by an asset to be considered as being part of the insolvency estate, the asset needs to be subject to foreclosure under the German Law of foreclosure (“ZPO”). This, however, can be well disputed since the ZPO does not recognize digital assets. Scholars try to overcome this gap in the ZPO with legal analogies, basically arguing that digital assets can be considered similarly to money. But such views disregard the profound differences between money and digital assets.
Supposing the digital assets could be considered part of the insolvency estate, in order to liquidate the debtor’s assets, the insolvency administrator must take possession of the insolvency estate. If, however, a debtor has the intention of hiding their assets from the insolvency administrator they will not disclose the fact that they hold digital assets. In order to verify this, the insolvency administrator would be obligated to access the tools with which the debtor manages their digital assets. These tools are commonly private computers and smartphones. Such devices are in fact protected against being accessed by the insolvency administrator and prevent any foreclosure measures from being taken since the ZPO assumes that any debtor must keep these tools in order to ensure a humane quality of life and may continue with their profession despite the insolvency proceedings. This means that the ZPO or InsO do not grant the insolvency administrator the opportunity to take possession of digital assets. This very practical problem has not even been discussed by German scholars, probably due to the fact that the ownership of digital assets is still rare. But this situation might change in the near future, thus providing the debtor with an opportunity to hide his digital assets.
Even worse, assuming that the insolvency estate includes digital assets and the insolvency administrator not only knows but can in fact access the digital assets, the InsO does not provide the insolvency administrator with the authority to utilize digital assets. The InsO only grants the utilization of movable assets, claims and “other titles”. Immaterial assets, however, are specifically excluded from this scope. Digital assets must be understood as exactly these immaterial assets. Scholars are trying to close this legal “loophole” but cannot argue with inconsistent planning by the legislator because the legislator not only intentionally left immaterial assets out of the scope, but at the time of passing this regulation was not even aware of the possibility to consider digital assets as well.
For this reason, it must be concluded that the InsO leaves the insolvency administrator exposed to various loopholes in its insolvency and foreclosure regime and provides private investors with a rare opportunity. Especially considering the fast development of the tokenization of real assets as a means to make the investment in digital crypto securities more flexible, these highlight issues in the German insolvency regime that are especially concerning and should be addressed with a conclusive new regime that is easily amendable with regard to the frequent emergence of new forms of digital assets.
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