Background

Several recent insolvencies of popular crypto fin-techs have shaken the crypto markets, eroding investors’ trust in digital assets in general and their future reliability. 

The European Union's (EU) response is to implement new and clarify existing safeguards for investors to protect their property in the event of an insolvency. In this context, the Markets in Crypto Assets Regulation (MiCAR) is to be implemented throughout the EU. 

Legislative changes

The European Parliament passed draft legislation, informally agreed with the Council in June 2022, containing safeguards against market manipulation and financial crime but also against the insolvency of crypto asset service providers. 

Key safeguards include the following:

• Crypto asset service providers are to make adequate arrangements to safeguard the ownership rights of clients, especially in the event of their insolvency.
• This obligation requires the crypto-asset service providers, who are authorised to hold and administer these assets on behalf of third parties, to segregate holdings of crypto-assets on behalf of their clients from their own holdings for the clear identification of assets.

Will this legislation be successful?

If such a segregation is properly executed, most experts in the field consider that the individual owner of these assets would have an enforceable right to segregation under the German Insolvency Code. The MiCAR does not, however, specify how the segregation is to be executed. The crypto industry is using this vast scope for interpretation to set its own industry standards in advance of MiCAR's implementation. 

Whether or not these industry standards are accepted by insolvency administrators or the courts remains to be seen. 

Find out more 

To discuss the issues raised in this article in more detail, please contact a member of our Restructuring & Insolvency team.