As cryptocurrencies continue to grow in relevance to the global economy, bankruptcy trustees and federal equity receivers will continue to encounter these assets, currently estimated to hold approximately $2.5 trillion in value, with increasing frequency.
Like cash, digital currencies are corporate assets that are considered among the most prone to theft (by either insiders or third parties), and therefore present particular risks around custody and control. Unlike cash, the corresponding tax ramifications can be complex and material, and the digital currencies themselves can be highly volatile in value and relatively illiquid when it comes time to engage in a trade.
Accordingly, when stepping into the role of bankruptcy trustee or federal equity receiver, it is important to assess quickly whether assets of the estate include cryptocurrencies (or “digital currencies”), as these present unique risks and challenges to be managed.
The purpose of this article is to identify key recommendations for locating, accessing, securing, and monetizing these assets, including tax considerations which will likely impact the monetization strategies.
1. How can cryptocurrencies be located, and their value estimated?
Forensic analysis can be an invaluable tool for quickly locating cryptocurrency assets. Key forensic steps could include:
a. reviewing the trial balance for accounts with descriptions referencing cryptocurrency assets, and reviewing the general ledger for transaction descriptions referencing cryptocurrency assets and/or cryptocurrency exchanges;
b. obtaining and reviewing bank statements for transfers to/from cryptocurrency exchanges;
c. conducting email searches and searching files on the network and on computer hard drives for digital wallets, in which public and private keys are stored;
d. reviewing internet browsing history of employees in the finance function for evidence of accessing websites, such as online exchanges or cloud mining services;
e. securing relevant mobile devices or mobile device backups to identify apps which are designed to purchase or sell cryptocurrency or to pay with cryptocurrencies for goods and services;
f. looking for purchases of mining equipment and specialized hardware wallets;
g. searching for virtual machines on the company’s existing network infrastructure that may have been set up (licitly or illicitly) to mine; and
h. reviewing the office or home for mining equipment, wallet hardware, and paper wallets.
Once a wallet is located, a block explorer tool can be used to accumulate the transactions and estimate the value of the cryptocurrency associated with it. Having an estimate of the materiality of these assets, and their approximate holding period, will be important for developing appropriate risk-based strategies to secure and monetize them, as discussed further in the article.