Clifford Chance

On 17 October 2023, the UK Jurisdiction Taskforce (UKJT) published a consultation on digital assets and English insolvency law with responses due by 6 December 2023. Clifford Chance's insolvency and financial regulatory experts have responded to the consultation, highlighting the flexibility in the existing English law approach and the benefits to be gained from the work of the UKJT and others (including the Law Commission, UNIDROIT, HM Treasury, the Financial Conduct Authority and the Bank of England) in matters such as characterisation of digital assets, choice of law and jurisdiction, regulatory issues, stability, and confidence in financial markets more generally.

What is the UKJT?

The UKJT is an industry-led initiative, formed in 2020 and tasked with promoting English law and jurisdiction for technology and digital innovation. It is chaired by Sir Geoffrey Vos, Master of the Roll.

How does the UKJT seek to achieve its objective: to promote market confidence and legal certainty?

The UKJT aims to clarify key questions regarding the legal status of, and basic principles applicable to, cryptoassets, distributed ledger technology (DLT), smart contracts and associated technologies under English law. It has previously issued statements on both the legal status of cryptoassets and smart contracts and on the issuance and transfer of digital securities under English law that have been influential both in the UK market and internationally.

What is the UKJT's latest initiative?

A consultation with the aim of producing a Legal Statement on Digital Assets and English Insolvency Law. The UKJT's consultation sought input into the questions that this proposed Legal Statement can most usefully answer.

What is the status of a Legal Statement?

A legal statement is a non-binding but influential statement that aims to provide the best possible answers to critical legal questions under English law. It seeks to demonstrate the ability of the common law in general, and English law in particular, to respond consistently and flexibly to new commercial mechanisms within emerging technologies.

What is the scope of the consultation?

The consultation asks respondents if the UKJT has identified the principal issues that will be of interest when considering digital assets in the context of English insolvency law. There are 8 questions that the UKJT proposes to consider looking at:

• the nature of digital assets as 'property'
• the allocation of insolvency jurisdiction
• the treatment of claims to digital assets
• whether such claims are monetary and the consequences of such
• obligations of insolvency officeholders
• the application of insolvency avoidance provisions
• the insolvency of an exchange or custodian
• the remedies available to insolvency officeholders to recover digital assets or their monetary equivalent.  

The consultation indicates that for its purposes, 'digital assets' are only those types of digital assets that cannot be classified using traditional legal concepts of personal property rights (which includes cryptoassets with no clear issuer such as bitcoin) and we therefore anticipate that the primary focus of the Legal Statement will be around such digital assets. This is helpful in our view, as we think the greatest uncertainties will arise in relation to these assets. For other types of digital assets, which would include for example where financial instruments are issued in digital rather than traditional forms, but otherwise fit within established legal and regulatory constructs, it may be that the UKJT stay silent. Alternatively, it would be helpful for the UKJT to confirm that the same treatment applies to digital as for traditional assets, i.e. that simply using a new technology does not of itself impact the legal analysis.

How will the Legal Statement promote market confidence?

As a starting point the UKJT's view is that English insolvency law is already capable of being coherent in its application to a broad range of digital assets and so it is envisaged that the Legal Statement will simply be providing guidance on how it will operate in practice and build upon the work of the UKJT in relation to certain digital assets (e.g. the Legal Statement on Cryptoassets and Smart Contracts published in November 2019 – which has a section on insolvency and the whether assets of this kind may be property for the purposes of the insolvency regime).

Clifford Chance has provided a response to the consultation. We are confident that the English insolvency regime is flexible and has over many years been proven to be able to accommodate a wide range of cases from individual bankruptcies to significant global corporate failures, spanning a whole range of different industry sectors, entities, and assets classes. As such we have indicated that we consider English insolvency law already to be well equipped in dealing with the competing entitlements to digital assets that may arise in both a formal insolvency context and restructuring scenarios.

Will the Legal Statement promote legal certainty as to the status and basic legal principles applicable to digital assets in an insolvency context?

Yes – overall, we think that the questions to be addressed in the Legal Statement are well formed, and we envisage that the Legal Statement is likely to provide useful guidance to the status and legal principles applicable to digital assets in an insolvency context.

In our response to the consultation, we have identified the need to consider the interaction of other regulatory and policy initiatives that have been progressing at pace more recently, to ensure that the Legal Statement is aligned to and consistent with those other initiatives.

For example, alongside a recent extension of the financial promotions regime to cover certain cryptoassets, HM Treasury, the FCA and the Bank of England have recently proposed measures for a framework for the issuance and custody of fiat-backed stablecoins and a regime for when these coins are used for payments and/or become designated as systemically important. Notably, in respect of systemically important fiat-backed stablecoins, there are proposals to implement a special administration regime. This will be followed by a regime regulating cryptoassets more widely, introducing authorisation requirements for certain cryptoasset activities, alongside rules for the issuance, offering and admission to trading of in-scope cryptoassets and a cryptoassets market abuse regime. More generally, the use of technology in the UK's financial markets is also being broadened through the introduction of the new FMI Digital Securities Sandbox which will improve on the ability to issue and trade financial instruments and investments in digital form.

We also indicated in our response that it would be useful to have clarification on the scope of the Legal Statement on digital assets, in particular its application to schemes of arrangement and restructuring plans under the Companies Act 2006. We consider that such restructuring tools could play a vital role in the market for digital assets, not least because they offer a flexible framework for resolving claims, or providing a mechanism for distribution, which when coupled with a tried and tested ability to deal with creditors whose individual identity may be uncertain, may make them particularly well suited to dealings with digital assets in distressed situations.

One of the most difficult areas for the Legal Statement to address is the international allocation of insolvency jurisdiction. While the English law rules on jurisdiction are clear (in relation to UK and non-UK incorporated/domiciled debtors) and generally speaking the English courts have a long history of providing cooperation with other jurisdictions in insolvency related matters, the Legal Statement will be limited as to the influence it can have on those other jurisdictions (where insolvent proceedings may be taking place). For this reason, it is important that English insolvency law and the UK government and regulators continue to embrace and promote international frameworks in this area.

Finally, we have suggested that the UKJT might want to reflect on the circumstances in which claims relating to different types of digital asset would be treated as giving rise to a claim for a "liquidated sum" – for example, does it make a difference if a claim is denominated in a fiat-backed stablecoin (e.g. USDC) as opposed to BTC or ETH?

What are the next steps?

The UKJT indicates that it will publish the Legal Statement on digital assets and insolvency law in February 2024. Stakeholders and professionals can therefore look forward to further guidance on the operation of the insolvency regime in the context of certain digital assets which will inevitably enhance and provide confidence in the English insolvency regime.