Cryptoassets, Corporate Distress And The Challenges Of Asset Tracing In Brazil

The use of virtual assets in today's economy creates new challenges for procedural and property law, especially when it comes to enforcement and credit recovery. Although digital currencies are often seen as "anonymous", technology and regulation have shown that these assets can be traced, which opens the door to court measures such as freezing and seizure. To understand this landscape, it is important to look at (i) how the underlying technology works, (ii) the legal nature of virtual assets, and (iii) how major jurisdictions regulate this market.

Technical Functioning and Architecture of Blockchain Technology

Blockchain can be described as a decentralized digital infrastructure that records and validates transactions in a secure and transparent way, with strong resistance to improper changes. It is a form of Distributed Ledger Technology (DLT) that runs on a peer-to-peer network, without a central authority responsible for verifying, executing, or storing information.

It works through a chain of linked blocks. Each block contains a set of validated transactions and a cryptographic reference that connects it to the previous block. This design creates an immutable and auditable ledger. The same transaction history is replicated across many computers around the world (nodes). Each node keeps an identical copy of the ledger and takes part in validating transactions and protecting the integrity of the network.

Transactions are added to the blockchain through consensus mechanisms, which ensure that only valid transactions are recorded. Under Proof of Work (PoW), first used by Bitcoin, nodes compete to solve complex mathematical problems using significant computing power. This makes manipulation of records economically and technically unrealistic, because altering past data would require near-total control of the network's computing power. Proof of Stake (PoS), used by newer networks, replaces intensive computing with economic participation. Validation power is generally linked to the amount of assets staked by the validator, which tends to reduce energy use and increase efficiency.

Blockchain transactions rely on public-key cryptography. The private key is the main control tool: it allows the holder to authorize transfers of digital assets. The public key, in turn, allows others to see transactions linked to that participant. For extra security, public addresses are derived from public keys through mathematical functions, creating an additional layer of protection against unauthorized access.

While transaction data is public and accessible to anyone, users' civil identities are not revealed directly. This mix of public records and identity protection creates a form of "relative anonymity." It is often possible to follow the movement of assets over time without immediately identifying the owner. However, transaction patterns and volumes linked to specific addresses can allow indirect identification, especially when assets interact with regulated platforms such as exchanges.

Smart contracts are also an important development within blockchain architecture. They allow the automatic execution of pre-programmed instructions when specific conditions occur. These self-executing arrangements can reduce intermediaries, lower operational costs, and support advanced automation models such as conditional payments, digital guarantees, and scheduled transfers. From a legal standpoint, smart contracts can also increase traceability, because the rules governing asset movement can be recorded on the network.

Overall, blockchain combines decentralization, cryptography, and public records, creating objective conditions for tracking transactions and identifying digital assets that may be subject to court enforcement measures.

Virtual Assets: Concept, Economic Relevance, and Regulation

Article 3 of Brazilian Law No. 14,478/2022 defines a virtual asset as a digital representation of value that can be traded or transferred electronically and used for payments or investment, but that is not domestic or foreign currency, electronic money, instruments that grant access to specific products or services (such as loyalty points), or representations of assets whose issuance, bookkeeping, trading, or settlement is already regulated by law (such as securities and financial assets).

Virtual assets can be grouped into different categories depending on their function, technology, and level of centralization. Common examples include cryptocurrencies such as Bitcoin, Ethereum, and Solana; stablecoins such as USDT, USDC, and DAI; central bank digital currencies (CBDCs), such as Brazil's Drex; privacy coins such as Monero and Zcash; and tokens, a flexible category that includes utility tokens used to access platforms or services, as well as other token models (including security tokens and NFTs).

In Brazil, the virtual asset market is mainly regulated by Law No. 14,478/2022, which sets guidelines for services related to virtual assets and defines the scope of state supervision. In practice, the regulation focuses less on the assets themselves and more on the intermediaries that provide services in this market (VASPs). After Decree No. 11,563/2023 assigned the Central Bank of Brazil (BACEN) the authority to supervise and regulate this sector, BACEN issued Resolutions Nos. 519, 520, and 521, which set rules and requirements for virtual asset service providers.

Internationally, regulation has also moved toward greater transparency and traceability, mainly by imposing obligations on service providers.

In the European Union, the MiCA Regulation (Markets in Crypto-Assets) creates a harmonized framework for issuing crypto-assets and providing related services. It sets strict requirements on governance, disclosures, and user identification. MiCA helps move the debate away from "absolute anonymity" by strengthening supervision and cross-border cooperation.

In the United States, the regulatory approach is more fragmented. The Securities and Exchange Commission (SEC) plays a key role in treating certain virtual assets as securities, especially when they qualify as investment contracts. This view affects the liability of issuers and intermediaries and supports traceability through platforms that must comply with regulatory duties.

In addition, the Bank for International Settlements (BIS) has played an important role in analyzing trends in CBDCs. BIS studies indicate that CBDCs may significantly expand transaction traceability while trying to balance efficiency, privacy, and financial stability.

Taken together, these developments show that virtual assets have moved from the margins of the financial system to become relevant parts of the digital economy, requiring regulatory responses that balance innovation, security, and system integrity.

Cryptoassets and the Changing Landscape of Corporate Distress

The progressive incorporation of cryptoassets into corporate financial structures has been changing the dynamics of corporate distress and insolvency. What started as an innovation focused on alternative payments or investment has become part of treasury operations, funding structures, and more complex asset strategies. In times of economic deterioration, this puts pressure on the effectiveness of traditional enforcement and credit recovery tools.

In insolvency proceedings, identifying, preserving, and enforcing against assets is essential to protect creditors and maximize the value of the estate. Cryptoassets challenge these assumptions because they operate on decentralized infrastructures, can move quickly across borders, and often do not rely on intermediaries with immediate duties to cooperate. As a result, insolvency law must adapt to a digital environment marked by speed, fragmentation, and information gaps.

In addition, the definition of the "asset" to be preserved can vary. Tokens may represent economic value, contractual rights, participation in protocols, or only an expected gain. In insolvency, this uncertainty affects classification, valuation, and the timing of urgent measures. To reduce losses, it is often advisable to combine urgent relief, information duties, and preservation of digital evidence with immediate technical support, so that volatility and fast transfers do not make enforcement ineffective before the first concrete court measure can be implemented.

In corporate crises, it is common to see liquidity converted into cryptoassets as a way to move assets away from traditional enforcement channels. Migration from the traditional financial system to blockchain environments can be quick and involve little institutional friction, which makes early detection harder for creditors and insolvency practitioners. The risk of dissipation increases precisely when predictability and transparency are most needed.

Self-custody wallets are particularly sensitive. Unlike wallets held by exchanges or other regulated intermediaries, where freezing orders and data requests can be directed to the provider, self-custody concentrates private-key control in the hands of managers or shareholders. In practice, the focus of enforcement shifts from the digital asset itself to the conduct of the controller, requiring indirect measures, cooperation duties, and proportionate procedural tools.

Tracking complexity is increased by mixers, tumblers, and cross-chain bridges. These mechanisms fragment flows, break linear trails, and allow assets to be moved and "reassembled" across different networks, which makes it harder to reconstruct the financial path and identify the final economic beneficiary. Even if such tools may have legitimate uses, repeated use in distress scenarios tends to raise investigation costs and increase the risk of frustrated recovery.

Lessons from Recent Insolvencies Involving Cryptoassets: The Brazilian Experience

These challenges have become more visible in Brazil through cases involving exchanges, investment platforms, and corporate groups exposed to digital assets. Although Brazil has not yet seen bankruptcy proceedings on a scale comparable to some widely known international collapses, there has been a growing number of lawsuits, urgent measures, and enforcement actions linked to cryptoassets, highlighting weaknesses in governance and transparency.

In disputes involving intermediation platforms, common patterns include poor segregation between client assets and company assets, weak internal controls, and operating models that are difficult to audit. In many situations, activity took place in a regulatory environment still under consolidation, with fragmented oversight, which made timely asset identification difficult and delayed action when the crisis was already clear.

For creditors, these cases show compounding risks. Volatility, uncertainty about custody, and doubts about access to private keys affect recovery expectations. Often it is hard to confirm whether assets are held in custody by providers that can be served with court orders, in self-custody structures controlled by managers, or with intermediaries abroad and each scenario calls for a different procedural strategy that must be executed quickly.

For courts and insolvency practitioners, Brazilian experience also shows the limits of tools designed for bank accounts, securities, and receivables. Traditional orders may be ineffective when wallets are directly controlled by individuals or when assets are transferred quickly on-chain. As a result, reliance on specialized technical evidence, blockchain tracing reports, and coordinated action with service providers as enforcement "anchor points" has increased.

The Brazilian experience also reinforces the importance of early action and cross-border cooperation. The speed of transfers and ease of fragmentation make late interventions especially costly. When there are signs of custody outside Brazil or movement through multiple foreign platforms, cooperation requests and coordinated measures become important to preserve value and prevent dissipation.

Blockchain Transparency, Traceability, and Practical Limits of Digital Tracing

Despite the perception of anonymity, public blockchains are highly transparent: transactions are recorded in a permanent and verifiable way, generating a large volume of data. Traceability, however, does not mean automatic identification of the legal owner. It means reconstructing asset flows to produce legally relevant inferences about control, economic availability, and allocation of assets, which can be particularly useful in insolvency.

Lessons from Recent Insolvencies Involving Crypto Assets: The Brazilian Experience

The relevance of these challenges has become more visible in Brazil, with the growth of cases involving exchanges, investment platforms, and business groups exposed to digital assets.

The increase in crypto assets in Brazil can be verified through data presented in the 8th X-Ray of the Brazilian Investor, prepared by Anbima (Brazilian Association of Financial and Capital Market Entities), which indicates that approximately 4% of the Brazilian population declared owning cryptocurrencies in 2024. Furthermore, considering the universe of approximately 59 million investors in the country, it is estimated that 6.5 million people have part of their assets allocated to crypto assets. This significant contingent reveal that crypto assets no longer occupy a merely marginal position in the financial system, but are increasingly becoming part of the assets of individuals and legal entities subject to risks of default and insolvency.

Recent surveys indicate that approximately 24 million Brazilians have already invested in cryptocurrencies, either through traditional financial institutions, specialized brokers, funds, and ETFs, or through self-management in digital portfolios without intermediaries.

These data highlight not only the popularization of the use of crypto assets, but also the dispersion of their custody, which poses additional challenges to the identification, location, and seizure of these assets in scenarios of asset crisis and corporate insolvency.

In this context, the traceability of crypto assets plays a central role in the effectiveness of credit protection mechanisms, especially when seeking to satisfy credits against insolvent companies. Although the country has not yet experienced bankruptcy proceedings on a scale comparable to some international collapses, the number of legal disputes, emergency measures, and enforcement incidents related to crypto assets is growing, revealing weaknesses in governance and transparency.

In litigation related to intermediation platforms, patterns such as inadequate segregation between client funds and proprietary assets, insufficient internal controls, and poorly auditable operating models are repeated. In several situations, the action took place in a regulatory environment undergoing consolidation, with fragmented supervision, which hindered the timely identification of assets and delayed measures when the crisis was already evident.

For creditors, the cases expose combined risks: volatility, uncertainty about custody, and doubts about access to private keys affect recovery expectations. It is often difficult to determine whether the assets are in portfolios held by providers subject to court orders, in self-custody structures controlled by administrators, or with intermediaries abroad, and each scenario requires a distinct and quickly executable procedural strategy.

For judicial administrators and courts, Brazilian practice highlights the limitations of instruments designed for bank accounts, securities, and receivables. Traditional orders may be ineffective in the face of portfolios controlled directly by individuals or rapid on-chain transfers. In response, there is a growing reliance on specialized technical evidence, blockchain tracking reports, and coordinated action with service providers as anchors for enforcement.

Experience also reinforces the importance of early action and transnational cooperation. The speed of transfer and ease of asset fragmentation make late interventions particularly costly. When there are indications of custody outside the country or passage through multiple foreign platforms, requests for cooperation and coordinated measures become relevant to preserve value and prevent dissipation.

Strategies for Enforcement, Traceability, and Personal Accountability in Crypto Recovery

In corporate insolvency, recovering cryptoassets requires identifying control points that are viable both legally and in practice. Where assets are held in custody by regulated intermediaries, court orders served on platforms can freeze assets, preserve records, and provide data on ownership and movements, acting as a bridge between decentralized networks and traditional enforcement.

Where assets are held in self-custody, the strategy is often indirect. It may involve disclosure orders, duties to cooperate, coercive measures, and sanctions for non-compliance. Enforcement depends on showing effective control over private keys and economic availability, and on reducing incentives for rapid dissipation.

Technical tracing supports these strategies. It helps map trajectories, locate conversion points into fiat currency, identify interaction with regulated platforms, and detect patterns inconsistent with ordinary business activity. Professional tools can reveal links between wallets, flag the use of mixers or bridges, and identify critical windows for court intervention.

The cross-border dimension is central. Rapid transfers between jurisdictions and the global presence of providers often make international cooperation necessary. Tracing, by specifying addresses, values, and routes, makes cooperation requests more precise and increases the effectiveness of preservation measures.

Finally, the use of cryptoassets to conceal assets reinforces the relevance of piercing the corporate veil in a digital context. An integrated analysis of on-chain flows, behavioral patterns, and economic links can indicate commingling and control by shareholders or managers, enabling personal liability in cases of abuse and preserving the economic purpose of insolvency law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.