Heads Or Tails: Structuring For Bankruptcy Remoteness In Digital Assets, The View From The BVI

Key takeaways

• Digital assets are generally recognised as property, but insolvency outcomes depend on whether customers hold proprietary rights or merely contractual claims.

• Omnibus wallets and pooled holdings can still achieve bankruptcy remoteness if trust intentions, records, reconciliation and custody structures clearly support customer ownership.

• Courts prioritise operational reality over labels; contracts, accounting, key control and asset-use practices must align to protect customer assets from insolvency estates.

This article first appeared in Volume 23, Issue 4 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing

www.chasecambria.com

Rosalind Nicholson, partner in our Insolvency and Dispute Resolution group, examines how digital asset structures can achieve bankruptcy remoteness and the key insolvency lessons from leading common law.

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Synopsis

‘Bankruptcy remoteness’ in the digital asset context means structuring the relationship so that if an exchange, custodian, broker or similar service provider becomes insolvent, client digital assets – or the client’s identifiable share of a pool – fall outside the provider’s insolvent estate and are not available for distribution to the provider’s unsecured creditors. The legal analysis is familiar. It simply applies established rules of property, trust, agency and insolvency priority to a technologically novel class of asset.

This article revisits the core legal building blocks: digital assets as property, and the critical distinction between proprietary and personal claims. It then tests those principles against the realities of how platforms actually operate: omnibus wallets, private-key custody, internal ledgering, reconciliation, and contractual allocation of risk.

The starting point is the BVI Commercial Court’s short but practically significant guidance in Philip Smith and Jason Kardachi (as joint liquidators) v Torque Group Holdings Ltd (in liquidation) (‘Torque’), then draws comparative lessons from Ruscoe and another v Cryptopia Ltd (in liq) (‘Cryptopia’) (New Zealand) and Quoine Pte Ltd v B2C2 Ltd (‘Quoine’) (Singapore), and from the more recent insolvency decisions in Re Taylor, Joshua James and another (Official Receiver, non-party) (‘Eqonex’) (Singapore) and the two Gatecoin decisions in Hong Kong. These decisions illustrate a common theme: the terms in force, the custody mechanics and the operational reality will often determine whether customers have proprietary rights or merely personal claims.

Four propositions emerge. First, digital assets are now generally treated by common-law courts as capable of being property. Secondly, that conclusion does not by itself determine whether a customer has a proprietary claim in an insolvency. Thirdly, where assets are pooled or held through omnibus wallets, the question is whether the contractual and operational structure gives the customer an identifiable proprietary interest in the relevant asset or pool. Fourthly, the practical success of bankruptcy-remoteness structuring depends on consistency between the terms, custody mechanics,
ledgering, accounting treatment, reconciliation and control of private keys.