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How Is Cryptocurrency Treated During the Process of Bankruptcy?

Cryptocurrency has disrupted quite a few financial markets. Bankruptcy is one of them. During the process of Chapter 7 bankruptcy, you dissolve your assets and pay off your debts. However, cryptocurrency throws in a bit of a wedge. Some people can be tremendously in debt because of cryptocurrency. Others may be holding essentially intangible assets. Here's what you need to know.

What Exactly Is Cryptocurrency?

Cryptocurrency is a decentralized currency system. A person pays money to purchase units of this digital currency, which can go up and down based on the markets. A decade ago, cryptocurrency was nearly entirely unregulated. Regulations are being developed, but they are slow going, as every country is dealing with the impact of cryptocurrency on its own.
Cryptocurrency is also highly volatile. The value can go up and down sharply in very rapid periods of time, making it very hard to figure out how much the currency is actually valued at. Since cryptocurrency is also difficult to trace and it is not reported to any agency, it can complicate financial issues.

What Happens If You Go Bankrupt Due to Cryptocurrency?

This is perhaps the easiest question to answer: A bankruptcy due to cryptocurrency is the same as any other type of bankruptcy. Bankruptcy due to cryptocurrency often happens because people trade this type of currency on the market and end up in losing positions. They ultimately owe money to the market that they were trading on, due to a margin call.
This situation is easy to deal with because the losses have already been quantified. The trader made an investment of a certain amount, which led to a loss and fees of certain amounts. During a bankruptcy, assets will be used to pay off these debts.

What Happens to Cryptocurrency During a Bankruptcy?

If someone has cryptocurrency during the process of a bankruptcy, the process becomes a little more difficult.
Firstly, cryptocurrency must be disclosed as an asset during bankruptcy. It is not always legally considered to be a currency, but it is legally considered to be a type of asset, even an intangible one. It is not legal to attempt to hide cryptocurrency during a bankruptcy proceeding, even if the currency currently resides in another country (which a digital currency can do).
The core problem lies in valuation. Cryptocurrency can change sharply from hour to hour, so it's in the bankruptcy trustee's best interests to try to capture as much of the value as possible. This is complicated by the fact that:
  • Cryptocurrency can be difficult to liquidate. Often it has to be liquidated in small batches, and it may not retain its value from batch to batch.
  • Cryptocurrency can be impossible to recover. If you have a physical wallet on your hard drive, you may still not be able to recover it if the password is lost.
The latter issue is something that has not yet been resolved in the court system. You may be physically in possession of a cryptocurrency wallet but be unable to open it until you remember the password. Effectively, this cryptocurrency is lost forever, even though it exists in a digital format. 
Ultimately, the trustee will decide when to sell off the assets and how much to recover from them, just as with any other commodity. However, not all courts understand the intricacies of cryptocurrency, which makes it important to have an attorney who does. 
Cryptocurrency is a new area of law and navigating it is difficult for even the most experienced. Nevertheless, many people are finding themselves in a situation where they need to figure it out. If you're trying to declare bankruptcy and have questions, a lawyer should be your first stop. Call Terry E. Hurst, Attorney at Law, for an appointment today.