First appearing in the early 2010s, crypto-assets are true outliers in the French legal landscape. Defined by the Monetary and Financial Code as “ any instrument containing, in digital form, units of non-monetary value that can be held or transferred for the purpose of acquiring goods or services, but which do not represent a claim against the issuer”1, these crypto-assets refer in practice to two types of digital assets:
- cryptocurrencies, which are made possible by so-called “blockchain”technologies; and
- tokens created by companies raising funds through digital currency offerings, more commonly known as Initial Coin Offerings (ICOs).
Originally designed as a means of exchange in the digital world, crypto-assets have gradually gained a foothold in the real economy through services that allow them to be bought or sold for fiat currencies, held, or used as a financing tool in the context of an ICO.
There are currently nearly 1,600 cryptocurrencies, three of which— Bitcoin, Ethereum, and Ripple —dominate transactions and market capitalization. In light of the rapid growth of these digital assets, regulators and lawmakers are now called upon to establish an appropriate regulatory framework through a coordinated effort at the European and global levels.
French law has , in fact, been a pioneer in this area. While the regulatory authorities have focused on enabling the use of blockchain technologies for the transfer of unlisted securities and minibonds , the legislative authorities have very recently turned their attention to the legal framework for ICOs and the taxation of crypto -assets . It follows that the French legislature does not currently intend to adapt insolvency law to address these new assets. However, given the growing success of crypto-assets, it is likely that insolvency proceedings could soon be initiated against a French company holding digital assets.
Consequently, through the lens of several practical scenarios under French law governing companies in financial distress, it will be necessary to analyze in advance the legal classification of cryptocurrencies and their treatment in the context of insolvency proceedings.
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1. The Legal Classification of Cryptocurrencies and Its Consequences
1.1 Is cryptocurrency a marketable asset within the meaning of Book VI of the Commercial Code?
The concept of “insolvency” is the cornerstone of insolvency law. Serving as a barometer of financial distress, this crucial concept makes it possible, in particular, to determine which insolvency proceeding should be initiated against a company.
In legal terms, insolvency refers to a situation in which a company is “unable to meet its current liabilities with its available assets5 .” Determining whether a company has ceased payments therefore requires an independent and precise assessment of the available assets of the company in financial distress.
In this context, should cryptocurrencies held as part of a distressed company’s assets be taken into account when determining the scope of available assets?
The concept of a company’s “available assets” includes (i) all liquid assets and (ii) readily realizable assets, that is, any asset easily and quickly convertible into cash, such as mature and discountable bills of exchange and listed securities. In practice, however, just like listed securities, cryptocurrencies are stores of value that can be immediately converted into euros upon resale on dedicated trading platforms, allowing for resales at the market price . They can also be resold on escrow platforms, which directly connect buyers and sellers.
Therefore, in our view, cryptocurrencies should be taken into account when assessing available assets, which would have two consequences.
In certain proceedings, digital assets will “inflate” the available assets, thereby enabling the distressed company to avoid insolvency, at least temporarily. However, if a company’s assets consist largely ofcrypto-assets,9 even the slightest fluctuation in their value could suddenly lead to insolvency, requiring the legal representative to exerciseheightened vigilance.10 It is true that as long as the company has sufficient cash on hand to meet its current expenses, a state of insolvency does not exist, even if certain assets are significantly depreciated at a given time.
1.2 Cryptocurrency: Is It an Intangible Personal Property or Currency?
In the months following the commencement of insolvency proceedings, the creditors of the debtor company are required to file their claims with the appointed insolvency administrator, as of the date of the order commencing the proceedings. This claim must be filed in euros or in a foreign currency; in the latter case, conversion to euros will be based on the exchange rate in effect on the date of the order opening theinsolvency proceedings.¹¹
In this context, can cryptocurrencies be treated as foreign currencies, such that they could serve as the basis for a claim?
The prevailing view is that cryptocurrency cannot constitute an official currency with legal tender status, due to the lack of a state connection and official recognition as such. Numerous reports issued by French and European regulatory authorities support this view, concluding that crypto-assets do not fulfill— or fulfill only very partially —the three traditional functions ofmoney.¹² To date, French courts have not yet had to rule on the legal classification of crypto-assets. In our view, it would be appropriate for the court hearing the matter to draw inspiration from the decision rendered on January 22, 2016, by a California court, which ruled, among other things, that Bitcoin is not a currency but aproperty interest.¹³
Consequently, it does not appear that, in the context of French insolvency proceedings, a creditor can file a claim whose value is expressed in cryptocurrency.
Classifying cryptocurrencies as belonging to the legal category of intangible personal property would have several other consequences.
Indeed, cryptocurrency owners would be led to view these assets as a means of establishingthe basis for a securityinterest.¹⁴ However, in our view, creating a security interest in these complex assets seems highly unlikely. For example, creating a non-possessory pledge on cryptocurrencies would offer very little security to the secured creditor, assuming that the pledge could be considered validlycreated.¹⁵ Similarly, creating a security interest with transfer of possession would require the transfer of the cryptocurrencies to the secured creditor or an agreed-upon third party, which would entail significant practical difficulties.
More generally, the complexity and extreme volatility of these newassets¹⁶ would constitute a real source of uncertainty for the creditor when enforcing the security interests granted. It is worth considering, however, whether cryptocurrencies can be subject to a retention-of-title clause, such that they could be claimed by a creditor who considers itself the true owner.
For the creditor’s claim to succeed, the creditor must prove that there was no transfer of ownership of the cryptocurrencies to the debtor company due to nonpayment or partial payment of the cryptocurrencies. In our view, however, such a scenario could not arise in practice. Indeed, the blockchain technology that enables the circulation of cryptocurrencies effectively entails a transfer of ownership, so that, in principle, it should not allow for the inclusion of a retention-of-title clause or a deferred payment of the digital asset that is the subject of the transaction block.
Consequently, a debtor company that holds cryptocurrencies as part of its assets would necessarily have full ownership of them.
2. The Treatment of Cryptocurrencies in Insolvency Proceedings
2.1 Before the commencement of insolvency proceedings: How should a company executive handle cryptocurrencies?
To prevent the debtor company from squandering its assets to orchestrate its insolvency, or from unduly favoring certain creditors at the expense of others, the French legislature has established the principle of the so-called “ suspicious” period.¹⁷ During this phase, the bodies overseeing a reorganization or judicial liquidation proceeding may seek to set aside certain acts deemed suspect in order to restore the debtor company’s assets to their state prior to the execution of the disputed acts.
Given this, could transactions conducted in cryptocurrencies be called into question in the context of the voidability of transactions during the suspect period?
Two possibilities can be considered: payments made in cryptocurrencies and the conversion of cryptocurrencies into cash during the period in question.
According to the relevant provisions, any payments made during the period in question for past-due debts—other than in cash, including commercial paper, wire transfers, assignment slips, or any other form of payment commonly accepted inbusiness transactions—may be challenged.¹⁸
We can reasonably conclude that, as of now, cryptocurrency transactions do not (yet) constitute a “commonly accepted method of payment in business transactions.” Consequently, from a strictly legal standpoint, payments made in cryptocurrencies during the period in question may be called into question.
From a practical standpoint, however, it is worth questioning whether such a challenge is appropriate. Indeed, the difficulty stems from the high volatility of cryptocurrencies, since between the time the payment is made and the time the digital assets are returned due to the transaction’s invalidity, their value may have increased or decreased significantly.
On the other hand, based on an interpretation of current laws, the mere conversion of cryptocurrencies into euros should not be subject to the invalidity provisions of the “suspicious period.” However, in our view, an executive who, fully aware of impending difficulties, proceeds to sell their cryptocurrencies quickly and at a low price could be held liable.
Indeed, it is conceivable that this executive could be held liable for insufficient assets, since this ill-advised conversion could be considered a management error that contributed to increasing the liabilities of the company in financial distress. Nevertheless, proving a causal link would likely be difficult in practice.
2.2 During Insolvency Proceedings: How Should the Insolvency Administrator Handle Cryptocurrencies? Valuation Challenges for the Prospective Buyer.
During insolvency proceedings, the key issue is the valuation of cryptocurrencies. If safeguard or judicial reorganization proceedings are initiated, the debtor company’s operations continue during an “observation ” period.¹⁹ In order to generate cash for the company—which is essential for financing the continuation of its operations—the bankruptcy trustee may sell thecryptocurrencies.²⁰ To do so, the administrator will need to rely on the cooperation of the debtor company’s legal representative to gain access to the various storage methods for the cryptocurrenciesheld.²¹
It is worth considering whether the insolvency administrator could be held liable if, in an effort to expedite the process, he or she were to sell the cryptocurrencies held by the debtor company at a bargain price, to the detriment of the interests of the insolvency proceedings. Nevertheless, this risk seems theoretical to us, insofar as the bankruptcy trustee will have taken care to obtain prior authorization from the bankruptcy judge to proceed with the sale of these cryptocurrencies.
When a company is subject to reorganization or liquidation proceedings, two possible exit strategies may be considered: the total or partial sale of the business and/or the separate sale of the company’s various assets.
In the context of a total or partial sale, prospective buyers must submit a price proposal to the Court, taking into account, among other factors, the valuation of these digital assets. However, given their high volatility, it is highly likely that between the time the prospective buyer submits its offer to the Court and the time the Court rules on the offer, the value of the cryptocurrencies will have fluctuated. Consequently, since the submitted acquisition offer cannot be modified until theCourt’s decision,22 the prospective buyer will have to bear the risk of a crash in the value of the cryptocurrencies.
In the context of isolated disposals of the debtor company’s assets, the issue of valuation will be avoided through the intervention of the bankruptcy judge, who must authorize the sale of cryptocurrencies at public auction or by private agreement, at the prices and on the terms he or she determines. Consequently, the value of the cryptocurrencies may be determined during the auction, or it will be set in advance by the bankruptcy judge.
Thus, it must be acknowledged that French law governing distressed companies exhibits a certain rigidity that is not particularly compatible with the highly volatile nature of cryptocurrencies. In anticipation of the first French insolvency proceedings involving cryptocurrencies, insolvency practitioners will need to train themselves to handle these very specific assets without undue risk.
Anja Droege Gagnier and Léa Marlière
1 Article L.561-2 of the Monetary and Financial Code
2 Ordinances No. 2017-1674 of December 8, 2017, and No. 2016-520 of April 28, 2016, on the “shared electronic registration system ” and their implementing decree of December 24, 2018
3 Bill on the Action Plan for Business Growth and Transformation, known as “PACTE”
4. 2019 Finance Act
5 Articles L.631-1 and L.640-1 of the Commercial Code
6 Specifically, cash on hand, provisional credit balances in demand deposit accounts, demand commercial paper, and credit lines or payment extensions granted by creditors
7 For example, the Coinbase website
8 For example, the Local Bitcoins website
9 For example, in the case of a specialized cryptocurrency exchange platform
10 In particular, given its legal obligation to file for insolvency within 45 days of the onset of insolvency (Article L.631-4 of the Commercial Code)
11 Article L. 622-25 of the Commercial Code
12 ESMA, ACPR, AMF, Banque de France, Focus No. 16, “The Emergence of Bitcoin and Other Crypto-Assets: Challenges, Risks, and Prospects,” March 5, 2018
13 U.S. Bankruptcy Court, Northern District of California, Case No. 14-30725, Hashfast v. Mark Lowe
14 Since the pledge applies only to tangible property, it cannot be upheld
15 In our view, its enforceability against third parties would be contingent upon its registration in a national registry
16 With the exception of certain so-called stable cryptocurrencies, such as the “stablecoin”
17 The period between the date of suspension of payments and the date of the order initiating proceedings
18 Article L.632-1 of the Commercial Code
19 Enabling a detailed assessment of the company’s condition and the identification of necessary restructuring measures
20 With the approval of the bankruptcy judge
21 For example, a USB drive (“hard wallet”) or the keys used to access a digital wallet
22 Except in a more favorable sense