Especially in view of the crisis resulting from the Coronavirus pandemic, the question arises: What happens to tokens in insolvency, especially if they are held in safekeeping by a service provider for his customers?
Crypto currencies have been discussed for a long time. These discussions have also not stopped at the lawyers. Many questions had to be solved in the beginning, but decisions by courts or the legislator were rare. After a long debate (e.g. the classification of Bitcoin as a unit of account by BaFin and the contrary ruling of the Superior Court of Justice (Kammergericht) Berlin), German supervisory law clarified the situation on January 1, 2020 by gold-plating the fifth Money Laundering Directive (AMLD): Tokens that fall under the definition of crypto assets are financial instruments. The trading and safekeeping of crypto assets are financial services requiring a licence.
German civil law and insolvency law have not changed with regard to crypto assets. The question of what a token actually is in terms of civil law, which has already been widely discussed in the legal literature, continues to arise. This leads to the question of what happens to the token in insolvency.
Insolvency of the issuer
The discussion about the legal nature of token sometimes obscures the real issue: If a token is to represent a claim for payment against the issuer (security token), the token does not play a significant role. The token holder receives an isolated claim against the issuer. The token itself should only be evidence of the ownership of the claim. If the issuer becomes insolvent, the token is handled according to the underlying right (in this case a claim). If we stay with the example that the token represents a claim for payment, the token holder (as far as no subordination is agreed) is an insolvency creditor. He must register and assert his claim in the insolvency proceedings. The fact that a token should prove ownership does not lead to the registration of the token in the proceedings.
In the case of Bitcoin, the question of the issuer's insolvency does not arise because there is no issuer in Bitcoin.
Insolvency of the token holder
A quite simple solution can also be found in the event of the token holder's insolvency. Since the security token in our previous example has no intrinsic value of its own, but only serves as evidence of the underlying right, this right falls into the insolvency estate and the insolvency administrator must exploit this right accordingly. This can be done by collecting the claim or by selling it. The token can help him in this (for example, by selling it on a crypto exchange).
Even Bitcoin, which has no underlying right comparable to a security token, must be realized in insolvency. Bitcoin is accompanied by an asset, which accordingly falls into the insolvency estate. Exploitation is possible via a Bitcoin exchange, for example. However, the insolvency administrator may face de facto obstacles. It is true that he has a right to information on the return of the private key, which can also be compulsorily enforced. However, the insolvency administrator must first have knowledge of the token. Since token regularly rely on anonymity, it is sometimes difficult for the insolvency administrator to obtain knowledge of the token assets at all if the insolvency debtor acts in breach of duty.
Insolvency of the wallet provider or crypto depositories
In many cases, the token holder does not keep his token or private cryptographic keys (private key) himself, but uses a service provider (wallet provider or crypto depository). This applies to both, token that fall under the term crypto asset and other token. The rights that the token holder has if the custodian becomes insolvent have not been explained much so far and in particular are not explicitly regulated by law.
Background: Insolvency of a custodian bank
Legal security exists in this respect for classic securities such as shares, which are held in safe custody by a custodian bank on behalf of the customer. The customer has a right of segregation in the event of insolvency of the custodian bank. The customer is the owner of the security and is protected accordingly by the Insolvency Code.
Transferability to token?
Unfortunately, the legal regulations for securities cannot easily be transferred to token. The background to this is that in the case of securities, the customer owns the security itself, but in the case of token, in our opinion, only the underlying right; the token serves only as evidence. It is also important to note that the custodian does not hold the underlying right (such as the claim) of the token, but only the token or the private key. This is only a question of factual access to the right, not the right itself.
The situation is different with Bitcoin, for example, which does not have an inherent right. Here the custody of a value-giving moment is present. However, the current rights of segregation and separation under the Insolvency Code tie in with rights in rem and personal rights, which do not exist with Bitcoin.
The token holder currently faces significant legal uncertainties in the insolvency of the custodian. The wishful thinking for a digital society must not obscure the fact that the current legal regulations do not cover it. It is the task of the legislator to make Germany fit for the future in this respect as well. Other countries have already recognized this and have adapted their legislation.
Possible legislative solutions
In Switzerland, adaptations to the digitised procedures are to be made by selective amendments to existing legislation. An amendment to the Federal Law on Debt Collection and Bankruptcy (SchKG) is intended to clarify the insolvency of the custodian of token. The segregation law is to apply explicitly to crypto-based assets.
Liechtenstein has taken a different path. The Token and VT Service Provider Act (TVTG), which entered into force on 1 January 2020, regulates the essential basic principles of token, including a registration obligation for service providers in the area of "Trusted Technologies/Vertrauenswürdige Technologien" (short: VT service providers). These include VT Key Depositaries and VT Token Depositaries. Tokens and VT-keys held in trust or in the name of the customer are to be regarded as third-party assets in the event of bankruptcy of the VT Service Provider and are segregated in the customer's favour, subject to all claims of the VT Service Provider against the customer.
Both ways would be conceivable as a model for Germany. The Swiss model has the advantage of an explicit regulation in insolvency law and of being incorporated into existing systems. The Liechtenstein solution stands out for this with a special law that summarizes the essential rules in a compact form.
However, a comparable law by the German legislator is not expected to be passed during this legislative period.