Alexandria, Va. — Wild fluctuations in cryptocurrency value potentially invite both a surge in bitcoin-related bankruptcies and an increase in bitcoin-related fraudulent-transfer litigation, according to an article in the February ABI Journal. “Given the potential for accompanying fraudulent-transfer litigation, bankruptcy practitioners should be prepared to grapple with bitcoins in a bankruptcy setting,” Alan Rosenberg of Markowitz, Ringel, Trusty + Hartog, PA (Miami) writes in his article, “The Cryptocurrency Craze: How to Treat Bitcoins in Fraudulent-Transfer Litigation.”

In contrast to traditional forms of currency, bitcoins are not issued by a government or central banking authority, but instead are created by “mining,” a process where “miners” receive transaction fees and newly minted bitcoins in return for verifying and recording payments in a public ledger, Rosenberg writes. “"While cash remains king of the bankruptcy realm, the rapid increase in the use and consumption of bitcoin is undeniable.”

The price of bitcoin fluctuates constantly and is determined by open-market bidding on virtual currency exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges. The continued volatility in cryptocurrency has the potential to create a wave of “bitcoin bankruptcies,” according to Rosenberg, and will require bankruptcy trustees to scrutinize an array of bitcoin transactions. “Inevitably, this heightened scrutiny will increase bitcoin-related fraudulent-transfer litigation,” he writes. “However, given their relative novelty, most bankruptcy courts have not had an opportunity to hear fraudulent-transfer cases involving bitcoins.”  

“In the context of fraudulent-transfer litigation, bitcoins should be treated in the same manner that one might treat a foreign currency,” Rosenberg recommends. Under § 550 of the Bankruptcy Code, he explains, a trustee “has the ability to recover the property transferred, which would allow the estate to benefit from any appreciation.” Whether bitcoins are treated as currency or property, the Bankruptcy Code may provide a trustee to recover either the appreciated value of the Bitcoins or ownership of the virtual currency.

Rosenberg discussed bitcoins and fraudulent-transfer litigation on a recent ABI Podcast. Click here to listen.

To obtain a copy of “The Cryptocurrency Craze: How to Treat Bitcoins in Fraudulent-Transfer Litigation” from the February edition of the ABI Journal, please click here.

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ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 12,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abi.org/education-events.