What Happens to Cryptocurrency in Bankruptcy?

Cryptocurrency such as Bitcoin has, since 2009, been an asset that more and more people own. Some use it just like money, to buy things online, and others hold on to it like an investment, and in fact, Bitcoin has gone way up and way down in value over time. But what happens to your cryptocurrency when you file for bankruptcy?

What is Cryptocurrency?

Cryptocurrency is currency that is not backed by the government. It is unregulated, and as such, can be used anonymously (a fact that has led to cryptocurrency being used for illegal purposes, in some cases). More and more online stores are accepting cryptocurrency, but generally it has not yet become as common as normal money.

Does it Have to be Disclosed?

Because cryptocurrency ownership is anonymous, and is not thought of as a traditional stock, many people may think that they don’t have to disclose ownership of cryptocurrency in bankruptcy. However, they do.

You should not rely on the fact that ownership of cryptocurrency is anonymous, because other documents that have to be produced in bankruptcy, such as bank statements, will often lead the trustee to ask questions that result in the revelation that you own cryptocurrency. Then, the fact that you hid your ownership of Bitcoin will certainly jeopardize your discharge, and could lead to criminal penalties.

Rapper 50 cent recently learned this lesson the hard way, when his ownership of cryptocurrency was discovered in a bankruptcy proceeding. This was after the rapper had previously bragged about owning Bitcoin in a social media post.

What’s it Worth?

The question is not whether Bitcoin and similar cryptocurrency have to be disclosed—the issue is whether it can be taken by a bankruptcy trustee.

To that extent, Bitcoin is no different than any other property, share or stock that you may own. The issue is what the shares are worth at the time that you are filing for bankruptcy.

The problem is that there is no established market for cryptocurrency. You can’t just look at NASDAQ or the stock market and see what your Bitcoin shares are worth. And while there are certainly markets that will tell you what your Bitcoin is worth, those markets are unregulated. Getting an accurate valuation may require access to whatever market the cryptocurrency is being traded in or on.

In some cases, neither the debtor nor the trustee may even be able to liquidate cryptocurrency, as there are restrictions on how much can be liquidated at any one time.

Bitcoin is also highly volatile. Currency values can fluctuate thousands of dollars within just hours. The value of a debtor’s property is the property value at the time of filing. That means that where possible, it may be a good idea to file bankruptcy whenever the currency is valued lower.

For consumers who own large amounts of cryptocurrency, the best option may be a Chapter 13 bankruptcy, which allows a debtor to keep their property.

Call the West Palm Beach bankruptcy lawyers at Kelley Kaplan & Eller at 561-264-6850. We can help you determine whether bankruptcy is right for you.

Resources:

natlawreview.com/article/cryptocurrencies-practical-considerations-insolvencies

npr.org/sections/thetwo-way/2018/02/27/589052493/rapper-50-cent-who-bragged-about-owning-bitcoin-now-denies-it

lawjournalnewsletters.com/2019/02/01/how-bankruptcy-courts-will-treat-cases-involving-cryptocurrency-exchanges/?slreturn=20201128180326