The question of how cryptocurrencies are classified under Canadian bankruptcy law has again been brought to the forefront with the collapse of Bahamas-based cryptocurrency exchange FTX. Although FTX’s insolvency won’t trigger the application of Canada’s bankruptcy and insolvency regime under the Bankruptcy and Insolvency Act, the Ontario Teachers’ Pension Plan, for example – one of Canada’s biggest pension funds – invested a total of US$95 million in FTX International and its U.S.-based entity across two funding rounds in October 2021 and January 2022. While they may be a recent development, digital assets are a very real thing in our world, and their classification must be considered, including from a Canadian insolvency law perspective.
While there is broad acceptance that cryptocurrencies are likely assets, there is no widespread agreement on how to classify them – are they financial assets, intangible assets, inventory, investment property or something else? For the purposes of our discussion on the treatment of cryptocurrencies under Canadian insolvency law, the core definition under consideration is “property.”
The Bankruptcy and Insolvency Act (BIA) defines property in an expansive manner and has been interpreted broadly by the Supreme Court of Canada. This definition includes any type of property, whether situated in Canada or elsewhere, and encompasses money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property.
In the Matter of the Bankruptcy of Quadriga Fintech Solutions Corp., Whiteside Capital Corporation and 0984750 B.C. Ltd. D/B/A Quadriga CX and Quadriga Coin Exchange, a Canadian court recognized cryptocurrency as “property” for the purposes of the BIA. This case also illustrates that if a licensed insolvency trustee (LIT) can locate and take possession of the cryptocurrency, it is an asset for the purposes of a bankruptcy liquidation. The court ruled that the principles of efficiency and economy support valuing cryptocurrency as of the date of bankruptcy to reduce the administrative burden and cost to the estate.
Additionally, Section 67(1)(c) of the BIA mandates that in the case of bankruptcy, a cryptocurrency with monetary value should go into the estate of the bankrupt. Cryptocurrency is seen as being analogous to debts in a currency other than in Canadian dollars, meaning that section 215.1 of the Bankruptcy and Insolvency Act would apply.
For distribution purposes, all unsecured creditors who were affected users ranked pari passu (meaning that multiple parties to a contract, claim, or obligation are equally treated). No affected user of the exchange opposed the ranking scheme, and the court endorsed it.
In conclusion, the broad definition of property under the BIA, as well as the court’s recognition of cryptocurrency as property in the Quadriga case, means that there should be little debate about whether or not cryptocurrency assets constitute property of a bankruptcy estate for the purposes of any bankruptcy proceeding involving Bitcoins or for any debtor-in-possession restructuring under the Companies’ Creditors Arrangement Act (CCAA).