Promising crypto ‘stability’ won’t stop near-term bankruptcies

November 7, 2023

Hot on the heels of 30-year old cryptocurrency king Sam “SBF” Bankman-Fried being found guilty by a New York jury of one of the biggest frauds in American history, City watchdogs the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are accelerating their efforts to make the UK a global hub for digital currencies.

Odd timing? The idea is that Stablecoins, a less volatile form of digital currency pegged to a ‘stable’ reserve asset such as the US dollar or gold, could be brought into a regulatory framework that would make payments more efficient and – eventually – protect the public. The PRA suggests that Stablecoins will either have to be backed by deposits at the Bank or “highly liquid securities”, or some combination of the two.

The crypto debate will run way beyond SBF’s sentencing in April. He’s going down for two counts of wire fraud, two counts of wire fraud conspiracy, one count of securities fraud, one count of commodities fraud conspiracy and one count of money laundering conspiracy, each carrying a potential 20 year term.

Stable or not, detractors of digital currencies maintain there is a whiff of ‘Emperor’s new clothes’ about the whole thing, but more have been sucked in than you might think. In the UK, it’s estimated that 6-7 million people – a tenth of the population – have dabbled in cryptocurrencies. So, what happens when crypto punters are, at best, sitting on theoretical losses they can afford to bear, or at worst, face personal bankruptcy because of their exposure? Having monitored for some time the yo-yoing of the major digital currencies, led by Bitcoin and Ethereum, HMRC is, unsurprisingly, up to speed with the tax treatment of crypto assets and liabilities. Nonetheless, risk remains for stricken holders hoping to mitigate their financial positions.

On the plus side, UK crypto investors can “bank” losses with HMRC to offset against future gains. Profitable disposals, as with other investments, attract capital gains tax at 20%. Sales at a loss, however, can offset future gains on other types of investments, such as shares or property. Losses need to be claimed within four years of the end of the tax year in which they were realised. It is also possible to bank a ‘negligible value claim’ with HMRC when a crypto asset becomes worth ‘next to nothing’. No sale is needed and the window for carrying forward is indefinite. This rule also applies to ‘lost’ crypto assets, for example if a private key or password can’t be retrieved.

Fraud is different, however. Negligible value and capital losses are allowed if proof of holding at some point can be established; but not receiving cryptoasset tokens that were paid for are unlikely to be seen as a disposal since the individual still owns the stolen asset and has a right to recover it.

Employees of crypto businesses, or external consultants to those enterprises, may yet face a major risk if they are paid in cryptocurrencies. In such cases, individuals are subject to income tax on the asset’s market value at the time of payment. A subsequently bombed-out valuation may not deliver enough cash to meet the income tax liability. If there is no way of meeting the bill, there is a good chance that HMRC will seek a bankruptcy order.

Guidance from HMRC, including updates, is available here.

A new policy paper (Oct 2023) from the UK Government is available here.

If you are a crypto investor facing bankruptcy, or a business in need of forensic accounting, asset tracing and other services to recover funds from a crypto-focused business, please don’t hesitate to get in touch with us at Buchler Phillips for a free initial consultation.

This article is written by James Bryan, Restructuring Manager at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

How can we help you?

We offer initial free confidential advice without obligation.