Digital Assets Report


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The BVI can provide warmth and shelter in the crypto winter

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The British Virgin Islands (BVI) have been the rightful home for some of the largest players in the digital assets space for many years now. The combination of a sophisticated public and private sector with a deep understanding of the industry, along with a stable regulatory environment have created the perfect foundation for even the most complex and intricate blockchain projects to thrive.

It is therefore unsurprising that virtual asset service providers now comprise a sizeable chunk of the approximately 400,000 corporate entities registered in the BVI. But the BVI’s contribution to the digital assets space also means it has encountered its fair share of the industry’s recent troubles.

The challenges faced by the cryptocurrency market in 2022 have resulted in financial distress and even liquidations for some large crypto funds and lenders. This demonstrates the importance of a home jurisdiction that is not merely supportive of the foundation and development of digital asset services, but also provides a supportive and, when needed, robust framework for those in difficulty. The emergence of the crypto winter has highlighted the credentials of the BVI in this regard.

Three arrows to the heart

One of the major catalysts of the current bear market was the collapse of Terra’s UST and LUNA stable coins, which lost their peg to the US dollar and with it, nearly $45bn in value. Terra’s crash caused ripple effects throughout the crypto market. 

Prominent cryptocurrency hedge funds such as Three Arrows Capital (3AC), a BVI-domiciled fund structure with operations in Singapore, suffered major losses, which prevented investors from liquidating their positions after 3AC failed to meet margin calls with various digital currency lending firms. After weeks of speculation as to 3AC’s spiraling financial position, the BVI Commercial Court placed 3AC into liquidation and appointed BVI licensed insolvency practitioners to act as joint liquidators over the fund. 

The 3AC liquidation has since expanded into other jurisdictions. In July 2022, the BVI joint liquidators filed a Chapter 15 petition in the US Bankruptcy Court for the Southern District of New York, ultimately obtaining a full recognition order. In late August, the High Court of Singapore recognized 3AC’s BVI liquidation as the foreign main proceeding and its BVI joint liquidators as the company’s foreign representative. 

3AC is reported to have had over $3bn worth of digital assets under its management as of April 2022. As such, it was inevitable that there would be contagion and it was not long before numerous other crypto lenders, brokerage firms, funds and exchanges encountered difficulties of their own. 

In June 2022, Celsius and Voyager, two large US-based crypto lenders both filed for Chapter 11 bankruptcy. At around the same time, Babel Finance, another large crypto lender, suspended withdrawals due to major losses and in the months since, there have been numerous reports of other funds, lenders and custodians experiencing significant, if not fatal levels of distress.

BVI insolvency regime

3AC’s recent liquidation illustrates the ability of the BVI insolvency regime to facilitate the appointment of licensed insolvency practitioners who could swiftly secure and preserve assets. It also demonstrates the way BVI-appointed liquidators are able to seek recognition and assistance in other jurisdictions, which is crucial in complex cross-border restructurings and insolvencies (bankruptcies). 

If the commercially attractive and flexible provisions of the BVI’s Business Companies Act provide the apparatus to take off, the BVI Insolvency Act and Rules provides the safety net when things do not go to plan. The insolvency regime achieves a delicate balance of protecting the rights of creditors – both secured and unsecured -whilst also enabling viable companies to restructure their debts if the circumstances allow.

The insolvency regime in the BVI offers similar protections to creditors that are found in other major financial centres around the world: its legislative provisions are largely based on the UNCITRAL model law. There are strict eligibility requirements for those who can be appointed as BVI liquidators of insolvent companies and appointees have wide-ranging powers that allow them to collect in and preserve assets of the company, protect them from hostile creditor actions, and ultimately make distributions in accordance with long-established rules of priority.

In cross-border cases, the BVI courts will typically empower BVI-based liquidators to seek recognition and/or use their powers in foreign jurisdictions. Similarly, the BVI courts are also well-attuned to recognizing foreign liquidators and enabling them to deal with assets located in the BVI. The BVI’s adoption of the Judicial Insolvency Network’s ‘Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters’ ensures that the BVI is part of a formal framework for cross-border cooperation between foreign courts and judges to facilitate coordinated cross-border insolvencies 
and restructurings.

Of particular importance where financial distress is a consequence of short-term factors, the BVI courts have confirmed in recent years the availability of a restructuring mechanism. This entails the appointment of ‘light-touch’ provisional liquidators who take office alongside, and with the mandate of overseeing and advising, the existing board of directors of the insolvent company, with a view to restructuring debts and allowing the company to emerge back into solvency. Restructurings are often pursued on a group-wide basis and the BVI’s approach in this area has developed in tandem with the Cayman Islands and Bermuda. 

Creditors with security over the assets of a BVI company or over the shares in a BVI company will generally be afforded the right to appoint receivers over those assets at minimal cost. Where appointed over BVI shares, receivers will generally be entitled to vote the shares and take control over assets further downstream in order to realise repayment of their debt.

Sophistication of the BVI

Due to the high volume of BVI companies and the frequency with which the insolvency and restructuring regimes are used, legal and insolvency practitioners in the BVI boast a wealth of knowledge and expertise when advising on distressed assets and corporate turn-around. 

In addition, because of its familiarity with entities in the digital assets space, the BVI is spawning a more specialised practice in adapting liquidators’ duties and powers to the preservation and liquidation of digital assets.

While it is essential that a jurisdiction provides the right building blocks, the BVI also has the right architects and tools available to deal with any troubled projects in a commercial and sensible manner. This should give institutional investors and company founders alike a significant level of comfort to secure investment at a sufficient level to ensure the digital asset 
space thrives. 

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