Did You Know…
Cryptocurrency exchanges face financial challenges
MyCryptoWallet’s chief executive, Jaryd Keonigsmann appointed liquidators from SV Partners on Friday 3 December. MyCryptoWallet rode the crypto wave to reach a claimed 20,000 customers since its establishment in 2017 by providing transaction services that supported the buying and selling of various cryptocurrencies.
SV Partner’s first creditors’ report is due 17 December. Reportedly, the company’s administrators are looking for a buyer to purchase the company’s technology systems and infrastructure.
For crypto consumers this appointment highlights one of many areas of risk associated with cryptocurrency. In having currency stored in an exchange ahead of transactions those consumers run the risk of becoming unsecured creditors in the event of insolvency. Unlike banks, cryptocurrency exchanges operate in a space free of regulation.
Another key difference is the right of control over the asset held by the exchange. Some consumers mistake that right of control with that of their bank account. This is incorrect, the right of control remains with the exchange in most circumstances.
Recently in 2020, the New Zealand High Court in Ruscoe & Moore v Cryptopia Limited (in liquidation) (at [133]) decided that cryptocurrency assets are in fact property and can be held by a company and subsequently, as in this case, its liquidators. AFSA has also issued guidance about dealing with crypto in a bankrupt estate.
Other high profile exchange incidents include collapses, hacks or suspected theft activity. This has highlighted calls for regulation of the sector. Whether governments will risk engaging with the speculative currency systems is another question to consider. Any government engagement to regulate may carry with it the risk of being seen to legitimise digital currencies that are argued by many to be merely speculative and tautological (i.e. a bitcoin is worth a bitcoin). In spite of this view, consumers appear to want to engage with the volatile currencies. When they do, they need to store data that contains their currency information.
Another solution that avoids storing currency in an exchange is the use of a cold wallet, however this carries the risk of the loss of the wallet (i.e. the physical loss of the USB drive or hard drive or its corruption). Additionally, this solution risks the loss or failure of memory concerning any password protecting the assets, as high profile losses of passwords protecting currency with value then at over $350m have been highlighted in the news recently.
MyCryptoWallet’s liquidation provides an opportunity for the liquidation and legal process to engage with the current models used to facilitate exchange in the various crypto currencies. It may also provide motivation to regulate, and if it does, it may have significant consequences for cryptocurrencies and its various stakeholders.
