The treatment of crypto assets within the South African insolvency framework has been a subject of consideration, examining the legal status of crypto assets and their potential to constitute assets available for administration in an insolvent estate. The Insolvency Act 24 of 1936, which predates digital assets, defines ‘property’ broadly, encompassing movable and immovable property wherever situated within the Republic and including certain contingent interests.
The legal concept of ‘movable property’ covers any asset or right that does not qualify as immovable, but its application to cryptocurrencies remains open to debate. The key question is whether existing South African laws can flexibly adapt to new technologies, and recent court rulings suggest they can.
Crypto Assets as Property
Crypto assets are not considered legal tender in South Africa, with the South African Revenue Service describing them as digital representations of value that can be traded, transferred, and stored electronically. The Financial Sector Conduct Authority’s 2022 declaration brought crypto-asset-related financial services within the regulatory perimeter of the Financial Advisory and Intermediary Services Act 37 of 2002, but did not transform Bitcoin into legal tender.
In a landmark South African case, Bester NO and Others v Mirror Trading International, the court ruled that Bitcoin qualifies as movable property under the Insolvency Act. Judges applied the ‘always speaking’ principle, interpreting the law to include cryptocurrency within insolvency proceedings, ensuring it could be part of an insolvent estate.
This ruling means that even though the Insolvency Act does not explicitly mention crypto assets, Bitcoin, or blockchain, these assets can still be treated as movable property for purposes of the Act. Additionally, South African courts have recognized Bitcoin as both ‘money’ and ‘capital’ in exchange-control cases.
Recovery of Crypto Assets
Recovering crypto assets in insolvency poses practical difficulties, particularly in locating and recovering assets held in private wallets or through crypto-asset platforms. A trustee or liquidator may need to reconstruct transactions from blockchain records, exchange records, and other documentation to establish the relevant wallet addresses and private keys.
The MTI case highlights the challenges trustees face in tracking cryptocurrency transactions, as they sought to classify transfers of Bitcoin and cash to investors as invalid under insolvency laws. Section 26(1) of the Act allows for reversing transactions made without fair compensation, which could apply to cryptocurrency transfers.
Recognition and recovery of crypto assets do not solve the separate problem of valuation, which is perhaps the most difficult practical issue due to the extreme price fluctuations of crypto assets. The trustee or liquidator may need to determine a value for purposes of preparing an inventory of estate assets, determining solvency, and calculating creditor claims.
The problem of the valuation date is that several possible valuation dates may be relevant, including the date of the original acquisition, the date of the transfer, or the date of sequestration or liquidation. One proposed methodology for calculating investor claims contemplated determining Bitcoin values by reference to the highest value of Bitcoin on the date of investment, with deductions for payments made.
The approach adopted in Bester NO is significant because it avoids creating an artificial distinction between conventional movable assets and digital assets. However, reliance upon interpretation has limitations, and failure to identify the full estate or incorrect valuation may result in prejudice to creditors.
According to Sibongile Bango, a Legal Advisor, the importance of specifying both the valuation date and the valuation source cannot be overstated, as it directly affects the determination of the value of crypto assets in an insolvent estate, and the Insolvency Act 24 of 1936 provides the framework for this process.
