Bankruptcy, recognition proceedings and recoveries in a cryptocurrency world

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Lee Pascoe
Norton Rose Fulbright, Melbourne


In the days where global daily news is dominated by stories of bitcoin’s surge in value, its money-making opportunities, its secret wealth creation formula and its dark underbelly, it is timely to revisit some of issues that arise when one of the critical players in the new cryptocurrency space collapses.

On 15 September 2008 the fall of Lehman Brothers dominated global news. But only a few people can tell you that on 28 February 2014, MtGox Co Ltd (‘MtGox’) – a Japanese registered entity that operated one of the largest bitcoin exchanges in Tokyo – collapsed and sought bankruptcy protection after losing bitcoin valued at US$473m.

What is a bitcoin exchange?

A bitcoin exchange is a digital marketplace or online platform that acts as the intermediary between buyers and sellers of cryptocurrency. A simple transaction through a cryptocurrency exchange operates by a seller depositing bitcoin (or another cryptocurrency) with the exchange. Most exchanges offer a wallet for users to store their bitcoin and private keys with which they authorise transactions. With a positive balance at the exchange, the seller can then sell the cryptocurrency. A buyer will deposit ordinary currency with an exchange in order to buy cryptocurrency from the sellers. At most exchanges, parameters can be set to facilitate transactions, such as limits on orders and the price to buy/sell cryptocurrency.

Global exchanges are largely unregulated and have fallen victim to fraud and theft with reports of some 980,000 bitcoins being stolen from exchanges since 2011.1 To put this into perspective, at the time of writing, that amount of bitcoins is worth close to US$10bn.

MtGox Co – bitcoin’s Lehman Brothers

MtGox, reportedly the world’s largest cryptocurrency exchange leading up to it filing for bankruptcy protection in 2014, is by far the biggest cautionary tale to date. A Japanese corporation located in Tokyo halted all bitcoin withdrawals on 7 February 2014 due to theft or the disappearance of some 744,800 bitcoins, owned by customers of the exchange and held by the exchange itself, to the value of approximately US$473m.

The potential for hacking and bitcoin theft from exchanges is one of the biggest threats to the security of the transactions and poses a significant risk of insolvency should such events occur. Simply put, in the absence of regulation, there is no requirement that an exchange backs up its bitcoin deposits or transactions with actual funds.

Japanese main proceeding

On 28 February 2014, MtGox filed a civil rehabilitation proceeding in the Tokyo District Court with the intention of rehabilitating the entity. The civil rehabilitation procedure was short-lived, with the application being dismissed by the Tokyo District Court on 16 April 2014, on the basis that there was no prospect of the business recommencing. An order for provisional administration was made with the appointment of Nobuaki Kobayashi as the Provisional Administrator.2 Just eight days later, it was all over for MtGox with the court ordering that bankruptcy proceedings be commenced (the ‘Japanese bankruptcy proceedings’).Kobayashi was appointed as the trustee in bankruptcy.3

US recognition proceeding

The ripple effect in the decentralised world of cryptocurrency was unsurprising and it was quickly identified that the filing in Japan would not provide MtGox with the necessary protections in the United States and Canada, where it was the subject of a number of pending and active lawsuits. Accordingly, soon after the initial Japanese filing, a petition was filed in the US Bankruptcy Court for the Northern District of Texas to have the civil rehabilitation recognised pursuant to Chapter 11 of the US Bankruptcy Code (the ‘Code’).4 Preliminary relief was granted on the same day.

On 18 June 2014, at the final recognition hearing, the US Bankruptcy Court determined, among other things, that:5

• the Japanese bankruptcy proceedings were a ‘foreign proceeding’ for the purpose of section 101(23) of the Code;

• the centre of main interests (COMI) of MtGox was in Japan and, as such, the Japanese bankruptcy proceeding is a ‘foreign main proceeding’ as defined in section 1502(4) of the Code and therefore is entitled to the recognition afforded in section 1517(b)(1); and

• all relief provided pursuant to sections 1520, 1521(a)(4) and 1521(a)(5) of the Code will apply without limitation.

Orders consistent with the Court’s findings were made and, in particular, the Japanese bankruptcy proceeding was recognised as a foreign main proceeding pursuant to sections 1517(a) and 1517(b) of the Code with all of the effects of recognition, as set forth in section 1520 of the Code, being applicable.6

Canadian recognition proceeding

Upon service on the trustee, of a statement of claim relating to a class action against MtGox filed in Ontario, an application for initial recognition was made to the Superior Court of Justice of Ontario pursuant to Part XIII of the Bankruptcy and Insolvency Act (BIA).7 The application sought, among other things, recognition of the Japanese bankruptcy proceeding as a foreign main proceeding (section 270 BIA) and the entitlement to a stay of proceedings against or concerning MtGox and its property.8

There was little issue raised in relation to the preliminary matters that were required to be established for recognition of the Japanese Bankruptcy Proceeding as a ‘foreign proceeding’ under the BIA:9

• the Japanese Bankruptcy Proceeding was a judicial proceeding in Japan, dealing with the creditors’ collective interests generally under Japanese law, relating to bankruptcy in which MtGox’s property and affairs were subject to control or supervision by the Tokyo District Court, for the purpose of liquidation (section 268(1)); and

• for the purpose of the recognition application (section 269(1)), the Trustee was a ‘foreign representative’ being a person authorised in a foreign proceeding to administer MtGox’s property or affairs for the purpose of liquidation (section 268(1)).

Consistently with the approach taken in the US recognition proceeding, the trustee sought recognition of the Japanese bankruptcy proceedings as a ‘foreign main proceeding’.

It is at this point that an insolvency professional could incur some difficulties, when appointed to an entity (or individual) that operates its business on the blockchain and in the decentralised environment of cryptocurrency trading. Fundamentally establishing the entity’s COMI may prove far from simple, in circumstances where its assets and business are less likely to be tangible and more likely to include forms of intellectual property, bitcoin and data.

By way of example, section 268(2) of the BIA provides that ‘in the absence of proof to the contrary, a debtor’s registered office and, in the case of a debtor who is an individual, the debtor’s ordinary place of residence are deemed to be the centre of the debtor’s main interests’.10 In determining COMI, section 268(2) of the BIA is supplemented by the three pronged test in Lightsquared LP (Re),11 which asks:

• can creditors promptly ascertain the location of that centre?

• were the debtor’s main assets and operations found there? and

• was the debtor managed there?

Fortunately, in the Canadian recognition proceeding, the trustee was able to establish that MtGox’s COMI was in Japan by demonstrating, among other things, that MtGox:

• was organised under the laws of Japan;

• had its registered office and corporate headquarters in Japan together with its books and records;

• held its bank accounts in Japan;

• had its sole director domiciled in Japan; and

• had its holding company in Japan.

Consequently, the necessary orders were made that the Japanese bankruptcy proceeding was a foreign main proceeding and the benefit of the automatic stay was provided to the company in accordance with section 271(1) of the BIA.

However, the nature of an exchange business and in particular its lack of physical presence, tangible assets or its manner of trading utilising cloud servers located in different corners of the globe can all mean that ascertaining the COMI of an entity is not always clear. In particular, notwithstanding that a corporate entity may satisfy the preliminary test of proof of its registered office, there is a strong possibility that in the cryptocurrency trading world there may be a rebuttal of that presumption. As such, when seeking recognition of a proceeding as a foreign main proceeding an insolvency professional will have to critically turn their mind to whether in fact the COMI test will be able to be satisfied by virtue of the operations of the exchange.

MtGox in 2017 and beyond

Unsurprisingly, the liquidation of MtGox is far from complete. In fact, some would argue that it is just getting underway. In the three years since filing for bankruptcy, the MtGox liquidation exchange has manifested itself in two class actions,12 numerous ancillary bankruptcies of related and unrelated entities,13 claims of fraud and embezzlement and the ultimate arrest of sole director Robert Karpelès. But there is no end in sight for creditors.

On 27 September 2017, the trustee held its ninth creditors’ meeting and noted the following in his Report:14

• the cash balance in the MtGox account was approximately US$10.8m, which did not include the value of the bitcoin;

• the number of bitcoin managed by the estate is 202,185;15

• there were 24,750 proofs of claim that had been filed with the trustee accepting claims to the value of US$406,190,772;16 and

• costs of the bankruptcy totalled US$10,809,093 (including professional fees and the trustee’s fees).

Soon after, on 24 November 2017, a group of creditors have again attempted to agitate a petition for a civil rehabilitation proceeding in the Tokyo District Court assumedly on the back of the recent rise in value of the bitcoin held by the trustee. The petition is currently being examined by the court and until this receives approval the bankruptcy proceedings will proceed as normal.

On March 7, 2018 the latest creditors’ meeting took place.

Considerations for insolvency professionals in the cryptocurrency world

The traditional approach to insolvency appointments must surely need to be reconsidered in light of the new wave of businesses trading in the cryptocurrency world. Some of the matters that are likely to require attention and potentially a new or modified approach include the likely outcomes from an appointment, identification and realisation of assets, determining applicable law and increased reliance on cross-border recognition proceedings.

First, in the event of theft or hacking, restructuring is unlikely to be an option. Fundamentally, while there remains an absence of regulation, and such businesses lack tangible assets to offer as security, traditional lenders are unlikely to be willing to advance funds to facilitate recovery. Moreover, given the specialised market in which these entities operate, and the criticality of avoiding ‘downtime’, it is unlikely to be tenable in most instances to do anything other than wind up the entity if it has been offline for any period of time or if it has suffered losses of the cryptocurrency that undoubtedly would have constituted its substantive asset base.

Second, determining the legal regime applicable to the financially distressed entity will not always be straightforward. If the relevant entity is registered then you are supported with respect to the initial filing in the jurisdiction of its registration. However, as the corporate structures around the exchanges become more sophisticated or alternatively, in some instances remain completely unstructured, there is a strong possibility that redress to the relevant legislative recognition mechanisms, in other jurisdictions, will become critical.

Third, the focus of any insolvency professional following appointment is to identify, safeguard and, where appropriate, realise the assets of the entity. In circumstances where the majority of the assets are likely to be intangible, greater than ordinary consideration needs to be given to how such objectives can be achieved. Although some value may be recoverable from the sale of websites and servers it is unlikely to be of any significance considering the only tangible assets listed by the trustee in the MtGox report were two servers, 28 laptop computers and a chair.

Further, it may be the case that ordinarily simple assets, such as cash at bank, may be difficult to secure in circumstances where banking is not undertaken by the entity in the jurisdiction in which the formal insolvency proceeding is commenced. A clear example of how this may work in practice is to consider the banking arrangements of Bitfinex, one of the world’s largest exchanges. The company is incorporated in Hong Kong with former banking arrangements in the US for money, flowing to and from the exchange, to be forwarded through to its banks in Taiwan. Upon that relationship souring the arrangement is now reported to require customers who want to deposit money with the exchange to do so via a bank in Poland.17

Clearly issues may also arise with respect to the identification, securing and realisation of the intangible assets, such as forms of intellectual property, bitcoin (or other cryptocurrency) and data. For example, if data is found on a physical server it may be that the data is within the jurisdiction where the insolvency proceeding was commenced. However, if the data is stored on a cloud server, it may be in another jurisdiction halfway around the world and somewhat inaccessible in the absence of appropriate recognition and ancillary orders.

Most importantly, and most troubling, is in relation to the assets that are likely to hold the true value for the enterprise, being the bitcoin or other forms of cryptocurrency. If the assets are hacked, stolen or missing or the relevant office holders of the exchange refuse to cooperate, identifying or realising the cryptocurrency assets may prove almost untenable.

Traders of bitcoin are not identified by name on the blockchain, but rather their identities are in the form of public keys. Accordingly, even identifying that the assets are held requires knowledge of at least one public key of the transacting parties. Further, to transact cryptocurrency, a private key to the digital wallet is also required. In the absence of holding the private key (usually held by the owner of the wallet), ownership of the cryptocurrency cannot be established and any value within the wallet cannot be accessed.

To identify cryptocurrency assets, insolvency professionals will need to consider whether to specifically seek disclosure of such assets at the time of appointment, including requesting details of the cryptocurrency holdings, the value and requiring disclosure of the relevant public and private keys. In the absence of cooperation, insolvency professionals will need to consider other indicators of digital currency transactions, such as transfers from traditional financial accounts to trading or exchange platforms and examination of the computers, servers and personal devices of the entity.

In circumstances where entity office holders fail to cooperate, an insolvency professional may find it necessary to seek redress to witness examination methods where formal questions can be put to the relevant office holders or employees in relation to the cryptocurrency assets, their value and the methods by which such assets can be accessed.

Finally, even if the credentials for the cryptocurrency assets are located or provided, the intangible nature and volatility of the assets makes their realisation difficult. Any insolvency professional attempting to realise value will need to carefully consider their statutory obligations when determining whether, and when, it is in the interests of creditors to transfer the assets for funds or whether holding the cryptocurrency in its current form is a better long-term proposition for creditors. In such circumstances, it is likely an insolvency professional will be well-advised to seek court approval for any realisation strategy involving cryptocurrency assets.

Only time will tell as to whether the bubble will burst and what that will mean for the insolvency profession and the approach taken to managing the players in the cryptocurrency industry who find themselves in financial distress.



1 Alexandra Harney and Steve Stecklow, ‘Bitcoin’s surge little comfort for burned Mt Gox clients in international legal limbo’ (30 November 2017) The Japan Times, available at last accessed 8 March 2018.

2 ‘Information regarding the dismissal of the application for commencement of a civil rehabilitation procedure and the order for provisional administration’, available at last accessed 8 March 2018.

3 ‘Decision’, available at last accessed 8 March 2018.

4 ‘Announcement regarding the applicability of US Bankruptcy Code Chapter 15’, available at last accessed 8 March 2018.

5 ‘Order Recognizing Foreign Main Proceeding And Granting Related Relief by U.S. Bankruptcy Court’, available at last accessed 8 March 2018.

6 Page 4, Order 2 of the ‘Order Recognizing Foreign Main Proceeding and Granting Related Relief’, see last accessed 8 March 2018.

7 RSC 1992.

8 A Smith, ‘MtGox Co., Ltd (Re), 2014 ONSC 5811’ (2016), De Jure 49(2), 349, at last accessed 8 March 2018.

9 Ibid, 349–350.

10 The deeming provisions in relation to COMI are evident in most legislation of jurisdictions that have adopted the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (1997).

11 2012 ONSC 2994 (CanLII); (2012) 92 CBR (5th) 321 (Ont SCJ).

12 Filed in the US and Canada.

13 See, for example, the liquidation of a New Zealand Bitcoin trading platform Bitcoinica, which was holding 64,000 bitcoins and hundreds of thousands of dollars with MtGox at the time it filed for bankruptcy protection in Japan.

14 ‘Report addressed to the Tokyo District Court, Collegiate Section of 20th Civil Division’, 1–5, available at last accessed 8 March 2018.

15 As of 7 December 2017, the value ascribed to bitcoin was US$2,837,060,930.

16 The report specifies the figure at JPY 45,609,593,503 and was converted to US$ on 7 December 2017.

17 Matthew Leising, ‘$1 billion mystery shrouds tether and its links to bitcoin exchange’ (Sydney Morning Herald  5 December 2017) available at accessed 8 March 2018.


Lee Pascoe has extensive experience advising insolvency representatives, secured creditors and directors in all forms of insolvency proceedings. She has also acted for financial institutions in both secured and unsecured, domestic and international, debt recovery and enforcement proceedings. Lee has an undergraduate degree in Law with Honours from Deakin University in Melbourne, and a Master’s in International and Comparative Commercial Law from Monash University. She holds an advanced certification in restructuring and insolvency from ARITA, Australia’s leading organisation for restructuring, insolvency and turnaround professionals and is a Fellow of INSOL International. She has also participated in the Working Group V meetings of UNCITRAL.