Crypto-assets are virtual currencies that use cryptography for security and operate on decentralized networks based on blockchain technology. The use of crypto-assets, as medium of exchange or storage of value, is on the rise globally, with Kenya not being an exception.
However, this increased popularity of crypto-assets has brought about new legal challenges, including those related to insolvency. In Kenya, the legal framework that governs insolvency does not effectively cater to crypto-assets, creating uncertainties and difficulties for creditors and debtors in such situations. This article discusses the legal considerations that arise when crypto-assets are involved in insolvency proceedings in Kenya.
The Insolvency Act does not expressly recognize or exclude digital assets as property. Consequently, courts and insolvency practitioners encounter challenges when dealing with such assets. Unlike tangible assets, crypto-assets only exist as a code and require a private key to access and transact with them. The nature of these assets also makes it difficult to take asset-tracing insolvency measures such as freezing of accounts.
These digital assets are also highly volatile when valued against traditional currency. It is, therefore, difficult to assess their worth in insolvency proceedings to determine a value for distribution to creditors.
Despite these practical and legal challenges, Kenya’s Capital Markets Authority (CMA) has taken some measures to regulate crypto-assets in the financial markets. The CMA on 1st May 2018 proposed draft regulations to govern ICOs (Initial Coin Offerings), which are increasingly popular fundraising methods in the cryptoworld. The regulations require ICOs to be registered with the authority, among other requirements, to ensure investor protection and market integrity.
Additionally, recent court decisions have begun to consider the legal status of crypto assets. In one instance, the court ruled that the definition of an asset would include digital assets as long as there exists a mode to prove ownership. This could be through blockchain records or receipts of acquisition. This is a positive development, as it recognizes the value and legal status of digital assets in the Kenyan legal system.
While incremental progress has been made in grappling with challenges brought about by crypto-assets, the need for a clear regulatory framework cannot be overlooked. Legislation tailored to accommodate the unique attributes of digital assets will facilitate their categorization as property, ensuring the recognition and enforcement of rights concerning them under the law.
Although the Central Bank of Kenya has issued several warnings and statements on crypto -assets highlighting their high risk and lack of government backing; the Kenyan government has also shown interest in exploring blockchain technology and its potential in various sectors, including finance, healthcare, and land registration.
Different jurisdictions have adopted diverse stances regarding the classification of crypto-assets as property. While Japan has opted not to confer proprietary status upon crypto-assets, Singapore has promptly acknowledged these digital assets as property.
Crypto-assets stand more than a transient trend, and with conflicted government interest the intersection of these digital assets and insolvency will continue to present unique legal challenges not only in Kenya but also the rest of the world. With the recent court rulings affirming the legal standing of digital assets and the proposed regulatory measures by the CMA concerning ICOs, we anticipate a growing momentum and prioritization towards the establishment of a clear regulatory frameworks that will enhance the clarity surrounding the identification and recoverability of these assets within legal contexts, including insolvency practice.
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