22 Jun Registering Security Interests for Cryptocurrencies
Practitioners and their clients should be aware that the recent decision by El Salvador to legislate Bitcoin as legal currency tender may soon mean that (at least for Bitcoin) Australian cryptocurrency finance will require security interest registrations on the Personal Property Securities Act 2009 (Cth) (PPSA).
Let me explain…
The Personal Property Securities Act (PPSA) came into effect on 30 January 2012 brings into effect the Personal Properties Securities Register (PPSR) which serves as a notice board for entities with interests in property in the possession of another entity. This includes suppliers of goods, financiers etc. Read more about the PPSA here.
Under section 10 of the PPSA, currency is defined as “currency authorised as a medium of exchange by the law of Australia or any other country.” By reason of El Salvador’s position and s 10 (ie in reference to “any other country”), it may mean that Bitcoin (and maybe other cryptocurrencies) are a form of collateral under the PPSA. Where there is collateral, the PPSA generally requires perfection (including by way of registration on the Personal Property Securities Register (PPSR)) to secure your interest against that collateral).
Take for example, iFinance Pty Ltd which gives $10k to Bill to finance the purchase of Bitcoin on a local exchange network. Assuming the above is correct, iFinance would be required to register a security interest against the Bitcoin under the collateral class currency. The effect of this registration would secure iFinance’s security position in the event of Bill’s insolvency.
Taking another example. Assume Bill utilises a DeFi (or event CeFi) platform (like Compound) and decides to deposit $10k worth of Bitcoin in exchange for $5k in US dollars (in the form of a loan and repayable in the long-term future).
Why might Bill do this? Maybe Bill does not want to lose his Bitcoin, but has a desire to buy a small car for his daughter or son.
Under the PPSA, if Bill were to enter insolvency, arguably the DeFi platform, which is made up of millions of individual depositors, could be required to perfect its security interest against Bill. This perfection could be achieved by control (but that would largely depend on the terms and conditions of the platform) or by registering their security interest on the PPSR. I am not aware of anything remotely like this happening to date.
Therefore, it is important that where finance is used to purchase, acquire, transfer or deal in cryptocurrencies that you and your clients seek professional legal advice on securing the finance attached to the crypto.
Now, in the case of an insolvency, how does the financier (if a PPSR exists) or a Liquidator (if no PPSR) secure the cryptocurrency or wallet? Perhaps we leave that discussion for another day…