Financial Auditing Giant PwC Publishes Insolvency Guide for Distressed Crypto Firms

The major meltdown in the cryptocurrency market over the last year has compelled several crypto firms to unwind their operations. Businesses that were directly linked to the crypto market fluctuations we majorly hit e.g. crypto mining companies.

Big four financial auditing giant Pricewaterhouse Coopers (PwC) published the ‘Crypto Insolvency’ Guide last month in February 2009. This guide is specifically aimed for financially distressed companies in the crypto sector.

The new Insolvency guide by PwC explains the associated complexities with respect to the nascent industry. PwC notes that, in general, a company’s financial strength is determined by two parameters - balance sheet and cash flow assessment. However, the extreme volatility associated with crypto companies makes it difficult to assess the crypto company.

The document also notes that “the lack of clarity on the accounting treatment of cryptoassets and as of yet, no broad consensus on taxonomy in the crypto world or how to accurately value cryptoassets, means that ambiguity may arise when evaluating the solvency status of your crypto firm.”

Moreover, under severely distressed conditions, the companies’ directors are focused to serve the best interest for their creditors instead of their shareholders. Thus, if the director fails to manage the insolvency process properly, it might lead to additional issues of civil penalties, management control, and criminal penalties, notes PwC.

It states that when the relationships between directors and creditors break down, “a disgruntled creditor may take enforcement action to initiate formal insolvency proceedings [...] and to appoint a liquidator”.

In such a case, a third-party liquidator holds the statutory right to investigate the functioning of the director. However, if not forced liquidation, a director can also retain the ability to initiate voluntary liquidation. PwC says that in such case the company can opt for sod-touch-liquidation wherein the management holds the control while restructuring and creditor payments are settled.

The latest guide from PwC comes at a time just when the Canadian crypto exchange QuadrigaCX is facing legal proceedings. After the untimely death of its founder in 2018, QuadrigaCX customers lost access to the funds in the company’s wallet as the key to it was only known by the owner.

Since then, the exchange has been through several legal hurdles due to the account freezing. The insolvency concerns for the exchange reached its peak.