In the case of Bester N.O & Others v Mirror Trading International Proprietary Limited (in liquidation) t/a MTI, the Western Cape Division of the High Court considered whether cryptocurrencies fell within the definition of property under the context of the Insolvency Act and whether courts in South Africa had jurisdiction in respect of cryptocurrency.

In recent years, the world has seen a sharp uptake in cryptocurrency and non-fungible tokens across the global marketplace. Although cryptocurrency itself is not a new concept, with Bitcoin being an all too familiar term since early 2009, its popularity and value have grown exponentially. Whilst the pull of cryptocurrency is enticing, and several traders are open to accepting it as a valid form of payment, many banks and other financiers should remain as cautious as ever.

As defined in South Africa's Insolvency Act 1936, "property" refers to movable and immovable property. Cryptocurrency operates in a digital space outside of any particular country and, therefore, seems to fall short of that definition. However, South African courts have allowed crypto-assets to be considered as "property" and, by extension, as "security" as contemplated in South Africa's current legislation.

In the Bester case, the court deliberated on how the definition within the Insolvency Act extended far beyond the common law definition. It also examined the attributes of cryptocurrency, including its intangible, incorporeal, fungible, divisible, and movable nature. The court also compared the nature of cryptocurrency to money, where money constitutes property in terms of the definition in the Act.

It found that Bitcoin and, by extension, cryptocurrency could be considered movable property in terms of the Insolvency Act and that the transfer and disposition thereof should be dealt with in terms of the Act as well. It was broadly remarked that although cryptocurrency operates in cyberspace, this is irrelevant, as the "owner" of the cryptocurrency was domiciled in South Africa and its property was within the country. Much like the endless possibilities of cryptocurrency, this interpretation opens up a fresh set of challenges for banks, financiers and money lenders.

The main challenge is the manner in which a creditor takes security of cryptocurrency. Firstly, a creditor would have to carefully consider the ownership of cryptocurrency. Then, for cryptocurrency to be used or transferred, the user must have a digital wallet, containing a public and a private key, with a pin code known only to that user. Furthermore, cryptocurrency is anonymous, making it difficult to trace the transactions. It would be prudent for a creditor to consider having the cryptocurrency transferred to their personal digital wallet since merely ceding cryptocurrency would not offer them any control over it.

Therefore, at this stage, it would be financially unsound for a creditor to accept cryptocurrency as a form of security due to its unregulated and volatile nature. Furthermore, the value of cryptocurrency is dependent on supply and demand, and given the media hype, it may not bode well for creditors in the long run. Although cryptocurrency may be an accepted form of currency in the future, creditors should remain sceptical of accepting cryptocurrency as security.

Reviewed by Manchadi Kekana, an Executive in ENS' Insolvency practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.