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Posts Tagged ‘Bitcoin’

More Money Can Mean More Problems: The Evolution of Coverage for Cryptocurrency

Posted on: September 20th, 2019

By: Danny Walsh and Isis Miranda

Businesses, governments, and non-profits across the globe are implementing projects that leverage blockchain, a digital ledger technology, to improve their operations.

Cryptocurrency is one of the more controversial uses of blockchain technology. Although Bitcoin is the most dominant cryptocurrency, there are approximately 2,600 cryptocurrencies valuing over $260 billion. As cryptocurrencies become widely accessible through mobile applications combined with increased self-regulation, including voluntary leverage caps, the current trend toward acceptance by governments will continue.

As with early insurance claims arising in the world of cyber, traditional forms of cover are being updated to reflect the scope of coverage, and altogether new forms are in the works.

Coverage for cryptocurrency under traditional insurance policies may depend on how the term is defined. An Ohio court relied on an Internal Revenue Service (IRS) definition in holding that the insured’s stolen Bitcoin valued at $16,000 was “property” under his insurance policy. Kimmelman v. Wayne Ins. Grp., No. 18 CV 1041 (Ct. Com. Pl. Sep. 25, 2018). IRS Notice 2014-21 states as follows: “For federal tax purposes, virtual currency is treated as property” and is therefore subject to capital gains taxes. Accordingly, when the insured in Kimmelman submitted his claim for stolen Bitcoin, the insurer concluded that Bitcoin constituted “money” under the policy and, therefore, was subject to the policy’s $200 sublimit. In the subsequent coverage litigation, the trial court rejected the insurer’s argument that the stolen Bitcoin constituted “money” and denied the insurer’s motion for judgment on the pleadings. The court, however, did not address the policy’s definition of “property,” which may have limited coverage to loss of “tangible property.”

Federal courts have consistently held that Bitcoin is “money or funds” under federal law governing money transmission. A Florida appellate court also held that selling Bitcoin constitutes “money transmission” for purposes of the state’s money transmission law. State v. Espinoza, 264 So.3d 1055 (Fla. Dist. Ct. App. 2019). Defendant Espinoza was charged with money laundering and engaging in the business of a money transmitter without a license. He sold Bitcoin to an undercover agent of the Miami Beach Police Department after the agent said he planned to use the Bitcoin for illicit purposes. The trial court dismissed the charges against Espinoza, but the appellate court overturned the dismissal. The appellate court conceded that Bitcoin is not “currency,” but based its ruling on the fact that it has “monetary value” since it can be exchanged for currency.

The issue of whether crypto assets, including cryptocurrencies and digital tokens, constitute securities subject to regulation is still in flux. The Securities and Exchange Commission (SEC) has taken the position that cryptocurrencies, such as Bitcoin, are not “securities” because they are designed to operate like currency. On the other hand, the SEC has stated that other cryptocurrencies that act as digital tokens do constitute securities and that initial coin offerings (ICO’s), which involve digital tokens, are subject to securities regulations.

In the insurance context, a significant issue is whether cryptocurrency or digital tokens are viewed as “money,” “property,” “securities,” or some other term. Currently, some policies expressly include or exclude coverage for cryptocurrencies. For example, crime and fidelity ISO forms can have either a broad virtual currency exclusion or an “Include Virtual Currency as Money” endorsement, which revises the definition of “money” to include virtual currency.

We will be following the development of crypto cover policy forms as the use, acceptance, and regulation of cryptocurrencies emerge and evolve in the years to come.

If you have any questions or would like more information, please contact Danny Walsh at [email protected] or Isis Miranda at [email protected].

SEC Holds Public Forum as Part of Increasing Efforts to Regulate Digital Assets, Cryptocurrency Exchanges, and ICOs

Posted on: March 28th, 2019

By: Jennifer Lee

The Securities and Exchange Commission will be hosting a public forum on distributed ledger technology and digital assets in Washington DC on May 31, 2019. This is a part of the SEC’s increasing efforts to regulate cryptocurrency exchanges and initial coin offerings (ICOs) that have been proliferating unchecked until very recently.

Since digital assets are still an emerging concept, regulators, such as the SEC and the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, have been struggling to figure out how the existing regulatory framework applies to cryptocurrencies, exchanges, and ICOs. However, as established financial institutions, such as Fidelity, begin to enter the digital asset space, the SEC has ramped up its efforts to ensure that companies are aware of and are in compliance with all applicable laws and regulations. Depending on the nature of the services provided, companies may be subject to the Securities Exchange Act of 1934, Bank Secrecy Act, and states’ money transmitter licensing statutes.

The push for more oversight over cryptocurrencies comes at the heels of high-profile scandals involving cryptocurrency exchanges and ICOs that left consumers and investors alike with nothing but questions after losing their fiat and digital currencies.

The very first incident involved Mt. Gox, a bitcoin exchange based in Tokyo, Japan that operated between 2010 and 2014. Cryptocurrency exchanges allow its users to exchange fiat currency (e.g., U.S. Dollars) into cryptocurrency and provide digital wallets for users to store their cryptocurrency. At its heyday, it was handling over 70% of all bitcoin transactions worldwide. However, it ran into a host of problems in 2013 continuing on to 2014 until it stopped operations and filed for bankruptcy. During the litigation that ensued, it was revealed that Mt. Gox somehow lost approximately 750,000 of its customers’ bitcoins, valued at around $473 million at that time.

More recently, in February 2019, the cryptocurrency exchange QuadrigaCX announced that it was missing approximately $145 million in digital assets. Its executives, consumers, and law enforcement are in a frenzy to determine what happened to the missing digital assets as the only person who had access was QuadrigaCX’s founder Gerry Cotten, who had passed away the month prior.

These incidents are not limited to cryptocurrency exchanges, especially as ICOs have become more popular in recent years. ICOs are similar to IPOs in the sense that investors can buy a stake in a particular cryptocurrency (referred to as a token), but unlike IPOs, a token’s value is not tied to the value or performance of an underlying company. In November 2018, the SEC settled charges against professional boxer Floyd Mayweather Jr. and singer/producer DJ Khaled for failing to disclose payments they received for promoting investments in ICOs. This suggests that despite the decentralized nature of cryptocurrencies and ICOs, the SEC has assumed jurisdiction over the space and its players.

Accordingly, broker-dealers and investment advisory firms looking to get involved in the digital asset space, including operating cryptocurrency exchanges, providing trading platforms for cryptocurrencies, or facilitating ICOs, must ensure that they are in compliance with all existing laws and regulations that govern traditional financial transactions and investments.

For more information or to inquire about the firm’s services related to digital currencies, please contact Jennifer Lee at [email protected].