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Posts Tagged ‘cryptocurrency’

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].

Next Up Libra: Regulating Cryptocurrency

Posted on: July 23rd, 2019

By: David Molinari

Reluctance to accept cryptocurrency as a medium of exchange continues to focus, in substantial part, on the inability to regulate a virtual form of currency.

Cryptocurrencies were originally meant to be stateless entities, not beholden to legal frameworks of any state or country.  Such intent was/is short-sighted if the goal is to function as an alternative currency.  Regulation is the doorway through which cryptocurrency must pass to be considered a viable system of currency for everyday transactions.  The word “regulation” has taken on a negative meaning.  “Regulation is bad for (fill in the blank)” is a familiar refrain.  However, regulation, at least concerning currency markets and exchanges, establishes rules and order.  When the currency alternatives are defined by the term “virtual,” proponents of cryptocurrency will face skepticism.  In the absence of federal directives on the cryptocurrencies, some states have tried to take matters into their own hands.  The result is a patchwork approach trying to meld old currency regulations to control the new frontier of cryptocurrencies.  Perhaps as a nod to the inevitable choice of government regulation or irrevocable stamp of “outlaw,” Facebook’s executive, David Marcus, in recent statements before the Senate Banking Committee noted that Libra will get “appropriate approvals” from regulatory agencies and be subject to regulatory oversight and review.

But what does regulatory oversight look like in a virtual currency world? How can any state or the Federal Government regulate a system where any major corporation with international reach can create their own form of cryptocurrency.  Cryptocurrencies raise concerns of national security because virtual currencies have the potential for illicit activities such as money laundering or facilitating other unlawful behavior.  The virtual currency market was created so digital asset service providers can operate in the shadows of no regulation.  Also, cryptocurrencies are highly volatile because exactly what backs the currency?  What is the value of any cryptocurrency at any time?  How can the system be protected from fraud?

There are three aspects that should be covered when attempting to establish a system of regulation for virtual currency: The use of cryptocurrencies as legal tender in business transactions, imposing authority on operation of cryptocurrency exchanges as money transmitters; and the status of smart contracts and Ethereum Tokens.

The first two factors seem amendable to the type of regulatory framework of establishing a commissioner or government arm that is responsible to evaluate whether the crypto/digital currency has capital enough to ensure safety and soundness of the currency for consumer protection.  A minimum amount of capital should be maintained by the cryptocurrency provider measured by total assets, total liabilities, the expected value of the virtual business activity, the amount of leverage employed and liquidity.

A difficult factor is determining a definition of “digital unit” to be used as a form of stored value.  Further, should there be carve-outs for online gaming platforms, digital units used exclusively as part of a consumer affinity or rewards program; or, digital units redeemable for goods, services or purchases exclusively with the issuer or designated merchant.

Libra is the latest threat to an old guard established financial system.  Where Facebook’s Libra allegedly differs is it is not intended to compete with the US or other countries’ sovereign currency; and therefore, won’t interfere with central banks on monetary policy. Yet by the very nature of being an alternative currency, Libra like other cryptocurrencies are competitors and disruptors of established currency markets.  A competitor is seen as a threat in most environments; when the environment is a financial system, competitors are a threat that raise serious concerns.  Libra, like other cryptocurrencies were designed to be independent of legal frameworks.  Regulation is the opposite to cryptocurrency’s design.  While such opposites in another environment or market would cripple any new product or service, cryptocurrency as a technology, is an idea whose development isn’t tied to or halted by government oversight.  While it is quaint to conclude cryptocurrency will be forced to adjust to government’s brand of regulation, that may not be accurate in this situation.  Cryptocurrencies are operating and will go on and continue to be unregulated. It is the regulating bodies that are playing catch-up.

If you have questions or would like more information, please contact David Molinari 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].

Pass That Dutch: California Insurers Respond to Budding Cannabis Industry

Posted on: July 2nd, 2018

By: Kristin Ingulsrud

California Insurance Commissioner Dave Jones announced on June 4, 2018 his approval of the Cannabis Business Owners Policy (CannaBOP) in California.  The new CannaBOP program was designed for cannabis dispensaries, storage facilities, processors, manufacturers, distributors, and other related businesses.  The CannaBOP program includes property and liability coverage for qualifying businesses.

Other recent offerings by insurers to the California cannabis industry include the first commercial insurance from an admitted carrier in November 2017, the first surety bond program in February 2018, and the first coverage for commercial landlords and a product liability and product recall program in May.

In April, President Donald Trump seemingly called off Attorney General Jeff Sessions’s war on marijuana and promised to support legislation that would protect states that have legalized marijuana from a federal crackdown.  The unpredictability of the current administration in regards to federal enforcement is just one of the unique issues the legalized cannabis industry faces.

Commissioner Jones hosted a webinar in May, Weeding through the Unique Insurance needs of the Cannabis Industry with the National Association of Insurance Commissioners Center for Insurance Policy and Research.   “Cannabis businesses face various insurance gaps—which means cannabis customers, workers and business owners may not have access to insurance to help them recover if there are accidents, injuries, property damage, or any of the things commercial insurance typically covers,” said Jones.

Topics included the effects of conflicting state and federal law on insurance claims, policy exclusions and gaps in coverage.  The webinar also covered the future of the cannabis industry and new trends such as on-site consumption, cryptocurrency, and blockchain.

Commissioner Jones  held the nation’s first public hearing in October 2017 to identify insurance gaps faced by the cannabis industry as part of his ongoing initiative to encourage commercial insurers to offer tailored coverage.  Since that time, insurers in California continue to expand their offerings to the cannabis industry.

If you have any questions or would like more information, please contact Kristin Ingulsrud at [email protected].

Is Virtual Currency Here To Stay?

Posted on: November 15th, 2017

By: Matthew S. Jones

With the growing interest in Bitcoin, Ethereum, and Litecoin, it was only a matter of time the U.S. Securities and Exchange Commission (“SEC”) and Internal Revenue Service (“IRS”) weighed in on the legality of such “cryptocurrency”. But what is “cryptocurrency”? It is a medium of exchange that functions like money, but is independent from national borders, central banks, sovereigns, or fiats. In the most basic sense, it only exists in the virtual world, traded on multiple global platforms, in an effort to secure and verify transactions easier.

Cryptocurrency is growing more and more popular because of the increased privacy, fast transactions (almost instantaneous), irrevocability, inexpensiveness, and global reach. In fact, approximately 80,000 to 220,000 transactions occur per day, representing over $50 million in estimated daily volume. Further, there are approximately 1,100 digital currencies in existence at this time.

So how does cryptocurrency work? Well, through a process called “the blockchain protocol.” This technology records all bitcoin transactions and removes the financial middleman, allowing transactions to be finalized within minutes. Each transaction is verified and creates a log that is public record.

However, with the use and trade of these new currencies on the rise, as well as the unknown allure of such cryptocurrencies, there has been an increase in ponzi schemes. These schemes essentially promise customers an opportunity to invest in Bitcoin when in fact, the customers are only brought into the company’s ponzi scheme.

In an effort to promote safety in the trade of these currencies, the SEC declared that any cryptocurrency token deemed to be a security must be registered with the SEC or otherwise be exempt. If such cryptocurrency is not registered or exempt from registration, the issuer and other participants may be subject to liabilities and other remedies under state and federal securities laws. Such regulation by the SEC is important to help prevent fraudulent transactions.

Additionally, with the increased trading of cryptocurrency as a security, there are tax implications as well. For example, Bitcoin value has increased approximately 800% over the past year. This has caught the IRS’s attention since tax reporting on such trades/profits does not match the actual number of individuals involved in such trading. However, this should come as no surprise given the significant and fast increases in value of cryptocurrency.

So, to answer the question posed by this blog’s title: it depends. At this point, it seems as if cryptocurrency is not going anywhere in the near future. The increased interest, fast transactions, and global reach will likely continue to drive the cryptocurrency’s use. However, with the SEC and IRS close behind to ensure its proper use, it may only be a matter of time until such currencies cease to exist or hold value.

If you have any questions or would like more information, please contact Matthew Jones at [email protected].