Coverage issues raised by cryptocurrency

Insurers and consumers alike are seeing the emergence of cryptocurrency in their daily lives. As increasing numbers of companies worldwide begin using bitcoin and other digital assets for a host of investment, operational, and transactional purposes, it raises an important question: How is cryptocurrency defined for the purposes of insurance coverage?

What is cryptocurrency? A Primer

As a commonly adopted definition,  cryptocurrency is a software object with units or “tokens” that can be transferred securely and verifiably from one owner to another. Transactions are recorded in a public, widely distributed database (a “blockchain”). Cryptocurrencies have been designed to serve as currencies, but, as detailed in the cases below, they don’t yet fulfil the central functions of money. (A “fiat currency” is any money declared by a government to be legal tender).  However, many argue that Bitcoin is a homogeneous, virtual good that is entirely identical across all the online markets in which it is sold.

In the crypto industry, platforms are careful to distinguish cryptocurrency from traditional currency. Moreover, cryptocurrency is not backed by the government, and the IRS has gone so far as to designate it as property. In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency. In short, a uniform approach to how to designate cryptocurrency is still evolving.

Recent Holdings Involving “Crypto” Designation

For being such a popular subject, few courts have taken on the issue of definitively defining cryptocurrency for coverage purposes. In fact, the current leading case on the subject Kimmelman v. Wayne Ins. Group, No. 18 CV 1041, 2018 WL 11417314 (Ohio Com.Pl. Sep. 25, 2018), has remained the only known case on the issue in over four years. In Kimmelman, an Ohio trial court judge held bitcoin to be “property” and not money under a homeowners insurance policy.

As background, the insured, James Kimmelman, submitted an insurance claim to his Insurer, reporting roughly $16,000.00 of Bitcoin stolen from his digital wallet. The Insurer investigated the claim and made a payment of $200.00 to Kimmelman, determining the Bitcoin was “money” and governed by a sublimit within the policy. Kimmelman filed suit against the Insurer, asserting claims for breach of contract and bad faith. The Insurer moved for judgment on the pleadings, which the court addressed in its September 25, 2018 order.

The Insurer argued Bitcoin is generally recognized as “money,” citing articles from CNN, CNET, and the New York Times. The Insurer also cited IRS Notice 2014-21, which subscribed the term “virtual currency” to Bitcoin. Accordingly, the court held that the only authority it could “rely on in determining the status of Bit[c]oin is” IRS Notice 2014-21. Under the notice, “‘[f]or federal tax purposes, virtual currency is treated as property.’” Id. p. 3 (quoting IRS Notice 2014-21). Even though the IRS used the term “virtual currency,” the court found the IRS recognizes Bitcoin as property and, therefore, the court also recognized Bitcoin as property for purposes of the policy’s available limits of coverage.

Some courts are even going beyond the money or property characterization, and finding bitcoin to be something else altogether. In Commodity Futures Trading Commission v. McDonnell, 287 F. Supp.3d 213 (E.D.N.Y. 2018), the U.S. District Court for the Eastern District of New York ruled that virtual currencies are commodities under the Commodity Exchange Act (CEA) and therefore subject to the Commodity Futures Trading Commission’s (CFTC) anti-fraud and anti-manipulation enforcement authority. Granting the CFTC’s request for a preliminary injunction against the defendants who allegedly engaged in deception and fraud involving virtual currency spot markets, Judge Weinstein noted that “[u]ntil Congress clarifies the matter,” the CFTC has “concurrent authority” along with other state and federal administrative agencies and civil and criminal courts over transactions in virtual currency.

According to the court, virtual currencies are “‘goods’ exchanged in a market for a uniform quality and value.” As such, the court reasoned that they “fall well-within” the common definition of commodity as well as the CEA’s broad definition of commodity, which includes “all other goods and articles ... and all services, rights, and interests ... in which contracts for future delivery are presently or in the future dealt in.”

As reflected in the above holdings, cryptocurrencies and blockchain technologies present both emerging risks, and opportunities, for insurers and consumers alike. As these technologies continue to grow, evolve, and become more ubiquitous in our economy and everyday lives, the impact of court interpretations of cryptocurrency will likewise become front and center in the coverage conversation.