By Madiha Zuberi on
The confusion over #Bitcoin grows in the latest lawsuit brought in
a California bankruptcy court by Trustee Mark Kasolas against Marc Lowe, a
former employee of HashFast Technologies LLC.
The trustee alleges, among other things, that Lowe
received from the bankrupt Bitcoin mining company fraudulent transfers which
included 3,000 Bitcoin (“BTC”) in September 2013, valued at approximately
$363,861.
The lawsuit requires the bankruptcy court to determine
whether Bitcoin is property or currency—a finding that would provide the total
dollar amount recoverable by a bankruptcy trustee. This is an issue of first
impression before the bankruptcy court.
The court’s definition is significant because if Bitcoin
is “currency,” the trustee would be entitled to the BTC historical value or the
value on the date of transfer, which is $363,861. Alternatively, if Bitcoin is
“property,” the trustee would be entitled to receive the value of the BTC at
the transfer date or time of recovery, whichever is greater. As of
the filing date in May 2014, the BTC increased in value to $1,344,705.
To complicate matters, the court will have to sort
through all four major U.S. regulators’ language and treatment of Bitcoin. Both
parties cite U.S. regulator precedent—the trustee, the CFTC’s and the IRS’s
treatment of Bitcoin as property, and Lowe, the SEC’s and FinCEN’s treatment of
Bitcoin as money or currency.
For reference, below is a summary of where each of the
major U.S. regulators stands in its treatment of Bitcoin:
The SEC treats Bitcoin as a security or money. In the Bitcoin-Ponzi prosecution
by the SEC against Trendon Shavers and his company Bitcoin Savings and Trust
(BSTC), the SEC treated Bitcoin as a security. In its decision, the U.S. District Court sided with
the SEC, finding “no reason to conclude…that Bitcoin is not money.”
FinCEN treats Bitcoin as currency. The Financial Crimes Enforcement Network has also clarifiedits definition
of the digital currency, considering it “a medium of exchange that operates
like a currency in some environments.” FinCEN regulates money services
businesses, which are required to obtain money transmitter licenses—an
expensive process that few startups can afford and few Bitcoin service
providers have been able to complete.
The IRS treats Bitcoin as property. The IRS recently issued guidance stating
that it will treat virtual currencies, such as Bitcoin, as property for federal
tax purposes. As a result, general tax principles that apply to property
transactions apply to transactions using virtual currency.
The CFTC treats Bitcoin as a commodity. In a press release, the CFTC
declared that “[t]he definition of a ‘commodity’ is broad, [and] Bitcoin and
other virtual currencies are encompassed in the definition and properly defined
as commodities.”
Both parties have set forth their arguments in summary
judgment briefing, and oral arguments are set to be made on February 19, 2016.
For now we’re keeping an eye on the case. Given the
volatility of the Bitcoin markets, we anticipate seeing more litigation with
BTC at issue. We will report back with a detailed analysis of the court’s
findings as it relates to Bitcoin litigation.
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