Insurance companies and consumers see the emergence of cryptocurrency in their daily lives. As an increasing number of companies around the world begin to use bitcoin and other digital assets for end-use, operational and transactional investments, this raises an important question: how is cryptocurrency defined for insurance coverage?
What is cryptocurrency? An introduction
As an agreed definition, cryptocurrency is a software object with devices or “tokens” that can be securely and verifiably transferred from one owner to another. Transactions are recorded in a public and widely distributed database (a “blockchain”). Cryptocurrencies were designed to serve as currencies, but as described in the cases below, they will not yet displace the core functions of money. (A “fiat currency” is any currency that a government declares to be a legal tender). However, many claim that Bitcoin is a homogeneous virtual good that is completely identical across all online marketplaces where it is sold.
In the crypto industry, platforms are careful to distinguish cryptocurrency from traditional money. In addition, cryptocurrency is not supported by the government and the IRS has gone so far as to designate it as property. In 2014, the IRS Notice 2014-21, 2014-16 issued IRB 938, which explains that virtual currency is treated as property for federal income tax purposes and provides examples of how long-standing tax principles that apply to transactions involving property apply to virtual currency. In short, a uniform approach to how to designate cryptocurrency is still under development.
Special holdings, including the term “Crypto”
For being such a popular topic, few courts have addressed the issue of the definitive definition of cryptocurrency for hedging purposes. In fact, the most important current issue on the subject Kimmelmann v. Wayne Ins. Consolidator, No. 18 CV 1041, 2018 WL 11417314 (Ohio Com.Pl. Sept. 25, 2018), remained the only known case on the issue for more than four years. In Kimmelman, a judge in the Ohio District Court considered bitcoin to be “property” and not cash as part of a home insurance policy.
In the background, the insured, James Kimmelman, filed an insurance claim with his insurance company, in which he reported that Bitcoin worth approximately $ 16,000.00 was stolen from his digital wallet. The insurance company investigated the claim and made a payment of $ 200.00 to Kimmelman, stating that bitcoin was “money” and controlled by a lower limit of the policy. Kimmelman sued the insurance company with allegations of breach of contract and bad faith. The insurance company requested a judgment on the pleadings, which the court explained in its order of 25 September 2018.
The insurance company claims that Bitcoin is generally recognized as a “currency”, citing articles from CNN, CNET and The New York Times. The insurance company also cited IRS Notice 2014-21, which attributed the term “virtual currency” to Bitcoin. As a result, the court revealed that the only authority it could rely on to determine the status of Bit[c]oin er ”IRS Notice 2014-21. During the message, “‘[f]or for federal tax purposes, virtual currency is treated as property. “ID. P. 3 (with reference to IRS Notice 2014-21). Although the IRS used the term” virtual currency “, the court concluded that the IRS recognizes Bitcoin as property, and therefore the court also recognized Bitcoin as property for the purposes of available coverage limits for the font.
Some courts even go beyond the characterization of money or ownership and include bitcoin as the hero of choice. IN Commodity Futures Trading Commission v. McDonnell, 287 F. Supp.3d 213 (EDNY 2018), the U.S. District Court of 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 (CFTC) anti fraud and tampering authority. By accepting the CFTC’s request for a provisional ban on defendants allegedly involved in fraud and fraud involving virtual currency spot markets, Judge Weinstein found that “[u]Until Congress settles the case, the CFTC is a “competing authority” with other state and federal administrative agencies and civil and criminal courts over virtual currency transactions.
According to the court, virtual currencies are “goods traded in a market of consistent quality and value”. As such, the court found that they “fit well” into the general definition of merchandise as well as the CEA’s broad definition, which includes “all other goods and articles … and all services, rights and interests …… or in the future, contracts for future delivery will be entered into. “
As mentioned in the inventories above, cryptocurrencies and blockchain technologies pose both new risks and opportunities for insurers and consumers. As these technologies continue to grow, evolve, and become more pervasive in our economy and daily lives, the impact of forensic interpretations of cryptocurrency will also become central to the conversation.