It is hard to peruse the internet or even mainstream media outlets without hearing about bitcoin. What is this ubiquitous bitcoin? It depends on whom you ask.
A CNN Money articled defined bitcoin as “a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto.” The IRS has recently defined bitcoin as an “intangible asset” for investors, making it subject to capital gains and loss treatment using the realization method.
While bitcoin lingers between a currency and an asset, more than 100,000 bitcoin transactions are taking place every day. Large e-commerce and industry giants such as Microsoft, Dell, DISH, Expedia, and Overstock now accept bitcoin as a form of payment.
Bitcoin has become synonymous with cryptocurrencies, although there are over 900 different cryptocurrencies in circulation as of this writing. Bitcoin and other cryptocurrencies are digital assets designed to be used as a unit of exchange. The holding and transfer of these “currencies” uses cryptography to secure transactions and to control the creation of additional units of the digital asset.
While bitcoin continues to work through its identity crisis, a California bankruptcy court has ruled, in an issue of first impression, that bitcoin should be treated more akin to property than currency within the definition of the bankruptcy code. In a fraudulent transfer and preference adversary proceeding, the trustee brought suit against the former promoter of the debtor for the transfer of 3,000 bitcoins prior to the firm’s collapse. During summary judgment, both sides submitted arguments on whether bitcoins should be considered currency (valued at $360,000) or a commodity (valued at $1.3 million). The 9th Circuit entered an order on the liquidating trustee’s motion, stating, “The court does not need to decide whether bitcoin are currency or commodities for the purposes of fraudulent transfer provisions of the bankruptcy code. Rather, it is sufficient to determine that, despite defendant’s arguments to contrary, bitcoin are not United States dollars. If and when the Liquidating Trustee prevails and avoids the subject transfer of bitcoin to defendant, the court will decide whether, under 11 U.S.C. §550(a), he may recover the bitcoin (property) transferred or their value, and if the latter, valued as of what date.” While the status of bitcoin may not be settled, it does appear that, at least in bankruptcy, courts are likely to treat bitcoin more like a commodity than a currency.
With over 900 cryptocurrencies in circulation and new ones being formed at a breakneck pace, creditors, debtors and bankruptcy practitioners alike should carefully examine cryptocurrency assets in any underlying credit transactions, as well as stay abreast of developments on how bankruptcy courts determine the valuation of these cryptocurrencies.