Wednesday, February 24, 2016

Court Rules Bitcoin Is Property, Not Currency

By Anne Sherry, J.D.

The bankruptcy court in San Francisco held that, for purposes of the Bankruptcy Code's fraudulent transfer laws, bitcoin are in the nature of property rather than currency. The decision implicates whether the liquidating trustee can go after a transferee for $360,000 or four times that amount. Although the decision is limited to the bankruptcy context, it hints at how courts may approach the question in other bitcoin-related litigation (Kasolas v. Lowe, February 19, 2016, Montali, D.).

In September 2013, HashFast Technologies paid a medical doctor 3,000 bitcoin for promoting HashFast's bitcoin mining hardware. At the time, the payment was worth about $360,000. Bitcoin has since appreciated to the point that the same number of bitcoin would now be worth about $1.25 million. HashFast was placed into bankruptcy in May 2014, and the trustee brought an adversary proceeding against the doctor to avoid the transfer.

Who benefits from appreciation? Under Section 550(a) of the Bankruptcy Code, if a transfer is avoided, the trustee may recover "the property transferred, or, if the court so orders, the value of such property." The trustee asked the court for a "heads I win, tails you lose" ruling directing that the estate's recovery in the event of avoidance would be "either the 3,000 bitcoin themselves or the value of those bitcoin at the transfer date or time of recovery, whichever is greater." The issue for the court was whether bitcoin is currency, as in the doctor's view, or property, in the trustee's (bolstered by rulings to that effect from the CFTC and IRS).

Bitcoin is property. After a hearing at which it frequently likened the fluctuating value of bitcoin to the price for Golden State Warriors season tickets, the bankruptcy court concluded that the asset being transferred was clearly property. Although bitcoin has a value that can be measured in dollars, for purposes of the fraudulent transfer laws of the Bankruptcy Code, it is not the legal equivalent of currency.

The bankruptcy court's holding is limited to the characterization of bitcoin. Even though it ruled that bitcoin is not currency, the court retained discretion to fix the value of any transfer claim at the time of the initial transfer. At the hearing, the court expressed sympathy for fraudulent transferees, remarking that in most cases they are innocent recipients. The court also hinted at a reluctance to require the doctor to pay more than he received for the bitcoin, assuming he already sold them.

The case is No. 15-03011.