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It’s a little bit like an immovable object meeting an unstoppable force, a perfect storm: How can a creditor perfect a security interest in an asset that is, by its very nature and design, hidden?
What is and what isn’t currency?
FinCEN describes currency as “coin and paper money of the United States or any other country that is designated as legal tender, circulates and is customarily used and accepted as a medium of exchange in the country of issuance.” Bitcoin does not fit any of those parameters. In fact, its very existence, it’s reason for being, is not meeting any of those parameters.
But Bitcoin isn’t anything to sneeze at. As of November 20th, 2017, each bitcoin was worth over $8,000. Over 100 cryptocurrency-focused hedge funds have been founded in the last year, and traditional investment funds and financial institutions are finding it increasingly difficult to ignore the virtual currency revolution. For example, although the CEO of JPMorgan Chase has repeatedly called Bitcoin a “fraud” and predicted its imminent demise, JPMorgan is now planning on allowing its clients to trade bitcoin futures, pending regulatory approval.
What is Bitcoin?
Bitcoin, for the uninitiated, is a virtual currency that provides complete purchasing transparency by listing all transactions on a public ledger. Anyone can trace the ownership of each bitcoin. Bitcoin transfers are irreversible. Though the public ledger identifies ownership of each bitcoin, it does not provide information on liens — who those individuals are and what kind of debt they hold. After all, the primary purpose of Bitcoin is to conceal the identity of the individual. All that matters in the Bitcoin universe is the transfer of value, not who is giving and who is receiving.
Perfecting a Security Interest in Cryptocurrency
How can creditors perfect a security interest in cryptocurrency? First, one must define what kind of collateral it is. As it turns out, this is impossible because it does not precisely fit any existing category.
Although a Texas federal district court found that Bitcoin could “be used as money,”and therefore ordered a bitcoin investment company to reinstate $40 million in profits and interest to its clients, it does not meet the Uniform Commercial Code’s definition of money because it is not regulated by any government.
Using the definition of “general intangibles” in Article 9 of the Uniform Commercial Code or classifying Bitcoins as “investment properties” seems the only available remedy. But still, to take possession of virtual currency after a borrower defaults, a creditor would have to identify the individuals electronic wallet or other non-deposit account, login to it, and then transfer the currency to an account in their name. Unless the borrower breaks the law in a major way, like Silk Road founder Ross Ulbricht, law enforcement and the courts are unlikely to take the necessary steps to uncover the individuals virtual wallets and seize their assets.
The Bottom Line(s)?
The government and the legal world are lagging far behind when it comes to understanding cryptocurrencies. For the time being, bitcoins are unlikely to become viable in large commercial transactions until the existing uncertainties regarding security interests are resolved. In the future, Article 9 may be revised to account for cryptocurrencies. But that day is a still a long way off. It would require adoption of statutory amendments in individual states.
One possible solution is for the Bitcoin world to adopt the indirect holding system of financial intermediaries outlined in Article 8 of the UCC. In this system, the financial asset is held by a third party in an account maintained by the third party, which account is credited to the person with rights to the asset in the account.
As it stands, certain individuals are undoubtedly hiding assets from creditors, spouses, etc. by storing value in cryptocurrency. Most judges, solicitors and lawyers wouldn’t think to look for crypto-assets. And even if they did, finding them would be a different matter entirely. Crypto, you’ll recall, means ‘hidden’.
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