Insuring Cryptocurrencies?

By Hannah Taylor*

There is no comprehensive, settled legal doctrine or regulatory scheme for cryptocurrencies.[i] This leaves the judiciary to apply an outdated regulatory framework to the novel situations cryptocurrencies present. An Ohio lower court hearing the case of Kimmelman v. Wayne Insurance Group is currently grappling with adjudicating a Bitcoin dispute with sparse guidance from regulators.[ii]

There are many types of blockchain technologies and amongst them there remains a wide range of possible applications as the technology continues to mature. In the most simplistic terms, Blockchain technology allows connected computers to reach agreements over shared data.[iii] The most notable sub-classification blockchain technology is cryptocurrencies. Among the different types of cryptocurrencies, some, like Bitcoin, provide consumers with an alternative to traditional currencies.[iv] Other types of cryptocurrencies, like Etherium, provide platforms where individuals can build out new applications.[v] Pre-built applications on this decentralized technology represent the third main type of cryptocurrencies.[vi] Government regulators have been slow-moving to enact a comprehensive regulatory scheme for cryptocurrencies and the cryptoeconomies that they power because of lingering uncertainty over their true uses.[vii]

In the Kimmelman case, the appropriate treatment of Bitcoin, an alternate currency sub-classification of cryptocurrencies is at issue.[viii] James Kimmelman brought suit against his insurance carrier for breach of contract and bad faith.[ix] After $16,000 worth of Bitcoin was stolen from his online account, his insurance company sought to limit his recovery under his homeowner’s insurance policy to the $200 sublimit for monetary losses.[x] Since the insurance company argued that Bitcoin is properly considered money, the defense moved for a judgement on the pleadings.[xi] On September 25th, 2018, the court denied the motion.[xii]

In the denial, the judge points out that the defense could point to no timely regulatory guidance defining the cryptocurrencies as money.[xiii] The judge found that media reports and public understanding of Bitcoin were not controlling legal references.[xiv] Finding other case history and statutes neither governing nor persuasive, the court stated that the “only authority the Court can rely on in determining the status of BitCoin is the Internal Revenue Service Notice 2014-21.”[xv] Within that notice, the IRS categorized certain cryptocurrencies as property for federal taxing purposes.[xvi] Still, this novel finding by the court may have greater normative impact on our legal understanding of the regulation of cryptocurrencies. To the average user of these financial technologies, virtual currencies seem pretty equivalent to traditional money. But the IRS reaches their conclusion by describing the type of cryptocurrency that have “an equivalent value in real currency, or that acts as a substitute for real currency” is simply “convertible virtual currency” – meaning that the BitCoin itself is property that can be exchanged for legitimate money.[xvii]

This case is one to watch because of the additional definitional questions that the Ohio Court may settle. Kimmelman pled that his Bitcoin should have been considered covered property under the terms of a homeowner’s insurance policy.[xviii] Luckily for Kimmelman, the IRS notice specifically makes reference to Bitcoin as an example of the type of convertible virtual currency subject to its definition as property.[xix] To evade federal tax liabilities or to claim insurance recovery, future litigants with different cryptocurrency brands – whether they function like alternative currencies, utilities, or app platforms – may have to argue that their versions are or aren’t sufficiently like BitCoin in the eyes of the IRS.

 

Remember though that Kimmelman has only survived the pleading stage to his case. During the litigation, he will have to actually establish the facts that the court assumes when evaluating a motion to dismiss.[xx] To prevail he will have to show that his insurance company acted in bad faith. And he will have to “escape” the defense’s argument that the lost BitCoin is subject to the “$500 sub-limits for ‘electronic funds’ and a $1,500 limit of ‘securities’” rather than the more expansive coverage provided for real property.[xxi] The lack of clear authority on this issue of classification may force the court to reach further into the scarce regulatory framework before reaching a final ruling.

Much of the current lag in the current regulation in these technologies reflect current uncertainty and anxieties about their actual uses.[xxii] Lack of appropriate guidance has left the door open for unanswered questions to be settled during such litigation. Cases such as Kimmelman’s may reveal where the pressure points are. Increased litigation and subsequent judicial innovations may spark regulators into making policy choices and into providing the court with a more stringent framework. Especially if those regulatory bodies find the court’s prior analysis unfavorable.

* Hannah Taylor is an Associate Editor on MJEAL. She can be reached at hannahmt@umich.edu


The views and opinions expressed in this blog are those of the authors only and do not reflect the official policy or position of the Michigan Journal of Environmental and Administrative Law or the University of Michigan.

[i] Cryptocurrency Regulations Around the World, Comply Advantage , (“It’s hard to find a consistent legal approach to cryptocurrencies in the United States.”), https://complyadvantage.com/blog/cryptocurrency-regulations-around-world/ (last visited October 25th).

[ii] Jeff Sistrunk, 4 Important Insurance Decisions You May Have Missed, Law 360, (Oct. 11, 2018, 5:59 PM), https://www.law360.com/articles/1090847.

[iii] Peter Van Valkenburgh, What is “Blockchain” Anyway?, Coin Center (April 25, 2017), https://coincenter.org/entry/what-is-blockchain-anyway.

[iv] Ray King, Understanding the Different Types of Cryptocurrency, Bit Degree Tutorials (last updated Sept. 17, 2018), https://www.bitdegree.org/tutorials/types-of-cryptocurrency/

[v] Id.

[vi] Id.

[vii] Sam Bourgi, U.S. Crypto Regulation Unlikely to Materialize in the Near Future: White House Official, Hacked, (Feb. 18, 2018), https://hacked.com/u-s-cryptocurrency-regulation-unlikely-materialize-near-future-white-house-official/.

[viii] Kimmelman v. Wayne Ins. Group, No. 18CV001041 (Ohio Sept. 25, 2018) (order denying defendant’s motion for judgement on the pleadings), https://www.propertyinsurancecoveragelaw.com/files/2018/10/Kimmelman.pdf.

[ix] Cozen O’Connor, Crypto Covered Under Homeowner’s Policy? Ohio Trial Court Hold’s Coverage and Bad Faith Claims for Bitcoin Theft Survive Motion fo r Judgement on the Pleadings, JDSUPRA (October 15, 2018), https://www.jdsupra.com/legalnews/crypto-covered-under-homeowner-s-policy-65355/

[x] Sistrunk, supra note 2.

[xi] Id.

[xii] Id.

[xiii] Kimmelman v. Wayne, supra note 8.

[xiv] Id.

[xv] I.R.S. Notice 2014-21 (2014), https://www.irs.gov/pub/irs-drop/n-14-21.pdf.

[xvi] Id.

[xvii] Id.

[xviii] O’Connor, supra note 9.

[xix] I.R.S., supra note 15.

[xx] Bitcoin Exchange Guide News Team, Bitcoin Insurance May See Homeowner Policy Coverage Protection in Ohio Crypto Theft Court Case, Bitcoin Exchange Guide, (October 23, 2018), https://bitcoinexchangeguide.com/bitcoin-insurance-may-see-homeowner-policy-coverage-protection-in-ohio-crypto-theft-court-case/.

[xxi] Id.

[xxii] Annaliese Milano, Crypto Regulation? Not Anytime Soon, Says White House Official, Coin Desk, (Feb 16, 2018), https://www.coindesk.com/crypto-regulation-not-anytime-soon-says-white-house-official.

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