Cryptocurrency & Your Bankruptcy
Cryptocurrency is becoming more and more popular throughout the world. And while cryptocurrency has largely gone unregulated by governments, more and more nations are starting to take a stance on cryptocurrency in regards to regulations and law. While the world’s legal and government sectors have been trying to catch up with legislation for cryptocurrency, one area of law that has seen significant movement on the issue is bankruptcy law.
In the Northern District of California’ s U.S. Bankruptcy Court, Judge Montali issued the following order that clarifies what cryptocurrency is not:
“The court does not need to decide whether bitcoin is currency or commodities for purposes of the fraudulent transfer provisions of the bankruptcy code. Rather, it is sufficient to determine that, despite defendant’s arguments to the contrary, bitcoin is not United States dollars.”
If cryptocurrency is not a U.S. dollar, then how should it be classified when it comes to bankruptcy cases? According to the Uniform Commercial Code (UCC), bitcoin isn’t money because it is not a “medium of exchange currently authorized or adopted by a domestic or foreign government.”
If Cryptocurrency Isn’t Money, What Is It?
According to UCC Article 9, Secured Transactions, cryptocurrency appears to fall under “general intangible,” which “means any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction.”
If classified as a general intangible, a debtor’s personal property can be subject to a creditor’s interest in the property. The creditor will then have a “security interest” in the cryptocurrency. This means the creditor can sell the property to satisfy a debt the debtor defaulted on. Because cryptocurrency can be classified as a general intangible, the financial statements that create a perfection can be filed in the debtor’s jurisdiction and are not reliant on possession or control.
Looking at the bankruptcy code, particularly Section 541, cryptocurrency falls under “property of the estate.” Section 541 says property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”
Although cryptocurrency can be traced through a debtor’s various financial statements, the volatility of the currency can create problems with valuation.
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