58614670_thumbnailThe confusion over Bitcoin grows in the latest lawsuit brought in a California bankruptcy court by Trustee Mark Kasolas against Marc Lowe, a former employee of HashFast Technologies LLC.

The trustee alleges, among other things, that Lowe received from the bankrupt Bitcoin mining company fraudulent transfers which included 3,000 Bitcoin (“BTC”) in September 2013, valued at approximately $363,861.

The lawsuit requires the bankruptcy court to determine whether Bitcoin is property or currency—a finding that would provide the total dollar amount recoverable by a bankruptcy trustee. This is an issue of first impression before the bankruptcy court.

The court’s definition is significant because if Bitcoin is “currency,” the trustee would be entitled to the BTC historical value or the value on the date of transfer, which is $363,861. Alternatively, if Bitcoin is “property,” the trustee would be entitled to receive the value of the BTC at the transfer date or time of recovery, whichever is greater. As of the filing date in May 2014, the BTC increased in value to $1,344,705.   

To complicate matters, the court will have to sort through all four major U.S. regulators’ language and treatment of Bitcoin. Both parties cite U.S. regulator precedent—the trustee, the CFTC’s and the IRS’s treatment of Bitcoin as property, and Lowe, the SEC’s and FinCEN’s treatment of Bitcoin as money or currency.

For reference, below is a summary of where each of the major U.S. regulators stands in its treatment of Bitcoin:

The SEC treats Bitcoin as a security or money. In the Bitcoin-Ponzi prosecution by the SEC against Trendon Shavers and his company Bitcoin Savings and Trust (BSTC), the SEC treated Bitcoin as a security. In its decision, the U.S. District Court sided with the SEC, finding “no reason to conclude…that Bitcoin is not money.”

FinCEN treats Bitcoin as currency. The Financial Crimes Enforcement Network has also clarified its definition of the digital currency, considering it “a medium of exchange that operates like a currency in some environments.” FinCEN regulates money services businesses, which are required to obtain money transmitter licenses—an expensive process that few startups can afford and few Bitcoin service providers have been able to complete.

The IRS treats Bitcoin as property. The IRS recently issued guidance stating that it will treat virtual currencies, such as Bitcoin, as property for federal tax purposes. As a result, general tax principles that apply to property transactions apply to transactions using virtual currency.

The CFTC treats Bitcoin as a commodity. In a press release, the CFTC declared that “[t]he definition of a ‘commodity’ is broad, [and] Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”

Both parties have set forth their arguments in summary judgment briefing, and oral arguments are set to be made on February 19, 2016.

For now we’re keeping an eye on the case. Given the volatility of the Bitcoin markets, we anticipate seeing more litigation with BTC at issue. We will report back with a detailed analysis of the court’s findings as it relates to Bitcoin litigation.

The case is in the Northern Bankruptcy Court, In re HashFast Technologies LLC, Case No. 15-03011.

Further reading from BakerHostetler’s Private Wealth Team: