It seems like you can’t go a day without hearing something about cryptocurrency or the associated terms like virtual currencies, bitcoin and fiat currencies. Since the release of Bitcoin in 2009, thousands of cryptocurrencies have emerged, with Ethereum being another prominent name. The current cryptocurrency market is estimated to be worth more than $3 trillion and is expected to keep growing. Needless to say, the adoption and use of cryptocurrency by businesses and organizations will inevitably lead to large sums of unclaimed digital assets. So, it begs the question: what are states doing to adjust to this emerging market and what are they doing to enable holders to report unclaimed cryptocurrencies?
Before discussing the topic, let’s first talk about what cryptocurrency is and why it matters. Paul Vigna at the Wall Street Journal recently released a great article, “What is Cryptocurrency, and How Does It Work” that explains it quite well. He says, “the primary reason it matters is this: Bitcoin allows any two people anywhere in the world with an internet connection to make a transfer of value in a few minutes without a middle man.” He goes on to say that cryptocurrency was first heard of back in 2008, promising an alternative to the existing financial system and that “crypto is such a new area, and has largely been unregulated or only lightly regulated…”
In regards to unclaimed property regulations of digital currency, we are seeing more and more states develop administrative guidance or even pass laws related to the escheatment of cryptocurrency. The 2016 Revised Uniform Unclaimed Property Act (RUUPA), which was developed and proposed by the Uniform Law Commission (ULC), introduced virtual currency in its definition of property subject to unclaimed property laws. It is important to note that the ULC can only propose legislation; the legislation becomes effective only after a state adopts it. In other words, each state has a choice of whether to adopt the laws as drafted by the ULC. This is important when we talk about the impacts of RUUPA, specifically as it relates to the definition of virtual currency and adoption by the states. Per RUUPA, virtual currency is defined as, “a digital representation of value used as a medium of exchange, unit of account, or store of value, which does not have legal tender status recognized by the United States.” To date, several states have adopted RUUPA (or some form of it) and officially recognize property held in virtual currency as potential unclaimed property due to the states. Absent official adoption via state statute, other states are communicating guidance for reporting virtual currency via information provided on their websites. The classification of digital currency varies by state; a few states have adopted virtual currency reporting codes, “VC codes,” including VC01, virtual currency in U.S. dollars for liquidated virtual wallets, and VC02, virtual currency in native currency units (i.e., Bitcoin, Ethereum, Litcoin, Filecoin, etc). States that have not introduced VC codes default to the code “MS17,” which represents a catch-all for miscellaneous intangible property.
We should also take a moment to recognize that cryptocurrency is just that – a currency. In addition to being held in a virtual wallet, it can be invested in a variety of different products such as IRAs, UGMA/UTMA and 529 accounts, which could also affect the analysis and reporting of cryptocurrency.
Currently, no state can accept cryptocurrency in its native form, but some jurisdictions such as the District of Columbia and New York are exploring setting up virtual wallets so that cryptocurrency can be escheated in its native form. A number of jurisdictions encourage the liquidation of virtual currency, but only a few provide the statutory authority requiring a holder to do so. If the state does not statutorily require liquidation, there is a risk to the holder who liquidates and remits the funds to the state, as the value of the cryptocurrency can fluctuate significantly, which can lead to claims by the apparent owner for subsequent gains in the cryptocurrency value. If a jurisdiction recommends remitting the liquidated value of cryptocurrency, Sovos recommends consulting with your corporate attorney and/or outside legal counsel prior to liquidating and reporting as directed, evaluating all potential legal implications.
Over the past decade, we have seen the explosion of cryptocurrency and the adoption by businesses, organizations, and even entire nations (e.g., El Salvador adopting Bitcoin as an official legal tender). The change has been rather abrupt, so it is no surprise that states are lagging in their ability to establish the appropriate regulatory framework to manage unclaimed property of digital currencies. Nonetheless, we have seen some development by numerous states in this area and can only expect it to evolve quickly. For example, Delaware recently passed Senate Bill 103 (SB 103), which included very detailed reporting requirements for virtual currency and defines the time period in which liquidation must occur. Consequently, it is critical that holders continually track regulatory changes so they can be well positioned to stay in compliance when states audit them.
With so many nuances that are unique to this industry, it is important that consultants and advisers understand the challenges and are experienced in assisting companies of varying profile reach compliance. Look no further than Sovos’ Consulting Team to assist you in your compliance pursuit.
By: Laurie Andrews and Paola Narez