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Unclaimed Property and Cryptocurrency: Regulation and the Impact on Digital Assets

Kristine Butterbaugh
April 7, 2021

For the past 70 years, unclaimed property reporting requirements have been challenging for US businesses. Understanding the nuances of individual state statutes and how to comply effectively and efficiently has caused many sleepless nights for unclaimed property professionals. Well, that may be a bit extreme, however, state regulations are difficult to master. When the first escheatment laws were enacted, the notion of virtual currency was far from the minds of those developing the laws and would have been thought of as ideology dabbling in the realms of fantasy.  

Unclaimed property reporting

Fast forward to the twenty-first century where we now have digital assets living conceptually in a blockchain.  Terms like altcoin, yield-farming, HODL, DEX, mining, and staking are permeating the digital realm and regulators are working feverishly trying to monitor and regulate transactions that are a challenge to contain, at best. So how do the companies engaging with digital assets live harmoniously with the regulators looking to control the reporting, specifically as it relates to unclaimed property?  

It is important to note that most businesses, large or small, private or public, are likely to produce unclaimed property, and organizations dealing in digital assets are no exception. Each state has outlined its own unique set of rules and requirements on how companies should communicate with owners, maintain historical records, and report the unclaimed property to the state(s).  The costs of non-compliance can be significant, and depending upon the value of the asset and the state, can push well into the thousands. There can be penalties, interest, and even misdemeanor charges for failure to comply. Couple all that with the possibility of lengthy state audits, which can morph into beasts-of-burden for an organization in terms of costs and human effort.  

Impact of  the RUUPA on unclaimed property

Since state unclaimed property laws apply to a wide variety of assets or property types and since virtual currency is property (as defined by the US Internal Revenue Service (IRS) ruling Notice 2014-21), then one would speculate that virtual currency would be subject to unclaimed property law, right?  If only the answer was so clear-cut. Virtual currency and unclaimed property are still somewhat caught in the twilight zone of compliance, although this zone between fantasy and reality is diminishing. Prior to the 2016 Revised Uniform Unclaimed Property Act (RUUPA), developed and updated by the Uniform Law Commission (ULC), there were no specific definitions of virtual currency in the Uniform Unclaimed Property Act. RUUPA brought forth virtual currency in its definition of property that is subject to unclaimed property laws. Even those states that have not enacted RUUPA are finding their way in the virtual currency world and creating expectations for compliance.  

As of this writing, there are nine states who have enacted RUUPA or some form thereof, where virtual currency is a property type specifically defined in the statute. There are three additional states where forms of RUUPA have been introduced. Additionally, there are several states that are requiring or recommending the reporting of virtual currency without the adoption of RUUPA. Many of the states today cannot accept submission of the virtual currency and require liquidation prior to reporting. There are differences in the recording of the virtual currency property type from MS17 to VC01 and VC02 to serve as an example.

If you provide any type of digital asset custody services, you have a direct legal obligation to the owner. It is important that you review the requirements for unclaimed property reporting and partner with an expert, like Sovos, to help you navigate the waters of compliance.

Take Action

Join us on April 20, 2021 from 1 – 5 P.M. EDT for the opportunity to learn more about these monumental changes in the world of digital assets and unclaimed property. View the agenda, esteemed presenters, and register for this free event here!

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Author

Kristine Butterbaugh

Kristine Butterbaugh is a Solution Principal at Sovos. She focuses on go-to-market strategy and emerging markets in unclaimed property and insurance regulatory reporting. She has been involved in the unclaimed property industry for over 20 years and is one of our unclaimed property experts here at Sovos.
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