Hedging Issues Caused by Cryptocurrency | kennedy

Insurers and consumers are seeing the rise of cryptocurrency in their everyday lives. As an increasing number of businesses around the world begin to use bitcoin and other digital assets for end-use, operational and transactional investments, this raises an important question: how is cryptocurrency defined for insurance coverage?

What is cryptocurrency? An introduction

As an adopted definition, cryptocurrency is a software object containing units or “tokens” that can be transferred securely and verifiably from one owner to another. Transactions are recorded in a public and widely distributed database (a “blockchain”). Cryptocurrencies are designed to serve as currency but, as described in the cases below, they will not yet supplant the core functions of money. (A “fiat currency” is any currency declared legal tender by a government). However, many require Bitcoin to be a homogeneous virtual good that is completely identical across all the online marketplaces where it is sold.

In the crypto industry, platforms are careful to differentiate cryptocurrency from traditional money. In addition, cryptocurrency is not backed by the government and the IRS has even gone so far as to classify it as property. In 2014, the IRS Notice 2014-21, 2014-16 issued IRB 938, explaining that virtual currencies are treated as property for federal income tax purposes and providing examples of how long-term tax principles that apply to transactions involving property from apply to virtual currencies. In short, a unified approach to designating cryptocurrency is still evolving.

Special holdings with the designation “Crypto”

Because it is such a popular topic, few courts have addressed the issue of the final definition of cryptocurrency for hedging purposes. In fact, the most important current case on this subject Kimmelmann v. Wayne Ins. consolidator, no. 18 CV 1041, 2018 WL 11417314 (Ohio Com.Pl. Sept 25, 2018), remained the only known case on this matter for more than four years. In Kimmelman, an Ohio District Court judge considered bitcoin “property” and not cash as part of home insurance.

In the background, the insured, James Kimmelman, filed an insurance claim with his insurer, reporting that approximately $16,000,000 worth of Bitcoin had been stolen from his digital wallet. The insurer investigated the claim and made a $200.00 payment to Kimmelman, determining that the bitcoin was “money” and governed by a sub-limit in the policy. Kimmelman sued the insurer, alleging breach of contract and bad faith. The insurer has requested a ruling on the pleadings, which the court explained in its order dated September 25, 2018.

The insurer states that Bitcoin is widely recognized as a “currency,” citing articles from CNN, CNET and The New York Times. The insurer also cited IRS notice 2014-21, which endorsed the term “virtual currency” on Bitcoin. As a result, the court revealed that the only authority it could “rely on to determine the status of Bit…[c]oin is” IRS Notice 2014-21. Below the message, “‘[f]or for federal tax purposes, virtual currency is treated as property. “ID CARD. p. 3 (with reference to IRS Notice 2014-21). Although the IRS used the term “virtual currency”, the court concluded that the IRS recognizes Bitcoin as property and therefore the court also recognized Bitcoin as property with in view of the font’s available opacity limits.

Some courts even go beyond the characterization of money or property and take bitcoin as the chosen one altogether. In Commodity Futures Trading Commission v. McDonnell, 287 F. Supp.3d 213 (EDNY 2018), the US District Court for the Eastern District of New York has ruled that virtual currencies are commodities under the Commodity Exchange Act (CEA) and are therefore subject to the Commodity Futures Trading Commission (CFTC) ) anti-fraud and tampering powers. Judge Weinstein accepted the CFTC’s request for a preliminary injunction against defendants accused of cheating and fraud involving spot virtual currency markets.[u]Until Congress clears up the matter, the CFTC is a “competing authority” with other state and federal administrative agencies and civil and criminal courts over virtual currency transactions.

According to the court, virtual currencies are “‘goods’ traded in a market of uniform quality and value”. As such, the court ruled that they “fit well” within the general definition of merchandise and the CEA’s broad definition, which includes “all other goods and articles … and all services, rights and interests …”. † in which contracts for future delivery are currently or in the future. †

As noted in the positions above, cryptocurrencies and blockchain technologies present emerging risks as well as opportunities, for insurers and consumers alike. As these technologies continue to grow, evolve and permeate our economy and everyday life, the impact of cryptocurrency forensic interpretations will also become central to the conversation.

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