Michael Carroll Mar. 3, 2016, 3:42pm

SAN FRANCISCO – The elusive definition of the bitcoin – an Internet payment system that operates in a decentralized way and aims for low transaction fees – has come into somewhat better focus as a bankruptcy case in Northern California moves toward trial.

At the center of the case is HashFast Technologies, a San Francisco company that went belly-up while selling bitcoin computer devices that allowed investors to reap financial rewards through the gradual release of new bitcoin along with transaction fees. HashFast filed for bankruptcy in 2014 and is now suing a California doctor to reclaim what it paid him for promoting the computer devices, called BabyJets, according to court documents.

The doctor, Marc Lowe, received 3,000 bitcoin for his efforts at promoting HashFast technology in 2013, and now the liquidating trustee for the bankrupt firm, Michael Kasolas, wants to recoup what it paid him.

Ultimately, the company was unable to keep up with orders for the computer devices, so customers began seeking refunds.

Attorney Ron Oliner, who represents Kasolas, noted that one of the key points of contention in the case was whether bitcoin was a currency or more like a commodity or property. Oliner noted that during a hearing in February, U.S. Bankruptcy Judge Dennis Montali offered an “interlocutory,” or interim ruling that was both “instructive and useful.”

“In fraudulent-transfer litigation, if the transfer is in money, the trustee gets the money, interest and fees,” Oliner told the Northern California Record. “But if it’s property, then the trustee gets the appreciated value.”

Oliner said the judge concluded, that "bitcoin is in the nature of property, not the monetary value of the bitcoin at the time of the transfer.” Oliner added that the value of the bitcoin when HashFast paid it to Lowe was about $300,000. As a tangible property or commodity, however, it would be valued according to what it’s worth in today’s market, or about $1.3 million, Oliner said.

This could mean that the trustee will recoup the higher value from Lowe if ultimately the bankruptcy judge determines that the financial transfer in question was fraudulent.

Though Montali’s decision was not binding, Oliner emphasized that it would be useful as the case moves to trial in late summer or early fall of 2016. This particular bankruptcy case involves what’s known as a “clawback,” a term referring to funds or benefits that a company handed out but now seeks to recoup because of unusual circumstances.

In bitcoin terminology, the decentralized network of investors and companies whose actions help to shape the overall trust in the payment system are termed “miners.” They, in turn, gain financial rewards as the system expands and bitcoin’s value mounts.

Bitcoin made its debut in 2009.

Lowe’s attorneys had used publications from the Consumer Financial Protection Bureau, the U.S. Securities and Exchange Commission and the U.S. Treasury Department’s Financial Crimes Enforcement Network in arguing that bitcoin is a currency rather than a commodity. Bitcoin has also been labeled a cryptocurrency because it uses cryptography as a security measure and is thus difficult to counterfeit.

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U.S. District Court for the Northern District of California
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San Francisco, CA 94102

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