SAN FRANCISCO – A federal judge recently entered a ruling on how a crypto currency will be viewed in bankruptcy court, but at least one journalist covering the digital financial world said the non-tangible nature of bitcoins continues to challenge legal definition.
“The court does not need to decide whether bitcoin are currency or commodities for purposes of the fraudulent transfer provisions of the bankruptcy code,” Judge Dennis Montali of the U.S. Bankruptcy Court for the Northern District of California ruled. “Rather, it is sufficient to determine that, despite defendant’s arguments to the contrary, bitcoin are not United States dollars.”
While bitcoins may not be U.S. dollars, they are still currency, Bitcoinist and Bitcoin.com investigative journalist Sergio Scout recently told the Northern California Record.
As such, Scout said bitcoins need a universal framework as digital currency because they are used everywhere in the world where there is access to the Internet, and they are used together with other currencies.
“I see bitcoin as a real global currency,” Scout said. “Some lawyer or politician might see it as property -- in this case, digital property -- since most of bitcoin is used in the digital world. Any other definition does not really fit because bitcoin behaves like any other government-issued currency out there.”
Montali's ruling stems from a 2013 endorsement deal in which California ophthalmologist Marc Lowe signed an agreement with HashFast Technologies LLC to write blogs endorsing the California company’s BabyJet, a computing hardware system for bitcoin mining. In return, Lowe was to receive 10 percent of the company’s sales revenue in bitcoins.
A little more than one month, 160 blogs and 550 presales later, HashFast paid Lowe 3,000 bitcoins that in 2013 had a market value of $363,861. It was a significant sum considering HashFast’s CEO earned $144,000 a year and the doctor had no marketing experience.
Yet, the BabyJet was still in manufacturing infancy at the time. Despite revenues generated from presales, the struggling San Francisco tech firm was unable to deliver its units by its December 2013 deadline. By January 2014, customers wanted their money back. Soon after, creditors filed an involuntary Chapter 7 petition against HashFast.
Now, HashFast’s bankruptcy trustee, Jessica Mickelsen of Katten Muchin Rosenman, is seeking the return of the 3,000 bitcoins paid to Lowe on the grounds of fraud. Today, those same bitcoins have an appreciated market value of more than $1.27 million.
Lowe’s lawyer, Brian Klein of the law firm Baker Marquart, had asked the bankruptcy court to consider that bitcoins be treated the same as dollars when compensating the doctor.
Such a position is not without merit.
The European Union’s Court of Justice ruled in October that bitcoins are to be treated as currency, not a commodity, for tax purposes.
U.S. regulators, however, do not agree.
The Commodity Futures Trading Commission in September decided bitcoins and other virtual currencies are to be viewed as a commodity, though we traditionally think of commodities as being supported by a physical asset, such as oil, gold and agricultural products.
In March 2014, the Internal Revenue Service said bitcoins would be treated as property and subject to the same rules as stocks for tax purposes, which made them subject to capital gains taxes. Unlike stocks, however, bitcoins have no underlying asset on which to base value.
“My own opinion is that like gold, bitcoin is whatever people use it as," Bitcoin angel investor Roger Ver, widely known as “Bitcoin Jesus” and owner of Bitcoin.com, told the Northern California Record. "Gold can be property in the form of jewelry or currency in the form of a coin. Bitcoin has the ability to be all these things and more.”