Why it matters: On February 19, 2016, a Northern District of California bankruptcy judge ruled in In re Hashfast Technologies LLC that, for purposes of valuation under the fraudulent transfer provisions of the U.S. Bankruptcy Code, Bitcoin is not the equivalent of U.S. dollars. The ruling arose in the context of an attempt by a bankruptcy trustee to set aside the 2013 transfer from the estate of 3000 Bitcoin, then worth $360,000, that had since appreciated to a present day value of $1.2 million. The interesting conundrum came down to the valuation of the 3,000 Bitcoin in the event the transfer were to be successfully avoided, with the trustee arguing that Bitcoin is property that can be recovered by the estate at its present day appreciated value, while the defendant transferee argued that Bitcoin are the equivalent of U.S. dollars and thus the 3,000 Bitcoin that were transferred retained their lower U.S. dollar value.
Detailed discussion: On February 19, 2016, a Northern District of California bankruptcy judge ruled in In re Hashfast Technologies LLC that, for purposes of valuation under the fraudulent transfer provisions of the U.S. Bankruptcy Code (Code), Bitcoin is not the equivalent of U.S. dollars.
According to a practitioner following the matter, the case involved an adversarial proceeding brought by the bankruptcy trustee against a medical doctor who had been paid 3000 Bitcoin in 2013 by Hashfast Technologies LLC (Hashfast) to promote Hashfast's Bitcoin business. Evidence showed that, although the 3000 Bitcoin had an approximate value of $360,000 when "paid" to the defendant in 2013, they had since appreciated to a present day value of $1.2 million. Hashfast filed for bankruptcy in May 2014, and the trustee sued to avoid the Bitcoin transfer under the fraudulent transfer provisions of the Code. The dispute that led to the ruling was how the Bitcoin should be valued for purposes of recovery to the estate should the transfer be successfully avoided, i.e., was Bitcoin property (to be valued at its current value) or currency (to be valued as of the time it was transferred)?
Under Section 550(a) of the Code, if a transfer is successfully avoided, the trustee is entitled to recover "the property transferred, or, if the court so orders, the value of such property." The trustee thus argued that the Bitcoin were property and that the estate was entitled to recover either the 3,000 Bitcoin or their current appreciated value of $1.2 million. The defendant in turn argued that Bitcoin were not property for purposes of Section 550(a) but rather the equivalent of U.S. dollars that retained their lower "face" value.
The practitioner who attended the hearing reported that the judge "frequently likened the fluctuating value of bitcoin to the price for Golden State Warriors season tickets" before concluding that Bitcoin were "clearly property." In his order filed on February 22, 2016, the judge ruled that "[t]he court does not need to decide whether bitcoin are currency or commodities for purposes of the fraudulent transfer provisions of the bankruptcy code. Rather, it is sufficient to determine that, despite defendant's arguments to the contrary, bitcoin are not United States dollars. If and when the Liquidating Trustee prevails and avoids the subject transfer of bitcoin to defendant, the court will decide whether, under 11 U.S.C. § 550(a), he may recover the bitcoin (property) transferred or their value, and if the latter, valued as of what date."
Although the judge's ruling is limited to this specific bankruptcy context, it is interesting to note that in September 2015 the CFTC ruled Bitcoin to be a commodity subject to regulation under the Commody Exchange Act and relevant CFTC regulations (we covered the CFTC ruling in our September 2015 newsletter under "CFTC Pronounces Bitcoin and Other "Virtual" Currencies to Be Commodities Subject to Its Regulation in Its First Action Against an Unregistered Bitcoin Trading Platform"). A harbinger of things to come?
See here to read the Order on Motion for Partial Summary Judgment filed on 2/22/16 in the case of In re Hashfast Technologies LLC.
For more on this subject, see the 2/24/16 article on Jim Hamilton's World of Securities Regulation blog entitled "Court Rules Bitcoin is Property, Not Currency" by Anne Sherry, J.D.