Andrew "Drew" Hinkes is Counsel at Berger Singerman LLP, a business law firm in Florida. Hinkes represents companies and entrepreneurs in state and federal commercial litigation matters, representation of court-appointed fiduciaries, and electronic discovery issues.
Drew is also frequently published and cited for his work on virtual currencies, smart contracts, distributed ledger-based technologies, computer data security and data breaches and technology regulation.
Although multiple regulators and judges have attempted to legally classify bitcoin and other cryptocurrencies, a Bankruptcy Court in San Francisco has an opportunity to determine whether bitcoin should be treated like a commodity or like US currency.
In HashFast Technologies LLC v Lowe, the Bankruptcy Court is being asked to determine whether the recipient of a transfer of bitcoins has to return (a) the actual bitcoins transferred or their current value (treat them as property), or (b) the value of the bitcoins on the day they were transferred (treat them as currency).
In HashFast, the debtor, Hashfast Technologies LLC, transferred to Lowe 3,000 BTC, which were worth $363,861.43 at the time. Today, they are worth approximately $1.3m. The Trustee for the debtor sued to “clawback” the transfer into the bankruptcy estate (either as an avoidable preference or fraudulent transfer), based on claims that the transfer was fraudulent or unauthorized.
Using 11 U.S.C. §550(a), the bankruptcy trustee seek to may recover the transfers for the benefit of the creditors of the bankruptcy estate.
The Trustee and Lowe, the recipient of the transfer, are arguing over the classification of the bitcoin because, if the bitcoins are a commodity, then the Trustee is entitled to the return of 3,000 BTC or the current value of $1.3m; if the bitcoins are US currency then the Trustee is only entitled to the return of $363,861.43.
The Trustee has argued that bitcoin should be treated as a commodity based on guidance from the Internal Revenue Service (IRS) treating bitcoin as property, and based on rulings from the Commodity Futures Trading Commission (CFTC), which also treat bitcoin as a commodity, claiming that the Bankruptcy Court should order the return of the transferred bitcoins themselves or their current value (which has appreciated since the transfer to Lowe.)
Lowe argues that the transfer at issue was always discussed in terms of fiat currency, and that the Trustee should only be able to recover the value of the bitcoins at the time of the transfer.
Lowe’s position is based on interpretations by the Securities and Exchange Commission (SEC), he contends, as well as multiple case opinions whereby judges determined that bitcoin is a form of currency. He further claims that the Financial Crimes Enforcement Network (FinCEN) considers bitcoin to be form of currency, and that the Bankruptcy Court should view bitcoin as a currency and limit the Trustee’s recovery to the value at the time of transfer.
Lowe claims that the Trustee is unfairly seeking to recover a windfall because the fiat value of bitcoins transferred has risen since the transfer to Lowe, and that if bitcoin’s value had fallen, the Trustee would take a contrary position.
The relevant bankruptcy statute, 11 USC §550(a), states:
“…the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property.”
Although the purpose of section 550 is to recover from the correct party and to restore the estate to the financial condition that would have existed had the transfer never occurred, § 550(a) does not define “value,” nor indicate at what time “value” is to be determined.
A bankruptcy court has discretion on how to value the property so as to put the estate in its pre-transfer position, and is empowered to award the greater of the sums to the trustee (Sanders v Hang (In re: Hang), 2007 Bankr. LEXIS 2836 (Bankr. E.D. Cal. Aug 16, 2007).
Cases in which the value of transferred property appreciated after the transfer are uncommon. In those rare circumstances, courts will make determinations based upon the circumstances of each individual case.
In those rare cases, courts ordered the return of the appreciated asset because the focus “is not on what the transferee gained by the transaction but rather on what the bankruptcy estate lost as a result of the transfer.” (In re: Gardner, 2007 WL 2915847, at *3 (Bankr. D. Utah Feb. 23, 2007).
Implications for HashFast
The same outcome would occur if a foreign currency is substituted for bitcoins. If the debtor transferred €500, and those euros appreciated over the course of the case, then the trustee should be entitled to recover the €500, even though at the time of recovery it would take more dollars to buy the same number of euros.
Lowe argues that the bankruptcy estate should not be returned to its condition prior to transferring the bitcoins to Lowe, and instead should only receive the value at the time of the transfer, even though the law allows the court to award the property transferred to the Trustee.
The true issue is not whether bitcoin is a currency or commodity, but rather whether bitcoin is US currency or not.
Once the Bankruptcy Court determines that it is not US currency, the issue will probably be resolved, and bitcoin will be viewed like a non-US currency and treated like a commodity (i.e. similar to gold) under the applicable statute. Accordingly, even if the Bankruptcy Court rules in favor of the Trustee, the resulting opinion will do little to settle the currency versus commodity debate.
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