Cryptocurrencies are quickly becoming part of the financial mainstream, with institutional and retail investors alike adding them to their portfolios in record numbers. State legislatures are trying to keep up with this growth by modifying abandoned and unclaimed property laws.
DEFINING AND UNDERSTANDING VIRTUAL CURRENCY
In 2017,
a digital representation of value used as a medium of exchange, unit of account, or store of value, that does not have legal tender status recognized by
The amended Act expands that definition to include "any type of digital unit, including cryptocurrency, used as a medium of exchange, unit of account, or a form of digitally stored value, which does not have legal tender status recognized by
Unlike many other financial assets, cryptocurrencies and other blockchain-based digital assets were designed so they could be held directly by the owner, without a central repository. Many people hold custody of their cryptocurrencies in this way, using wallet software that they alone control. This can be technologically challenging for some because it requires them to manage unwieldly hexadecimal codes known as private keys, and it places a burden on them to not lose those private keys. Because of these difficulties, many people prefer to have a third party hold custody of their cryptocurrency. Numerous hosted wallet service providers offer custodial services.
DORMANCY HOLDERS AND THE ABILITY TO ESCHEAT
One core component of abandoned and unclaimed property ("AUP") laws is the tracking period for determining when a property has become "dormant." Most common property types become dormant within one to five years. Once property becomes dormant, the holder of the property must contact owners to remind them that a debt is owed to them. The amended Illinois Act establishes a five-year dormancy period for virtual currency based on the last contact with the holder. Such contact, when it is sufficient to defer dormancy, is referred to in the
The amended Act, however, does not specify types of ownerto-holder contacts for crypto that would constitute an indication of interest that defers dormancy. Using existing AUP frameworks as a guide, one might compare crypto to securities, where an indication of interest can be in the form of a vote, phone call, or email to the transfer agent to update the owner's personal information, and in some states, direct deposit of dividends. The analogy has limitations, though, because securities have a welter of requirements and reporting obligations placed upon those issuing, owning, and dealing in them.
A comparable regulatory framework unique to crypto transactions has not yet developed for escheat purposes. All or most crypto custodians likely have the electronic monitoring capacity to track when users log into the account, buy or sell crypto, or transfer crypto from one wallet to another. It is reasonable to anticipate that logging into one's account is a sufficient indication of interest to stave off dormancy, but are passive actions that affect an owner's wallet similar? As an example, if another party deposits crypto into the owner's wallet, will that toll dormancy? In many states, direct deposit of a securities dividend is no longer sufficient as an indication of interest. Will it be similar for crypto?
What such a framework may require becomes even more complicated as different types of crypto platforms are evaluated from an escheat-compliance perspective. Cryptocurrency exchanges in
Decentralized finance-
For example,
Any assets held at noncustodial smart contract addresses have the potential to become dormant. Monitoring contacts with such addresses and demanding escheat from ostensible holders may prove difficult, if not impossible, to enforce given their noncustodial nature.
Further, because there is no central administrator and no legal requirement or mechanism to collect owner names and addresses, in many cases, the only known information about the transacting parties will be their public keys. To which jurisdiction would a holder escheat dormant crypto when there is no owner name or physical address, or when there may be no state of incorporation or legal domicile for the holder to use? Further, the purported holder may not be located in
ESCHEATING CRYPTO
Once a crypto asset becomes dormant, the amended Act mandates the holder liquidate the crypto within 30 days prior to the compliance filing and remit the proceeds to the appropriate government authority. The term "escheat" refers to taking ownership of property. That term is inexactly but commonly used to describe the process of remitting abandoned property to a state that will hold the property in custody for the owner.
The price of crypto fluctuates in dollar terms. It is not fixed like a paycheck or a receivable credit on account denominated in
The Uniform Act is custodial in nature-that is to say, it does not result in the loss of the owner's property rights. The state takes custody and remains the custodian in perpetuity. Although the actual possibility of his presenting a claim in the distant future is not great, the owner retains his right of presenting his claim at any time, no matter how remote. State records will have to be kept on a permanent basis. In this respect the measure differs from the escheat type of statute, pursuant to which the right of the owner is foreclosed and the title to the property passes to the state. Not only does the custodial type of statute more adequately preserve the owner's interests, but, in addition, it makes possible a substantial simplification of procedure. 8 Uniform Laws Annotated 74 (1972).
The solution of requiring liquidation undermines that custodial nature. While owners can still collect their value, that value is now fixed and finite, unable to ride the ebbs and flows of the market.
Further, contracts with crypto custodians may contain provisions that limit the ability of a "holder" to liquidate and escheat crypto. Crypto holders may not have the legal right to use the owner's private key to direct a transaction on the blockchain to liquidate their value. While there is case law, such as People v.
The true intent of the Illinois RUUPA is to safely hold crypto until the owner claims it. In this regard, the state has implemented protections for securities that could be emulated for crypto. Section 15-703 of the Act provides that the state must hold escheated shares for three years after delivery; if the shares are sold prior to that time, the owner is entitled to claim the value of the shares at the time of the claim, plus dividends and interest. The amended Act lacks a comparable safeguard for crypto. The state is limited in infrastructure that would allow crypto to be transferred to the state in a custodial manner. However, there are viable alternatives, such as implementing a longer mandatory holding period (e.g., 10 years), developing strategic alliances with viable third-party providers to act as a holding mechanism for crypto, or directing the holder to segregate and hold the crypto until the state may give direction for the sale.
OWNER RECOURSE
The amended RUUPA states that "the owner shall not have recourse against the holder or the administrator to recover any gain in value that occurs after the liquidation of the virtual currency under this subsection." It is unlikely that this limitation will dissuade legal action by the angry owner of crypto that increased tenfold since the date of liquidation for escheat compliance.
If the historical litigation trend by owners of escheated securities provides any guidance, owners will not stand by as docile observers when a holder liquidates his or her crypto for escheatment. When finding the value of crypto increased significantly after his wallet was liquidated, a crypto owner will likely go after everyone involved in what he views as an unlawful seizure and taking. States notoriously have not stepped up to shield duly compliant holders in the past, even in the face of a statutory obligation to do so. Query why they would behave differently with crypto.
Crypto is the new unclaimed property frontier. In fact,
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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