As the use of blockchain technologies and cryptocurrencies continues to grow, and in the midst of regulators like the SEC and the IRS continued grappling with oversight and enforcement issues, the states are readying themselves to be able to take custody of unclaimed cryptocurrency in its native form. This new functionality, together with the growing popularity of cryptocurrency, merit further consideration, particularly noting the cryptocurrency market is projected to reach $1.5 billion by the end of 2025.
Virtual currency was first addressed in the 2016 Revised Uniform Unclaimed Property Act (“RUUPA”), a model act promulgated by the Uniform Law Commission as a standard for states to follow when updating their laws. RUUPA defines virtual currency as a “digital representation of value used as a medium of exchange, unit of account, or store of value, which does not have legal tender status recognized by the United States.” Game-related digital content is excluded from this definition.
Several states that have enacted RUUPA-like laws, including Colorado, Illinois, Kentucky, Tennessee, Utah and Vermont, similarly define or adopt the RUUPA definition of virtual currency as a property type that is eligible for escheat. However, neither RUUPA nor any of these states address virtual currency apart from providing a definition. Maine’s law only defines game-related digital content and excludes it from the definition of “property” and thus from escheatment. Even if the state does not specifically provide for virtual currency in its law, each state has a “catchall” provision that includes other miscellaneous intangible property, and the state could argue that this provision encompasses virtual currency. Given the nature of this property, financial institutions, exchanges, and online wallet providers are left with many unanswered questions on how escheatment would practically be performed.
For instance, Illinois’ recently proposed legislation and Nevada’s recently published Holder Reporting Manual instruct holders to liquidate the digital asset, then escheat the corresponding cash value to the state. Additionally, in New York, the Comptroller “must sell or liquidate the virtual currency as soon as he or she deems it advisable and practicable.” See below for further details on these state changes. Liquidating virtual currency upon receipt and denying the owner any gain in value after liquidation could put the holder at risk for reputational damage and litigation if this is viewed as negligent escheat, or as an unconstitutional taking under the US Constitution.
• Illinois HB 4573 was introduced in February 2020 (pending) which defines virtual currency as any type of digital unit, including cryptocurrency, used as a medium of exchange, unit of account or form of digitally stored value and provides for a 5-year dormancy period for unclaimed cryptocurrency. Holders must liquidate the cryptocurrency within 30 days of filing the related report and remit the proceeds to the state. In addition, owners do not have recourse against the holder or the administrator to recover any gain in value that may occur after the liquidation.• Nevada - In June 2019, Nevada revised its law to include virtual currency as property that was eligible to escheat but did not define it¹ . Nevada’s guidance in its Holder Reporting Manual (FY 2020 and 2021) on the other hand, indicates that virtual currency is covered under the state’s catchall provision (with a 3-year dormancy period) and instructs holders to report virtual currency using property-type code MS 17 (Miscellaneous Currency)². Holders are currently instructed to liquidate the virtual currency and report the cash value as of the date of liquidation. Nevada SB 71, pre-filed on November 18, 2020, proposes to include a definition for virtual currency similar to RUUPA.
• New York AB 8314 was introduced in June 2019 (pending), which would have amended the unclaimed property law to require that virtual currency escheat to the state after a 3-year dormancy period. This bill is unique in that it is the only bill to date that defines the holder, which for New York, is defined as an entity engaged in “virtual currency business activity,” meaning that the entity can receive, store, hold, buy, sell, control or administer virtual currency. The Comptroller must sell or liquidate the virtual currency as soon as he or she deems it advisable and practicable. Similar to the Illinois bill, claimant owners do not have recourse against the holder or the administrator to recover any gain in value that occurs after liquidation, as they are only entitled to the proceeds of the sale at the time of liquidation.
Aside from the potential issues associated with the liquidation of escheated cryptocurrency, there are a wide variety of other questions and concerns that holders of cryptocurrency need to be prepared to address or have an advocate on hand to help them navigate. For example, if the state argues that cryptocurrency is a type of virtual currency that falls within their catchall provisions, holders should question whether this property type is ever “due and payable” if it cannot be redeemed for cash. Furthermore, is the financial institution, exchange, or online wallet provider the true holder? What if they are unable to access and/or transfer the virtual currency? Do they have the actual possession or control over the virtual currency that trigger unclaimed property reporting obligations?
Owners are often anonymous and are the only persons who can transfer virtual currency via a unique identifier, password, or private key. If an owner is anonymous, how does the holder perform due diligence? And does the holder escheat the property to the state of the holder’s incorporation since the property has an unknown address?
Whether you are a company that has emerged as a part of the support system to the cryptocurrency world (e.g., coin exchanges) or simply a company that now accepts Bitcoin or similar cryptocurrencies as payment, proactively addressing the potential unclaimed property issues that could emerge is paramount.
As the use of cryptocurrency continues to grow and the states prepare to take receipt of virtual currency, remember too that your reporting obligations vary by state, including dormancy periods, due diligence requirements, and report due dates. Additionally, if it is the company’s first-time filing, be sure state amnesty programs are considered. Finally, ensure that robust policies and procedures are in place to capture as much owner contact information as possible, you communicate regularly with your owners, and track unclaimed cryptocurrencies to ensure, where necessary, accurate and timely reporting.
MarketSphere will be hosting a Webinar in February 2021 on the topic of cryptocurrency and unclaimed property impacts. Click here to receive an invitation to attend this webinar.
 NV S 44, enacted June 7, 2019 and effective July 1, 2019.
 Holder Reporting Manual FY 2021, p. 21: The presumption of abandonment for virtual currency is covered under NRS 120A.500(1)(n), through June 30 2019, and SB44 (2019) Section 11(1)(o) effective July 1, 2019
*Content contained in this article is considered accurate as of the publish date.