By\u00a0Michael Menapace, Esq.\u00a0<\/strong><\/em><\/p>\n Many individuals and businesses hold some amount of cryptocurrency.\u00a0 According to a recent survey, nearly 10 percent of Americans have invested in cryptocurrency since the first Bitcoin was \u201cmined\u201d in 2009.\u00a0 And, along with the rise in prevalence of virtual currencies in recent years has come a surge in cryptocurrency theft, with one Ponzi scheme defrauding cryptocurrency investors out of $2.9 billion dollars in 2019.\u00a0 Those who invest in, use, and hold cryptocurrency should protect their assets.\u00a0 While individuals can purchase insurance to protect themselves if certain types of assets are destroyed or stolen, such as a house, car, or personal property, individuals may have difficulty obtaining coverage for their cryptocurrency.<\/p>\n Bitcoin is just one cryptocurrency built on the technology called the blockchain.\u00a0 Other virtual currencies include Ethereum, Ripple, Litecoin, Monero, and ZCash.<\/p>\n Homeowner\u2019s insurance protects an insured against the loss of certain property.\u00a0 For example, if a thief breaks into your home and steals your television, that loss will likely be a covered loss of property under a standard homeowner\u2019s policy.\u00a0 For an overview of what homeowners insurance typically covers, see here.<\/p>\n Is theft of cryptocurrency covered under homeowners insurance?<\/strong><\/p>\n But, is an owner of cryptocurrency insured if a thief hacks their computer and steals virtual currency?\u00a0 Part of the answer relates to the question \u2013 what is <\/em>cryptocurrency?\u00a0 Are these virtual currencies a security, money, property, a commodity, or something else? As discussed below, it seems unlikely, and inappropriate, for the loss of cryptocurrency to be a covered loss under a homeowners policy.<\/p>\n The Securities and Exchange Commission takes the position that cryptocurrency is, or at least can be, a \u201csecurity\u201d and cautions that \u201cissuers [of virtual currencies] cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token.\u201d\u00a0 On the other hand, the IRS has issued Notice 2014-21, identifying cryptocurrency as \u201cproperty\u201d for federal income tax purposes. Still a third possibility is that cryptocurrency, which can be used to purchase goods and services, is properly classified as money.<\/p>\n As the above demonstrates, the same word, or virtual product, can have different meanings depending on the context.\u00a0 Here, we are considering how cryptocurrency is interpreted under an insurance policy.\u00a0 There does not seem to be any reason why cryptocurrency must be treated as the same thing by the SEC, IRS and insurers.\u00a0 Therefore, the pronouncements of the SEC or IRS should be only of limited assistance.<\/p>\n A common homeowners insurance policy states that the insurer will cover the loss of the insured\u2019s dwelling, other structures, and personal property.\u00a0 Crytocurrency is clearly not a dwelling or structure, so the question is whether cryptocurrency is \u201cproperty\u201d in the general sense because homeowners policies often protect against the loss of property.\u00a0 Beyond the IRS guidance discussed above, there is authority for the position that cryptocurrency is property.\u00a0 For example, an Ohio state trial court held that cryptocurrency was property covered by a homeowners policy.\u00a0 That ruling is discussed further below.<\/p>\n Not all homeowners policies are the same <\/strong><\/p>\n Even if cryptocurrency is property in a general way, however, the insurance analysis does not end there because not all property is treated equally under a homeowners policy.\u00a0 For example, coverage for the loss of personal property often has a $200 sublimit for \u201cmoney, bank notes, bullion, gold and [other precious metals], coins, medals, scrip, stored value cards and smart cards.\u201d\u00a0 Likewise, a homeowners policy may have a sublimit of $1,500 for \u201csecurities, accounts, deeds, letters, of credit, notes other than bank notes, . . . tickets and stamps.\u201d\u00a0 When considering these common sublimits, is it more appropriate to apply the $200 limit for money or the $1,500 limit for those items akin to securities?\u00a0 At least for some cryptocurrencies, like Bitcoin, an analogy to money seems more appropriate because Bitcoin is specifically designed to be an alternative to traditional currency.\u00a0 Considering an individual\u2019s ownership of Bitcoin a security does not seem to make sense.\u00a0 After all, when one thinks of a person owning a security, such as a share of stock in Acme Corp, the comparisons with Bitcoin are thin.<\/p>\n Beyond the issue of whether cryptocurrency is insured generic property, money, or a security, there is another fundamental issue to consider under a homeowners policy.\u00a0 The insuring agreement in many homeowners policies states that personal property is insured for \u201cdirect physical loss to the property described\u201d such loss from vandalism or theft.\u00a0 Because cryptocurrency is a virtual<\/em> currency, there is nothing to physically lose or destroy.\u00a0 What is lost or destroyed is the record of ownership or the \u201ckey\u201d to demonstrate ownership of the currency.\u00a0 Cash can be burden by fire \u2013 not so for a currency that never exists physically.\u00a0 A policyholder would have a difficult time explaining how the plain meaning of \u201cdirect physical loss\u201d is met when the virtual currency is stolen.<\/p>\n A couple cautionary notes are required for this discussion.\u00a0 First, not all homeowners policies are the same.\u00a0 The terms and conditions of each policy will control; therefore, a generalized discussion about homeowners policies is just that \u2013 general.\u00a0 For example, some policies treat money and securities the same, which could change or eliminate the need for the above analysis.<\/p>\n \u00a0<\/p>\n Is cryptocurrency considered property under a homeowners policy<\/strong><\/p>\n Second, individuals should not take too much comfort in the one reported decision on cryptocurrency as property under a homeowners policy.\u00a0 In the Kimmelman v. Wayne Insurance Group<\/em> decision from an Ohio trial court, the court ruled that cryptocurrency was generic property, not money, and the policy\u2019s $200 sublimit did not apply.\u00a0 Whether this decision is persuasive in other courts remains to be seen, but there are reasons why it should not.\u00a0 The Ohio court did not provide a fulsome analysis of the issues, which limits its usefulness.\u00a0 For example, there is no discussion on whether the policy\u2019s submits for electronic funds or securities should apply.\u00a0 In addition, the policy language is at issue in that it was drafted in 1999, years before cryptocurrencies were invented.\u00a0 Newer policy language may not be the same.\u00a0 Finally, the court relied heavily on the IRS guidance mentioned above, which states that cryptocurrencies are treated as property.\u00a0 But that IRS guidance also states that cryptocurrency is treated as property \u201cfor income tax purposes.\u201d\u00a0 While IRS guidance on tax issues is persuasive, that guidance should have no impact on how insurance contracts should be interpreted.<\/p>\n The court was also persuaded that Bitcoin was general property, not money, because it could be exchanged for money, i.e.<\/em> it is a convertible virtual currency.\u00a0 But that rationale doesn\u2019t explain that various forms of currency are converted to other kinds of currency all the time, e.g.<\/em> Euros are converted into dollars.\u00a0 Indeed, Bitcoin was originally conceived as a currency \u201cakin to cash\u201d by Satoshi Nakkamoto in his whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System<\/em>. \u00a0And outlets such as the Wall Street Journal report Bitcoin value under \u201cCurrencies\u201d with the Euro, U.S. Dollar, the Japanese Yen, etc., not under Stocks, Bonds or Commodities.\u00a0 No one would argue that the Yen is not money but is property that can be converted into U.S. Dollars.<\/p>\n It also bears a mention that the focus on Bitcoin, even if the Ohio decision were correct, does not necessarily apply to other cryptocurrency platforms that have different purposes from Bitcoin.\u00a0 For example, Ethereum was created for a different purpose from Bitcoin.\u00a0 Ethereum, while it has a value associated with its coins\/tokens, its original and fundamental purpose included providing a platform where one can build out new applications rather than simply being a substitute for traditional currency.\u00a0 (For an explanation of the different types of cryptocurrencies, see this tutorial (last updated Jan. 2020)).\u00a0 In all, I believe that Kimmelman<\/em> was wrongly decided or, at least, of limited persuasive value that other courts should not find persuasive.<\/p>\n What Can Individuals Do?<\/strong><\/p>\n The bottom line is that individuals should not rely on their homeowners policies to protect them from the loss of cryptocurrencies.\u00a0 Commercial entities, in contrast, can buy crime policies or cyber insurance policies, which are largely unavailable to private individuals.\u00a0 What can individuals do?\u00a0 They must take proactive steps to protect themselves rather than relying on someone compensate them if their assets are lost or stolen.<\/p>\n For example, if an individual is using \u201chot\u201d storage for their Bitcoin, i.e.<\/em> having the virtual currency accessible online, the currency is vulnerable to theft by hacking or ransomware attack. The owner might consider, therefore, having a commercial third party hold the virtual token or coin in its digital wallet for the individual.\u00a0 That commercial entity can be insured under a crime or cyber policy.\u00a0 If the individual is using \u201ccold\u201d storage, e.g.<\/em> storing the currency offline on a flash drive, the cold storage is vulnerable to physical destruction or old-fashioned theft.\u00a0 In that case, the individual should secure the flash drive from theft and physical description by keeping it in a fire-proof safe.\u00a0 Frankly, these are precautions that individuals should be taking even if the risk of loss were covered by a homeowners policy.\u00a0 But, until coverage for cybercurrency for individuals is widely available under a homeowners policy, owners would be wise to take steps to protect their digital assets from bad actors and physical accidents.<\/p>\n \u00a0<\/p>\n Michael Menapace is a <\/em>Non-Resident Scholar<\/em> of the Insurance Information Institute, a partner at Wiggin and Dana LLP, and a professor of Insurance Law at the Quinnipiac University School of Law.<\/em><\/p>\n \u00a0<\/p>\n<\/p><\/div>\n![\"\"](\"http:\/\/www.iii.org\/insuranceindustryblog\/wp-content\/uploads\/2020\/02\/p_nonres_michaelm-1-150x150.jpg\")
![\"\"](\"http:\/\/www.iii.org\/insuranceindustryblog\/wp-content\/uploads\/2020\/02\/GettyImages-897850912-300x200.jpg\")