Tag Archives: crypto currencies

Are Crypto-Currencies Money or Property?

Blockchains have a problem: They cannot exist in digital isolation; their value must be derived from the value of something else — something real.

There will always come a time when something real must be represented by data on a blockchain, or when data on a blockchain must represent something real. The tools that we use today for the storage, exchange and representation of value are money and title to property. This is the most over-looked peril in blockchain technology.

Are crypto-currencies actually money?

There are many prominent articles by many smart people discussing this topic. However, at the time of this writing, according to U.S. Uniform Commercial Code, article 9, a very explicit definition for money is provided as follows:

Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government.

Therefore, the answer is clear. No, digital tokens are not money.

See also: Why Insurers Caught the Blockchain Bug  

While the destruction of digital tokens may represent an economic loss, that loss would need to be somehow quantified as something real. And we’re back to where we started; at some point, token must represent something real. The courts and law enforcement cannot be invoked to protect your bitcoin, and they struggle immensely to protect the value that the bitcoin is supposed to represent, except, notably, in money laundering.

While we may be able to identify the peril and even calculate the probability of loss, we cannot predetermine the consequence of the loss and therefore we cannot price the risk correctly. End of story.

Are crypto-currencies considered property?

There is some ambiguity here, as well. When we think of property, we think of discrete units that are largely inseparable. The title to an asset travels with the whole asset as it changes hands. A lien on the property would be needed to assert dominion on the asset. But bitcoins are quite easily divisible, almost fluid, lubricating a blockchain as a secondary artifact or its maintenance program. If I loaned you a car but kept the wheels as collateral, the utility of he car would be encumbered. Or it would be like holding a lien against the money to purchase the car, and not the car. This doesn’t make sense.

The answer for all practical purposes is that crypto-currencies cannot really be treated as property at least within the boundaries of law and are therefore uninsurable.

Are we stuck?

So, if bitcoins are not money and bitcoins are not property, what are they? How does one prove ownership? How does the owner assert dominion? How would liability be assigned for economic losses of another person in a transaction where all agreements are in the form of non-revocable contracts executed by software? Where do rights and responsibilities attach?

This is a deeply troublesome discussion if you are in the business of assuring or insuring blockchain-based enterprises.

More troubling is that these precise characteristics are what make crypto-currencies attractive for illegal activity, thereby increasing variance of expectations rather than reducing variance – the exact counter-effect of insurance. If assets can be converted to crypto-currency, they become difficult to seize or repossess. The extra-legal sector is categorically uninsurable by mainstream carriers.

Fortunately, some clever legal scholars at Harvard’s Berkman Center have suggested that perhaps ownership may be established with a claim against the cryptographic keys that open and close the contracts that contain the value articulated on blockchain. This is a very interesting idea. We have already established that these nodes and these keys are insurable. Logic may be built into key distribution to assign liability or limit liability and, thus, price risk correctly.

A Hybrid Approach

In earlier articles, we identified the problems that blockchain solves. We also identified the problems that blockchains cannot solve. Using a hybrid approach of decentralized computers and decentralized human interaction, we may be able to build a bridge that can cross the insurability gap between the virtual and the real world upon which everyone from banks, entrepreneurs and modern decentralized organizations may cross.

See also: What Is and What Isn’t a Blockchain?  

Some conceptualization of the hybrid approach may consider the following: a system of physical proofs that are interchangeable with the digital proofs in a blockchain — as needed or where appropriate.

For example:

  • Instead of a computer modeling a fake network of Byzantine generals, a network of real “generals” can be set up to model a computer network.
  • Instead of a solution to a trivial puzzle as a means of generating a digital token, the solution to a real life puzzle can also be used to generate a digital token.
  • Instead of a hashing program that generates a cryptographic key, a person’s résumé could be used as the algorithm to hash cryptographic keys that are authorized to open and close packets on the blockchain (see Curiosumé)
  • Etc…

As long as each component of the blockchain ecosystem is insurable, the entire system would remain insurable. There would otherwise be no limit to the number of blockchains that can exist nor the number or combination of analog and digital components that can be mixed as long as the tokens, in the end, can clear accounts.

(Adapted from: Insurance: The Highest and Best Use of Blockchain Technology, July 2016 National Center for Insurance Policy and Research/National Association of Insurance Commissioners Newsletter: http://www.naic.org/cipr_newsletter_archive/vol19_blockchain.pdf)

Bitcoin Is Here to Stay and Will Transform Payment Systems

Since the digital currency known as Bitcoin came on the scene in 2009, much has been written about it, both good and bad.  However, it seems clear that Bitcoin’s underlying “protocol” has the potential to transform the global payments system. Entrepreneurs are flocking to the Bitcoin protocol. Private equity and venture capital, most notably in Silicon Valley, have also begun to make substantial investments in the technology.

The technology for “crypto-currencies” like Bitcoin may hold particular promise for opening up the financial system to the masses of individuals in the world’s poorest countries, the majority of whom do not have access to bank accounts. The technology also has implications far beyond the financial system and could have fundamental impact on voting, legal contracts and real estate transactions, to name just a few.

A debate is raging over whether Bitcoin should be regulated, and, if so, how far regulation should go, to minimize any dangers while not suppressing innovation as Bitcoin develops out of its “infancy.”

Several events have galvanized those in favor of more robust regulation. In October 2013, the FBI arrested Ross Ulbricht, a.k.a. “Dred Pirate Roberts,” who is alleged to have been the mastermind behind Silk Road, a website that was devoted to selling illegal drugs and other illicit items and services. The sole medium of exchange on Silk Road: Bitcoin. In January 2014, Charlie Shrem, a well-known member of the Bitcoin community and the CEO of BitInstant, one of the best-known and largest Bitcoin exchanges at the time, was arrested on money-laundering charges. Then, Mt. Gox, a Tokyo-based digital currency exchange, collapsed, and the loss of millions of dollars of customer Bitcoins spread through the news like wildfire. Taken together, these events have caused many fraud prevention professionals working in law enforcement, regulatory agencies, compliance departments and other institutions where digital currencies could conceivably be an issue to eye Bitcoin and other “alternative” currencies with a healthy dose of skepticism.

In spite of these events, Bitcoin has been gaining support commercially among merchants and retailers. The Sacramento Kings of the National Basketball Association, the Chicago Sun-Times and Overstock.com, among others, now accept Bitcoins as a method of payment. Thousands of small businesses scattered across the U.S., with notable concentrations in San Francisco and New York, also are accepting Bitcoins.

Because Bitcoin is a disruptive technology, there were no real applicable regulatory or enforcement mechanisms in place when Bitcoin came into existence in 2009. The nature of the Bitcoin protocol is such that regulations already in existence, in most cases, could not be easily adapted. The exchange, transmission, trade, securitization and commoditization of Bitcoins all have regulatory implications. Regulators are rightly concerned about such issues as consumer protection, anti-money laundering/countering the financing of terrorism, fraud prevention and other important issues.  However, because of Bitcoin’s disruptive nature, the application of existing regulations often places Bitcoin in a regulatory “gray zone.”

In March 2013, the U.S. Financial Crimes Enforcement Network, known as FinCEN, issued guidance that characterized Bitcoin exchanges in such a way that they must register with FinCEN and follow the Bank Secrecy Act’s (BSA) anti-money laundering (AML) regulations. Exchanges also must develop bank-level AML and Know Your Customer compliance standards for their businesses.

In July 2014, the New York Department of Financial Services (NYDFS) issued proposed regulations regarding “virtual currencies.” The proposal has entered a 45-day comment period. The proposal would require companies involved in virtual currency business activities to have in place policies and procedures designed to mitigate the risks of money laundering, funding terrorists, fraud and cyber attacks. At the same time, the regulations seek to impose privacy and information security safeguards on companies operating in this environment.

As the country’s leading financial center, New York has taken the lead in proposing regulations that seek to balance the need for anti-money laundering, fraud prevention and consumer protection safeguards against the desire to promote innovation within the nascent digital currency industry. Though it is unclear whether the proposed regulations achieve these ends, it might be argued that these regulations are preferable to a regulatory vacuum that leaves industry insiders and investors with more questions than answers. However, the danger of overregulation is that it could drive away legitimate industry actors and the innovation that would follow. Absent investment and innovation in the industry, the technology is largely left in the hands of those who wish to exploit it for nefarious purposes.

Only time will tell.


1)  Digital currency technology is here to stay, and overregulation could stifle investment and innovation in the industry, leaving the technology in the hands of those who wish to exploit it for nefarious purposes.

2)   Bitcoin technology is still in its infancy, and venture capital and private equity elements are beginning to show real interest in the technology’s exciting potential to transform certain business practices across a wide range industries.

3)  Regulatory agencies have only recently begun to take notice of the potential issues that this disruptive technology presents.