Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.
CFTC. At the same time that the U.S. Commodity Futures Trading Commission (Commission) settled charges against Coinflip, Inc., it issued an Order finding for the first time that Bitcoin and other virtual currencies are properly defined as commodities. Aitan Goelman, the Commission’s Director of Enforcement stated, “While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives market.”
California. California’s Bitcoin Bill, AB 1326, was put on hold this week. Senator Mitchell ordered the Bill be moved to the inactive file, which means it is now “dormant or dead” according to California government definitions. However, legislation that is placed in the inactive file can subsequently be removed from the inactive file by the author.
Charges against Mt. Gox ex-CEO. Japanese prosecutors filed charges against Mark Karpeles, accusing him of stealing $2.7 million of clients’ money. The charges allege that Karpeles embezzled the funds deposited by clients into other accounts. Karpeles is also alleged to have falsified data on the outstanding balance of the exchange.
Bitpay, Inc. hacked. Bitcoin payment processor Bitpay, Inc. was hacked on three separate occasions in December 2014, resulting in a total of 5,000 bitcoins being stolen. Bitpay immediately filed a claim with its insurer, Massachusetts Bay Insurance Company (“Hanover”), who declined to pay. Bitpay filed suit [I would hyperlink to the complaint] against the insurer this week alleging breach of contract and bad faith failure to pay, seeking damages in addition to its $950,000 claim (policy limits less the $50,000 deductible). The insurer rejected the claim on an overly narrow reading of its own policy language, arguing that Bitpay incurred an indirect loss rather than a direct loss. The loss was indirect and thus not covered, Hanover argued, because the coverage “is only triggered by situations where an unauthorized user hacks into or gains unauthorized access into [the insured’s] computer system and uses that access to fraudulently cause a transfer of Money” (which includes Bitcoin in this policy). Look for further analysis of this case as it progresses, but it highlights the importance of understanding the policy language and working with counsel and insurance brokers familiar with virtual currency technology.