Viewpoint: Bitcoin After Brexit
Investors and value-holders in tumultuous markets typically look to safe havens to protect their assets. The emergence of bitcoin and other cryptocurrencies has created a potential new safe haven during periods of recession, currency devaluation or hyperinflation. In early 2013, bitcoin was trading for less than $40 per bitcoin. Amid a massive financial crisis and the seizure of bank accounts in Cyprus, holders of Cypriot accounts began buying massive amounts of bitcoin, which by mid-2013 drove the price of bitcoin to more than $260 for the first time. By November 2013, the value of bitcoin peaked at $1,242.
More recently, the uncertainty associated the Brexit vote appears to have directly affected bitcoin value. On June 17, 2016, bitcoin was trading at more than $750. Five days later, as polls showed the Brexit vote leaning heavily to “remain,” bitcoin dropped as low as $585. In the days after the vote to leave the European Union became final, the British Pound, the Euro, the Chinese Yuan and global stocks dropped precipitously. Bitcoin, on the other hand, spiked to more than $676.
Could the value spikes after the Cyprus seizures and the Brexit vote point to bitcoin as a new safe-haven asset generally?
A Brief Background on Bitcoin
Bitcoin often is described as a “digital currency.” On a more technical level, bitcoin is a digital asset within a peer-to-peer computer network payment system created in 2008 by an anonymous cryptographer going by the pseudonym Satoshi Nakamoto. Because the computer network uses open-source, peer-to-peer software, no truly central authority administers and oversees transactions, and no government controls or backs the digital “currency.” Instead, users or “nodes” on the network verify transactions by solving complex computer algorithms. The verified transactions are then recorded on a public ledger (called the blockchain) for all to see. Transactions employ lengthy key codes rather than traditional personally-identifiable information. Accordingly, users can trade bitcoin quasi-anonymously.
Because bitcoin lacks government or centralized control, conceptually it is accessible to anyone with an internet connection and eliminates many of the transaction costs associated with traditional currency trading. For the same reasons, however, it can be highly volatile. At the inception of the network in 2009 and through 2012, a single bitcoin was worth pennies at best. In November 2013, the value of a bitcoin peaked at $1,242, largely due to the Cyprus seizures. The price of bitcoin declined thereafter amid hacking scandals, the insolvency proceeding of Mt. Gox (bitcoin’s then largest exchange), and negative perceptions created by the high-profile criminal case involving the elicit online marketplace known as Silk Road. Despite its volatility over the last seven years, however, bitcoin has endured and shows no signs of disappearing.
Before Bitcoin Becomes a Safe Haven, the Market Needs More Certainty
Bitcoin’s sharp rise after the Brexit vote appears to evidence a new confidence in bitcoin as a safe haven. Investment professionals, however, have been extremely reluctant to give bitcoin such status. One recent research note observed that calling bitcoin a safe haven “obfuscates the fact that bitcoin is a high-risk and volatile investment” and ignores that “bitcoin’s correlation to other traditional safe-haven assets has fluctuated significantly.” Instead, bitcoin can be viewed as “something entirely different that does not fit into the normal buckets that investments are typically bracketed into.”
The inability to categorize bitcoin into a traditional “bucket” is equally visible in the legal context, and perhaps particularly in the bankruptcy context. In a recent widely-circulated decision, for example, a bankruptcy judge concluded that bitcoin is not currency for purposes of a trustee’s recovery of avoidable transfers. See In re Hashfast Technologies LLC, No. 15-3011DM (Bankr. N.D. Cal. Feb. 19, 2016). The case involved a “bitcoin mining” computer company that paid 3,000 bitcoin to an individual to promote the company’s products. After the company’s bankruptcy filing, a trustee was appointed. The trustee sought the return of the value of the bitcoin paid to the promoter. The total value of the bitcoin in question had increased from $363,861 at the time of payment to nearly $1.3 million as of the Feb. 19, 2016 ruling.
The arguments on each side were predictable. The promoter argued that the company intended to use the bitcoin as currency and that the trustee should be able to recover only the value of the bitcoin at the time of the payment. The trustee, on the other hand, argued that the bankruptcy estate should be able to recover the fully appreciated value of the bitcoin as a commodity. The bankruptcy court did not fully resolve the issue. Rather, it concluded solely that “bitcoin are not United States dollars,” and left for another day the question of whether the trustee could recover the value of the bitcoin at the time of payment or the subsequent appreciated value.
In the criminal context, a Florida court recently dismissed money-laundering and similar charges against a person for the sale of bitcoin to an undercover detective. See Florida v. Espinoza, No. F14-2933 (Fla. Cir. Ct. July 22, 2016). In an order accessible here, Judge Teresa Pooler of the Florida Circuit Court for Miami-Dade County found that bitcoin is not “the equivalent of money,” and specifically concluded that the defendant was not a “money transmitter” within the meaning of the criminal statute at issue. Judge Pooler also concluded that bitcoin itself is neither money nor a “payment instrument.” The court’s decision is particularly insightful as it relates to bitcoin’s potential as a safe haven:
The value of Bitcoin fluctuates wildly and has been estimated to be eighteen times greater than the U.S. dollar. Their high volatility is explained by scholars as due to their insufficient liquidity, the uncertainty of future value, and the lack of a stabilization mechanism. With such volatility they have a limited ability to act as a store of value, another important attribute of money. . . . This Court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, that Bitcoin has a long way to go before it is the equivalent of money.
As these legal decisions demonstrate, the current legal system is still deciding whether bitcoin fits into any familiar “buckets” or whether Congress and/or the judiciary will have to create new ones. Characterizing bitcoin as a commodity versus a currency, versus “Monopoly money,” versus some other property right, is just one example of the many issues bitcoin presents in the legal context. In short, the legal outcomes currently lack any degree of predictability.
Bitcoin does not share the features of traditional safe-haven investments such as gold, government bonds, or preferred fiat currency—therein lies much of its appeal, as well as its deficiencies, at least currently, as a safe haven. The current legal framework also requires significant development to provide greater certainty regarding bitcoin. It remains to be seen whether Judge Pooler was correct in her view that bitcoin “has a long way to go before it is the equivalent of money.” Whether traders treat it as a safe haven ultimately will be the true test. Over time, their collective decisions may give rise to bitcoin as an alternative safe haven, or those decisions may bring a wave of novel legal issues to our courts and Congress. In either case, investors and legal professionals would do well to keep an eye on this growing and rapidly evolving field.
Bryce Suzuki is a partner in Bryan Cave’s Phoenix office. He provides strategic business planning and dispute resolution assistance to a diverse range of lenders, companies, and business owners. His practice focuses on providing advice to clients affected by potential or actual insolvency issues. More recently, he has focused on the emerging field of cryptocurrency (Bitcoin) and blockchain technologies.
Justin Sabin in an associate in Bryan Cave’s Phoenix office. His practice focuses on commercial financing transactions, commercial workouts and business bankruptcies. He also regularly represents clients in all aspects of commercial restructuring and bankruptcy matters. He also focuses on the emerging field of cryptocurrency and blockchain technologies.
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