The first half of the year saw a flurry of virtual currency-related legislation introduced at the state level, and two recently signed laws specifically address cryptocurrency’s treatment as unclaimed property (UP). According to Illinois S.B. 338, entities holding abandoned virtual currency are required to liquidate the UP and remit the proceeds to the state Treasurer. And effective August 1, 2021, Delaware added “virtual currency” to the definition of property subject to reporting requirements for unclaimed property. Like Illinois, the state says virtual currency UP must be liquidated prior to reporting and remitting the proceeds of the liquidation to the state.
UP laws were first drafted in the 1950s, a time when women couldn’t open bank accounts without their husbands’ permission, and the very first credit cards were being released. The legislators and treasuries that crafted UP laws couldn’t have possibly envisioned virtual currencies or related concepts like blockchain.
Fast forward 70 years though, and you can now exchange dollars for Bitcoin at gas stations and use it to buy a bag of tools or a cart full of produce. Cryptocurrencies, blockchain and Bitcoin ATMs are officially part of our economic fabric.
But many states are still operating on outdated UP laws that don’t recognize virtual currency characteristics as an asset. At the same time, newly signed UP laws that attempt to address virtual currencies actually make compliance in those states more difficult.
As a result, the burden of maintaining UP compliance across multiple states falls on the virtual currency holders themselves, and facing these regulations alone is a major challenge for three key reasons.
First, property value often determines due diligence for UP. A key trait of cryptocurrencies is their volatility as an asset— in one 24-hour period in April, Bitcoin dropped in value by about $7,000.
That’s not a good characteristic when the value of UP determines the degree of due diligence — a state’s required amount of outreach to owners about their UP. For instance, Massachusetts requires that holders must send due diligence mailings to locate owners for any property with a value of over $100. These mailings must be sent every reporting cycle and at least 60 days before a UP report is filed. But because virtual currency has no set value, its value could fluctuate (wildly, even) in a way that affects compliance.
Meanwhile, thresholds for due diligence vary by state. Compared to Massachusetts, Idaho’s threshold for UP due diligence is $50, and it requires due diligence letters each reporting cycle no more than 120 days before the filing due date. The variety of due diligence requirements and thresholds depending on property value can make compliance a headache for virtual currency holders to figure out.
Second, some states don’t accept cryptocurrencies as UP in their native form. Illinois for instance, requires cryptocurrencies to be liquidated before they can be reported and remitted to the state. Liquidating cryptocurrencies makes them lose their value as an investment, which is detrimental to the cryptocurrency owner.
Delaware and Kentucky’s UP laws are even harsher toward cryptocurrency holders and owners. In addition to requiring liquidation, these states also specify that the owner has no recourse against the state to recover any gains in value that would have occurred if the cryptocurrency hadn’t been liquified.
On the opposite end of the spectrum, New York and Washington, D.C. have both introduced bills that don’t require holders to liquidate cryptocurrencies before reporting them to the state. This would benefit cryptocurrency holders if passed, but it doesn’t make navigating state UP laws any easier.
Last but not least, changing laws are making it tough to comply with new legislation before upcoming deadlines. As virtual currency’s place in society evolves day-by-day, states are having to actively adapt their laws to meet these changes.
As of May, 31 states had pending virtual currency-related legislation in the 2021 legislative session. UP wasn’t spared from these legislative acts—the governors of Illinois, Nevada and North Dakota each have signed acts that relate to unclaimed property and cryptocurrency. Meanwhile, Indiana and Kentucky each repealed UP acts and replaced them with revised UP acts that include provisions about virtual currency. And most recently, states like New York, Ohio and Wisconsin, as well as Washington, D.C., introduced laws in May and June that define virtual currency for the first time.
In trying to bring legislation in line with current technology, states are putting pressure on holders to comply with rules they may not know or understand. Keeping track of one state’s laws is tough enough. But operating in multiple states compounds the problem for virtual currency holders, especially when the company’s core competency is virtual currency trading, not compliance.
Statutory compliance solutions within reach
The 2016 Revised Uniform Unclaimed Property Act (RUUPA), however, offers some order to the many UP and cryptocurrency laws. Developed by the nonprofit Uniform Law Commission, RUUPA specifically defines virtual currency as a property that is subject to UP laws. RUUPA essentially guides states’ policies by codifying the definition of cryptocurrency.
So far, 12 states have enacted RUUPA or some form of it, with varying attention given to virtual currency as a defined property type. The challenge in most cases is a lack of specific process guidance on dormancy, due diligence and remittance of virtual currency.
Simply put, if companies provide any type of digital asset custody services, they have a direct legal obligation to the owner. Faced with UP laws that demand virtual currency liquidation prior to remitting, as well as arbitrary due diligence statutes, holders owe it to their owners to do all they can to maintain compliance while protecting the investment. Navigating the virtual currency/UP compliance path as a virtual currency holder alone is a daunting task. To help holders better understand the rules they must follow while still being able to focus on their core competencies, there are a range of options for handling compliance, from hiring someone internally, to working with a consultant, to partnering with organizations that specialize in compliance or leveraging software tools that streamline the process.