Looking at Unclaimed Property Issues in Cryptocurrency

Cryptocurrency continues to take hold as an international social, economic, and cultural phenomenon. Like with any new and emerging technology, the speed at which users have adopted cryptocurrency has drastically outpaced the speed of state and federal agencies in studying, much less regulating, the technology. But that is starting to change, as there are dozens of cryptocurrency-related bills pending in state legislatures and Congress, an executive proposal, and of course the numerous crypto laws that have been enacted within the last couple of years.

Among the various pieces of recent and pending state legislation are bills designed to subject cryptocurrency to state unclaimed property laws. All 50 states—plus the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and Guam—have adopted custodial unclaimed property, or escheat, laws. These laws require holders of unclaimed property to report and remit such property to the state once it has become presumed abandoned. After escheatment, the owner of the property can recover the funds directly from the state.

At a high level, unclaimed property represents an obligation by a holder to pay money to an owner on a liability. Unclaimed property laws typically apply to items such as payroll (e.g., the employee did not cash their paycheck), accounts receivable credit balances (e.g., the customer double paid a bill and was not refunded), accounts payable (e.g., the holder sent a check to a vendor, but the vendor did not cash it), and funds held in bank accounts and other investment accounts. States also expressly require the escheat of certain non-cash obligations such as shares of stock, which the state will liquidate, and a handful of states require the escheat of money equal to the value of unused gift cards and similar instruments. State unclaimed property agencies actively enforce these laws through audits conducted by third-party audit firms, typically involving multiple states. Holders can be subject to penalties and/or interest if the auditor finds that the holder has not been fulfilling its obligations to report and remit property to the state in a timely manner.

The Uniform Law Commission in 2016 promulgated the Revised Uniform Unclaimed Property Act, or RUUPA, which replaced the Uniform Unclaimed Property Act, adopted in 1995. RUUPA was an attempt to modernize aspects of the unclaimed property laws given the advancements in technology and property types during the intervening decades. Cryptocurrency is one such area that RUUPA addressed. In particular, RUUPA includes virtual currency within the definition of property subject to escheat and defines the term “virtual currency.” However, RUUPA does not establish the applicable protocol for escheating virtual currency, including the dormancy standards that apply for determining whether virtual currency is escheatable and how, exactly, holders are to remit the property to states.

As of today, 12 states have adopted all or substantially all of RUUPA. These states have taken different approaches to the treatment of virtual currency. On the one hand, Illinois has adopted a specific dormancy standard for virtual currency—five years after the last indication of interest in the property by the owner—and Illinois expressly requires holders to liquidate virtual currency before reporting and remitting it to the state. The statute provides that owners shall not have recourse against the holder or the state as a result of any loss in value that occurs post-liquidation. Kentucky similarly requires liquidation and includes a no-recourse provision, and Wisconsin’s statute indicates that liquidation is required. (Without further details, our firm has been informed by the Wisconsin Department of Revenue that formal guidance is forthcoming, followed by a possible statutory amendment during the next legislative session.) On the other hand, the other states that have adopted RUUPA have either taken the standard approach or not addressed cryptocurrency at all—e.g., Maine.

In addition, a number of other states that have not adopted RUUPA have enacted or are considering enacting provisions addressing cryptocurrency, including Delaware, Nevada, and West Virginia. Like Illinois and Kentucky, Delaware’s law requires holders of unclaimed crypto to liquidate and remit the proceeds to the state, and there is a no-recourse provision.

In light of these laws, companies operating within the cryptocurrency space will need to determine whether they may be a “holder” of unclaimed cryptocurrency and hence required to escheat to the state after the dormancy period has expired. However, the answers to crucial questions are not always clear despite the existence of statutory provisions. For example:

• Is the fact that the owner of the cryptocurrency has not interacted with their crypto and/or the company sufficient to indicate that the crypto should be escheatable?
• Except in the states that expressly require liquidation, how should holders remit crypto to the states?
• Will states without a liquidation provision be willing and able to accept the crypto in kind?
• Will states indemnify holders for escheating an owner’s crypto to the extent the owner asserts a claim for loss in value post-liquidation, and does the answer depend on whether the holder or the state is the party that effectuates the liquidation?

These questions are magnified when companies are faced with claims for the escheat of cryptocurrency by states without express provisions. Indeed, an increasing number of state agencies and third-party auditors have indicated that cryptocurrency is escheatable as an administrative matter, notwithstanding the lack of a specific law in the state’s unclaimed property code or duly promulgated regulation. These states have generally asserted that crypto is escheatable under the state’s so-called catch-all provision, which applies to intangible property that is not otherwise covered by the law. Under a typical catch-all provision, property is escheatable to the extent that it remains unclaimed for the dormancy period after being payable or distributable to the owner. This type of provision raises obvious interpretational questions for crypto holders, such as when, if ever, crypto can be considered payable or distributable.

Related to this question, courts have held that non-cash property types, such as gift cards or merchandise credits, are not escheatable under a state’s catch-all provision and must be addressed in a specific statute. Thus, by proceeding with escheat claims in the absence of a statutory provision, states impose unnecessary risk on holders and owners of crypto.

In sum, companies operating in the cryptocurrency space will need to carefully consider these questions and monitor the inevitable legislative efforts of states to amend (or interpret) their unclaimed property laws to require the escheat of unclaimed crypto.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. 

Author Information

Michael Giovannini is a partner with Alston & Bird’s Unclaimed Property and State & Local Tax teams.

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