Bitcoin is not money

Bitcoin, Monero, Ethereum, Litecoin, Ripple (XRP), Bitcoin Cash, Stellar, Dash, Tron — these are just a few of the digital assets, or cryptocurrencies, available today and the ones noted most in the news.

Bitcoins are digital coins that are stored, sent, and received to make purchases, initiate payments or invest. (Here, “bitcoin” encompasses all forms of cryptocurrency.)

In mid-December 2017, there were reportedly more than 1,300 types of digital assets with a collective market cap of $450 billion. As of April 3, 2018, Investing.com shows there are 1,700 digital currencies with a total market cap of $278.6 billion.

According to Coindesk, there are four types of bitcoin users and the appeal differs by user type:

• For computer programmers, the rewards for mining
• For speculators, the volatility
• For libertarians, the perceived lack of regulation
• For criminals, the perceived anonymity

More businesses are looking into using cryptocurrencies in their payment transactions, including insurance professionals. The following is an overview of key issues and what to watch out for.

Wallet systems

Bitcoin owners use several types of wallet systems to send, receive and store their bitcoins. The wallets vary in features as well as the devices on which they are used.

Cold Wallets and Hot Wallets: All wallet systems are classified as either hot or cold. When it’s connected to the internet, or online, a wallet is said to be “hot” and when disconnected, or offline, it’s “cold.” Cold is considered the most secure, thus recommended for storing large amounts of bitcoins. “Hot” is suitable for frequently accessed funds. Bitcoin owners typically use cold storage for long-term holdings and a hot wallet for regular use.

Desktop Wallets: Desktop wallets are designed to be downloaded for use on laptops and personal computers. They’re easy to access even when the computer isn’t connected to the internet. Some widely known desktop wallets include Armory, Multibit, mSIGNA and Hive.

Mobile Wallets: These are bitcoin wallets tailored to a smartphone. Mycelium and Blockchain are both available on Android and iOS devices. For Blackberry phones, Bitcoin Wallet is one of the few available. Perhaps, one of the handiest features on mobile wallets, apart from enhanced security features, is the QR code capability, which enables instant payments.

Online Web Wallets: Third-party wallet service companies, for example, Coinbase and Circle, provide these via the Cloud. The wallets on these platforms are only accessible through an internet connection. Institutions trust Bitgo for its vault services that include a co-sign feature to lock accounts. There are also multi-signature wallets available, such as those from Coinkite that let the bitcoin owner decide the number of co-signatories on an account.

Physical Wallets: Digital bitcoins can be generated into a paper wallet via sites such Bitaddress.org or Blockchain.info. Once the bitcoins are generated, they can be printed on paper. Paper wallets, which can be held in a safety deposit box or other physical storage, can securely hold bitcoins in cold storage for a long time.

Hardware Wallets: These are termed wallets but they are actually physical vaults. They are small, portable devices used for storing, sending and receiving bitcoin transactions online. Their developers make use of top-grade cryptography and take them through continual scrutiny. Trezor and Ledger are two such companies.

SikurPhone: In addition, Sikur, a Brazilian cybersecurity firm, has just launched a smartphone with a built-in cryptocurrency wallet designed to keep digital coins safe. The SikurPhone stores the owner’s private keys in the Sikur cloud, so if the phone is lost the company can remotely wipe it and send a new phone, and the bitcoin funds will be safe.

Bitcoin Clients: These are bitcoin wallets used by the pioneers of bitcoin currency. Computers installed with these wallets form part of the core network and thus have access to all transactions on the blockchain of bitcoin transactions.

BitcoinQt (now Bitcoin Core) was the first bitcoin client wallet. Many believe it is what the creator of bitcoin, Satoshi Nakamoto, used. Clients can download Bitcoin Core and play a role in the overall state of the network. Alternatively, some clients use Electrum, which is a lightweight encrypted wallet with richer features that is password-protected and does not need to be downloaded.

Cryptocurrencies are not insurable

Because bitcoins are cryptocurrencies, they are often mistakenly confused by insureds as a form of money and thus insurable. However, cryptocurrencies are not legal tender.

Cryptocurrency has no physical form, and it’s not backed by tangible assets. Cryptocurrency is unregulated, digital money, which is issued and usually controlled by its developers.

Simply put, cryptocurrency is lines of code that has monetary value that is used and accepted among the members of a specific virtual community.

Bitcoins are not legal tender, so they’re not insured or controlled by a central bank or other governmental authority, can’t always be exchanged for other commodities, and are subject to little or no regulation. Further, they can’t be converted to cash. Bitcoin can be exchanged for cash, however, and some prepaid debit cards may be purchased with bitcoins in certain transactions.

Cryptocurrency must be traded digitally, but it can be used to make donations, pay employees, buy or sell houses, buy or sell items, book a hotel room or buy tickets to an event — if the retailer or seller offers digital exchange of the currency.

The Internal Revenue Service treats cryptocurrency as property, so there may be capital gain implications to many transactions.

Recent court ruling

In a closely watched case, a Miami-Dade judge ruled that bitcoin is not money.

Defendant Michell Espinoza was on trial for illegally transmitting and laundering $1,500 worth of bitcoins to undercover agents who expressed the intention to use them to purchase stolen credit cards. Espinoza’s attorney argued that the charges should be dismissed because, under Florida state law, the cyber-currency could not be considered money.

After extended deliberation, Judge Teresa Mary Pooler agreed in a ruling issued in July 2016

“This court is not an expert in economics,” Pooler wrote in her ruling. “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 equivalent of money.” She then proceeded to dismiss all three counts against the defendant.

Agents and brokers should make their business clients who use or want to use bitcoins or other cryptocurrencies aware of these facts. Even though bitcoins may be considered valuable by their owners, they’re not money, and thus there is no insurance coverage available for these digital assets.

Karen L. Sorrell, CPCU (ksorrell@alm.com), is an editor with FC&S Online, the recognized authority on insurance coverage interpretation and analysis for the P&C industry.

See also:

The state of insurance technology in 2018

Agent Study 2018: What technology devices does your agency use