Story by: Jess Klein
Earlier this month, while the crypto community was busy freaking outover the Senate Banking Committee hearings over Facebook’s recently announced Libra cryptocurrency, its members overlooked a sneaky little news item about another centralized body seeking to bend the cryptocurrency space to its whims — that centralized body being “the government.” On July 16, the news broke that New York was the latest state to consider updating its escheatment policies, which stipulate the processes through which governments can obtain unclaimed property, in ways that would allow these states to seize cryptocurrency “abandoned” by its owners.
So far, only five states have added “virtual currency” to their escheatment laws — Illinois, Kentucky, Tennessee, Utah, and Colorado. New York’s recently proposed bill would be the sixth.
Given that many in the libertarian-leaning crypto community favor Bitcoin precisely because it was specifically designed to operate out of state control, you’d think this piece of news would have incited fear, fury, and the donning of some tinfoil hats to block out government brain-rays trying to get to the private keys of their crypto wallets. After all, this policy could be read as the government asserting all cryptocurrency held by U.S. citizens ultimately belongs to it.
Instead, the response to this news reflects a maturing of the cryptocurrency space. The people that comprise it realize how much the U.S. government has already stepped in when it comes to regulating decentralized currencies, and they grasp how little expanded policies will be able to touch their precious digital coins.
“This is not an issue if you hold your own coins, clearly, as there’s no way for anyone to seize coins without the private key, at least on Bitcoin,” crypto evangelist Jimmy Song told me over email. A diehard Bitcoin maximalist (as in, a member of the crypto community who believes Bitcoin is the only viable cryptocurrency), Song has been known to storm out of a public debate if his opponent too brutally challenges his beloved BTC. To him, escheatment is no threat (at least when it comes to Bitcoin).
But before we hear more from crypto holders, there’s a lot to unpack here. First, there are the practical questions: How can states claim assets, especially ones that aren’t even physical? Does a state’s ability to seize cryptocurrency under any circumstances fundamentally negate the draw of money that was designed to be stateless? And, most importantly: What is escheatment, a term that sounds like it belongs in a Charles Dickens novel, doing bouncing around our state legislatures?
Let’s start with question three. Escheatment as a term goes back to feudal England, where a monarch owned all the land in his kingdom and would essentially rent it out to tenants-in-chief, who would “hold” the land but not own it. These landholders would be able to bequeath the land on which they lived to their heirs, meaning they had ownership-like rights, even though the land ultimately belonged to the higher ruling power. But if the tenant-in-chief made the foolish mistake of, say, committing treason, they’d lose all their land privileges. The land they held would go back to the monarch, with no chance of the tenant’s heirs ever gaining possession.
Escheatment law has long since been adapted to modern day property ownership. In the U.S., it applies to assets like stocks and bonds, wages, or insurance payments issued by payment processors. This is the law that lets the government take the $18 in Krispy Kreme stock your Aunt Doris gave you for your Bat Mitzvah, but you forgot about when you moved the next year while the statements continued to get sent to (and bounce back from) your old address.
Most states have escheatment laws that asset-holding and payment-granting financial institutions must follow. These institutions have to “basically pay attention to the things that they’re holding for people,” says James Foust, a senior research fellow at Coin Center, a Washington, D.C.-based firm that aims to increase the public’s understanding of cryptocurrency and decentralized technologies. If a customer fails to contact a financial institution holding their assets for a set period of time, usually between one and five years, “there’s an assumption that property has been abandoned.” The institution must alert state government and hand over the funds.
Ultimately, the onus is on the financial institutions to do this. A centralized exchange like massively popular Coinbase would be obligated to hand over the Bitcoin sitting in a customer’s digital wallet if that customer failed to log into their account or otherwise touch base with the exchange in, say, a five-year period. But if someone keeps their Bitcoin in a private wallet, which is an app or physical device that’s only accessible to the owner by way of a string of numbers and letters known as a digital key, the government wouldn’t be able to touch it. (It’s worth noting that those who embrace cryptocurrency because it’s decentralized wouldn’t keep their crypto with a bank-like institution such as Coinbase to begin with, which helps explain Song’s confidence that this won’t be an issue… for people like him.)
James Foust of Coin Center gives the example of a bank sending checking account statements that keep bouncing back in the mail, because the person who opened the account changed their address and stopped logging into their account online. After a certain number of years, the bank is obligated to turn those funds over to the state’s department of revenue. If the account holder resurfaces to claim the money, the state can return it. The same would go for cryptocurrency abandoned in Coinbase for five years in Illinois — the exchange would have to ultimately hand it over to the state.
This time lapse doesn’t affect the value of money sitting in a checking account, but it does make a difference if you’re reclaiming an abandoned asset with regularly shifting value like crypto. When a state claims an abandoned stock under escheatment laws, says Foust, the government will auction it on the market within a year or so. If the original owner of that stock shows up to reclaim it, they won’t get their stock back. They’ll get whatever the value it sold for when the government decided to auction it off.
“For example, if you bought [one] Bitcoin in 2012, and now you are trying to get it back, you wouldn’t want what [the government] sold it for 2014,” says Foust, referring to an era in which one Bitcoin was worth around $500. “You’d want $10,000,” which was Bitcoin’s price at the time Foust and I spoke.
The true devotees of crypto, however, love it for its independence from the state more than its investment value. These are the people who post libertarian screeds from their Twitter accounts, or people who live as off-the-grid as possible in part because they don’t like the government telling them what to do with their money.
Trent Larson identifies as an anarchist and a Mormon and is the principal software developer for Medici Land Governance, which uses blockchain to track land ownership. (The last time I saw him, he was participating in a New York Blockchain Week panel while shoeless.) He isn’t concerned about states including cryptocurrency in their escheatment policies because it’s a drop in the bucket compared to “all the other regulations” the government has already imposed on cryptocurrency holders.
In June, the heavyweight crypto exchange Binance blocked U.S. customers from trading on its platform, and Larson says his account was suspended from the Sweden-based trading platform Nova Exchange because of his location in the United States. Multiple crypto companies exited New York State in 2015because of what their CEOs called “regulatory overreach” inherent in acquiring a BitLicense, which would allow them to operate in the state. (Many cryptocurrencies, including Facebook’s in-the-works Libra coin, establish themselves as non-profit foundations in nations such as Switzerland and Estonia.) But at the same time, the U.S. may not be tech-savvy enough to make good on regulatory threats.
While the federal government owns some cryptocurrency and can claim the asset when it’s seized in, say, drug raids, says Foust, “I don’t know how many, if any, states have built out a similar capacity. But they may be interested in doing so if they think there is a significant amount of potentially abandoned cryptocurrency property in their state.”
Plus, escheatment only applies to assets held with third-party custodians, such as centralized cryptocurrency exchanges like Coinbase. Song, for one, is convinced that third-party custodians will “heavily resist” turning over customers’ unclaimed assets. “Exchanges, etc. will try very hard to keep the coins on behalf of their customers and will try to delay any seizure as much as possible,” Song claimed. Given that Coinbase has already succumbed to government pressure by submitting user data to the IRS, that may be wishful thinking on his part.
Combine Song’s optimistic position with the conviction of true Bitcoin believers, and you can wind up with an entirely, shall we say, optimistic outlook on the future of cryptocurrency in the U.S.
“States are always looking for ways to raise money,” Max Keiser, host of financial commentary show “Keiser Report” told me via encrypted messaging app Telegram (he prefers for his communications to remain as off-the-grid as possible as he travels around the country, tearing up U.S. dollars). “What’s new with Bitcoin is that individuals can opt out of the state.”
“I envision a time when states come to the Bitcoin community for a bailout,” he added. “We might oblige, but obviously, we’d have to be able to write the laws in exchange. He who has the Bitcoins, makes the laws.”
Keiser seems to almost envision a post-apocalyptic feudalism run by crypto lords, where holding Bitcoin is the new version of land ownership and those who’ve failed to buy in are the peasants. Where the Winklevoss twins, with their hoards of Bitcoin, finally rule over former Facebook rival Mark Zuckerberg, whose Libra remains stuck in regulatory limbo. Where preppers with bomb shelters full of canned peas they bought with Bitcoin will let “no-coiners” partake only if they agree to till the digital fields by setting up cryptocurrency mining rigs for the benefit of their digitally savvy overlord. Where the only people who own anything own strings of computer code that gives them the financial power to dictate the provenance of all earthly assets. (Despite the total lack of government or infrastructure in such a world, it would, evidently, still have electricity.)
Escheatment laws, in this possible world, would not come for your Bitcoin. Your Bitcoin would determine whose property you get to claim.
As Keiser sees it, we’re already well on our way there. The recent Facebook/Libra hearings, he said, “opened up [a path] for Bitcoin to slice right through any governmental attempt to stop it.”
It’s true that after the hearing, the Republican Congressman Patrick McHenry did say that there is “no capacity to kill Bitcoin.” Given that the cryptocurrency isn’t controlled by any single entity, not even the government can push a button to shut it down, or even effectively make rules about its distribution (except for forcing holders to pay taxes, in U.S. dollars, on crypto-related gains). This acknowledgment of how Bitcoin works got those in the crypto community excited — just as a small child gets excited when their parents learn the rules to a complex game they’ve invented.
But what these crypto holders may not realize is that once the parents know the rules of the game, they have even more ability to ruin it.by