Crypto And The Reach Of Unclaimed Property Laws: Is New Illinois Legislation The Future?

• Published date: 04 October 2021
• Subject Matter: Corporate/Commercial Law, Technology, Securities, Fin Tech
• Law Firm: Jones Day
• Author: Mr Mark W. Rasmussen, Jennifer C. Waryjas and Michael Wynne

Cryptocurrencies are quickly becoming part of the financial mainstream, with institutional and retail investors alike adding them to their portfolios in record numbers. State legislatures are trying to keep up with this growth by modifying abandoned and unclaimed property laws. Illinois Senate Bill 338, signed into law by Governor J.B. Pritzker (D) as P.A. 102-288 on August 6, 2021, exemplifies this trend. As amended by P.A. 102-288, the Illinois Revised Uniform Unclaimed Property Act will require holders to escheat dormant crypto and liquidate crypto into U.S. dollars in order to escheat. This both represents an administrative burden for crypto custodians and may be unwelcome by long-term crypto investors.

DEFINING AND UNDERSTANDING VIRTUAL CURRENCY

In 2017, Illinois adopted the definition of virtual currency that was developed for the Illinois Revised Uniform Unclaimed Property Act ("RUUPA" or "Act," 765 ILCS 1026/15-101 et seq.):

a digital representation of value used as a medium of exchange, unit of account, or store of value, that does not have legal tender status recognized by the United States. The term does not include (A) the software or protocols governing the transfer of the digital representation of value; (B) game-related digital content; or (C) a loyalty card [or gift card]. 765 ILCS 1026/15-102(32).

The amended Act expands that definition to include "any type of digital unit, including cryptocurrency, used as a medium of exchange, unit of account, or a form of digitally stored value, which does not have legal tender status recognized by the United States."

Unlike many other financial assets, cryptocurrencies and other blockchain-based digital assets were designed so they could be held directly by the owner, without a central repository. Many people hold custody of their cryptocurrencies in this way, using wallet software that they alone control. This can be technologically challenging for some because it requires them to manage unwieldly hexadecimal codes known as private keys, and it places a burden on them to not lose those private keys. Because of these difficulties, many people prefer to have a third party hold custody of their cryptocurrency. Numerous hosted wallet service providers offer custodial services.

DORMANCY HOLDERS AND THE ABILITY TO ESCHEAT

One core component of abandoned and unclaimed property ("AUP") laws is the tracking period for determining when a property has become "dormant." Most common property types become dormant within one to five years. Once property becomes dormant, the holder of the property must contact owners to remind them that a debt is owed to them. The amended Illinois Act establishes a five-year dormancy period for virtual currency based on the last contact with...