Jill H. Fertel, a partner in Cipriani & Werner’s Cybersecurity Litigation Practice, secured an historic cryptocurrency decision in Ali Sedaghatpour v. Lemonade Insurance Company, 1:22-cv-00355 in the Eastern District of Virginia.
At issue was the plaintiff’s novel claim that his cryptocurrency loss was insured by his homeowner’s insurance policy. After succumbing to a cryptocurrency “rug-pull” scam, the plaintiff experienced a loss of over $170,000 worth of cryptocurrency. He quickly filed an unsuccessful claim under his homeowner’s insurance policy. A lawsuit for breach of contract followed.
Cryptocurrency, or virtual currency, is a digital representation of value created to serve as a means of exchange. See Retail Commodity Transactions Involving Certain Digital Assets (Final Interpretive Guidance), 85 FR 37734 (June 24, 2020).1 Cryptocurrency purports to serve as “an electronic payment system based on cryptographic proof instead of trust, allowing two willing parties to transact directly without the need for a trusted third party." Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (October 31, 2008).2 At its inception, cryptocurrency was hailed as a democratization of capitol, a currency notably independent of central authority and government credit without need of supervision or any law enforcement apparatus. See Michael Abramowicz, Cryptocurrency-Based Law, Arizona Law Revue, 58 AZLR 359, 361 (2016).
Notably, despite its nomenclature or the frequent use of the word “currency” as a descriptor, cryptocurrency is not classified as currency in the United States. In fact, for purposes of taxes, cryptocurrency is classified as property. Relying on this classification, a trial court in Ohio issued a 2018 decision finding that cryptocurrency’s classification as “property” warranted its coverage under a homeowner’s insurance policy. See Kimmelman v. Wayne Ins. Group., Case No. 18-cv-001041, Doc. 0E337-P71 (Ohio Ct. Comm. Pl., Civ. Div. Sept. 25, 2018). This was the driving force behind Sedaghatpour.
Despite the plaintiff’s unsuccessful arguments to the contrary, cryptocurrency is not tangible property. Property coverage in homeowner’s insurance is designed to insure physical property - one’s home and contents, one’s personal possessions. Cryptocurrency, by its very nature, is simply not tangible physical property. It is not an object physically stored in a given location. Digital data is not physical matter; rather, it impacts and interacts with physical matter. Cryptocurrency can be accessed or traded from any device, anywhere in the world. This is a product of its intangibility.
The plaintiff further argued that terms such as “physical loss” and “physical property” were hopelessly ambiguous, affording the plaintiff the benefit of reading the policy in his favor and awarding coverage. Judge T.S. Ellis, approaching this issue as one of first impression under Virginia law, adopted Attorney Fertel’s arguments in a written opinion. This decision will contribute to the rapidly developing landscape of cryptocurrency litigation.
Issues of cryptocurrency and cybersecurity are complex and forever developing. If you are facing a dispute involving cryptocurrency or cybersecurity, the Cybersecurity Litigation Practice at Cipriani & Werner has the expertise you need to navigate these intricate, developing legal issues. If you have any questions about this case, please contact Jill Fertel, Esq. at email@example.com or (610) 567-0700.
1 Available at https://www.cftc.gov/sites/default/files/2020/06/2020-11827a.pdf.
2 Available at https://bitcoin.org/bitcoin.pdf.