By: Mona Ibadi
Since its inception over ten years ago, Bitcoin has been the focus of countless investors across the world. The unique nature of Bitcoin is that it does not require an intermediary such as a financial institution. Instead, users can access, buy, and send currency on an individual basis. The desire to make transactions without the centralization of money through a bank partially stems from a distrust of such institutions and the need for peace of mind that you are the only one with access to your money. This cryptocurrency, created by Satoshi Nakamoto, a (presumed) pseudonymous person or persons, permits anyone to open a digital bank account through an IronKey hard drive. The structure of Bitcoin allows a user to create an address with an associated private key only known to that user. Bitcoin software is governed by an algorithm with specific, computerized cryptocurrency rules. The freedom this process creates has downsides, including increased criminal activity through the sale of illegal drugs, tax evasion, money laundering, and ransomware (where criminals steal computer files and force an exchange of Bitcoin to retrieve them). However, another shocking downside of the Bitcoin system is that users are forgetting their private, exclusive passwords to their anonymous accounts.
Individuals locked out of their Bitcoin wallet have ten attempts to accurately guess their password before losing access to their fortune forever. One Bitcoin owner denounces the concept of people being their own banks with singular access to money. Stefan Thomas made the news for having only two guesses left for his Bitcoin wallet valued at about $220 million. He cannot recover his password because it is only known to the owner of the wallet – this is one aspect that makes Bitcoin so favorable. Currently, about $140 billion worth of Bitcoin is lost due to forgotten passwords. This figure, compared to the entire global cryptocurrency market valued at $1.07 trillion, is cause for concern. Given this large quantity of unused and inaccessible currency, can we sustain a decentralized, individual-based blockchain system despite the carelessness of users?
Mike Novogratz, billionaire investor and former hedge fund manager, opines lost passwords occurred at the onset of Bitcoin’s creation, but are no longer a problem. He believes the high cost of Bitcoin today prevents negligence by investors and forces cautious measures to ensure the safety of potentially millions of dollars. The value of Bitcoin has risen exponentially since its emergence, and people now recognize it as a legitimate opportunity to gain significant returns. Indeed, Bitcoin rose from 20 cents to $34,000-$40,000 – making many early investors very wealthy.
Contrarily, Wallet Recovery Services, a firm that helps find lost digital keys, reports about 70 requests a day from investors who are locked out of their digital wallets, about three times more than the previous month. Those desperate to access their fortunes are turning to crypto-hunters in the form of hypnotists, decoders, hackers, and data recovery services. One company, WeRecoverData, claims a 95% success rate using technology from a text file and recovering the password from the file’s raw data.
Whether the “lost password” phenomenon continues is up for debate, but the loss of millions of units of Bitcoin from circulation is certain. The effect of this lost currency takes a few forms. The largest effect is classic economics: supply and demand. Out of 21 million available Bitcoin, 3.8 million is already lost. Less Bitcoin available in the market simply increases the worth of each remaining Bitcoin.
Moreover, state lawmakers are developing an interest in such suspended, unmoving currency with an eye towards amending unclaimed property laws. In fact, the 2016 Revised Uniform Unclaimed Property Act (“RUUPA”) added virtual currency as a property type. States such as Illinois, Colorado, Tennessee, Kentucky, and Utah have already adopted versions of the RUUPA that cover cryptocurrency in its definitions of property. These regulations – escheat laws – require unclaimed or abandoned cryptocurrency to be reported to the state by the holder. Recently, New York began considering legislation that would permit the state to claim dormant unclaimed property – “abandoned” Bitcoin in this case.
However, experts speculate that cryptocurrency exchange holders and online wallet providers with no ability to transfer the property to the state would not be subject to these reporting laws. Depending on state law, certain property is presumed abandoned after a long period of inactivity. Such escheat laws vary significantly across states in regards to what defines a “holder,” how the state will identify and accumulate abandoned cryptocurrency, and the rights of the original owner of abandoned cryptocurrency.
While states do not aggressively audit or enforce reporting of unclaimed cryptocurrencies, virtual currency is gaining popularity and states may, and certainly have the capability, to capitalize on it as a source of revenue. If states decide to develop an infrastructure to locate, classify, and ultimately profit on lost Bitcoin, investors must be aware of the potential infringement into their property rights – even if that property is unattainable.
Mona is a second-year law student at Wake Forest University School of Law. She holds a Bachelor of Arts degree in Political Science from Drew University. Upon graduation, she intends to practice transactional law in the realm of privacy and corporate law.