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Bitcoin… What Is It Exactly?

A California Pawnbroker may buy, sell, and enter into pawn on any “tangible personal property”. (See Cal. Bus. & Prof. Code § 21626.) The term “tangible personal property” is defined by California Business & Professions Code § 21627 as “all secondhand tangible personal property that bears a serial number or personalized initials or inscription or that, at the time it is acquired by the secondhand dealer, bears evidence of having had a serial number or personalized initials or inscription.” (Cal. Bus. & Prof. Code § 21627.)

What is bitcoin? Good question. Bitcoin is a digital currency without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.

A bitcoin blockchain is a public ledger that records bitcoin transactions. Each block contains a hash of the previous block up to the genesis block of the chain. In the blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin address requires creating a random valid private key and computing the corresponding bitcoin address.

A bitcoin has two keys – a private key and a public key. The private key is how the owner access the bitcoin funds. The public key is what is provided to send or receive bitcoin. The transaction cannot be completed unless the private key is also provided. Due to the number of possibilities, apparently figuring out the key code is nearly impossible.

Due to the meteoric rise in popularity and demand for bitcoin, complementary platforms called “wallets” were created to ease the holding, investing, and convertibility of bitcoin (i.e., using bitcoin to purchase, invest, lend against). While this is a platform to ease the conversion or magnify the use of bitcoin, it does not separate the bitcoin from the blockchain. Instead, it creates a master-key for the bitcoin.

The wallet can be downloaded to a computer hard drive, be online, or a physical (paper) wallet, or a hardware wallet. The hardware wallets look like a thumb drive.

Tangible or intangible?

Bitcoin is an intangible asset. Every business that accepts bitcoin as a form of payment must classify for accounting purposes. Given the nature of bitcoin (and cryptocurrencies in general), accountants for major corporations across the U.S. have classified bitcoin, and its equivalents, as an “intangible asset with indefinite life.”¹

This makes sense even from a California Pawnbroker’s perspective. While it is true the bitcoin has something akin to a “serial number” and sometimes even a hardware or paper wallet, those are more like passcodes to access something that has no physical presence.

Does California Restrict Pawn Transactions to Tangible Personal Property Only?

Unfortunately, the answer to this question is unclear. A person or entity may own both tangible real and personal property as well as intangible property. The California Business & Profession Code § 21625, et seq. discusses regulations pertaining to “tangible personal property” which were impliedly mean pawnbrokers are limited to only tangible personal property.

On the other hand, the idea that the California legislature only intended pawnbrokers to “pawn” on “tangible personal property” is weakened by the fact that certain “tangible” items are excluded from “tangible personal property” (e.g., “coins, monetized bullion, or commercial grade ingots, etc. see Cal. Bus. & Prof. Code § 21627(d).) Since coins, for example, are not “tangible personal property” under the code, what are they? Intangible? Likely not, just outside of the B&P framework.

Further complicating this issue is when we examine the California Financial Code § 21000 which defines a pawnbroker as “[e]very person engaged in the business of receiving goods…” (See also Cal. Fin. Code §21002.) This code sections takes a broader scope interpretation of “goods” not limited to “tangible.”
In short, this is a complicated issue. Some states allow pawnbrokers to pawn on cryptocurrency. California does not expressly address this issue. The safest course would be to assume it is not allowed unless expressly allowed.

Even if you could, should you?

Assuming for a moment you are a pawnbroker that lives in a state (not California) which has clearly authorized you to pawn on bitcoin as if it were any other piece of personal property, the question is – should you? Obviously, under this hypothetical, this is squarely a business judgment issue. But here are some matters to ask yourself:

  • How do you validate whether this is a legitimate transaction or a scam?
  • How do you take possession of the bitcoin?
  • How do you value the transaction? More than any other “thing” traded in the stock market, bitcoin has some wild up and down swings in value.
  • How will this be regulated?

¹See e.g., https://www.forbes.com/sites/shehanchandrasekera/2020/05/21/how-are-cryptocurrencies-classified-in-gaap-financials/?sh=72a2ae2365b2; https://www.bdo.com/insights/assurance/financial-reporting/cryptocurrency-the-top-things-you-need-to-know; https://deloitte.wsj.com/riskandcompliance/2021/03/18/bitcoin-holdings-why-tax-and-accounting-matter/

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