Cryptocurrencies in Public and Private Law 0198826389, 9780198826385

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Cryptocurrencies in Public and Private Law
 0198826389, 9780198826385

Table of contents :
Foreword • Richard Aikens
Table of Cases
Table of Legislation
Notes on Contributors
1. Cryptocurrencies: The Underlying Technology • Sarah Green
2. It's Virtually Money • David Fox
3. Cryptocurrencies in International and Public Law Conceptions of Money • Charles Proctor
4. Developing the Right Regulatory Regime for Cryptocurrencies and other Value Data • Corrine Zellweger-Gutknecht
5. Cryptocurrencies and the Conflict of Laws • Andew Dickinson
6. Cryptocurrencies in the Common Law of Property • Sarah Green
7. Cryptocurrencies as Property in Civilian and Mixed Legal Systems • Dann Carr
8. The Characterisation of Cryptocurrencies in East Asia • Kelvin Low and Wu Ying-Chieh
9. Bitcoin and Banking: Are there Lessons to Learn? • Chris Hare
10. Taxation of Cryptocurrencies • Anne Fairpo
11. Non-State Community Virtual Currencies • Benjamin Geva and Dorit Geva

Citation preview






Sarah Green Contributors Daniel Carr Andrew Dickinson Anne Fairpo Benjamin Geva Dorit Geva Christopher Hare Kelvin FK Low Charles Proctor Wu Ying-​C hieh Corinne Zellweger-​G utknecht



1 Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © The Contributors 2019 The moral rights of the authors have been asserted First Edition published in 2019 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Crown copyright material is reproduced under Class Licence Number C01P0000148 with the permission of OPSI and the Queen’s Printer for Scotland Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2018957217 ISBN 978–​0–​19–​882638–​5 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.



Money has been with us for a long time.1 However it was only in 1938 that the first full-​scale English law analysis of ‘money’ was published with FA Mann’s magisterial work The Legal Aspects of Money.2 Cryptocurrencies burst onto the public consciousness as late as 2009 when the programmer(s)3 Satoshi Nakamoto launched the technology that enabled the public to trade in ‘Bitcoins’, which remains the best known of the many thousands of alternative cryptocurrencies that are traded today. Happily we have not had to wait nearly so long to have a detailed guide to the legal aspects of cryptocurrencies with the publication of the present volume. What are cryptocurrencies? My working description is that they are digital or virtual assets that use high-​level cryptography through a decentralized system for trading purposes and to keep those assets secure. Cryptocurrencies are not organized by any nation State and they are largely outside state control for the present. They represent a revolutionary new way to create and guard an ‘asset’ and to make payments for other assets. The advocates of cryptocurrencies argue that they have emerged as a result of a growing distrust or cynicism in so-​called ‘trusted third party’ financial institutions, following the apparent inability of banks and even States worldwide to master the financial crisis of 2008. Financial institutions, thought to be sound and trustworthy, failed, or were only saved at a huge cost to tax payers. Many individuals lost personal assets during or after the crisis. Since then ‘centralized’ and so-​called ‘trusted’ third parties, whether banks, credit agencies, or social media networks or companies, have had millions of peoples’ personal data stolen from them by internet hackers. The use of cryptocurrencies, cutting out ‘the middleman’ and using high-​standard cryptography for security, is a reaction to all these events. They enable people to transfer assets directly between two people without any need for a ‘trusted’ third party like a bank. It is even argued that cryptocurrency technology enables those who have no access to banks of similar institutions to have financial freedom, so that cryptocurrencies enable everyone to ‘take back control’ of their money or assets.

1 ‘A feast is made for laughter and wine maketh merry:  but money answereth all things.’: Ecclesiastes, 10:19. 2 7th edition published in 2012. It is now edited by Dr Charles Proctor, one of the contributors to the present volume. 3 It is not known whether the ‘programmer’ was one person or a group of people.



Foreword It is estimated that the total value of all cryptocurrencies in the world today is in the region of US$350 billion, although this figure fluctuates rapidly. The daily sale and purchase of cryptocurrencies is about US$17 billion. They seem likely to be an increasingly important part of the worldwide financial scene, despite attempts by several States, including China, to ban or restrict their use. The huge growth in the use of cryptocurrencies requires lawyers to tackle the issues of how they fit into legal frameworks. Although there have been a large number of articles and reports about different legal issues thrown up by cryptocurrencies, this is the first volume that makes a national, international, and comparative law study of the many difficult legal challenges that cyrptocurrencies present. The most basic question for any system of law which encounters a cryptocurrency, whether it be municipal or international, or private or public law, is how a cryptocurrency to be characterized. Is it to be treated, for legal analysis, as being equivalent to ‘money’, or is it an ‘asset’, or what English law calls a ‘chose (or thing) in action’ or some other form of property? Depending on the answer to that question, issues about the nature of ownership, possession, and other possible legal (or equitable) rights in cryptocurrencies can then be analysed. Given that cryptocurrencies are virtual and that anyone anywhere in the world who has access to the necessary cryptographic keys and a computer can trade in them, it is obvious that cross-​border legal issues such as how to decide which courts have jurisdiction in any dispute and which is the applicable law will be of fundamental importance. Although the originators of cryptocurrencies and many of its users would like to imagine that they are outside national and international regulatory control and the criminal law, that cannot be so. So the way the regulatory and criminal law deals with them also needs attention. So do issues of whether or how cryptocurrencies and trading in them or with them might be taxed. On a more philosophical and sociological level it is also pertinent to enquire into whether, if cryptocurrencies are not state-​ backed currencies or assets, they fulfil some kind of ‘community currency’ role and if so, what are the legal consequences of that? The meteoric rise in the use of cryptocurrencies necessitates that all these difficult legal and sociological questions be urgently examined. This book does so. It is not confined to English law, nor even European legal systems, but considers the problems from the viewpoint of Asian law systems as well. The distinguished authors, all specialists in the topics they address in each of the ten substantive chapters, explain the problems and suggest solutions in a clear and concise way. For any lawyer, like me, who is having to grapple with the legal aspects of cryptocurrencies for the first time, this book is a godsend. And for those who are not tyros, the deep and careful analyses that are given in each chapter will provide answers to problems or leads to further study. This book is very timely and I warmly welcome it. Richard Aikens vi



The editors would like to express their thanks to Travers Smith Braithwaite for funding, and to St Hilda’s College, Oxford, for facilitating the workshop in July 2017, at which most of the papers published as chapters in this volume were presented and discussed. Thanks are also due to the University of Oxford Law Faculty and to Christopher Hare for their assistance with administering these funds. In addition, Serena Crawshay-​Williams provided sterling help with editing the manuscript before it was sent to the publisher. Finally, David and Sarah are both immensely grateful to Sir Richard Aikens for taking the time to write the foreword to this volume.





Table of Cases Table of Legislation Notes on Contributors

xvii xxv xxxiii

1. Cryptocurrencies: The Underlying Technology I. Introduction


II. Decentralization and Distributed Consensus


III. The Chapter Contributions to this Book


2. It’s Virtually Money I. Introduction

A. What are virtual currencies and why do they present such challenges to existing categories? B. Universal medium of exchange C. Unit of account D. Store of value E. A peculiarly private law concept of ‘money’ F. Consequences of a failure to recognize virtual currency as money 1. Barter rather than sale 2. Applicability of the bona fide purchaser for value defence

II. Conclusion

2.01 2.03 2.15 2.19 2.20 2.22 2.26 2.26 2.44 2.48

3. Cryptocurrencies in International and Public Law Conceptions of Money I. Introduction


II. Theories of Money


III. Nature of Cryptocurrencies


IV. International Law


V. Public Law


VI. Criminal Law

3.27 3.28 3.32 3.34

A. Theft and fraud B. Cryptocurrencies and money laundering C. Financial markets legislation



Contents VII. The Central Bank

3.44 3.46 3.55

VIII. Conclusions


A. Financial stability B. Monetary policy

4. Developing the Right Regulatory Regime for Cryptocurrencies and other Value Data I. Introduction

4.01 4.01 4.04 4.05

A. Scope B. Thesis C. Structure

II. Asset and Manifestation: Substance and Form of Monetary Value over the Course of Time

A. Banknotes 1. Redeemable banknotes 2. Irredeemable banknotes B. Central bank reserve balances 1. Initially: claims to payment of legal tender 2. Later: legal tender in the form of non-​convertible sight deposits (fiat money) C. Interim conclusion

III. Modes of Creation of Money and Their Effects on the Substance of an Asset

A. Temporary money: created on a temporary basis B. Outright money: created with no connected reversal event C. Helicopter money

IV. Types of Manifestation and Their Effects on Legal Title, Transfer, and Protection of Commercial Dealings

A. Manifestation by possession B. Manifestation by oral or written but uncertificated consent C. Manifestation by certificated security D. Manifestation by money E. Manifestation by intermediated security F. Manifestation by entry in a register kept by a trusted party

V. Conclusion: Manifestation of Value Data by Entry in a Register Kept by a Trusted Technology

A. Value data: the rivalrous and excludable B. Book entries secured by elliptic cryptography C. Legal consequences and recent legislative developments 1. Static dimension: legal title 2. Dynamic dimension: mode of transfer D. Closing remark


4.06 4.06 4.06 4.12 4.20 4.22 4.27 4.35 4.47 4.48 4.51 4.56 4.60 4.63 4.64 4.65 4.66 4.71 4.76 4.80 4.80 4.83 4.87 4.87 4.94 4.100


Contents 5. Cryptocurrencies and the Conflict of Laws I. Introduction

A. Virtual currencies and cryptocurrencies in outline B. The conflict of laws in outline C. Regulatory challenges for the conflict of laws

II. The Law Applicable to the Relationships between Participants within a Cryptocurrency System

A. Introduction B. Key features of the Bitcoin and Ripple cryptocurrency systems 1. Bitcoin 2. Ripple C. Conflict of laws characterization of the relationships between participants in cryptocurrency systems D. The law applicable to relationships between participants in cryptocurrency systems 1. Choice of the applicable law (Article 3) a) The Rome I Regulation: choice of national law b) Possible future alternatives to choice of national law 2. Law applicable in the absence of choice (Article 4) a) Temporal application of the Rome I Regulation b) Particular categories of contract (Article 4(1)) and characteristic performance (Article 4(2)) c) The closest connection test (Article 4(4)) d) Does a tenuous connection to the country of closest connection suffice? 3. Other issues E. Reflection

5.01 5.01 5.04 5.07 5.15 5.15 5.18 5.18 5.23 5.27 5.35 5.36 5.36 5.39 5.44 5.45 5.49 5.62 5.65 5.68 5.72

III. Cryptocurrencies as ‘Money’ in the Conflict of Laws

5.73 5.73 5.81 5.89

IV. Cryptocurrencies as ‘Property’ in the Conflict of Laws

5.93 5.93 5.96

A. Cryptocurrencies and the ‘lex monetae’ B. Illegality of transactions involving cryptocurrencies C. Judgments in a cryptocurrency

A. Introduction B. The proprietary character of cryptocurrencies C. The law applicable to assignments of claims under the Rome I Regulation D. Beyond legal rights: the law applicable outside the Rome I Regulation

V. Conclusions

5.103 5.106 5.121

6. Cryptocurrencies in the Common Law of Property I. Introduction

6.01 6.08

A. Approach and terminology



Contents II. A Crypto-​Coin as an Object of Property

A. Data strings recording transactions B. Fungibility, specificity, scarcity, and exclusion 1. Fungibility as an aim of cryptocurrency design 2. Fungibility and specificity in property law 3. Cryptocurrencies as either fungible or specific in law 4. Scarcity and exclusivity C. Crypto-​coins in the law of personal property 1. Choses in possession and choses in action 2. Intangible personal property other than choses in action 3. The current authorities

6.11 6.12 6.20 6.20 6.21 6.25 6.26 6.28 6.28 6.32 6.38

III. Rules of Title and Transfer

6.45 6.45 6.48 6.48 6.49 6.50 6.53 6.57

IV. Mixture, Following, and Tracing

6.67 6.67 6.69 6.74 6.75 6.76 6.78 6.79

A. General B. Derivative transfers of title 1. General 2. Legal title and the blockchain record 3. The blockchain record as presumptive evidence of title 4. Derivative transfers of title and tracing 5. Purchase for value in good faith A. Mixtures of cryptocurrencies 1. Mixing in practice B. Tracing and cryptocurrencies 1. Cryptocurrencies are traced not followed 2. The blockchain and traceability 3. Pseudonymity and tracing C. Attribution in cryptocurrency transactions 1. Attribution by the blockchain record or by an external transaction D. Tracing through mixtures 1. Balances and transactional outputs E. Cryptographic and legal rules for tracing through mixtures 1. The poison approach: a punitive causation rule 2. The haircut approach: proportionate division 3. The first-​in-​first-​out approach: Clayton’s Case 4. Variations from Clayton’s Case F. Notice in cryptocurrency payments

6.79 6.81 6.81 6.83 6.84 6.86 6.88 6.93 6.97

V. Remedies

6.101 6.102 6.105

VI. Conclusion


A. Common law remedies B. Equitable remedies

7. Cryptocurrencies as Property in Civilian and Mixed Legal Systems I. Introduction




Contents II. Cryptocurrencies as Res

7.05 7.06 7.09 7.15 7.16 7.18 7.21

III. Implications of Recognizing Cryptocurrencies as Res

7.23 7.24 7.26 7.26 7.29 7.31 7.32 7.34

A. What is a unit of cryptocurrency? B. Fixed lists or numerus clausus C. Possession? D. Specificity E. Publicity F. Analogical addendum A. ‘Ownership’? B. Vindication and possessory actions 1. Vindication 2. Possessory actions C. Acquisitive prescription and original acquisition 1. Mixtures, specification, and occupation 2. Acquisitive prescription

IV. Conclusion


8. The Characterization of Cryptocurrencies in East Asia I. Introduction


II. Cryptocurrencies: Reinventing Money?


III. The Roman-​Germanic Terrain of East Asian Civil Law


IV. The Unbearable Strictness of Owning?

8.10 8.10 8.12 8.16

V. Real Rights without Tangible Objects: Quasi-​Real Rights?

8.22 8.28 8.31 8.33

VI. Conclusion


VII. Postscript


A. A fundamental distinction: ownership and its objects B. The objects of ownership in East Asia C. Cryptocurrencies as objects of ownership?

A. Rei vindicatio B. Damages under tort law C. Electing between remedies

9. Cryptocurrencies and Banking Law: Are there Lessons to Learn? I. Introduction


II. The Cryptocurrency as a Store of Value

9.04 9.13 9.16 9.18 9.20

III. The Cryptocurrency as Payment


A. The duty to act within mandate B. The duty of secrecy C. The duty to act with reasonable skill and care D. Fiduciary duties



Contents IV. The Cryptocurrency as a Basis for Lending


V. Conclusion


10. Taxation of Cryptocurrencies I. Background

10.01 10.13 10.16

A. Direct taxes B. Value-​added taxes

II. International Approaches

A. Cryptocurrencies as property 1. United States 2. Australia: income tax and capital gains tax 3. Other countries a) Singapore b) France c) Israel d) The UK B. Cryptocurrencies as currency 1. Australia: goods and services tax—​supplies of cryptocurrencies 2. European VAT 3. UK VAT 4. UK corporation tax 5. UK business tax 6. Switzerland C. Other approaches

10.18 10.18 10.18 10.38 10.49 10.51 10.54 10.57 10.59 10.62 10.63 10.68 10.74 10.82 10.85 10.86 10.90

III. Consideration of the Tax Treatment of Cryptocurrencies

10.98 10.100 10.112

IV. Conclusions


A. Equality B. Efficiency, convenience, and certainty

11. Non-​State Community Virtual Currencies

I. Introduction: What Is Digital Community Currency?


II. Legal Tender and Money


III. Exchange, Community, and Money: Chicken and Egg?


IV. How Far Ought Acceptance Be Free? Lessons from History


V. Does Digitization Change the Meaning of a ‘Monetary’ Community?


VI. Privately Issued Money: Does Law Converge with Economic Sociology?




Contents VII. Is the Banknote Unique? The Reach of Its Legal History


VIII. Do Cryptocurrencies Constitute ‘Money’?


IX. Does Community Money Bring Net Benefits? A Brief Overview


X. Conclusion and Final Observations








UNITED KINGDOM A/​S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari, The Chikuma [1981] 1 WLR 314 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.25 Able UK Ltd v HMRC [2007] EWCA Civ 1207 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Actavis UK v Eli Lilly & Co [2015] EWCA Civ 555, [2016] 4 All ER 666 . . . . . . . . . . . . . . . 5.92 Akbar Khan v Attar Singh [1936] 2 All ER 545 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.09 Alldridge v Johnson (1857) 7 E & B 885, 119 ER 1476 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16 Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1984] AC 50 . . . . . . . . . . . . . . 5.41 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.29, 6.38, 6.39, 6.41, 6.103, 9.04, 9.09 Arnold v Britton [2015] UKSC 36, [2019] AC 1619 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.78 Ashton Investments Ltd v OJSC Russian Aluminium (Rusal) [2006] EWHC 2545 (Comm) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.08 Attorney-​General v Observer Ltd [1990] 1 AC 109 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16, 9.17 Attorney-​General for Hong Kong v Nai-​Keung [1987] 1 WLR 1339 . . . . . . 3.29, 3.30, 6.41, 9.09 Azam v Iqbal [2007] EWHC 2025 (Admin) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.09 BBMB Finance Ltd v Eda Holdings Ltd [1990] 1 WLR 409 . . . . . . . . . . . . . . . . . . . . . . . . . 6.104 BCCI (Overseas) Ltd v Akindele [2001] Ch 437 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.105 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 (HL) . . . . . . . . . . . . . . . . . . . . . . . 4.15 Banks v Whetson (1596) Cro Eliz 457 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.51 Barclays Bank v Quincecare [1992] 4 All ER 363 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.19 Barclays Bank v Taylor [1989] 1 WLR 1066 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16, 9.17 Barclays Bank plc v O’Brien [1994] 1 AC 180 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.98 Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22 . . . . . . . . 6.87, 6.89, 6.94 Black v Freeman & Co (1910) 12 CLR 105 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.49 Breyer Group Plc and Others v Department of Energy and Climate Change [2014] EWHC 2257 (QB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.29 British Red Cross Balkan Fund, Re [1914] 2 Ch 419 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.94 Burnett’s Trs v Grainger 2004 SC (HL) 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.09 Campanari v Woodburn (1854) 15 CB 400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457 . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 Celtic Extraction Ltd, Re [2001] Ch 475 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.41, 9.09 Charge Card Services Ltd, Re [1989] Ch 497 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.38, 9.25, 11.46 Clarke v Shee (1774) 1 Cowp 197 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.49, 6.59 Clayton’s Case, Devaynes v Noble (1816) 1 Mer 529 . . . . . . . . . . . . . . . . . . . . . . . 6.89, 6.91, 6.94 Coats Ltd v Inland Revenue Commissioners [1897] 1 QB 778, [1897] 2 QB 423 . . . . . . . . . . 2.35 Coco v AN Clark (Engineers) Ltd [1968] FSR 415 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 Coinstar Ltd v The Commissioners for Her Majesty’s Revenue and Customs [2016] UKFTT 0610 (TC), aff’d [2017] UKUT 256 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 Colonial Bank v Whinney (1885) LR 30 Ch 261, adopted (1886) LR 11 App Cas 426 (HL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.28, 6.32, 6.33, 6.38 Commerzbank AG v IMB Morgan [2004] EWHC 2771 (Ch); [2005] 2 All ER (Comm) 564 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.89



Table of Cases Commissioners of Taxation v English, Scottish and Australian Bank [1920] AC 683 . . . . . . . . 9.08 Coutts & Co v Stock [2000] 1 WLR 906 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11 Cowan de Groot Properties v Eagle Trust [1992] 4 All ER 700 . . . . . . . . . . . . . . . . . . . . . . . 6.100 Cox v Ergo Versicherung [2014] UKSC 22, [2014] AC 1379 . . . . . . . . . . . . . . . . . . . . . . . . . 5.92 Cretanor Maritime Co Ltd v Irish Marine Management Ltd [1978] 1 WLR 966 . . . . . . . . . . . 9.15 Customs & Excise Commissioners v Barclays Bank plc [2007] 1 AC 181 . . . . . . . . . . . . . . . . 9.15 Davies v Customs and Excise Commissioners [1975] 1 WLR 204 . . . . . . . . . . . . . . . . . . . . . . 2.37 Delbrueck & Co v Manufacturers Hanover Trust, 609 F 2d 1047 (2nd Cir, 1979) 1051 . . . . . 9.22 Despina R [1979] AC 685 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.90 Devaynes v Noble, Clayton’s Case (1816) 1 Mer 529 . . . . . . . . . . . . . . . . . . . . . . . 6.89, 6.91, 6.94 Diamantides v J P Morgan Chase Bank [2005] EWCA Civ 1612 . . . . . . . . . . . . . . . . . . . . . . 9.20 Diplock, Re [1948] Ch 465�����������������������������������������������������������������������������������������������������6.78 Douglas v Hello! Ltd (No 3) [2008] 1 AC 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 Drew v Nunn (1879) 4 QBD 661 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Earl of Haig’s Trustees v IR 1939 SC 676 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Egon Oldendorff v Libera Corp [1995] 2 Lloyd’s Rep 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.71 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 . . . . . . . . . . . . . . . . . . 6.49, 6.56, 6.106 Emperor of Austria v Day and Lossuth (1861) 3 De G F & J 217, 45 ER 861 . . . . . . . 3.18, 11.12 Environment Agency v Churngold Recycling [2014] EWCA Civ 909, [2015] Env LR 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.29 Foley v Hill (1848) HLC 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.15, 6.30, 7.13, 9.09, 9.10, 11.47 Footman Bower & Co Ltd, Re [1961] 1 Ch 443 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.90 Foskett v McKeown [2001] 1 AC 102 . . . . . . . . . . . . . . . 4.68, 6.75, 6.79, 6.85, 6.87, 6.105, 9.09 Foster v Driscoll [1920] 1 KB 470 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.82 Fourie v Le Roux [2007] 1 All ER 1087 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Government of India v Taylor [1955] AC 491 (HL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.18 Governor & Company of the Bank of Scotland v A Ltd [2001] 1 WLR 751 . . . . . . . . . 9.09, 9.20 Governor and Company of the Bank of Scotland v Alfred Truman [2005] EWHC 583 (QB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.22 Hallett’s Estate, Re (1880) 13 ChD 696 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.78, 6.95, 6.105 Halpern v Halpern [2007] EWCA Civ 291, [2008] QB 195 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.37 Hill & Al v Lewis (1693), 1 Salk 132, 91 ER 124 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.44 Hollicourt (Contracts) Ltd v Bank of Ireland [2001] 2 WLR 290 . . . . . . . . . . . . . . . . . 9.11, 9.15 Hopkins v Geary (1702), Hill Ann BR Guildhall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.44 Hunter v Moss [1993] 1 WLR 934, [1994] 1 WLR 452(CA) . . . . . . . . . . . . . . . . . . . . . . . . . 6.47 IBL Ltd v Coussens [1991] 2 All ER 133 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.104 IRC v Muller & Co’s Margarine Ltd [1901] AC 217 . . . . . . . . . . . . . . . . . . . . . . . . . 5.108, 5.110 Indian Oil Corporation Ltd v Greenstone Shipping SA (Panama) [1987] QB 345 . . . . . . . . . . 6.87 Industrial and Commercial Bank Ltd v Banco Ambrosiano Veneto SpA [2003] 1 SLR 221 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.24 Ireland v Livingstone (1872) LR 5 HL 395 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.13 Isaack v Clark (1615) Bulstrode 307; 1 Rolle 126 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.51 J & P Coats Ltd v Inland Revenue Commissioners [1897] 1 QB 778, [1897] 2 QB 423 . . . . . 2.35 J P Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm), aff’d [2010] EWCA Civ 1221 . . . . . . . . . . . . . . . . . . . . . . . . 9.11, 9.19, 9.20 Jervis v Harris [1996] Ch 195 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.43 Joachimson v Swiss Bank Corporation [1921] 3 KB 110 . . . . . . . . . . . 6.15, 6.87, 6.90, 9.10, 9.12 John Foster & Sons Ltd v Inland Revenue Commissioners [1894] 1 QB 516 . . . . . . . . . . . . . . 2.35



Table of Cases K v National Westminster Bank plc [2006] 2 All ER (Comm) 655 . . . . . . . . . . . . . . . . . . . . . 9.23 Karak Rubber Co Ltd v Burden [1972] 1 WLR 602 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.18 Kotonou v National Westminster Bank plc [2010] EWHC 1659 (Ch) . . . . . . . . . . . . . . . . . . 9.20 Kuwait Airways Corporation v Iraqi Airways Co (Nos 4 and 5) [2002] 2 AC 883 . . . . . . . . . . 6.29 Laconia [1977] AC 850 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.25 Ladbroke & Co v Todd (1914) 30 TLR 433 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10 Lancare Services Ltd v Barclays Bank plc [2009] EWCA Civ 752 . . . . . . . . . . . . . . . . . . . . . . . 9.22 Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Ltd [2013] EWCA Civ 365, [2013] 1 Lloyd’s Rep 98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.63 Leask v Commonwealth [1996] HCA 29, (1996) 187 CLR 579 . . . . . . . . . . . . . . . . . . . . . . 10.41 Lehman Brothers International (Europe) [2012] UKSC 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.09 Leigh and Sillavan Ltd v Aliakmon Shipping Co Ltd [1986] AC 785 . . . . . . . . . . . . . . . . . . . . 9.08 Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728 . . . . . . . . . . . . . . . . . . . . . . . . 5.83 Lipkin Gorman v Karpnale (a firm) [1991] 2 AC 548 . . . . . . . . . . . . 6.30, 6.59, 6.103, 9.16, 9.19 Littlewoods Mail Order Stores v Inland Revenue Commissioners [1963] AC 135 . . . . . . . . . . 2.35 Lloyds Bank Ltd v Bundy [1975] QB 326 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.20 London and Mediterranean Bank, Re (1870) LR 5 Ch App 567 . . . . . . . . . . . . . . . . . . . . . . . 9.15 London Joint Stock Bank v Macmillan [1918] AC 777 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.13 London Joint Stock Bank v Simmon [1892] AC 201 (HL) . . . . . . . . . . . . . . . . . . . . . . . . . . 11.16 Lupofresh Ltd v Sapporo Breweries Ltd [2013] EWCA Civ 948, [2013] 2 Lloyd’s Rep 444 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.71 Macmillan Inv v Bishopsgate Investment Trust plc (No 3) [1995] 1 WLR 978 . . . . . . . . . . . . 6.98 Mansouri v Singh [1986] 1 WLR 1391 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.88 Mardorf Peach & Co Ltd. v Attica Sea Carriers Corporation of Liberia, The Laconia [1977] AC 850 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.25 Mercedes-​Benz v Leiduck [1996] AC 284 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Midland Bank v Seymour [1955] 2 Lloyd’s Rep 147 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.13 Miliangos v George Frank (Textiles) Ltd [1976] AC 443 . . . . . . . . . . . . . . . . . . . 5.90, 5.92, 11.10 Miller v Race (1758) 1 Burr. 452; 97 ER 398 (KB) . . . . . . . . . . . . . . 4.37, 6.51, 6.59, 6.61, 6.62, 7.33, 11.08, 11.12 Montagu’s ST, Re [1987] Ch 264 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.105 Moss v Hancock [1899] 2 QB 111 . . . . . . . . . 2.13, 6.64–​6.65, 11.13, 11.23, 11.41, 11.51, 11.53 Murphy v HSBC Bank plc [2004] EWHC 467 (Ch) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.20 N Joachimson v Swiss Bank Corporation [1921] 3 KB 110 . . . . . . . . . 6.15, 6.87, 6.90, 9.10, 9.12 NSB Ltd v Worldplay Ltd [2012] EWHC 927 (Comm) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.22 National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51 . . . . . . . . . . . . . . . . . . . . 9.19 National Provincial Bank Ltd v Hastings Car Mart Ltd [1965] AC 1175 . . . . . . . . . . . . . . . . . 9.09 National Westminster Bank Ltd v Halesowen Presswork Assemblies Ltd [1972] AC 785 . . . . . 9.15 Navee Ltd v The Commissioners for Her Majesty’s Revenue and Customs [2017] UKFTT 0602 (TC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1 . . . . 2.04, 6.29, 6.42, 6.46, 6.102, 7.30, 9.08 Office of Fair Trading v Lloyds TSB Bank plc [2008] 1 Lloyd’s Rep 30 . . . . . . . . . . . . . . . . . . 9.22 One Step (Support) Ltd v Morris-​Garner [2018] 2 WLR 1353 . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Owners of MV Despina R, The Despina R [1979] AC 685 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.90 PJS v News Group Newspapers [2016] UKSC 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 PML v Person(s) Unknown (responsible for demanding money on 27 February 2018) [2018] EWHC 838 (QB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 Papadimitriou v Crédit Agricole Corpn and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.98



Table of Cases Patel v Mirza [2016] UKSC 42, [2017] AC 467 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.82 Perrin v Morgan [1943] AC 399 (HL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.15 Pettit v Novakovic [2007] BPIR 1643 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Pharaon v Bank of Credit and Commerce International SA [1998] 4 All ER 455 . . . . . . . . . . 9.17 Phillips v News Group Newspapers Ltd [2013] 1 AC 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10 Phipps v Boardman [1967] 2 AC 46 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.09 Popek v National Westminster Bank plc [2002] EWCA Civ 42 . . . . . . . . . . . . . . . . . . . . . . . . 9.20 Price Waterhouse v BCCI Holdings (Luxembourg) SA [1992] BCLC 583 . . . . . . . . . . . . . . . . 9.17 Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567 . . . . . . . . . . . . . . . . . . . . . . . . . 2.46 R J Reuter Co Ltd v Mulhens (No 2) [1954] Ch 50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.108 R (United Kingdom Association of Fish Producer Organisations) v Secretary of State for Environment Food and Rural Affairs [2013] EWHC 1959 (Admin) . . . . . . . . . . . . . . . . 3.29 R v Preddy [1996] AC 815 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.19, 6.54, 9.04 R v Velumyl [1989] Crim LR 299 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.28, 6.24 Raiffaisen Zentralbank Österreich AG v Five Star Trading LLC [2001] EWCA Civ 68, [2001] QB 827 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.32, 5.104 Ralli Bros v Compania Naviera Sota y Aznar [1920] 1 KB 614 . . . . . . . . . . . . . . . . . . . . . . . . 5.82 Regazzoni v KC Sethia Ltd [1956] 2 QB 490 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.82 Robshaw Brothers Ltd v Mayer [1957] Ch 125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.35 Ross v Lord Advocate 1986 SC (HL) 70 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.13 Royal Brunei Airlines Sdn Bhd v Tan [1995] AC 378 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.100 Russell-​Cooke Trust Co. v Prentis [2002] EWHC 2227 (Ch), [2003] All ER 478 . . . . . 6.87, 6.94 Schioler v Westminster Bank Ltd [1970] 2 QB 719 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.18, 9.19 Scott v Surman (1742) Willes 400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.51 Secure Capital SA v Credit Suisse AG [2015] EWHC 388 (Comm), aff’d [2017] EWCA Civ 1486 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.09 Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 1 WLR 1555 . . . . . . . . . . . . . 9.18 Services Europe Atlantique Sud v Stockholm’s Rederiaktebolag SVEA (The Foleas) [1979] AC 685 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.90 Shah v HSBC Private Bank (UK) Ltd [2010] EWCA Civ 31 . . . . . . . . . . . . . . . . . . . . . 9.19, 9.23 Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281 . . . . . . . . . . . 6.49, 6.55, 6.56, 6.106 Sharp v Thompson 1995 SC 455 (IH) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.24 Sierra Telecommunications Co Ltd v Barclays Bank plc [1998] 2 All ER 821 . . . . . . . . . . . . . . 9.14 Simpson v Connolly [1953] 1 WLR 911 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.34, 2.35 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) [2011] EWCA Civ 347, [2012] Ch 453 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.98 Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2004] 1 AC 260 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.14 Sollaway v McLoughlin [1938] AC 247 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.104 South African Breweries International (Finance) BV v Laugh it Off Promotions CC [2005] FSR 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.12 Space Investments Ltd v Canadian Imperial Bank Trust Co (Bahamas) Ltd [1986] WLR 1072 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.31 Squirrel Ltd v National Westminster Bank plc [2005] 2 All ER 784 . . . . . . . . . . . . . . . . . . . . . 9.23 St Albans District Council v International Computers Ltd [1996] 4 All ER 481 . . . . . . . . . . . 9.11 Stafford v Conti Commodity Services [1981] 1 All ER 691 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.19 Standard Bank London Ltd v The Bank of Tokyo Ltd [1995] 2 Lloyds Rep 169 . . . . . . . . . . . 9.24 Sunderland v Barclays Bank Ltd (1938) 5 LDAB 163 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 Swift v Dairywise Farms Ltd [2000] 1 WLR 177 . . . . . . . . . . . . . . . . . . . . . 3.29, 3.33, 6.41, 9.09 TSB Bank of Scotland v Welwyn Hatfield District Council [1993] Bank LR 267 . . . . . . . . . . 9.25 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80 . . . . . . . . . . . . . . . . . . . . . . 9.24



Table of Cases Tamimi v Khodari [2009] EWCA Civ 1042 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.20 Tassell and Lee v Lewis (1695), 1 Ld. Raym. 743, 91 ER 1397 . . . . . . . . . . . . . . . . . 11.43, 11.44 Taurus Petroleum v State Oil Marketing Co of the Ministry of Oil, Iraq [2017] UKSC 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.14 Tayeb v HSBC Bank plc [2004] 4 All ER 1024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.22, 9.23 Tidal Energy Ltd v Royal Bank of Scotland plc [2015] 2 All ER 15 . . . . . . . . . . . . . . . . . . . . . 9.24 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 . . . . . . . . 9.16, 9.17 Turner v Royal Bank of Scotland [1999] 2 All ER (Comm) 664 . . . . . . . . . . . . . . . . . . . . . . . 9.17 United City Merchants v Royal Bank of Canada [1983] 1 AC 168 . . . . . . . . . . . . . . . . 5.86, 5.88 United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.08 United Railways of the Havana and Regla Warehouses [1961] AC 1007 . . . . . . . . . . . 5.90, 11.10 Valse Holdings SA v Merrill Lynch International Bank Ltd [2004] EWHC 2471 (Comm) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.19 Verjee v CIBC Bank and Trust Company (Channel Islands) Ltd [2001] Lloyd’s Rep Bank 279 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.19 Vestergaard Frandsen A/​S v Bestnet Europe Ltd [2013] 1 WLR 1556 . . . . . . . . . . . . . . . . . . . 9.16 Ward v Evans (1702), 2 Ld Raym 928, 92 ER 120 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.44 Welex AG v Rosa Maritime Ltd [2003] EWCA Civ 938, [2003] 2 Lloyd’s Rep 509 . . . . . . . . . 5.71 Westdeutsche Landesbank v Islington LBC [1996] AC 669 . . . . . . . . . . . . . . . . . . . . . 6.49, 6.106 Westminster Bank v Hilton (1926) 136 LT 315 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11, 9.13 Westminster Property Group, Re [1984] 1 WLR 1117, aff’d [1985] 1 WLR 676 . . . . . . . . . . . 2.35 White & Carter (Councils) Ltd v McGregor [1962] AC 413 . . . . . . . . . . . . . . . . . . . . . . . . . . 2.43 Whitecomb v Jacob (1710) 1 Salk 160 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.51 Williams & Glyn’s Bank Ltd v Barnes [1981] Com LR 205 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.19 Wilson, Smithett & Cope Ltd v Terruzzi [1976] QB 683 . . . . . . . . . . . . . . . . . . . . . . . . 5.85, 5.86 Wilton Park Ltd v Commissioners for Her Majesty’s Revenue and Customs [2015] UKUT 343 (TCC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 (The) Winkfield [1902] P 42 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.50 Woods v Martins Bank Ltd [1959] 1 QB 55 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9.10 Wooley v Poole (1820) 4 B & Ald 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.33 Wright v HSBC plc [2006] EWHC 930 (QB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.09 Young v Toynbee [1910] 1 KB 215 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Your Response Ltd v Datateam Media Ltd [2014] EWCA Civ 281, [2015] QB 41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04, 6.29, 6.38, 6.42, 9.11 EUROPEAN UNION Regina v Thompson (1978) ECR 02247 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.39 Case 34/​82, Martin Peters Bauunternehmung GmbH v Zuid Nederlandse Aannemers Verenigung [1983] ECR 987 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.28, 5.29, 5.32 Case C-​256/​00, Besix SA v Wasserreinigungsbau Alfred Kretzschmer GmbH & Co KG [2002] ECR I-​1699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.32 Case C-​464/​01, Gruber v Bay Wa [2005] ECR I-​439 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.70 Case C-​27/​02, Engler v Janus Versand GmbH [2005] ECR I-​481 . . . . . . . . . . . . . . . . . . . . . . 5.29 Case C-​180/​06, Ilsinger v Dreschers [2009] ECR I-​3961 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.29 Case C-​533/​07, Falco Privatstiftung v Weller-​Lindhors [2009] ECR I-​3327 . . . . . . . . . 5.10, 5.52 Case C-​381/​08, Car Trim GmbH v Key Safety Systems Srl [2010] ECLI:EU:C:2010:90 . . . . . 5.10 Case C-​585/​08, Pammer v Reederei Karl Schlüter GmbH [2010] ECR I-​12527 . . . . . . . . . . . 5.70 Case C-​509/​09, eDate Advertising GmbH v X [2011] ECR I-​10269 . . . . . . . . . . . . . . . . . . . . 5.11 Case C-​523/​10, Wintersteiger AG v Products 4U Sondermaschinenbau GmbH [2012] ECLI:EU:C:2012:220 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11, 5.12, 5.60



Table of Cases Case C-​64/​12, Schlecker v Boedeker [2013] ECLI:EU:C:2013:551 . . . . . . . . . . . . . . . . . . . . . 5.63 Case C-​218/​12, Emrek v Sabranovic [2013] ECLI:EU:C:2013: 666 . . . . . . . . . . . . . . . . . . . . 5.70 Case C-​548/​12, Brogsitter v Fabrication de Montres Normandes EURL [2014] ECLI:EU:C:2014:148 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.30 Case C-​305/​13, Haeger & Schmidt GmbH v Mutuelles du Mans Assurances IARD [2014] ECLI:EU:C:2014:2320 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.62, 5.63 Case C-​352/​13, Cartel Damage Claims Hydrogen Peroxide SA v Evonik Degussa GmbH [2015] ECLI:EU:C:2015:335 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11 Case C-​366/​13, Profit Investment Sim SpA [2016] ECLI:EU:C:2016:282 . . . . . . . . . . . . . . . 5.31 Case C-​373/​13 Kolassa v Barclays Bank plc [2015] ECLI:EU:C:2015:37 . . . . . . . . . . . . . . . . 5.28 Case C-​441, Hejduk v Energie.Agentur.NRW GmbH [2015] ECLI:EU:C:2015:28 . . . . . . . . 5.12 Case C-​264/​14 Skatteverket v Hedquist [2015] ECLI:EU:C:2015:208 . . . . 3.11, 3.15, 3.36, 5.10, 5.51, 5.52, 9.05, 10.66, 10.68, 10.74, 10.79, 10.97 Case C-​359/​14, Ergo Insurance SE v If P & C Insurance AS [2016] ECLI:EU:C:2016:4 . . . . . . 5.28 Case C-​12/​15, Universal Music International Holding BV v Schilling [2016] ECLI:EU:C:2016:449 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11 Case C-​135/​15, Republik Griechenland v Nikiforidis [2016] ECLI:EU:C:774 . . . 5.47, 5.75, 5.82 Case C-​196/​15, Granarola SpA v Ambrosi Emmi France SA [2016] ECLI:EU:C:2016:559 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10 Case C-​618/​15, Concurrence SARL v Samsung Electronics France SAS [2016] ECLI:EU:C:2016:976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.12 Case C-​194/​16, Bolagsupplysningen OÜ v Svensk Handel AB [2107] ECLI:EU:C:2017 ECLI:EU:C:2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.11 Case C-​249/​16, Kareda v Benko [2016] ECLI:EU:C:2017:472 . . . . . . . . . . . . . . . . . . . 5.53, 5.57 Case C-​274/​16, Flightright GmbH v Air Nostrum [2018] ECLI:EU:C:2018:160 . . . . . . . . . . 5.30 Case C-​64/​17, Saey Home & Garden NV/​SA v Lusavouga-​Máquinas e Acessórios Industriais SA [2017] ECLI:EU:C:2018:173 . . . . . . . . . . . . . . . . . . . . . . . . . 5.10, 5.53, 5.56 INTERNATIONAL Corfu Channel case (UK v Albania) (Merits) [1949] ICJ Rep 4 . . . . . . . . . . . . . . . . . . . . . . . . 3.19 Decision of the European Central Bank of 5 June 2014 on the remuneration of deposits, balances, and holdings of excess reserves ECB/​2014/​23 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.24 Dolneanu v Moldova, App No 17211/​03 (ECtHR, 13 November 2007) . . . . . . . . . . . . . . . . . 3.21 Lesina v Ukraine, App No 9510/​03 (ECtHR, 19 June 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.21 Opinion of the European Central Bank of 12 October 2016 on a proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2015/​849 . . . . . . 5.01 Parillo v Italy (2015) 62 EHRR 300 (Grand Chamber) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.14 Rudzinska v Poland, App No 45223/​99 (ECtHR, 7 September 1999) . . . . . . . . . . . . . . . . . . . 3.22 INTERNATIONAL TRIBUNALS Serbian Loans case (France v Kingdom of the Serbs, Croats and Slovenes [1929] PCIJ Rep Series A No 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.16, 3.17 OTHER JURISDICTIONS Australia Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 241 ALR 705 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.20 Commissioners of the State Savings Bank of Victoria v Permewan, Wright & Co Ltd (1914) 19 CLR 457 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.10 Daewoo Australia Pty Ltd v Suncorp-​Metway Ltd (2000) 33 ACSR 48 . . . . . . . . . . . . . . . . . . 2.28 French Caledonia Travel, Re (2004) 22 ACLC 498 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.87, 6.90



Table of Cases Gammasonics Institute for Medical Research Pty Ltd v Comrad Medical Systems Pty Ltd [2010] NSWSC 267 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11 Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [NSWCA] 380 . . . . . 2.45 Matthews v The Queen [2014] VSCA 291 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 Matter Technology Ltd v Mrakas [2018] NSWSC 507 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.02 O’Dea v Merchants Trade-​Expansion Group Ltd (1938) 37 AR (NSW) 410 . . . . . . . . . 2.36, 2.37 Watson v Lee [1979] HCA 53 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.18 White v Shortall (2006) 206 Federal Law Reports 254 (SCNSW) . . . . . . . . . . . . . . . . . . . . . . 6.47 Canada Bank of Canada v Bank of Montreal [1978] 1 SCR 1148 . . . . . . . . . . . . . . . . . . . . . . . . 4.10, 4.15 Dearborn v Saskatchewan (Financial and Consumer Affairs Authority) [2017] SKCA 63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 Ontario Securities Commission and Greymac Credit Corp (1985) 55 OR (2d) 673 . . . . . . . . 6.94 Reference Re Alberta Statutes (1938) [1938] SCR 100 . . . . . . . . 11.13, 11.23, 11.41, 11.51, 11.53 China Shenzhen Court of International Arbitration Decision, Bitcoin Arbitration, 25 October 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.35 India CUB Pty Ltd v UOI (71 315) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.120 Ireland Attorney-​General v Davis [2018] IESC 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 Japan Japan Supreme Court Judgment, 18 Sep. 1940 Minshu 19-​1611 . . . . . . . . . . . . . . . . . . . . . . . 8.25 Japan Supreme Court Judgment, April 13, Saibansho Jihou 1505-​12 . . . . . . . . . . . . . . . . . . . . 8.31 Tokyo District Court Judgment, Heisei 26 (wa) no 33320, Heisei 27.8.5 . . . . . . . . . . . . . . . . 8.19 Netherlands Case No C/​13/​642655/​FTRK 18196, Rechtbank Amsterdam (20 March 2018) . . . . . . . . . . . 3.43 Case No C/​08/​140456/​HAZA 13.255, Rechtbank Overijssel (14 May 2014) . . . . . . . . . . . . . 3.43 New Zealand Dixon v The Queen [2015] NZSC 147 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 Fortex Group v Macintosh [1998] 3 NZLR 171 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 Singapore B2C2 Ltd v Quoine Pte Ltd [2018] SGHC 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 South Korea Korean Supreme Court Judgment, 19 Jan. 2017 No 2013 DA 17292 . . . . . . . . . . . . . . . . . . . 8.25 Korean Supreme Court Judgment, 30 May 2018 No 2018 DO 3619 . . . . . . . . . . . . . . . . . . . 8.16 Suwon District Court Judgment, 30 Jan. 2017 No 2017 NO 7120 . . . . . . . . . . . . . . . . . . . . . 8.16 Suwon District Court Judgment, 7 Sep. 2018 No 2017 GODAN 2884 . . . . . . . . . . . . 8.16, 8.29



Table of Cases Switzerland Decision of 1917 of the Swiss Federal Court 47 II 267 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.14 Swiss Federal Tribunal decision 4C.149/​2005 of 3 July 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.68 Swiss Federal Tribunal decision 6B.994/​2010 of 7 July 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.67 Tax Council Decision SKM 2018.104-​SR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.91 United States Coffey v Ripple Labs Inc, US Dist Lexis 135585 (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 Coinflip Inc, Re, Commodity and Futures Trading Commission, CFTC Docket No 15-​29 of 2015 (17 September 2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 Commodity Futures Trading Commission v McDonnell, 287 F.Supp 3d 213 (EDNY; 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 Greene v Mizuh Bank Ltd, US Dist Lexis 95536 (DC Ill, 2018) . . . . . . . . . . . . . . . . . . . . . . . 9.06 Hashfast Technologies LLC v Lowe, In re, Case No 15-​03011 (ND CAL 2016) . . . . . . . . . . . 3.43 Johnson v State, 52 So 652, 167, Ala 82 (Ala, 1 January 1910) . . . . . . . . . . . . . . . . . 11.16, 11.42 Leidel v Sallah, US App Lexis 10464 (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.06 Microsoft Corporation v United States, 855 F.3d 53 (2017), 62 . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Rensel v Centra Tech Inc, US Dist Lexis 106642 (DC Fla., 2018) . . . . . . . . . . . . . . . . . . . . . . 9.04 Rhodes v Lindly, 3 Ohio 51 (1827) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.16, 11.52 Securities and Exchange Commission v Shavers and Bitcoin Savings and Trust, Case No 4:13-​CV-​00416 (ED TEX 2014) (6 August 2013) . . . . . . . . . . . . . . . . . . 3.43, 9.04 State v Finnegan, Peter 103 NW 155, 127 Iowa 286 (Iowa, 1905) . . . . 11.09, 11.16, 11.42, 11.52 State of Florida v Espinoza, Case No Fl 14-​2923 (FLA CIR 2016) . . . . . . . . . . . . . . . . 3.43, 11.54 United States v Arjona (1887) 120 US 479 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.18 United States v Brown, 857 F.3d 334 (6th Cir, 2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.01 United States v Coinbase Inc, US Dist 196306 (ND Ca, 2017) . . . . . . . . . . . . . . . . . . . . . . . . 9.17 United States v Robert M Faiella (Case 1:14-​cr-​000243-​JSR, SDNY, 8 August 2014), 39 F Supp 3d 544 (2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04, 11.54 United States v Grosh 342 F2d 141 (1965) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.18 United States v Murgio, 15-​CR-​769 (AJN) (SDNY, 12 January 2017) . . . . . . . . . . . . . . . . . . 3.43 United States v Ulbricht (Case 1:14-​cr-​00068-​KBF, SDNY, 9 July 2014), aff’d 858 F 3d 71 (2nd Cir, 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04, 9.05, 9.06, 9.07 Vick v Howard (1923) 136 Va 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.09 Wisconsin Central Ltd et al v United States, Docket No 17-​530, 138 S C 2067 (2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04, 10.28




UNITED KINGDOM STATUTES Administration of Estates Act 1925 ss 25, 52 . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Bank of England Act 1998 s 2A . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52 s 9B . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52 s 9C . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52 s 9H . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52 s 9I . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52 s 9L . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52 s 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.57 Banking Act 2009 . . . . . . . . . . . . . . . . . . 3.52 Pt 6 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.46 Bankruptcy Act 1883 . . . . . . . . . . . . . . . . 6.33 Bills of Exchange Act 1882 . . . . . . . . . . . . 4.15, 4.18, 11.08 s 29 . . . . . . . . . . . . . . . . . . . . . . 6.59, 11.08 s 30 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.08 s 38 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.08 s 75(1) . . . . . . . . . . . . . . . . . . . . . . . . . 9.22 s 75(2) . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 s 83 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.16 Coinage Act 1971 s 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.09 s 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 ss 9–​10 . . . . . . . . . . . . . . . . . . . . . . . . . 9.04 Consumer Credit Act 1974 s 75(1) . . . . . . . . . . . . . . . . . . . . . . . . . 9.22 Consumer Rights Act 2015 s 2(9) . . . . . . . . . . . . . . . . . . . . . . . . . . 9.08 s 33(1) . . . . . . . . . . . . . . . . . . . . . . . . . 9.08 s 34(1) . . . . . . . . . . . . . . . . . . . . . . . . . 9.08 s 35(1) . . . . . . . . . . . . . . . . . . . . . . . . . 9.08 ss 9–​11 . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 s 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.11 s 49(1) . . . . . . . . . . . . . . . . . . . . . . . . . 9.18 Copyright, Designs and Patents Act 1988 s 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.21 s 91 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Corporation Tax Act 2009 s 306A . . . . . . . . . . . . . . . . . . . . . . . . 10.84 Currency Act 1983 . . . . . . . . . . . . . . . . . 11.09 Currency and Bank Notes Act 1954 . . . . . 4.42 s 1 . . . . . . . . . . . . . . . . . . . . . . . 9.04, 11.09 Finance Act 2006 . . . . . . . . . . . . . . . . . . . 3.33

Financial Services and Markets Act 2000 . . . 3.42 Pt 15 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.03 Pt 16 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.03 s 2A . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52 Fraud Act 2006 ss 1–​4 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.30 s 2(2)(b) . . . . . . . . . . . . . . . . . . . . . . . . 3.30 s 3(b) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.30 s 4(1)(b) . . . . . . . . . . . . . . . . . . . . . . . . 3.30 s 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.28 s 5(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.30 Human Rights Act 1998 . . . . . . . . . 3.21, 3.54 Income Tax Act 2007 s 771 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 Insolvency Act 1986 s 234(2) . . . . . . . . . . . . . . . . . . . . . . . . 9.15 s 236 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 s 283(1) . . . . . . . . . . . . . . . . . . . . . . . . 6.07 s 365 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 s 436 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Larceny Act 1861 s 100 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.65 Mental Capacity Act 2005 s 2(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 s 16(2) . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 s 18(1) . . . . . . . . . . . . . . . . . . . . . . . . . 9.15 Police and Criminal Evidence Act 1984 s 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 Proceeds of Crime Act 2002 . . . . . . . 3.33, 9.15 Pt 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.33 s 326(1) . . . . . . . . . . . . . . . . . . . . . . . . 3.33 s 326(4) . . . . . . . . . . . . . . . . . . . . . . . . 3.33 s 326(9) . . . . . . . . . . . . . . . . . . . . . . . . 3.33 s 327 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.32 s 327(1) . . . . . . . . . . . . . . . . . . . . . . . . 9.14 s 328 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.32 s 328(1) . . . . . . . . . . . . . . . . . . . . . . . . 9.14 s 329 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.32 s 329(1) . . . . . . . . . . . . . . . . . . . . . . . . 9.14 s 329(2)(a) . . . . . . . . . . . . . . . . . . . . . . 9.14 s 330 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.14 s 330(5) . . . . . . . . . . . . . . . . . . . . . . . . 9.14 s 337 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 ss 338–​339 . . . . . . . . . . . . . . . . . . . . . . 9.23 s 338(2)–​(3) . . . . . . . . . . . . . . . . . . . . . 9.14



Table of Legislation s 340(3) . . . . . . . . . . . . . . . . . . . . . . . . 9.14 s 340(9) . . . . . . . . . . . . . . . . . . . . . . . . 9.14 Sch 9, para 1(1)(a) . . . . . . . . . . . . . . . . 9.14 Sale of Goods Act 1979 . . . . . . . . . 1.13, 2.27, 2.42, 9.08, 11.08 s 2(1) . . . . . . . . . . . . . . . . . . . . . . 2.27, 2.39 ss 12–​15 . . . . . . . . . . . . . . . . . . . . . . . 11.08 ss 13–​15 . . . . . . . . . . . . . . . . . . . . . . . . 9.16 s 20A . . . . . . . . . . . . . . . . . . . . . . . . . . 7.16 s 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 s 55(1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 s 61(1) . . . . . . . . . . . . . . . . . . . . . . . . . 2.33 Supply of Goods and Services Act 1982 s 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.18 Taxation of Capital Gains Act 1992 s 275A . . . . . . . . . . . . . . . . . . . . . . . 10.119 Taxes Management Act 1970 s 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 s 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 s 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 Terrorism Act 2000 . . . . . . . . . . . . . . . . . 9.23 s 21B . . . . . . . . . . . . . . . . . . . . . . . . . . 9.17 Theft Act 1968 . . . . . . . . . . . . . . . . . 3.29, 3.33 s 4 . . . . . . . . . . . . . . . . . . . . . . . . 3.28, 6.28 s 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.19 UNITED KINGDOM STATUTORY INSTRUMENTS Bank of England (Macro-​prudential Measures) Order 2015 (SI 2015/​909) . . . . . . . . . . . . . . . . . Bank of England Act 1998 (Macro-​ prudential Measures) Order 2015 (SI 2015/​905) . . . . . . . . . . . . . . . . . Bank of England Act 1998 (Macro-​ prudential Measures) Order 2016 (SI 2016/​1240) . . . . . . . . . . . . . . . . Civil Procedure Rules Pt 24 . . . . . . . . . . . . . . . . . . . . . . . . . . PD 25A . . . . . . . . . . . . . . . . . . . . . . . . PD 72 . . . . . . . . . . . . . . . . . . . . . . . . . Electronic Money Regulations 2011 (SI 2011/​99) reg 2(1) . . . . . . . . . . . . . . . . . . . . . . . . Financial Collateral Arrangements (No 2) Regulations (SI 2003/​3226) reg 3(1) . . . . . . . . . . . . . . . . . . . . . . . . Payment Services Regulations 2017 (SI 2017/​752) reg 67(3) . . . . . . . . . . . . . . . . . . . . . . . reg 72(3) . . . . . . . . . . . . . . . . . . . . . . . reg 77(3) . . . . . . . . . . . . . . . . . . . . . . .

3.52 3.52 3.52 2.43 9.15 9.14 9.04

EU LEGISLATION Treaties EC Treaty Art 30 seq . . . . . . . . . . . . . . . . . . . . . . . 4.39 Art 36 . . . . . . . . . . . . . . . . . . . . . . . . . 4.39 Treaty on the Functioning of the European Union (TFEU) Art 128(1) . . . . . . . . . . . . . . . . . . . . . . 4.24 Directives Directive 98/​26/​EC on Settlement Finality in Payment and Securities Settlement Systems . . . . . . . . . . . . . . 5.51 Art 2 (a) . . . . . . . . . . . . . . . . . . . . . . . . 9.06 Directive 2004/​39/​EC (Markets in Financial Instruments Directive/​MiFiD) Art 4(1) . . . . . . . . . . . . . . . . . . . . 5.50, 5.51 Annex I, Section C . . . . . . . . . . . . . . . . 5.51 Directive 2006/​112 (VAT Directive) . . . . 3.11, 3.15, 10.72 Art 24 . . . . . . . . . . . . . . . . . . . . . . . . 10.70 Art 135 . . . . . . . . . . . . 10.75, 10.76, 10.78 Art 135(1)(e) . . . . . . . . . . . . . . 10.71, 10.76 Directive 2009/​110/​EC of the European Parliament and of the Council of 16 September 2009 . . . . . . . . . . . . . . . . 3.35 Art 2(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.24 Directive 2014/​65/​EU (Markets in Financial Instruments Directive/​ MiFID II) Art 4(1) . . . . . . . . . . . . . . . . . . . . 5.50, 5.51 Annex I, Section C . . . . . . . . . . . . . . . . 5.51 Directive 2015/​2366/​EU of the European Parliament and the Council on payment services in the internal market . . . . . . . . . . . . . . . . . . . . . . . 3.38 Acts Budget 1982 Act No 81-​1160 of 30 December 1981 (OJ 31 December 1981) Art 94 . . . . . . . . . . . . . . . . . . . . . . . . . 4.72 Regulations

9.26 9.22 9.24 9.24

Regulation (EC) 974/​1998 . . . . . . . . . . . . 4.24 Regulation (EC) 44/​2001 Art 5(1)(b) . . . . . . . . . . . . . . . . . . . . . . 5.10 Regulation (EC) No 864/​2007 (Rome II Regulation) . . . . . . . 5.06, 5.09, 5.33, 5.75, 5.77, 5.89, 5.92



Table of Legislation Art 1(3) . . . . . . . . . . . . . . . . . . . . . . . . 5.92 Art 4(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.11 Art 8(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.12 Art 15(c)–​(d) . . . . . . . . . . . . . . . . 5.77, 5.89 Regulation (EC) No 593/​2008 (Rome I Regulation) . . . . . . . . 5.06, 5.09, 5.17, 5.42, 5.43, 5.46, 5.47, 5.48, 5.65, 5.68, 5.72, 5.75, 5.77, 5.89, 5.92, 5.102, 5.104, 5.119 Recital . . . . . . . . . . . . . . . . . . . . 5.37, 5.62, 5.66, 5.70, 5.103, 5.109, 5.119 Art 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.28 Art 1(3) . . . . . . . . . . . . . . . . . . . . . . . . 5.92 Art 3 . . . . 5.10, 5.35, 5.36, 5.37, 5.38, 5.39 Art 3(1) . . . . . . . . . . . . . . . . . . . . 5.36, 5.40 Art 4 . . . . . . . . . . . . . . . . . . . . . 5.10, 5.35, 5.38, 5.44, 5.45, 5.57, 5.63, 5.64, 5.66, 5.67 Art 4(1) . . . . . . 5.49, 5.50, 5.54, 5.62, 5.66 Art 4(1)(a) . . . . . . . . . . . . . . . . . . . . . . 5.10 Art 4(1)(b) . . . . 5.52, 5.57, 5.58, 5.60, 5.61 Art 4(1)(h) . . . . . . . . . . . . . . . . . . 5.50, 5.51 Art 4(2) . . . . . . . . . . . 5.54, 5.60, 5.62, 5.66 Art 4(4) . . . . . . . . . . . . . . . . . . . . 5.62, 5.66 Art 6 . . . . . . . . . . . . . 5.10, 5.35, 5.69, 5.70 Art 6(1) . . . . . . . . . . . . . . . . . . . . 5.69, 5.70 Art 6(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.69 Art 6(4) . . . . . . . . . . . . . . . . . . . . . . . . 5.70 Art 6(4)(e) . . . . . . . . . . . . . . . . . . . . . . 5.70 Art 6(4)(d) . . . . . . . . . . . . . . . . . . 5.51, 5.70 Art 6(4)(e) . . . . . . . . . . . . . . . . . . . . . . 5.51 Art 9 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.41 Art 9(1)–​(2) . . . . . . . . . . . . . . . . . . . . . 5.81 Art 9(3) . . . . . . . . . . . . . . . 5.75, 5.77, 5.82 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . . 5.31 Art 10(1) . . . . . . . . . . . . . . 5.35, 5.64, 5.71 Art 10(2) . . . . . . . . . . . . . . . . . . . 5.64, 5.71 Art 12 . . . . . . . . . . . . . . . . . . . . . . . . . 5.31 Art 12(1)(a)–​(b) . . . . . . . . . . . . . . . . . . 5.77 Art 12(1)(c) . . . . . . . . . . . . . . . . . . . . . 5.89 Art 12(2) . . . . . . . . . . . . . . . . . . . 5.75, 5.77 Art 14 . . . . . . . . . . . . . . . . . . . . . . . . 5.101 Art 14(1) . . . . . . . . . . . 5.103, 5.109, 5.119 Art 14(2) . . . . . . . . . . . . . . . . . . . . . . 5.103 Art 14(3) . . . . . . . . . . . . . . . . . . . . . . 5.101 Art 15 . . . . . . . . . . . . . . . . . . . . . . . . 5.101 Art 19(1) . . . . . . . . . . . . . . . . . . . . . . . 5.59 Art 19(2) . . . . . . . . . . . . . . . . . . . . . . . 5.59 Art 19(3) . . . . . . . . . . . . . . . . . . . . . . . 5.59 Art 21 . . . . . . . . . . . . . . . . . . . . . . . . . 5.82 Art 27(2) . . . . . . . . . . . . . . . . . . . . . . 5.104 Art 28 . . . . . . . . . . . . . . . . . . . . . . . . . 5.46 Electronic Money Regulations 2011 . . . . . . . . . . . . . . . . . . . . 3.35, 3.37

Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.36 Regulation (EU) 1215/​2012 (Brussels I Regulation) . . . . . . 5.06, 5.09, 5.28, 5.29, 5.53 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10 Art 7(1) . . . . . . . . . . . . . . . 5.10, 5.31, 5.32 Art 7(1)(a) . . . . . . . . . . . . . . . . . . . . . . 5.10 Art 7(1)(b) . . . . . . . . . . . . . . . . . . . . . . 5.10 Art 7(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.11 Arts 17–​19 . . . . . . . . . . . . . . . . . . . . . . 5.10 Regulation (EU) 848/​2015 on insolvency proceedings Art 2(9) . . . . . . . . . . . . . . . . . . . . . . . 5.110 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . 5.105 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . 5.110 Art 7 . . . . . . . . . . . . . . . . . . . . . . . . . 5.105 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . 5.110 Regulation (EU) 679/​2016 of the European Parliament and of the Council of 27 April 2016 . . . . . . . . . 9.16 Payment Services Regulations 2017 . . . . . 3.38 Art 2 . . . . . . . . . . . . . . . . . . . . . . 3.40, 3.41 Art 138 . . . . . . . . . . . . . . . . . . . . . . . . 3.39 Sch . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.39 Proposals European Commission’s Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the third-​party effects of assignments of claims (COM (2018) 96 final) . . . . . . . . . 5.104, 5.105, 5.119 Art 2 . . . . . . . . . . . . . . . . . . . . 5.101, 5.110 INTERNATIONAL INSTRUMENTS Articles of Agreement of the International Monetary Fund (IMF) . . . . . . . . . . . 3.19 Art IV(1)(iii) . . . . . . . . . . . . . . . . . . . . 3.17 Bretton Woods Agreement establishing the International Monetary Fund (IMF) Art VIII(2)(b) . . . . . . . . . . . . . . . 5.84, 5.85, 5.86, 5.87, 5.88 European Central Bank (ECB) Guidelines Art 5.3 . . . . . . . . . . . . . . . . . . . . . . . . . 4.24 European Convention on Human Rights (EHCR) . . . . . . . . . . . . . . . . . . . . . . 3.59 Protocol 1, Article 1 . . . . . . . . . . 1.15, 3.21, 3.22, 3.54 Geneva Securities Convention (adopted 9 October 2009) . . . . . . . . . . . . . . . . . 4.72



Table of Legislation Hague Principles on choice of law . . . . . . . . . . . . . . . . . . . . 5.42, 5.43 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.39 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 5.40 Art 11 . . . . . . . . . . . . . . . . . . . . . . . . . 5.41 Hague Securities Convention (adopted 17 January 2002) . . . . . . . . 4.72 International Convention for the Suppression of Counterfeiting Currency (adopted 1929, entered into force 22 February 1931) 112 LNTS 371 . . . . . . . . . . . . . . . . . . . . 3.18 Rome Convention [1980] on the law applicable to contractual obligations . . . . . . . . . . . . . . . . 5.46, 5.48 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.36 Art 4 . . . . . . . . . . . . . . . . . 5.44, 5.45, 5.57 Art 4(2) . . . . . . . . . . . . . . . . . . . . 5.54, 5.58 Art 4(5) . . . . . . . . . . . . . . . . . . . . . . . . 5.62 Art 5 . . . . . . . . . . . . . . . . . . . . . . 5.35, 5.69 Art 8(1) . . . . . . . . . . . . . . . . . . . . . . . . 5.35 Art 8(2) . . . . . . . . . . . . . . . . . . . . . . . . 5.71 Statute of the European Central Bank (ECB) Art 14(4) . . . . . . . . . . . . . . . . . . . . . . . 4.24 Art 17 . . . . . . . . . . . . . . . . . . . . . . . . . 4.24 Art 19 . . . . . . . . . . . . . . . . . . . . . . . . . 4.24 Art 21(1) . . . . . . . . . . . . . . . . . . . . . . . 4.24 Art 22 . . . . . . . . . . . . . . . . . . . . . . . . . 4.24 Art 23 . . . . . . . . . . . . . . . . . . . . . . . . . 4.24 Art 24 . . . . . . . . . . . . . . . . . . . . . . . . . 4.24 Uniform Law for Bills of Exchange and Promissory Notes (League of Nations, Convention of 7 June 1930) Art 75 . . . . . . . . . . . . . . . . . . . . . . . . . 4.07 United Nations Convention on the Assignment of Receivables in International Trade Art 22 . . . . . . . . . . . . . . . . . . . . . . . . 5.105 UNMIK Regulation No 1999/​4 on the currency permitted to be used in Kosovo (UNMIK/​REG/​4 of 2 September 1999) s 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.17 OTHER JURISDICTIONS Argentina Criminal Code s 156 . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 Australia A New Tax System (Goods and Services Tax) Act 1999 . . . . . . . . . . . . . . . . 10.66

Goods and Services Tax Ruling GSTR 2014/​3 . . . . . . . . . . . . . . . . . . . . . . 10.64 Sale of Goods Act (ACT) s 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Sale of Goods Act (NSW) s 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Sale of Goods Act (NT) s 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Sale of Goods Act (Qld) s 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Sale of Goods Act (SA) s 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Sale of Goods Act (Tas) s 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Sale of Goods Act (Vic) s 6(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Sale of Goods Act (WA) s 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.39 Taxation Determination TD 2014/​25 . . 10.39 para 32 . . . . . . . . . . . . . . . . . . . . . . . . 10.41 para 34 . . . . . . . . . . . . . . . . . . . . . . . . 10.42 Appendix 1 . . . . . . . . . . . . . . . . . . . . . 10.40 Taxation Determination TD 2014/​26 . . 10.43 para 10 . . . . . . . . . . . . . . . . . . . . . . . . 10.43 paras 15–​16 . . . . . . . . . . . . . . . . . . . . 10.44 paras 18–​21 . . . . . . . . . . . . . . . . . . . . 10.46 para 22 . . . . . . . . . . . . . . . . . . . . . . . . 10.45 Treasury Laws Amendment (2017 Measures No 6) Act 2107 . . . . . . . . 10.66 Austria Civil Code s 323 . . . . . . . . . . . . . . . . . . . . . . . . . . s 326 . . . . . . . . . . . . . . . . . . . . . . . . . . s 372 . . . . . . . . . . . . . . . . . . . . . . . . . . s 1053 . . . . . . . . . . . . . . . . . . . . . . . . . s 1460 . . . . . . . . . . . . . . . . . . . . . . . . . s 1463 . . . . . . . . . . . . . . . . . . . . . . . . .

4.63 4.63 4.63 4.63 4.63 4.63

Canada Act to amend the Bank of Canada Act (1966–​67) s 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank of Canada Act (1934) s 25(1) . . . . . . . . . . . . . . . . . . . . . . . . . s 25(2) . . . . . . . . . . . . . . . . . . . . . . . . . s 25(6) . . . . . . . . . . . . . . . . . . . . . . . . . Bank of Canada Act (1985) s 18(b) . . . . . . . . . . . . . . . . . . . . . . . . . s 18(l) . . . . . . . . . . . . . . . . . . . . . . . . . . s 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . Canadian Payments Act (1985) Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . .


4.15 4.10 4.10 4.16 4.23 4.23 4.23 4.23


Table of Legislation Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.23 Currency Act (1985) s 3(1) . . . . . . . . . . . . . . . . . . . . . . . . . 11.11 s 8(1) . . . . . . . . . . . . . . . . . . . . . 4.23, 11.09 s 8(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 4.23 s 13 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.11 Personal Property Security Act (Ontario) s 1(1) . . . . . . . . . . . . . . . . . . . . . . . . . 11.11 Securities Transfer Act (2006) (Ontario) s 97 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.72 Prosperity Certificates Act (1936) s 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 s 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 s 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 s 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 s 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 s 10 . . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 s 10a . . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 Prosperity Certificates Amendment Act (1937) Ch 83 . . . . . . . . . . . . . . . . . . . . . . . . . 11.30 Royal Canadian Mint Act (1985) s 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.23 China Bankruptcy Act Art 38 . . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 49 . . . . . . . . . . . . . . . . . . . . . . . . . 8.28 General Provisions of the Civil Law of China Art 114 . . . . . . . . . . . . . . . . . . . . . . . . 8.15 Art 115 . . . . . . . . . . . . . . . . . . . . . . . . 8.15 Art 127 . . . . . . . . . . . 8.17, 8.25, 8.27, 8.35 Law of Real Rights . . . . . . . . . . . . . . 8.07, 8.08 Art 5 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25 Art 34 . . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 35 . . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 39 . . . . . . . . . . . . . . . . . . . . . . . . . 8.12 Art 223 . . . . . . . . . . . . . . . . . . . . . . . . 8.24 Law of the People’s Bank of China Art 15 . . . . . . . . . . . . . . . . . . . . . . . . . 8.02 Art 17 . . . . . . . . . . . . . . . . . . . . . . . . . 8.02 Tort Law Art 2 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.32 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.32 Art 15(2) . . . . . . . . . . . . . . . . . . . . . . . 8.32 France Act of 24 Germinal Year XI (14 April 1803) . . . . . . . . . . . . . . . . . . . . . . . . 4.06 Act of 12 August 1870 . . . . . . . . . . . . . . . 4.12 Act of 5 August 1914 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12

Act of 25 June 1928 Art 2 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.12 Civil Code . . . . . . . . . . . . . . . . . . . . . . . . 8.07 Art 1196 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 1198 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 1322 . . . . . . . . . . . . . . . . . . . . . . . 4.64 Art 1583 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 2258 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 2276 . . . . . . . . . . . . . . . . . . . 4.63, 7.27 Art 2279 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Monetary Act of 1 October 1936 . . . . . . . 4.12 Germany Act on Copyright and Related Rates (UrhG) Arts 15–​22 . . . . . . . . . . . . . . . . . . . . . . 7.21 Art 31ff . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Act on the Protection of Trademarks and Other Symbols (MarkenG) Art 27ff . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Fiscal Code (EStG) Art 23(1) . . . . . . . . . . . . . . . . . . . . . . 10.95 Civil Code (BGB) . . . . . . . . . 7.12, 8.07, 8.08 Arts 12–​14 . . . . . . . . . . . . . . . . . . . . . . 7.21 Art 90 . . . . . . . . . . . . . . . . . . . . . . . . . 8.13 Art 413 . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Art 929 . . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 937 . . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 1005 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 1006 . . . . . . . . . . . . . . . . . . . . . . . 7.27 Patent Act (PatentG) Art 15 . . . . . . . . . . . . . . . . . . . . . . . . . 7.21 Italy Civil Code Art 1161 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 1163 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Japan Bank of Japan Act Art 46 . . . . . . . . . . . . . . . . . . . . . . . . . 8.02 Bankruptcy Act Art 62 . . . . . . . . . . . . . . . . . . . . . . . . . 8.18 Art 98 . . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Civil Code . . . . . . . . . . . . . . . 8.07, 8.08, 8.22 Art 85 . . . . . . . . . . . . . . . . 8.13, 8.18, 8.19 Art 175 . . . . . . . . . . . . . . . . . . . . . . . . 8.25 Art 206 . . . . . . . . . . . . . . . . . . . . 8.12, 8.18 Art 243 . . . . . . . . . . . . . . . . . . . . . . . . 8.18 Art 244 . . . . . . . . . . . . . . . . . . . . 8.18, 8.29 Art 245 . . . . . . . . . . . . . . . . . . . . 8.18, 8.29 Art 362 . . . . . . . . . . . . . . . . . . . . 8.19, 8.24 Art 417 . . . . . . . . . . . . . . . . . . . . . . . . 8.32 Art 709 . . . . . . . . . . . . . . . . . . . . 8.31, 8.32



Table of Legislation Payment Services Act . . . . . . . . . . . . . . . . 1.22 Art 2(5) . . . . . . . . . . . . . . . . . . . . . . . . 8.03 Penal Code Art 245 . . . . . . . . . . . . . . . . . . . . . . . . 8.14

Art 1940 . . . . . . . . . . . . . . . . . . . . . . . 4.63 Real decreto legislativo No 4/​2015 of 23 October 2015; OJ No 255 of 24 October 2015 . . . . . . . . . . . . . . . . . . 4.72



Civil Code Art 509 . . . . . . . . . . . . . . . . . . . . . . . . 4.63

Act on Banks and Saving Banks (SBA) of 2 February 1934 Art 16 . . . . . . . . . . . . . . . . . . . . . 4.67, 4.76 Art 37d . . . . . . . . . . . . . . . . . . . . . . . . 4.76 Art 47 . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 Act on Currency and Payment Instruments (CPIA) Art 2 . . . . . . . . . . . . . . . . . . . . . . 4.13, 4.27 Art 3 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.13 Art 3(1) . . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 3(2) . . . . . . . . . . . . . . . . . . . . . . . . 4.27 Art 3(3) . . . . . . . . . . . . . . . . . . . . . . . . 4.28 Art 7(1) . . . . . . . . . . . . . . . . . . . . . . . . 4.28 Act on Debt Enforcement and Bankruptcy (DEBA) of 11 April 1889 . . . . . . . . . . . . . . . . . . . . . . . . .4.74 Art 219 . . . . . . . . . . . . . . . . . . . . . . . . 4.65 Art 242 . . . . . . . . . . . . . . . . . . . . . . . . 4.79 Art 242(3) . . . . . . . . . . . . . . . . . . 4.36, 4.63 Capital Adequacy Ordinance of 1 June 2012 Art 18 . . . . . . . . . . . . . . . . . . . . . . . . . 4.32 Art 20 . . . . . . . . . . . . . . . . . . . . . . . . . 4.32 Art 29 . . . . . . . . . . . . . . . . . . . . . . . . . 4.32 Collective Investment Schemes Act (CISA) Art 35 . . . . . . . . . . . . . . . . . . . . . . . . . 4.76 Decree of 30 July 1914 on the issue of CHF 20 banknote and the statutory exchange rate for SNB banknotes . . . 4.08 Decree of 27 September 1936 on currency measures . . . . . . . . . . . . . . 4.08 Decree of 29 June 1954 on the statutory price for banknotes and on repealing their conversion to gold . . . . . . . . . . 4.09 Federal Act of Intermediate Securities (FISA) of 3 October 2008 . . . . . . . . 4.76 Arts 1–​3 . . . . . . . . . . . . . . . . . . . . . . . . 4.73 Art 4 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.75 Art 6 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.73 Art 10 . . . . . . . . . . . . . . . . . . . . . . . . . 4.73 Arts 17–​19 . . . . . . . . . . . . . . . . . . . . . . 4.73 Art 24 seq . . . . . . . . . . . . . . . . . . . . . . . 4.73 Art 29 . . . . . . . . . . . . . . . . . . . . . . . . . 4.73 Federal Act on Swiss Mortgage Bond Institutions of 25 June 1930 Art 42 . . . . . . . . . . . . . . . . . . . . . . . . . 4.76 Financial Market Infrastructure Act of 19 June 2015 Art 88 . . . . . . . . . . . . . . . . . . . . . . . . . 4.76

Malaysia Banking and Financial Institutions Act 1989 s 97 . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 Pakistan State Bank of Pakistan, Prohibition of Dealing in Virtual Currencies, BPRD Circular No 3 of 2018 (6 April 2018) . . . . . . . . . . . . . . . . . 9.02 Singapore Banking Act (Cap 19, 2008 Rev Ed Sing) . . . . . . . . . . . . . . . . . . 9.16 South Korea Act on the Regulation and Punishment of Concealment of Criminal Profits Art 8(1)(i) . . . . . . . . . . . . . . . . . . . . . . 8.16 Bank of Korea Act Art 47 . . . . . . . . . . . . . . . . . . . . . . . . . 8.02 Bankruptcy Act Art 407 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 411 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Civil Code . . . . . . . . . . . 8.07, 8.08, 8.14, 8.22 Art 98 . . . . . . . . . . . . . . . . . . . . . . . . . 8.14 Art 186 . . . . . . . . . . . . . . . . . . . . . . . . 8.25 Art 211 . . . . . . . . . . . . . . . . . . . . . . . . 8.12 Art 213 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 214 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 258 . . . . . . . . . . . . . . . . . . . . . . . . 8.29 Art 290 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 301 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 319 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 345 . . . . . . . . . . . . . . . . . . . . . . . . 8.24 Art 370 . . . . . . . . . . . . . . . . . . . . . . . . 8.28 Art 750 . . . . . . . . . . . . . . . . . . . . 8.31, 8.32 Spain Civil Code Art 448 . . . . . . . . . . . . . . . . . . . . . . . . 4.63



Table of Legislation Investment Funds Act of 1 July 1966 (revised 18 March 1994) Art 17(16) . . . . . . . . . . . . . . . . . . . . . . 4.76 Merger Act of 3 October 2003 Art 69 seq . . . . . . . . . . . . . . . . . . . . . . . 4.94 National Bank Act of 6 June 1905 Art 22 seq . . . . . . . . . . . . . . . . . . . 4.08, 4.26 National Bank Act of 1934 Art 47 . . . . . . . . . . . . . . . . . . . . . . . . . 9.16 National Bank Act of 23 December 1953 . . . . . . . . . . . . 4.09, 4.26 National Bank Act of 3 October 2003 Art 5(1)(b) . . . . . . . . . . . . . . . . . . . . . . 4.28 Stock Exchange and Securities Trading Act of 24 March 1995 Art 36a . . . . . . . . . . . . . . . . . . . . . . . . . 4.76 Swiss Civil Code (SCC) Art 713 . . . . . . . . . . . . . . . . . . . . . . . . 8.14 Art 714 . . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 727(1) . . . . . . . . . . . . . . . . . . . . . . 4.14 Art 727(2) . . . . . . . . . . . . . . . . . . . . . . 4.14 Art 930 . . . . . . . . . . . . . . . . . . . . . . . . 4.63 Swiss Code of Obligations (SCO) Arts 17–​19 . . . . . . . . . . . . . . . . . . . . . . 4.74 Art 24 . . . . . . . . . . . . . . . . . . . . . . . . . 4.74 Art 75, para 2 . . . . . . . . . . . . . . . . . . . . 4.63 Art 102 . . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 165(1) . . . . . . . . . . . . . . . . . . . . . . 4.64 Art 167 . . . . . . . . . . . . . . . . . . . . . . . . 4.64 Art 402(1) . . . . . . . . . . . . . . . . . . . . . . 4.69

Art 466 . . . . . . . . . . . . . . . . . . . . . . . . 4.68 Art 481 . . . . . . . . . . . . . . . . . . . . . . . . 4.64 Art 728 . . . . . . . . . . . . . . . . . . . . . . . . 4.63 Art 967(1) . . . . . . . . . . . . . . . . . . . . . . 4.65 Art 973c . . . . . . . . . . . . . . . . . . . . . . . . 4.78 Art 973c(4) . . . . . . . . . . . . . . . . . . . . . 4.74 Art 979(2) . . . . . . . . . . . . . . . . . . . . . . 4.65 Swiss Constitution Art 39 . . . . . . . . . . . . . . . . . . . . . 4.08, 4.09 Art 99 . . . . . . . . . . . . . . . . . . . . . . . . . 4.13 United States Coinage Act Pub. L. No 89-​81 . . . . . . . . 11.09 Internal Revenue Code s 988(e) . . . . . . . . . . . . . . . . . . . . . . . 10.31 Revised Uniform Fiduciary Access to Digital Assets Act . . . . . . . . . . . . . . . 6.07 Treasury Regulations regs 1.988–​2(a)(2)(iii)(B) . . . . . . . . . . 10.31 regs 1.1012–​1(c)(1)(i) . . . . . . . . . . . . 10.33 Uniform Commercial Code (UCC) ss 1–​201(24) . . . . . . . . . . . . . . . . . . . 11.11 ss 8–​503 . . . . . . . . . . . . . . . . . . . . . . . . 4.72 Uniform Regulation of the Virtual Currency Business Act . . . . . . . . . . 11.68 US Constitution Art 1 s 8, cl 5����������������������������������������� 11.15 s 10, cl 1������������������������������������������11.15





DAVID FOX, Professor of Common Law, School of Law, University of Edinburgh, UK SARAH GREEN, Professor of Private Law, School of Law, University of Bristol, UK DANIEL CARR, Senior Lecturer in Private Law, School of Law, University of Edinburgh, Edinburgh, UK ANDREW DICKINSON, Fellow and Tutor, St Catherine’s College and Professor of Law, University of Oxford, UK ANNE FAIRPO, Barrister, Temple Tax Chambers, London, UK BENJAMIN GEVA, Professor of Law, Osgoode Hall Law School of York University, Toronto, Canada DORIT GEVA, Associate Professor, Central European University, Budapest, Hungary CHRISTOPHER HARE, Tutorial Fellow, Somerville College, Oxford and Travers Smith Associate Professor of Corporate and Commercial Law, University of Oxford, UK KELVIN FK LOW, Professor, School of Law, City University of Hong Kong CHARLES PROCTOR, Partner, Fladgate LLP, London, UK WU YING-​CHIEH, Assistant Professor, School of Law, Singapore Management University CORINNE ZELLWEGER-​GUTKNECHT, Professor, Kalaidos University of Applied Sciences, Zurich, Switzerland and Private Lecturer in Private and Civil Procedure Law, Financial Market Law and Comparative Law, Faculty of Law, University of Zurich, Switzerland





I. Introduction II. Decentralization and Distributed Consensus

III. The Chapter Contributions to this Book  

1.01 1.02


I. Introduction The cryptocurrencies discussed in this volume—​ of which Bitcoin was the 1.01 pioneer—​have a specific set of characteristics and are able to exist only because of a particular series of technological developments. These cryptocurrencies are based on decentralization and consensus: two features which also give rise to most of the legal issues analysed in this volume. A sound understanding of decentralization and consensus is therefore necessary to engage with what follows. There are now several different cryptocurrencies and distributed ledger platforms in addition to Bitcoin and its Blockchain. These are not all identical in technological terms, but they do all have common features. These common features which represent what is significant about this potentially disruptive technology are the focus of this introductory chapter.

II.  Decentralization and Distributed Consensus Decentralization and distributed consensus are the crucial components of 1.02 cryptocurrencies, and they are the principal features which distinguish them from

* Sarah Green, Professor of Private Law, School of Law, University of Bristol, UK.



Cryptocurrencies: The Underlying Technology those forms of electronic payments that use intermediaries and electronic bank money, such as PayPal, WorldPay, and BACS. These characteristics also explain why cryptocurrencies are often described as ‘trustless’, meaning that transacting parties need not have any trust in one another in the real world, so long as they trust the payment protocol (which, for reasons that will soon become apparent, they probably should). 1.03 Decentralization in this context simply means that everyone who might want to

use the currency, and so has a copy of the relevant software, also has a copy of the ledger. The ledger is a record of every transaction made using that currency, and each computer operating the software (known as a node) has a copy of the entire thing:  from the beginning (the ‘Genesis Block’) to today’s latest block. This is where the term ‘Distributed Ledger Technology’ (DLT) comes from: Blockchain, which was created to underpin Bitcoin, was the first distributed ledger, but there are now distributed ledgers of several different forms. Common to all of them, however, is the idea that all participants have access to the full history of transactions made using that protocol. This is a novel way of dealing with the ages-​ old double-​spend problem. Historically, the challenge of how to prevent double spending has been met in two ways: the first is by using physical tokens, whose corporeal form physically prevents their being spent more than once, and the second is by employing an independent third party, such as a bank, to keep a record of transactions and their effects on the subsequent spending power of the parties involved.

1.04 Cryptocurrencies achieve the same result by sharing information with every user

and ensuring that the information so shared is perfectly synchronized. This way, ‘coins’ cannot be spent twice because everyone would know that this is what was being attempted, and the consensus necessary for validation and recording would not be reached. Security is thus achieved through complete transparency, and distributed ledgers have no need for any centralized record keeping, nor for any third-​party intermediary to verify the integrity of transactions. In other words, ‘total validation replaces central control’.1

1.05 Such transparency is achieved through what is known as ‘distributed consensus

protocol’, and this is characterized by two features:

(a) all computers on the network (referred to as ‘nodes’) must agree on which transaction data are ultimately recorded on the ledger, and (b) the transaction data must have been generated by an honest node.2

1 H Diedrich, Ethereum (Wildfire Publishing, 2016) 113. 2 For a more detailed and technical description of this, see A Narayanan, J Bonneau, E Felten, A Miller, and S Goldfeder, Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction (Princeton University Press, Princeton, 2016) 28–​50.



Decentralization and Distributed Consensus The question remains how any of this can be achieved. One method, used by 1.06 Bitcoin, is known as proof-​of-​work, and this allows nodes to reach a consensus on which transactions to record and in which order to do so. (The order is of course all-​important, as it is with any spending pattern, since what you have already spent determines how much you can spend in the future.) Proof-​of-​work is the means by which nodes persuade other nodes that the block of transactions that they wish to add to the chain is legitimate and should be trusted. The work involved here is the cryptography: the solving of a mathematical puzzle. This puzzle is of a very specific type. The optimum way of solving it is simply to work through very large numbers of trial and error iterations. In other words, lawyers might say that it is a difficult case, but not a hard one. It is clear what needs to be done, but doing it takes an immense amount of computational power3 simply to work through the many repetitions of the same calculation, each time trying a different input. The puzzle is known as a hash puzzle, and success requires finding the input necessary for a function to produce a specified output. The hash function itself, which is the crux of this whole process, could be described in non-​mathematical terms as a function which takes an input and produces an output that will look nothing whatsoever like the input.4 In fact, it is practically impossible to discover the original input simply by looking at the output, unless you know the hash function. Diedrich has provided the following illustration of how hashes work.5 There are different hash algorithms. One hash algorithm that was once popular was called MD5. For example, this text: i. MD5’s designer Ron Rivest has stated “md5 and sha1 are both clearly broken (in terms of collision resistance)”. So MD5 should be avoided when creating new protocols, or implementing protocols with better options. SHA256 and SHA512 are better options as they have been more resilient to attacks (as of 2009). ii. has the MD5 hash: iii. ed7f56281b8d079ff101009105f75b44 iv.  . . . The hash ed7f56281b8d079ff101009105f75b44 can be used as a unique id for the above text, for two reasons: If any punctuation or word was changed, you would get a different hash for it. You will not for your life be able to find another text that results into exactly this hash.6

3 Around $300 million dollars a year on Bitcoin alone, which is comparable to the annual electricity bill for the whole of Ireland. See Diedrich (n 1) 150. 4 In the Bitcoin protocol, the hash function takes an input of any length and always produces an output of a fixed length. 5 For present purposes, the substantive content of the text being hashed is irrelevant. 6 Diedrich (n 1) 106–​07. Although, as Diedrich makes clear, it is theoretically, if not practically, possible to find another text which results into exactly this hash. This practical impossibility is considered to provide sufficient security.



Cryptocurrencies: The Underlying Technology 1.07 Crucially, the same hash function, applied to identical inputs, will always

produce the same output. Applying the same hash function, however, to an input which is different from the original in only a miniscule detail will nonetheless result in a completely different output. This explains why the only way to solve such puzzles is through repeated trial and error: there are no shortcuts or clues provided by previous work, and the results of previous attempts are not in any way cumulatively helpful. Instead, nodes who wish to add a block to the chain first take a set of transactions that have been broadcast7 across the network. They then add to this something called a ‘blockhash’. A ‘blockhash’ is the output generated when the hash function is applied to the whole of the previous block in the chain. This blockhash serves therefore as a unique identifier of all of the data in that previous block, and so is what links the blocks (hence the term ‘chain’) and at the same time makes the protocol so secure:  embedding this unique summary of the previous block’s data in the following block, and, therefore, in all future blocks,8 makes the blockchain practically tamper-​proof. If any node wants to alter or modify the content of any given block, it would also have to rehash all of the blocks which follow it, and compete to persuade all nodes (who would be working on the basis that the original date were correct) that the new reality was the right one. This is so difficult, particularly in terms of computational power, as to be well-​nigh impossible in the current environment.

1.08 The proposing node, which has at this point taken the set of transactions it wishes

to verify, and added the blockhash,9 then starts the real work: it also adds a value as the mystery input, which is known in cryptography as a ‘nonce’. It then hashes all of this together (which means applying a specific and consistent hash function, that in the case of Bitcoin is called SHA256) and keeps doing this, using a different nonce each time, until it gets an output with the ‘correct’ number of leading zeros.10 At the heart of this scheme is the fact that a nonce is hard to find but easy to verify. While it routinely takes trillions of trial-​and-​error calculations to find it, it requires but one calculation to verify it: to test that a nonce is in fact resulting into a hash with the required number of leading zeros when added to the block data that it was found for.11

7 This means, for example, that Alice has purported to transfer a certain amount of bitcoin to Bob by entering the details of his public key (which functions rather like an e-​mail address) and issuing instructions for the network to transfer that amount from her stock of bitcoin to his. It would be foolhardy, however, for any payee to trust the integrity of any transaction at this stage because it has not yet been validated or added to the block chain. 8 And, by definition, the previous block will be similarly linked to all the blocks preceding it. 9 ‘Adding’ here takes the form of concatenation of data strings. 10 The ‘correct’ number is dictated by the protocol, and it does not matter what it is—​it is just a test for the nodes to prove the work they have done. 11 Diedrich (n 1) 149.



The Chapter Contributions to this Book This is known as ‘trapdoor’ maths because of its one-​way structure; it is very diffi- 1.09 cult to find the answer but, once you have the answer, it is very easy to verify that it is the right one. A simple analogy can be made with the combination to a briefcase lock. Anyone wishing to open the suitcase without knowing the combination will have to try (probably) very many attempted combinations to find the one which opens the case. Once she has found it, however, it is very easy for someone else to verify that she has found the correct combination: the verifier simply needs to put that combination into the briefcase dial and see if it opens. The result is a binary one—​pass or fail. Similarly, once a node has found what it believes to be the right nonce, the other nodes verify that it is correct by simply applying it to the publicly available data. If this produces the same output (the one with the required number of leading zeros), verification is complete. Once this happens, the proposed block is added to the chain, and the transactions in it are confirmed.12 This, however, is not the only thing which happens when the block gets verified. 1.10 Another of Bitcoin’s revolutionary qualities is its alignment of self-​interest with altruism. Verifying blocks is hard grind and very expensive in computational terms, yet it is essential to the continuation and security of the system. So, when a node successfully adds a block to the chain, it is rewarded with an output of bitcoin. In the Bitcoin protocol, the verification process is known as ‘mining’, and it is simultaneously the means by which new coins are minted.13 This is a system, therefore, in which self-​interest works in favour of the collective interest, and the two are mutually reinforcing.

III.  The Chapter Contributions to this Book It is clear, therefore, that these technological developments have the potential 1.11 to disrupt conventional payment mechanisms and change the way that parties transact and accrue assets. Largely, that disruption is already happening. The significant number of payment transactions already being carried out using cryptocurrencies means that the law governing those transactions and their results needs to develop accordingly. The various legal responses that have so far emerged have made it apparent that a consistent and coherent set of legal principles would make the treatment of cryptocurrencies both easier and more effective. The chapters in this book each consider a particular area of public or private law, 1.12 and offer either a solution to or a workable means of approaching the problems that have either already arisen or are bound to arise soon in their application to cryptocurrencies. Although each author takes on a specific inquiry, there are

12 To a certain extent anyway. There is a possibility of ‘forking’, which will be discussed below. 13 There is, however, only a finite number of bitcoin available: 21 million.



Cryptocurrencies: The Underlying Technology some recurrent themes which underlie many of the legal challenges relating to cryptocurrencies, and which sometimes call for differing responses, dependent either upon the jurisdiction and background of a particular legal system or upon the specific demands of a particular context. These are the questions of whether cryptocurrencies fit the definition of property and whether they count as money for legal purposes. 1.13 In Chapter 2, the first substantive chapter of the volume, Green looks expressly

at the question of whether, for the specific purposes of English private law, cryptocurrencies should be classed as money. This chapter considers the implications of cryptocurrencies being excluded from the definition of ‘money’ for the legitimate expectations of contracting parties: the classification of a transaction as one of sale depends on its being made for money, and not for money’s worth. An exchange of goods for anything other than money would apparently fall, at least on current English authority, to be classed as one of barter or exchange, and this would exclude it from the protection provided by the Sale of Goods Act 1979 and from the remedial advantages which accrue to sellers under a contract deemed to be one of sale. Whilst the exclusion of such a transaction from the protective purview of sales law would seem to run counter to the expectations of contracting parties, Green suggests that, unless the private law definition of ‘money’ is relaxed, cryptocurrencies will not meet the requisite criteria. As is recognized by several of the chapters in this volume, there is little difficulty in regarding cryptocurrencies as a medium of exchange, but the other characteristics currently regarded as necessary for the recognition of such media as ‘money’ are less obvious. It is, as is also made clear in Proctor’s Chapter 3, simply not the case that cryptocurrencies function as units of account. The present volatility in their worth against conventional state-​denominated currencies renders them an unreliable store of value. Green’s conclusion is that, in the narrow context of private law transactions, the function of a currency as a medium of exchange should be the criterion to which the law should pay the most attention, thereby allowing for transactions made with certain cryptocurrencies to count as contracts of sale. Whilst the conclusion of this chapter is based on an expansion of the private law definition of ‘money’, it would also be to reach the same result by expanding the definition of ‘sale’, so that payment in a conventional state-​denominated form of currency should not be required. This could even take the form of an explicit statutory inclusion of cryptocurrencies, which would avoid the need to disrupt the longstanding definition of ‘money’, particularly when this could lead to a potential dichotomy between private law money and public law money.

1.14 Proctor’s Chapter  3 picks up the analysis from this point, and examines inter-

national and public law conceptions of money. The difference in perspective of this chapter from the last is clear:  whilst the use of cryptocurrencies as a medium of exchange can be liberating for private individuals, the same activity is, from the State’s perspective, a threat to its monopoly over currency, and to its 6


The Chapter Contributions to this Book corresponding ability to regulate the cost of credit. Proctor’s analysis considers the State theory of money, but also makes comparative reference to the Societary theory of money, which has received less legal recognition than the State theory, but which nonetheless provides an important empirical dimension to the acceptance of any commonly accepted medium of exchange as money. Despite the reference in the title of the chapter to public international law con- 1.15 ceptions of money, it is clear that there is in fact no such thing. Money is regarded by public international law as whatever domestic systems determine it to be. That said, there are other international definitions which could be seen to circumscribe a State’s ability to exclude cryptocurrencies from its definition of money for all purposes. Here, Proctor’s discussion returns to the theme of property recurrent throughout this volume, and, in this chapter, specifically to Article 1, Protocol 1, of the European Convention on Human Rights. Proctor makes it clear that cryptocurrencies form a new asset class and, as such, a species of property or possession, thereby requiring States to consider the protection of holders’ property interests when regulating their use and holding. In Proctor’s view, this would seem to be the most pressing international and public law concern for the time being, since the level at which cryptocurrencies are currently used is, he suggests, not yet high enough to disrupt financial markets or to require a consequent shift in the public international law approach to them. Zellweger-​Gutknecht’s contribution in Chapter  4 segues into Proctor’s analysis 1.16 in dealing specifically with the regulatory regime for cryptocurrencies and other value data. ‘Value data’—​the existence of which has been made possible by the advent of distributed ledger technology—​is defined by Zellweger-​Gutknecht as assets which are both ‘excludable and rivalrous’. Both are essential characteristics in a commercial and legal environment in which tangibility (which is intrinsically excludable and rivalrous) has ceased to be the touchstone of value. Here, Zellweger-​Gutknecht uses ‘excludable’ to refer to data from which the holder can completely exclude others, thereby giving her effective possession of it and the value which derives from it. Her definition of ‘rivalrous’ is that which can be consumed only once, or once at a time, and so is not subject to the double-​spend problem. Zellweger-​Gutknecht argues that these characteristics, and the consequent ways in which value data perform as assets, mean that the legal regime to be applied to them need not differ greatly from that currently applied to assets that are more conventional. Whilst conventional currencies are lodged with trusted intermediaries, the trusted element of a cryptocurrency holding is the technology itself. At this point, we see another recurrent theme of the book: the existence of a func- 1.17 tional analogy between cryptocurrencies and conventional currencies, despite the obvious physical and technical differences between the two. The legal regime to which Zellweger-​Gutknecht refers here is the rules relating to segregation rights 7


Cryptocurrencies: The Underlying Technology and the bearing of insolvency risk. If, she argues, parties are willing to trust the technology in the same way in which they trust an intermediary institution such as a bank, then applying established rules to the transaction makes sense. Such parties do after all have the freedom to contract using the mechanism of their choice. The pertinence of this analogous approach is fortified by Zellweger-​Gutknecht’s observation that the nature of transactions in value data is very similar in function to that of conventional transactions. Both consist of an extinction of value in one location and a corresponding increase elsewhere. 1.18 Dickinson’s Chapter  5 on the conflict of laws implications of cryptocurrencies

marks the transition to the next chapters of the volume. It deals with the cross-​ jurisdictional underpinnings to many of the private law questions that follow. Given the inherently global nature of cryptocurrencies, the reach of Chapter 5 is especially significant. The optimistic tenor of Dickinson’s analysis is that, despite their novel form, cryptocurrencies do not require the formulation of wholly new solutions to the issues they present. Rather, what is needed is the careful selection of devices from the existing private international law toolbox.

1.19 The conflict of laws is principally concerned with rules of jurisdiction and applic-

able law: the former to decide whether an English court has the competence to decide a particular case, and whether it will do so, and the latter to determine which national law or laws to apply to the dispute. The most obvious issue which arises in relation to cryptocurrencies is that such questions have historically been resolved by reference to physical location: either of the parties or of their actions. Such an inquiry seems inauthentic in relation to transactions made in cryptocurrencies, both because the transaction itself has no obviously relevant tangible presence and because the identity of the parties, given the potentially pseudonymous nature of cryptocurrency exchange, will make the location of the actors very difficult. Nonetheless, Dickinson cautions against overstating the problems this causes, and makes the crucial point that there is in any event no ‘one-​size-​fits-​all’ solution to the treatment of transactions in cryptocurrencies. It is important, both for the purpose of private international law and for other legal inquiries, to pay attention to the specific functional features of the transaction concerned, in the same way that the law currently differentiates between different types of transaction made in the conventional way. Where, for instance, a transaction is made between two individuals on a contractual basis, the settled means of resolving contractual disputes can apply. Equally, where an actor has behaved wrongfully in relation to another by, for instance, appropriating property, the location of that action can be of as much assistance as it has been in the past. Notwithstanding the virtual nature of the currencies themselves, the fact that the parties maintain a physical presence in the world means that rules relating to physical location and territorial connection remain as valuable in relation to cryptocurrencies as they are in any other private international law problem. Dickinson gives a picture of how courts can approach cryptocurrency transactions, as well as their creation or ‘mining’, without causing 8


The Chapter Contributions to this Book undue disruption to existing private international law reasoning. In so doing, he describes what parties to cryptocurrency transactions actually hold as a result of their participation, something which is by no means obvious. He argues that the participants have a legitimate expectation, founded on the technology of the system, that the consensus rules will not be changed so as to deprive them of their association with particular units of that currency. This provides a very useful concept to carry forward into the analysis which follows it. Fox’s contribution in Chapter  6 deals with the characterization and treatment 1.20 of cryptocurrencies in the common law of property. He makes it clear why this matters, even though users of cryptocurrencies rarely show much interest in legal regimes that may apply to their transactions. Property law is default law, and so it should apply to their transactions unless the parties exclude its operation. This analysis links with the ideas in the chapters of both Green and Dickinson. Fox takes the view that cryptocurrencies are best dealt with through the application and analogical development of existing legal doctrine rather than through the wholesale creation of new concepts. For the common law of property, this would involve abandoning the long-​standing, but increasingly untenable, rule that the only objects of property are choses in action and choses in possession. Just as Zellweger-​Gutknecht argued that cryptocurrencies have excludable and rivalrous characteristics, Fox explains how the substance and function of cryptocurrencies tell us more about their amenability to a property analysis than does their virtual form. As he points out, even the rules of tracing and derivative transfer of title could be adapted to apply to cryptocurrencies. In common with both Green and Proctor, Fox contends that cryptocurrencies do not meet the criteria necessary to amount to ‘money’ in the law. They are not denominated in a State-​authorized unit of account. This is, however, a separate question from their status as objects of property. It is clear from the chapter that the two questions are distinct. Carr’s Chapter 7 builds upon the common law concepts set out by Fox. It con- 1.21 siders how the forms of property analyses in civil law and mixed legal systems would need to be adapted to accommodate cryptocurrencies. The principle focus of the proprietary analysis, as far as civilian systems go, is whether cryptocurrencies would count as a res, capable of forming the object of a property right. As with the common law analysis, this question is independent of whether the currency could count as ‘money’. The challenge then is to explain how cryptocurrencies could be accommodated in a legal regime that analyses res as either tangible things or intangible rights. Carr’s argument develops a common motif of the book, which is that in deciding which legal principles to apply to cryptocurrencies, their incorporeal form should be subordinated to their function and purpose. This is also brought to bear on the civil law requirement of specificity, which could be satisfied, Carr suggests, by the cryptographic uniqueness of such currencies, and the control over them which is made possible by the exclusivity of their private keys. Ultimately, he concludes, the extent to which civilian and mixed systems 9


Cryptocurrencies: The Underlying Technology accommodate cryptocurrencies will depend, in much the same way as any other legal system, on the breadth and force of commercial demand. 1.22 The magnitude of commercial demand is certainly relevant to the analysis of Low

and Wu in Chapter 8. They consider the characterization of cryptocurrencies in East Asia, a region in which the growth of cryptocurrencies has been faster than elsewhere in the world. The region makes for an interesting comparative analysis, not least because Japan, at one end of the spectrum, has explicitly included cryptocurrencies in its Payment Services Act, whilst China, at the other end, banned cryptocurrency exchanges in 2017. In South Korea, the other jurisdiction considered in this chapter, the technology has been neither especially embraced nor outlawed. Cryptocurrencies are not classified as ‘money’ in any of the jurisdictions, but the question arises again whether property rights arise in relation to them. It is perhaps not surprising that, in seeking to answer this question, this chapter also analyses the concepts of ‘tangibility’, ‘excludability’, and ‘control’, the latter two seeming to capture the realities of the contemporary commercial environment better than the first. Low and Wu lament that paucity of attention, both judicial and academic, which has to date been paid to the private law conception of cryptocurrencies, and they point to several cases from Japan and South Korea which demonstrate how this neglect has led to a failing in the protection of investors and of their assets. The class of assets to which they refer does encompass cryptocurrencies, since it seems that in East Asia, as in the other jurisdictions analysed in this volume, there are strong arguments to be made in favour of recognizing such currencies as capable of being the objects of property rights. Once more, however, there is in East Asia, no consensus about exactly how to categorize such assets, since they do not appear to fit comfortably into any existing taxonomy. In relation to Japan and South Korea, and even more so in relation to China, Low and Wu do not conclude on an optimistic note about the legal security of cryptocurrency transactions in the absence of any specific legislation to recognize their status as property.

1.23 In his Chapter 9, Hare asks whether there is any possibility of reconciling the

principles and practices employed by traditional banking with the trading and holding of cryptocurrencies. Like other analogical approaches in this volume, he takes three basic functions of traditional banking, storing value, making payments, and lending, and investigates the extent to which the same functions can be performed through the medium of cryptocurrencies. Whilst alluding to the question whether cryptocurrencies can be classed as money, Hare focusses the analysis in his chapter on the related but nonetheless distinct question of how the holder of any unit of cryptocurrency stores its economic value, and the legal implications of these arrangements.

1.24 One of the principal analogies employed by Hare is that of the traditional banker-​

customer relationship and the functionally similar relationship between a holder 10


The Chapter Contributions to this Book of cryptocurrency and the provider of an online storage wallet. Such a relationship, he suggests, is better regarded as contractual than proprietary in nature. Although the contents of the contract will be different from that between a banker and customer, sufficient similarities exist to make the effort of transposing the relevant principles worthwhile. The relationship between a cryptocurrency holder and a digital wallet provider is, for instance, unlikely to be treated as creating a fiduciary relationship in the absence of any specific undertaking on the part of the latter or vulnerability on the part of the former. This must be correct: it would be quite remarkable for the provider of an online wallet to be subjected to more onerous responsibilities than a retail bank providing fiat currency services for its customers. Some of the difficulty inherent in this may well derive from the nature of the language used by those creating and dealing in cryptocurrencies: the notions of ‘wallets’ and ‘storage’ do not make for easy transposition on to the legal realities of the situation. The principal legal reality of relevance for Fairpo in Chapter 10 is that, for tax 1.25 purposes, governments are rarely concerned with the form in which individuals accumulate wealth, as long as they pay in an acceptable fiat currency. In general, therefore, cryptocurrencies are regarded for the purposes of tax as forms of property rather than currency (there appearing to be no problem with such a classification in this context). Fairpo argues that this conceptual distinction is less important than the practical need for tax laws to be as equal, certain, and administratively efficient as possible, something which is currently not always the case. One of the reasons for this is that tax authorities are still inclined to view cryptocurrencies as predominantly a payment mechanism as opposed to an investment vehicle, even though the last two years have seen a marked increase in such currencies being held with a view to realizing a later sale at a profit. As with so many of the other contexts in which the increased use of cryptocurrencies gives rise to problems, the difficulties surrounding their taxation often arise, according to Fairpo, because of a failure of the relevant authorities to grasp the nettle and to set out clearly the way in which such assets will be taxed and the reasons for so doing. This may well be, with a glance back to Proctor’s chapter on international regulation, partly because those authorities do not yet regard the level of use of cryptocurrencies to be sufficient to necessitate such changes, but, if so, the failure of the law to provide prospective guidance is particularly problematic for taxation. Fairpo identifies Australia, however, as a jurisdiction which has already managed to reduce unfairness in the way that cryptocurrency assets are taxed, and goes on to point out that, in 2018, the United Kingdom announced the setting up of a taskforce, with the specific aim of providing such guidance. It would seem, therefore, that there is at least some indication of a shift in thinking where the taxation of cryptocurrencies assets is concerned. The Gevas’s Chapter  11 rounds off the volume by considering the use of 1.26 cryptocurrencies as a kind of ‘community currency’, and projecting this on to 11


Cryptocurrencies: The Underlying Technology likely future developments, as well as the legal responses to them. In doing so, Geva and Geva take lessons from the history of community currencies and transpose them to the current legal landscape to identify what is both valuable and valued about non-​State currencies. Their conclusions about this enable them to suggest what might be the most future-​proof characteristics of non-​State currencies. In keeping with the conclusions reached by several other contributors (albeit for different reasons), Geva and Geva point to the volatility of most non-​State currencies, which results from the absence of central bank or State backing. At the same time, the potential attraction of a decentralized and largely unregulated currency is clear. It may also be that the security provided by distributed ledger technology means that cryptocurrencies suffer from fewer security and trust issues than did previous incarnations of non-​State currencies. It is certainly the case that they already enjoy a wider user base than any community currency that has gone before. As with much of the analysis in this volume, some speculation has to be made: whilst cryptocurrencies are closer to their teenage years than their infancy, the law’s ability and inclination to deal with them appears still to be nascent. 1.27 The phenomenon of cryptocurrencies marks a revolution in the theory and prac-

tice of payment mechanisms. Contemporary accounts in the mainstream news display a kaleidoscope of views on their value and significance: fears of criminality and anarchy, hope in democratized currencies that are delinked from State control, puzzlement at the basic technical mechanics of their operation, fascination, and awe at the power and rapidity of technological advancements. One thing is for sure. Cryptocurrencies are here to stay, and we predict that their use will grow rather than diminish in significance. Like the Internet itself, cryptocurrencies will acquire their own unstoppable momentum as their value and utility become more widely appreciated.




I. Introduction

A. What are virtual currencies and why do they present such challenges to existing categories? B. Universal medium of exchange C. Unit of account

. Store of value D E. A peculiarly private law concept of ‘money’ F. Consequences of a failure to recognize virtual currency as money

2.01 2.03 2.15 2.19



2.20 2.22 2.26 2.48

I. Introduction The controversy about the concept of money is not exactly one of the most satisfactory chapters in the history of our science. It is chiefly remarkable for the smother of juristic and commercial technicalities in which it is enveloped and for the quite undeserved significance that has been attached to what is after all merely a question of terminology. The solution of the question has been regarded as an end in itself and it seems to have been completely forgotten that the real aim should have been simply to facilitate further investigation.1

To be categorized as money, any medium must currently fulfil three conditions: it 2.01 must be able to function as a medium of exchange, a store of value, and a unit of account. The public and economic reasons for this are clear. The private law context, however, has a distinct set of concerns and would be better served by focussing solely on the criterion of a medium of exchange. The relevance to private law of units of account and stores of value is limited. Professor Sir Roy Goode has long asserted that:

Sarah Green, Professor of Private Law, School of Law, University of Bristol, UK. * 1 Ludwig von Mises, The Theory of Money and Credit (first published 1912, Skyhorse Publishing 2013) ch 3, s 1.



It’s Virtually Money much of the debate on what constitutes money in law is rather sterile and has few implications for the rights of parties to commercial transactions, where payment by bank transfer is the almost universal method of settlement. In most developed countries, where bank failures were until recently infrequent, a bank’s unconditional commitment to pay is treated as the equivalent of cash. The crucial question, then, is not what constitutes money but what constitutes payment.2 2.02 Professor Goode was making the point because of the near-​universal use of bank

money in commercial transactions at the time he was writing. The advent of virtual currencies makes his suggested shift in focus even more appropriate. What is important for private law classification and remedial purposes is the fungibility of a medium of exchange and the consequent fact that it does not depend on a double coincidence of wants.3 These qualities set such assets apart from other media, such as goods exchanged for others under a barter agreement: a fungible medium of exchange has an objectivity of value and generic availability which goods lack. Whilst virtual currencies undoubtedly constitute fungible media of exchange, they do not clearly or consistently meet the criteria of being units of account or stores of value. Under current legal conditions, therefore, contracts made with such currencies are deemed not to have been made with money. One potential consequence of this is that those involving a transfer of property in goods will be presumed to be barter rather than sales agreements. The legal notion of barter, however, seems not to capture the essence of a transaction made for fungible value, as opposed to one made for individual and specific goods. According to the current legal position, the principal distinctive feature of a sales contract is the seller’s remedial action for the price; something which is not available for breach of a contract of barter.4 The remedy for debt, however, would seem to be more in keeping with the legitimate expectations of the parties to a transaction in which goods are exchanged for a virtual currency than would a claim for damages. Once something functions as a medium of exchange, it seems artificial and disingenuous to divide mutually agreed payment obligations up into those made on the basis of State-​issued (fiat) currency and those not. For private law purposes, therefore, it makes sense to treat virtual currencies as money. A. What are virtual currencies and why do they present such challenges to existing categories?

2.03 Given that virtual currencies need to be administered by using some form of com-

puting device, it is tempting to align them closely with electronic bank money,

2 Ewan McKendrick (ed), Goode on Commercial Law (4th edn, Penguin 2010) 488. 3 The phenomenon which must occur in order for an exchange to be desirable when the medium of exchange is not fungible: if A wants B’s apples, she must wait until she has something B wants to exchange for those apples. This clearly detracts from the efficacy and efficiency of transactions. Fungible media dispense with the problem. 4 Michael Bridge, Benjamin’s Sale of Goods (9th edn, Sweet & Maxwell 2016) para 1-​035.



Introduction which, for most of us, is dealt with using similar hardware. Why, then, do virtual currencies present such a classificatory problem, when bank money (which makes up more than 95% of the money used in the UK economy, for instance)5 has long been integrated into our legal understanding? One of the reasons is that, on closer inspection, it is clear that virtual currencies have far more in common with cash than they do with bank money. Yet they are not cash. This is where the difficulties for private law might be said to begin. It is not even easy to say whether virtual currencies are closer to cash than they are to goods: Schatt has described Bitcoin, for example, as something which is ‘[b]‌ased on an elegant algorithm and possessing attributes of both currency and commodity’.6 Since Bitcoin is, at least currently, the most successful example of a virtual currency, it would seem to provide an obvious basis for explaining the technology and its legal implications. A bitcoin is a very particular string of bits that exists only on the memory of a computer, on a hard drive, a thumb drive, or even as a long string of letters and numbers printed onto a piece of paper. A bitcoin is just data, very special data. And it’s not a coin. It’s a highly divisible unit.7

The legal implication of this is that a bitcoin is not a chose in action. The string 2.04 of data that constitutes a bitcoin is a unique and specific thing in its own right. It is therefore distinct from bank money, which, as a relationship of indebtedness between bank and customer, is a chose in action. It is also unlikely, however, that current common law orthodoxy would hold a bitcoin to be a chose in possession. In OBG v Allan,8 the House of Lords made it quite clear that the category of choses in possession does not include intangibles. Whilst this decision retained the established ‘documentary exception’, meaning that, for instance, cheques could be possessed, bitcoins would not fit this exception, since they themselves are the thing of value, rather than being a representation of an underlying asset in the way that cheques and share certificates are. There is no question that this model of currency, whilst sharing characteristics with forms of value with which the common law is familiar, does not fit comfortably into any existing classification. In practical terms, what the ‘holder’ of a bitcoin really has is exclusive access to 2.05 these unique strings of data, which gives her the power to control them, whether that be for spending, saving, or moving round between accounts. (There is no limit to the number of Bitcoin accounts one can have.) Each user has a public key, which functions like an address to which bitcoins can be sent as a means of payment, and a private key, which protects access to those bitcoins, functioning rather David Fox, Property Rights in Money (OUP 2008) 1.137. 6 Dan Schatt, Virtual Banking (Wiley 2014) 149. 7 ibid 153. ‘There were some 12.6 million bitcoins in existence in April 2014.’ 8 [2007] UKHL 21. See also Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281. Although, for a far more encouraging approach, albeit not absolutely analogous, see Dixon v The Queen [2015] NZSC 147 at [51] for the assertion that digital files (in this case photographs) can count as property. 5



It’s Virtually Money like a PIN or password. Strings of data are thus passed from account to account, as requested by users. Their movement, whilst physical at the level of binary data, occurs therefore within digital correspondence and is not seen or touched by users. This is what makes virtual currency ‘feel’ like bank money. In legal terms, however, it behaves far more like cash. When bank money moves from bank account to bank account, nothing actually moves at all, and the promise of one bank to pay a customer is substituted for the promise of another bank to pay another customer for the same amount. In other words, a debt is replaced by a different debt. As alluded to above, however, bitcoins are actually valuable physical assets which move from one account (or ‘wallet’) to another. This has a number of implications, the first and probably most important of which is that bitcoins can be lost or stolen, and that when this occurs, they cannot be recovered except by physical recaption (that is, finding the person who now has the bitcoin in question and persuading him in some way to return it to the rightful holder). It also means that transactions in Bitcoin are irreversible except, again, by persuading the transferee to return the same bitcoin. Significantly, there is no third party to either guarantee or indemnify users against the consequences of incorrect transfers. Some providers of online wallet software offer insurance against such risks, but as ever, the direction of insurance offers serves only to indicate the default bearer of a risk. 2.06 So, have we come (almost) full circle? Have we moved from cash, to bank money,

to bank money represented in electronic form, to cash represented in electronic form? Maybe, at least in terms of technical potential. There are several reasons, however, why virtual currencies have not yet come close to replacing cash, at least in most developed countries. It is often said that reliance on virtual currencies is problematic and risky because such currencies are not legal tender. But then, neither is bank money. Bank money lacks at least most of the legal characteristics of physical money: it is not issued under the authority of the State, it is not legal tender, it does not serve as a medium of universal exchange, and it is not negotiable.9

2.07 Yet bank money accounts for the overwhelming majority of transactions made

in modern first world economies. This, therefore, cannot be the only reason why virtual currencies are not (yet) universally used. Rather, the feature of Bitcoin, and indeed virtual currencies in general, which both endear them to some and alienate them from others, is their independence from any third-​party intermediary. The distributed ledger technology, or blockchain, which is the really significant feature of Bitcoin, obviates the need for banks, governments, or any central authority. It is a truly peer-​to-​peer system. Every user who has a copy of the Bitcoin software on her computer thereby has a copy of the entire transactional history of Bitcoin: a record of every transaction ever made is therefore available to all users.

McKendrick (n 2) 489. 9



Introduction The transactions which make up each ‘block’ in the ‘chain’ are made and verified across the network by member computers performing immensely difficult equations, in a race to be the one to come up with the correct answer. The computer that finishes first is rewarded with bitcoins and, at the same time, adds the new, verified block to the chain (once the correctness of the winning computer’s answer has been checked by its peers). The software is open source so anyone can download and modify it. Thus, the whole system is accessible to, and shared between, its users: there is not only no requirement for third-​party intervention but also there is no room for it. Governments across the world have had mixed reactions to this, of course (al- 2.08 though most have now seen their way to recognizing bitcoins as taxable assets). The absence of a third party in the Bitcoin network is something of a double-​ edged sword. The lack of any State underwriting of a currency makes it, in the long run, potentially less stable than State-​issued currency, and not as directly affected by economic policy. Within some States, this is an unappealing feature, but, in many others, it is its main attraction: Citizens of countries such as Argentina, whose governments have a near perfect track record of debasing their own currency and destroying the savings of their citizenry, have shown signs of preferring Bitcoin to their own state’s money.10

Initially, Bitcoin was less regulated than State-​issued currencies, but there is no 2.09 intrinsic necessity for this, and the regulation of it is increasing all the time.11 Historically, Bitcoin has been associated with criminal individuals, wanting to take advantage of its unregulated status, as well as the pseudonymous nature of its transactions. (This is no reason in itself to abandon it as a promising economic medium: the advance of the Internet was vastly accelerated by the commercial porn industry, as was the supremacy of VHS video over the technologically superior Betamax platform, confirming that virtue is by no means a pointer to commercial success.) The criminal underworld is not, however, the only community to have found in virtual currency something that it could not find elsewhere: Today, decentralized virtual currencies . . . deliver more benefits at a lower cost and with greater ease than conventional bank products . . . Bitcoin is helping to level the financial playing field by offering services to those individuals and businesses around the world unable to engage in financial transactions because of road blocks created by conventional bank products. Banks are excellent at keeping people away from financial services . . . Bitcoin has the potential to improve the quality of life for some of the world’s poorest people.12

It is this divorce between currency and State, however, which seems at the mo- 2.10 ment to be the most likely reason why virtual currencies would not fit within John Lanchester, ‘When Bitcoin Grows Up’ (2016) 38(8) London Review of Books 3, 12. 11 P Carl Mullan, The Digital Currency Challenge (Palgrave 2014) 131. 12 ibid 88. 10



It’s Virtually Money any existing category of ‘money’. As well as having to operate as a store of value, a medium of exchange, and a unit of account, in order to have the legal status of money, according to Mann, that medium must also be: a ) issued under the authority of the law in force within the State of issue; b) under the terms of that law, denominated by reference to a unit of account; and c) under the terms of that law, to serve as the universal means of exchange in the State of issue.13 2.11 The first of these is not only a characteristic which Bitcoin currently fails to ex-

hibit, but is actually something which is anathemic to it. As such, Bitcoin is unlikely to adapt so as to fulfil such a criterion in future. The question arises, therefore, whether this, inter alia, should preclude its recognition as a valid means of payment in a private law context. Economists and governments are likely to disagree with lawyers on this, since the biggest, and undoubted, difference between conventional and virtual payments methods lies in the fact that the latter are privately produced and controlled and, as such, they exist outside of State control.14 Nonetheless, the concerns of lawyers are specific and contextually defined, and this is certainly true of the private law in relation to payments.

2.12 Charles Proctor, the current editor of Mann on the Legal Aspect of Money,15 says,

in reference to such differing views:

It is, of course, unsurprising that lawyers and economists should differ in their approaches to questions of this kind, for their areas of concern and objectives are also entirely different. The economist may be concerned with such ideas as monetary policy, exchange rate policy, and the supply and soundness of money within an economic area as a whole. Lawyers, on the other hand, tend to be more concerned with the protection of the purely private rights of contracting parties and the discharge of monetary obligations.16 2.13 Yet the economist’s perspective is inextricably linked with the concept of ‘money’

as we know it. This is all but inevitable and, for most purposes, unproblematic. Yet, there are areas of private law of increasingly commercial significance, for which the traditional concept of ‘money’ is less than useful. This is not of course the first time that the common law’s definition of ‘money’ has been challenged by social and technological change. In the past, the law has responded to the increased use of bank notes in the place of coins by expanding its definition of ‘money’ to include them. When, some years later, it became apparent that there was a growing preference for bank money over both notes and coins, the law

13 Charles Proctor, Mann on the Legal Aspect of Money (7th edn, OUP 2012) para 1.17. 14 Although, even here, the perceived gulf between the conventional and the novel is not as big as would first appear, bank money is technically also produced and controlled by private entities (banks), albeit entities which are to some extent regulated by the State. 15 Proctor (n 13) para 1.17. 16 ibid para 1.08.



Introduction adapted once more. It is hardly likely that such technological and social developments will cease. In fact, given that the rate of such developments will probably increase,17 there is much to be said for liberating the expectations and practices of contracting parties from unnecessary definitional constraints. After all, contracting parties’ principal concern is for that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities.18

This describes a medium of exchange, a feature of traditional money undisputed 2.14 by either lawyers or economists. Or probably anyone else. As is well established, however, in order to fit the current technical definition of ‘money’, any medium must also exhibit two other features: it must be both a unit of account and a store of wealth. Virtual currencies fit the first criterion far more easily than they do the second two (as in fact do local UK currencies, such as the Bristol Pound and the Brixton Pound).19 B. Universal medium of exchange Whilst the function of a medium of exchange is the very least that something 2.15 must be in order to be considered any sort of currency, the traditional definition of ‘money’ has a greater attachment to universality than the purposes of private law require.20 If both parties to a contract are willing to accept a given medium of exchange, either on a discrete or relational basis, private law has an interest in protecting their expectation of enforceability. Whilst currently, and by default, contracts made for goods to be exchanged for anything other than money are treated as barter rather than as sale, true contracts of barter differ significantly from transactions made for a medium of exchange whose intrinsic quality does not immediately fulfil the needs of the parties. This distinction is important in delineating the boundaries of private law’s treat- 2.16 ment of transactions because it imposes an objectivity that would otherwise be lacking. In other words, barter agreements are dependent on the coincidence of

17 According to Moore’s law, the processing power of which newly produced computer hardware is capable doubles every two years. Gordon Moore made his prediction in 1970, and it has turned out to be accurate, although it is generally recognized within the industry that the rate of increase in power is now faster. Inevitably, such improvements in hardware performance beget corresponding software developments. The scale of the algorithmic calculations on which Bitcoin is based, for instance, would simply not have been feasible a decade before it was created. 18 Moss v Hancock [1899] 2 QB 111, 116. 19 Which are issued and only accepted by merchants within those particular cities. The idea is to encourage people to spend their money with local businesses. 20 Proctor (n 13) para 1.52.



It’s Virtually Money wants in a way that transactions using an independent medium of exchange are not. So, if A offers to give her car to B in exchange for a B’s bicycle and cycling gear, this is a transaction which depends for its worth on a particular subjective set of facts: perhaps A is moving to Oxford, and B is moving to Birmingham, so that an bicycle will be more valuable to A than a car and vice versa. This is not analogous to an agreement whereby A agrees to transfer her car to B for £3000. This is because, in the former situation, the lack of fungibility of the asset offered in exchange means that there is no certain sum, independent of the parties’ particular and immediate wants, which the law can identify as forming the basis of the parties’ primary obligations. When parties incur a primary obligation to pay a certain sum of money (or, historically, a quantity of fungibles), they thereby agree to produce something which transcends their particular and immediate requirements in both a temporal and substantive sense. Their ability to fulfil that obligation is not dependent upon the availability of specific things, which may be exhaustible, perishable, and vulnerable to irreplaceable loss, but can instead be fulfilled by a measure of something of general availability. It seems fungibility is the touchstone of distinction here, which would also explain why there exists the possibility of parties agreeing to make what would otherwise be a barter into an agreement of reciprocal sales on the basis of a mutual set-​off of prices, as in Alldridge v Johnson.21 The distinguishing characteristic here between a sale and a barter is the valuation of the consideration from each side;22 that is, not five oranges for three apples, but five oranges worth £2.50 for three apples worth £1.75, with, for instance, the difference to be paid in cash. By presenting the quid pro quo in this way, the parties have introduced fungibility into their obligations by giving value in currency as an alternative. Goode on Commercial Law defines ‘fungibility’ as: assets of which one unit is, in terms of an obligation owed by one party to another, indistinguishable from any other unit, so that a duty to deliver one unit is considered performed by the delivery of an equivalent unit.23 2.17 Von Mises provides a further helpful explanation of why money is the ultimate


A claim to money may be transferred over and over again in an indefinite number of indirect exchanges without the person by whom it is payable ever being called upon to settle it. This is obviously not true as far as other economic goods are concerned, for these are always destined for ultimate consumption.24 2.18 The presence of fungibility and the absence of consumability seem to identify

what is significant and distinctive about media of exchange, as opposed to other

21 (1857) 7 E&B 885, 119 ER 1476. 22 Bridge (n 4) para 1-​037. 23 McKendrick (n 2) 487. 24 von Mises (n 1) ch 3, s 1.



Introduction assets used for exchange or barter. For the private law purposes of facilitating, securing, and policing transactions, it is not obvious why the universality of that medium of exchange needs to form part of its definitional status. Virtual currencies such as Bitcoin are fungible for these purposes, at least as much as banknotes are. Whilst coins have no earmark at all, banknotes of course bear serial numbers, meaning that each one is strictly unique. The same goes for bitcoins, since they are all unique strings of digital code. Since, however, the serial number of a banknote or the content of a string of Bitcoin code makes no material difference to payers or payees, the former has always been treated as fungible for payment purposes. There is no obvious reason why a different approach should be taken to Bitcoin. Virtual currencies are also not consumables, but function in a way which corresponds with von Mises’s description above, since they are capable of fulfilling payment obligations amongst those willing to use them without ever needing to be settled or converted; they are not perishable, nor dependent for their value either on being spent within a certain amount of time, or used in a particular way. Thus, transactions in which the property in goods passes in exchange for virtual currencies are far closer in legal terms to those made for media of exchange (sale) than they are to those of barter. C. Unit of account It is fiendishly difficult to define precisely what a unit of account is. This may in 2.19 part be because it is an abstract concept, but one which is redundant without a quantitative value attached.25 In the United Kingdom, for example, sterling is a unit of account, providing as it does a ‘standard of value against which the value of commodities can be measured.’26 Since 1931, and the abandonment of the gold standard, sterling is also an independent measure of value, since it is not reducible to anything beyond itself (all the Bank of England now promises to pay the ‘bearer on demand’ is banknotes of different denominations), but it is not clear that this independence is necessary to its status as money. What is clear is that claims to money, such as ‘notes issues by banks of doubtful credit or bills that are not yet mature’27 or ‘anything more than the simple embodiment of a unit of account’28 (such as a coin or a banknote) are not units of account in their own right in the way that the traditional definition of ‘money’ requires. It is also the case that precious metals cannot function as units of account, since their value is subject to fluctuation and the vagaries of market demand,29 despite the fact that many might regard gold and silver as being at the very least intimately associated with the basic concept of money. Consequently, it would seem reasonable to Proctor (n 13) para 2.38. 26 Proctor (n 13) para 1.49. 27 von Mises (n 1) ch 3, s 1. 28 Proctor (n 13) para 1.51. 29 ibid. 25



It’s Virtually Money conclude that virtual currencies do not function as units of account, since their value relative to sterling is subject to the same fluctuations.30 Nor are they the lowest common denominations available within the economy, since their value depends on their convertibility into national currencies. Bitcoin, for instance, is a step removed from the debt instrument referred to above; not only does the former have its own denomination, whereas the latter is denominated in sterling, but Bitcoin gives its bearer no claim right, postponed or present. At most, a holder of Bitcoin has a liberty to present those assets to an exchange and request sterling in return.31 Thus, Bitcoin represents a means of claiming (in the non-​ Hohfeldian sense) money, rather than being money in its own right. D. Store of value 2.20 The viability of fiat money as a store of value depends entirely on the credit of the

bank of issue. But virtual currencies such as Bitcoin are doubly-​dependent: on their own market value, and then on the credit of banks that issue the currency for which they are exchanged. That said, there are several Bitcoin millionaires, so it is a medium which can store and accrue value, albeit with varying stability: The total value of all the bitcoin in circulation, as I  write [April  2016], is £4.24 billion. That number changes, often with disconcerting rapidity, since the price of bitcoin is sharply variable. This puts outsiders off, since one of the most basic functions of money is to store value; bitcoin is a lousy store of value, as many observers have pointed out. Bitcoin, however, already does an OK job with one of money’s other main functions, as a medium of exchange. You can buy plane tickets, book hotel rooms, buy computer equipment, food and pretty much anything else with bitcoin, which is now accepted by tens of thousands of businesses. Indeed, since you can buy gift cards with bitcoin, and use the cards at Amazon and other e-​commerce sites, you can in effect buy anything you want using the cryptocurrency. There are even bitcoin cashpoint machines.32

2.21 The ability of any medium to function as a store of value, however, is ultimately

relative. In Australia, Europe, and the United States, for example, Bitcoin is currently a relatively poor option. In Argentina, Zimbabwe, or India, however, it has looked at least at times a far more appealing prospect than fiat currency. E. A peculiarly private law concept of ‘money’

2.22 Private law’s concern with payment rights and obligations is no better served by

the conventional concept of money that it is by a more promiscuous idea of what can count as currency. That is not to suggest that the traditional institution of 30 Although this is would seem to result as much from their status within national economies, as from any of their own intrinsic qualities. 31 Or, of course, to present them to any party and offer them in return for goods or services. 32 Lanchester (n 10)  11. I  have left in Lanchester’s lack of capitalization, although, strictly, ‘Bitcoin’ refers to the generic currency, whilst ‘bitcoins’ are the actual tokens themselves.



Introduction money has no legal relevance, but that private law should adopt its own derivative and yet independent concept; one which is more responsive to the technological and economic changes for which private commercial activity is so often responsible, and on which it always relies. As private law currently stands, there are a number of effects which depend upon the classification of a transaction as having been made with ‘money’, and limited by that specific and conventional definition. Those effects are not, therefore, triggered by similar transactions made with virtual currencies, regardless of the expectations and intentions of the parties to any given contract. Given the swift and sustained rise in the use of these technologies, private law’s long-​established approach looks dated. ‘Money’, as traditionally understood, has an essential economic and political function, but the time has come to question whether that function coincides with the interests of private law. Remote shopping, while entirely feasible, will flop.33

In considering virtual currencies, it is very common to encounter scepticism about 2.23 the value of such a pursuit. Generally, this seems to be because such currencies are regarded as no more than a technological flash-​in-​the-​pan. Less than a generation ago, similar sentiments were expressed about the Internet. History has not been kind to those who have resisted the nearly inexorable force of Internet-​connected technologies . . . By not moving, the banking industry continues to experience disintermediation, the disconnection of consumers from their banks for a variety of functions including payments.34

Vigna and Casey describe the general trajectory of thinking about virtual cur- 2.24 rencies as moving from disdain through scepticism, curiosity, crystallization, and acceptance.35 Whilst it may well be that Bitcoin itself either fades into obscurity or crashes in a catastrophic way,36 the technology on which it is based is here to stay. Few can seriously believe that in another twenty years, people will still be passing each other pieces of paper and metal in exchange for goods and services. The financial industry certainly does not believe this, and most major banks have already committed serious funds to exploring Bitcoin’s underlying blockchain technology, with a view to integrating it into their payment protocols: The banks have looked into the possibility of better, faster, cheaper systems powered by blockchains, and have concluded that it’s possible for these to be a source of disruption and disintermediation of their business. Alternatively, they will be another profitable thing the banks own. They prefer the second option. A  number of competing syndicates, funded and largely owned by the banks, are rushing to develop and patent proprietary, finance-​friendly versions of blockchain technology.

33 ‘THE FUTURISTS:  Looking Forward A.D 2000’ Time Magazine (New  York, 25 February 1966). 34 Schatt (n 6) 174. 35 Paul Vigna and Michael Casey, Cryptocurrency (Bodley Head 2015) 11. 36 Although, at the time of writing, its value has been in the ascendant for a number of months.



It’s Virtually Money A consortium called R3Cev is backed by 42 financial companies and seeks to develop what would in effect be a private blockchain; Goldman Sachs, one of the firms behind R3Cev, has also filed a patent for a private blockchain-​backed currency called SETLCoin; Digital Assets Holdings, another blockchain company, is run by Blythe Masters, the English former J.P. Morgan executive who did more than anybody else to pioneer the credit default swap, the dazzlingly ingenious new financial instrument which was a huge success until it nearly destroyed the global financial system. This is just a tiny sample, and there are many other bitcoin-​related initiatives.37 2.25 The same technology holds much promise for sectors with particular transactional

challenges, such as corporate finance and international sales:  the blockchain, which is essentially a distributed, as opposed to a central, ledger,38 may well provide answers to, for instance, the problems generated by the intermediation of securities39 and the negotiability of electronic documents. In any event, there is a clear need for private law theory and practice to accommodate virtual currencies. On the basis of its current categories and definitions, that will not be easy. F. Consequences of a failure to recognize virtual currency as money

1. Barter rather than sale 2.26 In order to qualify as a sale of goods, subject to that specific statutory regime, the consideration given in exchange for the goods must be monetary in form. 2.27 Benjamin tells us:

It has been observed that ‘the full meaning of the word “price” is not actually defined by the Sale of Goods Act, except perhaps by s 2(1)’. The consideration in a contract of sale of goods must in English law be a price in money, either paid or promised. By money is meant legal tender; it does not mean money’s worth, so the agreement to transfer goods in exchange for shares is not a sale within the Act. Payment need not, however, be made in cash: a method of payment that enables the seller to obtain money—​and not merely money’s worth—​is within the Act, such as the use by the buyer of a charge card or credit card, or a debit card, or digital cash (smart card or payment by text message through a mobile telephone), or cheque, or banker’s draft, or trading check. It is irrelevant that the money payment comes, not from the buyer of the goods, but from the card issuer.40 2.28 It is, however, by no means clear that this provision would cover exchanges of

goods made for virtual currencies. The ‘digital cash’ reference appears to refer to the process through which fiat currency is transferred, as opposed to the underlying nature of the currency being exchanged. Whilst there is evidence that foreign

Lanchester (n 10) text to n 7. 38 See the introduction for a detailed description of distributed ledger technology. 39 Eva Micheler, ‘Custody Chains and Asset Values:  Why Crypto-​ Securities Are Worth Contemplating’ (2015) 74(3) CLJ 505, 532. 40 Bridge (n 4) para 2-​044. 37



Introduction currency is an acceptable alternative,41 the presumption here must be that the foreign currency concerned is one backed by a State or States, although, in some case, this is no guarantee of stability or value. According to Bridge: it is no objection to the characterization of an agreement as one of sale that the buyer pays with a cheque or banker’s draft, for here the instrument serves as a conditional payment until the bank, acting as agent for the buyer, puts the seller in funds with the amount of cheque or draft. The instrument itself may not be money but it is the means by which the seller obtains money.42

The editors of the current edition of Benjamin’s Sale of Goods do, however, 2.29 suggest: payment using ‘money’ issued by local communities or traders, such as the Brixton Pound in London, may constitute money for the purposes of a sale contract where the scheme gives holders of the notes the right to exchange them for legal tender and in so far as a holder of such a note uses it to pay for goods.43

This, in part a concession to the Societary theory of money, is notable for the 2.30 powerful condition that such independent currencies must give to their holders the right to exchange them for legal tender. The Societary theory of money is one which holds that the recognition of money results from social usage alone, and thus is not dependent upon State recognition. Whilst recognizing that this theory ‘plays a greater role than the adherents of the State theory would wish to admit’, particularly in times of financial chaos and instability, Proctor concludes that ‘the Societary theory cannot be reconciled with the undeniable monopoly of modern States over their currencies and the effective recognition of that monopoly by international law.’44 At the time of writing, in most countries, it is this, and only this Societary recognition, which facilitates the function of virtual currencies. The growth of both virtual and local currencies suggests perhaps that the Societary theory of money should not be dismissed too quickly. The most recent edition of Mann, however, suggests that, whilst it becomes attractive to adopt a functional approach—​money is that which serves as a means of exchange—​subject to the crucial proviso that its functions must have the formal and mandatory backing of the domestic legal system of the State or area in which it circulates. For anything which is treated as ‘money’ purely in consequence of local custom or the consent of the parties does not represent or reflect an exercise of monetary sovereignty by the State concerned, and thus cannot be considered ‘money’ in a legal sense.45

Daewoo Australia Pty Ltd v Suncorp-​Metway Ltd (2000) 33 ACSR 481; Proctor (n 13) para 1.83 42 Michael Bridge, The Sale of Goods (2nd edn, OUP 2009) para 2.28. 43 Bridge (n 4) para 1.034, n 233. 44 The example he uses is that of the hyperinflation in Zimbabwe, which reached its nadir in 2009. During that time, the locals simply ceased to use their own currency (ultimately redenominated at 1,000,000,000,000 to 1), preferring instead to deal in US dollars, and other foreign currencies. 45 Proctor (n 13) para 1.15. 41



It’s Virtually Money 2.31 It is an interesting and open question whether holders of bitcoins currently have

a right to exchange them for legal tender (and indeed what rights such holders have in any respect). When determining the value behind a digital currency unit, the linchpin of this equation is the point where digital units are swapped for national currency. Without convenient exchange points which allow for the conversion of digital currency units into national currency value, thus creating liquidity for the currency, a digital currency system will never appeal to a commercial audience.46

2.32 It would seem as if the holding of a bitcoin in itself generates no such right. The

location of any such right could lie only in the contractual agreement between the holder and the exchange which swapped her national currency for bitcoins in the first place: In decentralized virtual currency systems, such as Bitcoin, there is no administrator and third-​party agents are always responsible for the exchanges between digital currency and government-​issued fiat money.47

2.33 In Hohfeldian terms, it is hard to identify a claim right here. It seems easier to

argue that the holder has a power, a power to exchange that currency for fiat currency. In fact, the relationship between the holder of Bitcoin and the exchange would seem to be similar to a sale in itself, which might suggest that bitcoins are in this sense more like commodities. This would make them unlikely to be regarded as money, capable of being exchanged for goods in subsequent sales transactions. Both English and Australian Sale of Goods legislation defines the subject matter of its concern as ‘all personal chattels other than things in action and money’.48 In the absence of a more expansive notion of ‘money’ and ‘currency’, therefore, virtual currencies are liable to be excluded from this, which will often conflict with the commercial expectations and intentions of those who deal in them.

2.34 Strictly, in the context of sale as the law currently stands, it is important that the

exchange be made for money, rather than money’s worth. ‘A clear and liquidated financial advantage accruing to the “seller” will not . . . amount to money as such: money is not the same as money’s worth.’49 Historically, the common law has remained fairly committed to the requirement of money being the medium of exchange in contracts classified as sales. In Simpson v Connolly, Finnemore J said: [T]‌he general principle of English law in regard to sale is that a sale means the exchanging of property for money. That applies . . . to a sale of land and to a sale of chattels equally.50

46 Mullan (n 11) 10. 47 Although, in this, is it so different from the Brixton and Bristol pounds? See s 5 (.5) of Bristol Pound terms and conditions:  (accessed 2 August 2018). 48 eg Sale of Goods Act 1979, s 61(1). 49 Bridge (n 42) para 2.28. 50 [1953] 1 WLR 911, 915.



Introduction This was cited with approval by Upjohn J in Robshaw Brothers Ltd v Mayer,51 and, 2.35 in Re Westminster Property Group, Nourse J said: The authorities establish that in legislative usage and in the absence of a special context the word ‘sale’ denotes an exchange of property for cash and not for other property. I was referred to John Foster & Sons Ltd. v. Inland Revenue Commissioners [1894] 1 Q.B. 516; J. & P. Coats Ltd. v. Inland Revenue Commissioners [1897] 1 Q.B. 778 and in the Court of Appeal[1897] 2 Q.B. 423; Simpson v. Connolly [1953] 1 W.L.R. 911 and Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioners [1963] A.C. 135.52

In O’Dea v Merchants Trade-​Expansion Group Ltd,53 vouchers were issued along- 2.36 side purchased goods by a retailer, which could then be exchanged for other goods in the defendant’s warehouse. The goods in that warehouse were labelled according to the amount of vouchers required in order to obtain them. Betts AJ said: By no stretch of the imagination could it be said that the tokens represented money. The actual value of the tokens in money to anybody but the defendant is unknown . . . There is no separate assessment in money of the actual value of the goods . . . It seems to be impossible, therefore, to say that where tokens are procured by the customer from retailers are exchanged by the defendants for goods, there is a sale of those goods . . . There is no money consideration and there is no ‘price’ in the ordinary sense of that word.54

On the other hand, of Davies v Customs and Excise Commissioners,55 a transaction 2.37 in which trading checks were exchanged for goods, Lord Widgery CJ said, ‘I am quite confident that the customer who presents the . . . check is paying cash and not consideration other than cash’.56 Trading checks are vouchers transferred to a borrower by a lender, which are then used by that borrower to acquire goods from certain sellers. Those sellers then redeem the vouchers from the lender, sometimes less a commission. The distinction between O’Dea and Davies lies in the way in which the goods were valued. In the former, they were not valued in fiat money terms, whereas in the latter they were: customers paying with checks bought the same goods, for the same fiat money price as those paying in cash did. It would seem that this point has so far been determinative of the classification of sales contracts: An exchange of goods for other goods, with no stipulation as to money price, is a barter and is outside the Act . . . An agreement to provide goods against trading stamps or other tokens is not a sale. . . .57

51 [1957] ch125, 129. 52 [1984] 1 WLR 1117 at 1121. Decision and reasoning affirmed by the Court of Appeal at [1985] 1 WLR 676. 53 (1938) 37 AR (NSW) 410. 54 At 417. 55 [1975] 1 WLR 204. 56 [1975] 1 WLR 204 at 207. 57 McKendrick (n 2) 220–​21.



It’s Virtually Money 2.38 Whilst trading checks have little modern relevance, they have much in common

with store and credit cards, in that they operate as promises by third parties to pay sellers. Trading checks and credit cards differ from cheques (or at least from non-​guaranteed cheques),58 in that they are not conditional upon the drawer’s account remaining in credit. Whilst no longer a novel form of payment, such credit and store cards themselves satisfy our understanding of payment in a far more straightforward way than they do our definition of money. It is sometimes loosely said that the credit card is the equivalent of a money consideration, but the reality is that a credit card, like a cheque drawn on a bank account, is the means by which a money consideration can be paid to the seller by the credit card issuer. Where goods are supplied in return for a credit card payment, the contract is one of sale of goods.59

2.39 As Bridge points out, as far as the Sale of Goods Act 197960 is concerned:

A contract of sale of goods is defined in s 2(1) as one in which the seller agrees to transfer property in goods to the buyer for a money consideration: it does not say that the price must come from the buyer. The buyer’s duty to pay (s. 27) may be ‘negatived or varied’ (s. 55(1)) so that the seller looks to a third party instead for payment.61 2.40 And, according to Chitty:

Unless otherwise agreed the seller is entitled to payment in cash and in legal currency. But the parties may expressly or impliedly agree that payment may be made in some other manner, e.g. by cheque or by credit or charge card or by credit transfer, and such an implication may be made by course of dealing between the parties or by trade custom.62 2.41 It has long been established, even in a sales context, that the entirety of the

price need not be paid in money: part-​exchange, for instance, is one of the most common means of purchasing a vehicle.63 Part-​exchange describes a situation where asset A is assigned a price by the trader, and where that trader agrees to accept a money payment lower than that price, in combination with the transfer of asset B. Where, on the other hand, a trader agrees simply to exchange asset A for asset B plus a sum of money, but assigns no monetary value to either asset, this would not under the current law amount to a contract of sale.

2.42 This suggests that, on the basis of current analysis, virtual currencies would

not be regarded as money for the purposes of the law relating to sale of goods.

58 See Hugh Beale, Chitty on Contracts (32nd edn, Sweet & Maxwell 2016) para 44-​296. 59 Bridge (n 42) para 2.32. As authority for the final point, Bridge cites Re Charge Card Services Ltd [1989] ch 497, 509. 60 For equivalent provisions, see WA, s 1; Vic s 6(1); Qld, s 4; NSW, s 6; SA, s 1; Tas, s 6; ACT, s 6; NT, s 6. 61 Bridge (n 42) n 130. 62 Beale (n 58) para 44-​295. 63 Bridge (n 4) para 1-​038.



Introduction Instead, exchanges of such currencies for title to goods fall to be treated as contracts for exchange or barter, falling outside of the remit of Sale of Goods Act legislation: The implications of this distinction have not been fully explored. It is, however, clear that the Sale of Goods Act has no direct application to contracts of barter or exchange. There is reasonable agreement among the authorities that it is not open to a disappointed party, who has parted with goods without receiving the expected return, to sue for the value of the goods delivered as a price. The remedy is to claim unliquidated damages for non-​delivery of the goods promised in exchange, or possibly to sue the other party in tort on the basis that the property in such goods has passed to that party. It would seem, on principle, that there can be no claim for the price even when the goods have been valued for the purpose of the bargain, unless the transaction can be construed as two reciprocal sales, or a sale with a subsidiary agreement for payment in kind. There may, however, be a claim for a liquidated sum if this is agreed to be paid as part of the exchange, or when, after goods have been exchanged for goods on a running account, a cash balance is agreed to be due.64

The principal consequence for a disappointed seller, having agreed to accept 2.43 Bitcoin, would seem to be remedial, since she thereby loses the ability to sue for the price.65 This denies the seller the ability to enforce the primary obligation, and its corresponding advantages:66 debt claims are not discretionary,67 nor are they subject to the common law constraints of remoteness, mitigation, or penalties,68 and it is both procedurally and substantively easier for debt claimants to obtain summary judgment.69 In both theory and practice, then, the difference in legal treatment is significant enough to query the legitimacy of the distinction currently made between fiat and virtual currencies. 2. Applicability of the bona fide purchaser for value defence Another question which arises in relation to the status of virtual currencies is 2.44 whether the defence of bona fide purchaser for value without notice would apply in this context. David Fox has identified three principal features of the legal conception of money: First, its ability to pass as currency, so that fresh indefeasible title is created in the person who receives it as bona fide purchaser for value; secondly, its susceptibility to the principle of abstraction, which allows the legal title to money to pass by simple delivery or transfer regardless of the validity of the underlying transaction in which it is paid; and, thirdly, its relative untraceability at law so that a former owner’s

Bridge (n 4) para 1-​035. 65 Although that not always available anyway, depending on when property passes: Beale (n 58) para 44-​367; Bridge (n 42) para 11.61 66 Beale (n 58) para 26.008. 67 White & Carter (Councils) Ltd v McGregor [1962] AC 413, 455 (Lord Hodson). 68 Jervis v Harris [1996] ch 195. 69 Civil Procedure Rules, pt 24. 64



It’s Virtually Money surviving legal title to money is practically extinguished once his or her money has been mixed.70 2.45 As Fox goes on to explain, these features exist to protect the economic function of

money by eliminating the need to check the title of a transferor or the validity of a given transaction, thereby reducing parties’ transaction costs. It also prevents the value of money from being discounted by the transferee to account for the risk of the transaction not being secure because it effectively equates possession with the ability to pass title.71 In other words, ‘[t]‌he proprietary regime applying to money does not so much build trust between the parties as it make the possible absence of trust less relevant.’72

2.46 If the bona fide purchaser defence were not to be applied to such currencies, their

ability to function as media of exchange comparable to conventional currency would be seriously compromised. Quistclose Investments Ltd v Rolls Razor Ltd73 indicates that that the defence of bona fide purchaser for value extends to bank money, and, given the considerable physical differences between those choses in action and the physical coins in relation to which the defence was first formulated,74 the reason for this must be one of economic exigency. It stands to reason that the policy behind such an extension is one of facilitating effective commercial exchange and meeting the contractual expectations of the parties to transactions, who have undoubtedly come to regard bank money as being synonymous for all practical purposes with notes and coins. It would be counter-​productive at best for the security of minor transactions to be protected by an exception to the nemo dat rule, whilst leaving those making larger, bank money transactions vulnerable to the claims of dispossessed third parties.

2.47 It would be reasonable to argue, therefore, that these practical and commercial

arguments should be extended to virtual currencies. The significant difference between bank money and virtual currencies, after all, lies not in their private law function as between contracting parties, but in their public status; one as a tool of governmental policy and the other currently independent of it. The simple statement that money is a commodity whose economic function is to facilitate the interchange of goods and services does not satisfy those writers who are interested rather in the accumulation of material then in the increase of knowledge. Many investigators imagine that insufficient attention is devoted to the remarkable part played by money in economic life if it is merely credited with the function of

70 Fox (n 5) 2.01. See also David Fox, ‘Bona Fide Purchase and the Currency of Money’ (1996) 55(3) CLJ 547. 71 Fox (n 5) para 2.02. 72 Fox (n 5) para 2.18. See also James Edelman and Elise Bant, Unjust Enrichment (2nd edn, Hart 2016) 371; Hills Industries Ltd v Australian Financial Services and Leasing Pty Ltd [2012] NSWCA 380 at [83] (Allsop P). 73 [1970] AC 567. 74 Only later was it extended also to banknotes: Fox (n 5) para 2.21



Conclusion being a medium of exchange; they do not think that due regard has been paid to the significance of money until they have enumerated half a dozen further ‘functions’—​ as if, in an economic order founded on the exchange of goods, there could be a more important function that that of the common medium of exchange.75

II. Conclusion There is no good reason for private law to distinguish between fiat and virtual 2.48 currencies. To do so is to provide inconsistent remedial responses to substantively similar commercial arrangements and to undermine parties’ legitimate expectations. What is conspicuous to the economist is in this case invisible to the lawyer. It is time, therefore, for private law to free itself of the macroeconomic restrictions that have long been imposed upon it by a definition designed for different purposes.

von Mises (n 1) ch 1, s 3. 75





I. Introduction II. Theories of Money III. Nature of Cryptocurrencies IV. International Law V. Public Law VI. Criminal Law A. Theft and fraud

B. Cryptocurrencies and money laundering 3.32 C. Financial markets legislation 3.34

3.01 3.05 3.09

VII. The Central Bank


A. Financial stability B. Monetary policy

3.24 3.27 3.28

VIII.  Conclusions

3.44 3.46 3.55 3.58

I. Introduction The present chapter examines the consequences of cryptocurrencies for inter- 3.01 national and public law conceptions of money.1 As a matter of approach, it is necessary at the outset to consider prevailing legal 3.02 theories of money and, thereafter, to consider the extent to which cryptocurrencies either conform to or depart from such theories. As might be expected, technological advances and the advent of cryptocurrencies 3.03 such as Bitcoin, Ethereum, Litecoin, and many others pose direct challenges to longstanding canons of monetary law. The present chapter will therefore begin with a brief examination of current 3.04 theories of money. Thereafter, the status of cryptocurrencies will be considered Charles Proctor, Partner, Fladgate LLP, London, UK. * 1 To the extent to which the present discussion revolves around public law issues, it is written primarily from an English law perspective.



Cryptocurrencies against the backdrop of those theories. This will be followed by a review of the implications of such currencies in the public and international law contexts.

II.  Theories of Money 3.05 Both international and national conceptions of money have generally been built

on the assumptions that (i) the issue of physical money is the exclusive prerogative of the issuing State, and (ii) even money that is of a scriptural2 or electronic nature will be expressed in the national unit of account. These assumptions are longstanding and essentially continue to hold good even in the context of monetary unions, where a single currency is shared by a group of States.3

3.06 Equally, because the creation of a monetary system was seen as a State monopoly,

it necessarily followed that the State controlled (i) the medium of exchange, (ii) the unit of account,4 and (iii) the monetary store of value.5 It also necessarily followed that the State’s control over its monetary system allowed it to determine its own monetary and exchange rate policies. The criteria just formulated represent the State theory of money which may perhaps be regarded as the dominant theory at present.6 The theory was first expounded with clarity by GF Knapp in his Staatliche Theorie des Geldes.7

3.07 However, whilst the State theory of money currently holds sway, it does not com-

pletely dominate the theoretical landscape. As its name suggests, the competing, Societary theory of money focuses its approach to money on the conduct of society as a whole. Anything that in practice functions as a medium of exchange must be regarded as ‘money’, even though it lacks the legal underpinning required by the State theory.8 This may accord with an economist’s approach to ie money represented by a credit to a bank account. 3 On the State theory of money, see Charles Proctor, Mann on the Legal Aspect of Money (7th edn, OUP 2012) paras 1.17–​1.29. On monetary sovereignty in the context of monetary unions, see ibid ch 31. 4 The unit of account is intended to provide a ‘measuring stick’ against which the value of goods and services can be assessed: see ibid para 1.49. The well-​known volatility of the value of cryptocurrencies prevents them from performing this ‘measuring’ function. 5 On these features of a monetary system, see Proctor (n 3) paras 1.49–​1.60. 6 It should be added that an institutional theory of money was developed by Sainz de Vicuna, ‘An Institutional Theory of Money’ in Mario Giovanoli and Diego Devos (eds), International Monetary Law and Financial Law (OUP 2010) ch 25. The theory is further considered by Proctor (n 3) paras 1.30–​1.44. This theory places significant emphasis on the role of an independent central bank within the framework of a monetary system. Nevertheless, this theory depends to a significant extent on the ultimate sovereign authority of the State as the origin of the power to issue money. 7 Georg Knapp, Staatliche Theorie des Geldes (4th edn, Duncker & Humbolt 1923). It should be noted that the theory was criticized by economists on the grounds that it ignored market practice in a money-​using society. See, for example, Ludwig von Mises, The Theory of Money and Credit 69 (2nd edn, Duncker & Humbolt 1924, tr H E Bateson, Skyhorse Publishing 2013). 8 On the Societary theory of money, see Proctor (n 3) para 1.29. 2



Nature of Cryptocurrencies money but—​from a legal perspective—​the theory obviously lacks the certainty and clarity that lawyers are said to crave. Yet the Societary theory has a respectable history. In 1871 an Austrian economist, Carl Menger, published his Grundsatze der Volkwirtschaftslehre (Principles of Economics). Menger considers that the custom and practice of markets created a means of exchange that guided economies beyond pure barter. Thus, he notes, cattle were effectively an early means of exchange. Whilst a buyer of cattle may not necessarily have required them for use as cattle, he could be reasonably confident that others would accept them as a means of exchange for goods or assets that he did require. Thus, society was creating its own means of payment, without reference to any wider legal framework. Whilst this approach cannot be fully followed through without reservations or exceptions, the writer would argue that (i) the Societary theory of money provides a convincing description of the historical origins of money and society’s recognition of the need for a means of exchange, but (ii) modern legal and regulatory developments effectively mean that the Societary theory has now been supplanted by the State theory. It is perhaps unsurprising that the State theory retains its dominance. For lawyers, it is reassuring that the State’s constitutional infrastructure provides the Grundnorm for the monetary system. For governments and central banks, the theory settles monetary authority firmly within their own spheres of authority. That said, and given that further reference will be made to the Societary theory at 3.08 a later stage, it is necessary to make an observation as to the legal content of the Societary theory. The notion that society can, through its practices and customs, create a means of exchange necessarily connotes that the tokens concerned achieve a substantial level of general acceptance within the community concerned—​how, otherwise can it legitimately constitute a means of exchange? The challenges posed by this threshold will be considered below.

III.  Nature of Cryptocurrencies In order to pursue the discussion, it now becomes necessary to provide a working 3.09 definition of a cryptocurrency for present purposes. A cybercurrency or virtual currency has been described as: a digital representation of value that can be digitally traded and functions as (i) a medium of exchange and/​or (ii) a unit of account and/​or (iii) a store of value, but does not have legal tender status (i.e., when tendered to a creditor as a valid and legal means of payment) in any jurisdiction. It is not issued or guaranteed by any jurisdiction, and fulfils the above functions only by agreement with the community of users of the virtual currency . . . .9 9 See Financial Action Task Force, ‘Virtual Currencies: Key Definitions and Potential AML/​CTF Risks’ (June 2014) Financial Action Task Force 4 accessed 25 July 2018.



Cryptocurrencies The key point of distinction with national currencies is therefore the lack of legal tender status for cryptocurrencies,10 with the result that cryptocurrencies serve as money only by agreement among the contracting parties.11 If one adheres to the State theory of money in its fullest rigour, then cryptocurrencies can never be ‘money’ because they lack the necessary origins within the legislation and the machinery of the State. 3.10 This definition is to some extent mirrored in a report on virtual currencies issued

by the European Central Bank in 2012, which notes that ‘a virtual currency is a type of unregulated, digital money which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community’.12 In 2015, the ECB adopted a revised definition, referring to virtual currencies as ‘a digital representation of value, not issued by a central bank, a credit institution or e-​money institution, which in some circumstances can be used as an alternative to money’. In common with the definition given in paragraph 3.05 above, the ECB also states that ‘the ECB does not regard virtual currencies, such as Bitcoin, as full forms of money as defined in economic literature. Virtual currency is also not money or currency from a legal perspective’.13

3.11 It should be noted that the materials discussed above predate the decision of the

Court of Justice in a case on Bitcoin in the context of the EU’s VAT Directive,14 where the Court noted that Bitcoin ‘is neither a security conferring a property right nor a security of a comparable nature . . .’. To the contrary, ‘the Bitcoin virtual currency has no other purpose than to be a means of payment and . . . it is accepted for that purpose by certain operators’. On that basis, it was held that transactions effected through a Bitcoin/​traditional currency exchange were ‘transactions concerning currency, bank notes and coins used as legal tender’ within the terms of an applicable exemption from value added tax. For this purpose, Bitcoin as a means of payment was equated with other currencies, since it served no other purpose. Given the language employed in the VAT exemption, it seems to be fairly clear that the Court of Justice regarded Bitcoin as equivalent to ‘money’, and other commentators have expressed a similar conclusion.15 The decision is

On the nature and consequences of legal tender, see Proctor (n 3) paras 2.24–​2.28. 11 It should be noted that a very similar point may be made about scriptural or bank money (see Proctor (n 3) paras 1.67–​1.71), but, in practice, bank money is almost universally accepted as a means of payment. 12 European Central Bank, ‘Virtual Currency Schemes’ (October 2012) European Central Bank 13 accessed 25 July 2018. 13 On the points just noted, see European Central Bank, ‘Virtual Currency Schemes—​ A Further Analysis’ (February 2015) European Central Bank 4 accessed 25 July 2018. 14 Case C-​264 14/​Skatteverket v Hedqvist ECLI:EU:C. 2015.71, para 55. 15 See Phoebus Athanassiou, ‘Impact of Digital Innovation on the Processing of Electronic Pay­ ments and Contracting: An Overview of Legal Risks’ (2017) European Central Bank Legal Working 10



International Law clearly of significant interest in the present context, but (i) one of the indicia of ‘money’ is that it is generally accepted as means of payment, and (ii) whilst the judgment considers the acceptance of Bitcoin, it does not discuss whether Bitcoin is generally accepted for these purposes. From a purely monetary law perspective, this must be regarded as a flaw in the judgement, and, as a result, it is submitted that this decision does not detract from the views that have been discussed above. By way of summary, it may be observed that:


(a) cryptocurrencies plainly do not constitute ‘money’ within the State theory, since they lack the necessary foundation and origin as the unit of account within the legal system of a country; and (b) likewise, cryptocurrencies do not constitute ‘money’ within the Societary theory, since there is no indication that they enjoy the necessary level of general acceptance within a given community.16 Accordingly, whether one subscribes to the State theory or the Societary theory, 3.13 the monetary law outcome for cryptocurrencies is the same in each case. As has been shown above, the Societary theory explains the origins of money, 3.14 whilst the State theory is more appropriate in the context of modern monetary frameworks. It must therefore be accepted that a massive growth in the use and acceptance of cyber-​currencies might prompt a reconsideration of the definition of ‘money’ itself. However, matters are not yet close to that stage. The above paragraphs provide a sufficient description of cryptocurrencies for pre- 3.15 sent purposes. Subject to the issues that arose in the VAT Directive case, they also confirm an official-​level view that cryptocurrencies are not ‘money’ within the traditional legal sense17 and—​despite the contrary indicators from the Court of Justice—​it is suggested that this view is correct. So how can cryptocurrencies affect international or public law approaches to money? And what are the practical consequences of cryptocurrencies in these specific areas of law?

IV.  International Law As a general consideration, it may be said that public international law recognizes 3.16 the concept of money as a creature and creation of a national legal system.18

Paper Services 16/​2017, 19 accessed 25 July 2018. 16 For the statistics that support this conclusion, see para 3.46 below. 17 Although, as with any other expression, the meaning of ‘money’ will often depend on the specific context in which the issue arises: see the discussion in Proctor (n 3) para 1.03, with reference to cases such as Perrin v Morgan [1943] AC 399 (HL). 18 See the discussion of the Serbian Loans case, below.



Cryptocurrencies Perhaps as a consequence of that position, international law does not seem to have had the occasion or opportunity to develop a self-​standing definition of ‘money’. International law commentators refer to the definitions and theories of money noted in paragraphs 3.05–​3.08 above and do not appear to suggest that any refinements are necessary when money is considered within the framework of public international law.19 This approach would appear to be correct and, for the reasons already given,20 it must follow that cryptocurrencies are not ‘money’, whether viewed from the perspective of a domestic legal system or through the prism of international law. It is therefore possible to conclude that the creation of cryptocurrencies should not have any consequences for national or international legal conceptions of money.21 3.17 But what of the concept of monetary sovereignty, as distinct from money

alone? Most countries create and issue their own national currencies. Whilst it is true that currencies such as the euro have been established by treaty between a number of States, the currency only came into existence through an exercise of national sovereignty within each individual member State (that is to say, through the ratification of the treaty concerned). Whilst the Articles of Agreement of the International Monetary Fund pre-​suppose the existence of national monetary sovereignty,22 they do not explicitly state, define, or acknowledge the principle,23 nor do they attempt any definition of ‘currency’ or ‘money’.24 The most often cited authority for the existence of national monetary sovereignty is the 1929 judgment of the Permanent Court of International Justice in the Serbian Loans case, where it is noted that ‘It is indeed a generally accepted principle that a state is entitled to regulate its own currency’.25 The available materials are relatively sparse, although

19 See eg Claus Zimmermann, A Contemporary Concept of Monetary Sovereignty (OUP 2013) 11–​16. 20 See paras 3.09–​3.15 above. 21 It is felt that this statement is true in a general sense. However, as will be seen, a more nuanced approach may be necessary where the expression ‘money’ or cognate terms have to be considered in particular statutory contexts. See the discussion that follows. 22 eg by requiring member countries to refrain from manipulating the international monetary system: see Art IV(1)(iii) of the Agreement. 23 The omission is noted by Claus Zimmerman, ‘The Concept of Monetary Sovereignty Revisited’ (2013) 24(3) EJIL 797, 798. 24 There are numerous references to the ‘currency’ of a member country, but no express definition of that term. Given that (i) obligations arising under the Articles of Agreement apply only as between the Fund itself and its member countries and (ii) the Articles of Agreement were concluded in 1944, it may be assumed with a degree of confidence that the Articles are concerned solely with national currencies and that cryptocurrencies were beyond contemplation when the IMF Agreement was concluded. 25 Case concerning the payment of various Serbian loans issued in France (France v Kingdom of the Serbs, Croats and Slovenes) [1929] PCIJ Rep Series A no 20, at 44. This case may be regarded as the initial point of departure for the principle of monetary sovereignty:  see Zimmermann (n 19).



International Law there seems to be no doubt about the general principle of national monetary sovereignty.26 At a domestic level, courts have recognized the sovereignty of other nations with 3.18 respect to their national currencies and, correspondingly, have recognized an obligation to prevent the counterfeiting of foreign currencies within their own borders. This duty has been most directly recognized by domestic decisions in the United States27 and in Australia.28 The issue arose for consideration in the English courts in the nineteenth century, although the case was not a direct instance of counterfeiting and the decision is largely (although not exclusively) based on considerations of private law.29 Nevertheless, and to this limited extent, it may be said that national monetary sovereignty is not merely a right of the issuing State but also that the recognition of the right represents an obligation of other States.30 But, whilst recognition of monetary sovereignty sets the background to the present discussion, it is of only limited assistance in determining the consequences of cryptocurrencies in international law. This must necessarily be the case. The issue of a traditional currency is a quintessentially sovereign act which is capable of recognition and consequences under international law. In contrast, the creation of a cryptocurrency is a private or commercial act by individuals who are not representing the State in that endeavour.31 This view is reinforced by the fact that a cryptocurrency has no ‘nationality’ as such—​transactions in cryptocurrencies can be initiated from a computer anywhere in the world, at any time. So what are the consequences of cryptocurrencies for public international law? Given

26 The nature, scope, and extent of that sovereignty continue to evolve: see generally Zimmermann (n 19). 27 US v Arjona (1887) 120 US 479. The judgment notes that it is in the interests of the United States to recognize and give effect to the international law obligation to prevent counterfeiting, as it can then expect reciprocal treatment from other countries. See also US v Grosh 342 F2d 141 (1965), a case involving the counterfeiting of Cuban pesos with a view to undermining the Castro regime. 28 Watson v Lee [1979] HCA 53, para 35. 29 Emperor of Austria v Day (1861) 3 De G F&J, 217. This is in many respects an interesting case, and the actual decision is highly questionable. The defendants had commissioned the printing of a substitute currency that was to be used in Hungary, following the overthrow of the Emperor of Austria. An injunction was granted to prohibit the printing on the basis that—​if the plan were followed through—​both the Emperor and his subjects would suffer pecuniary and property losses. It is not clear why the English courts should restrain actions that may lead to losses suffered abroad, and the essential cause of action is by no means clear. The court touches on wider considerations, noting that the printing of such notes in England could lead to diplomatic protests, thus implying that international law formed a part of the court’s thinking. The court did, however, state that it would not grant an injunction to protect the political rights and prerogatives of the Emperor, since foreign sovereign rights cannot be enforced in England. See now the decision in Government of India v Taylor [1955] AC 491 (HL). 30 Whilst the duty to prevent counterfeiting has its origins in customary international law, it should be noted that this has largely been superseded by the International Convention for the Suppression of Counterfeiting Currency (adopted 1929, entered into force 22 February 1931) 112 UNTS 371. 31 Indeed, the absence of State involvement in cryptocurrencies is seen as one of their key attractions, especially for those seeking a cloak of anonymity.



Cryptocurrencies that obligations under international law fall primarily on States themselves, it is difficult to identify the content of any particular obligations with reference to cryptocurrencies. But it may be possible to make a few general observations. 3.19 First of all, and aside from the duty to prevent counterfeiting, States do not owe

any customary international law obligations with respect to the protection of other countries’ monetary systems.32 Consequently, if a State felt that its monetary or financial system was threatened by the increasing use of cryptocurrencies,33 it would have no legal right to call upon other States to suppress the creation or use of the cryptocurrencies concerned. This position is reinforced by the decentralized and anonymous nature of cryptocurrencies, which means that it is very difficult to attach any form of territorial or national responsibilities to this phenomenon. It is necessary to enter one reservation to this analysis, however unlikely it may be in practice. If a party present in country A sought to use or promote cryptocurrencies in a manner that was deliberately designed to undermine the economic or financial system in country B, then country B may have an international right to call upon country A to suppress that activity. This view flows not from specific considerations of monetary law but from ‘every State’s obligation not to allow knowingly its territory to be used for acts contrary to the rights of other States’.34 As stated, it is difficult to imagine that this issue will arise in practical terms.

3.20 Secondly, it is conceivable (if unlikely) that a State may seek to fulfil an inter-

national financial obligation by tendering payment in a cryptocurrency. This could arise in two alternative situations: (a) A  cryptocurrency could be identified as the money of account for payment under a treaty. This would depend upon the terms of the treaty itself and it seems inherently unlikely that there would be an express or inferred agreement to accept payments through this medium; (b) A tribunal could find that a cryptocurrency was the appropriate medium for the compensation of an international wrong. This would in turn depend upon the claimant State having incurred expenditure or loss in that cryptocurrency. Again, as matters stand at present, this seems to be an inherently unlikely situation.

3.21 Thirdly, Bitcoin may amount to a new species of ‘property’ that is entitled to

a degree of recognition and protection under international law. Most notably, cryptocurrencies clearly have some value as a means of exchange, and, therefore, 32 See generally the discussion in Proctor (n 3) ch 20. The statement in the text is directed purely to customary international law. The Articles of Agreement of the International Monetary Fund and other documents do of course create treaty obligations for member countries in the monetary sphere. 33 On potential threats to financial stability, see paras 3.46–​3.54 below. 34 On this formulation, see The Corfu Channel case (UK v Albania) (Merits) [1949] ICJ Rep 4, at 22.



International Law they must be treated as some form of property or possession.35 In this context, it is necessary to reproduce Article 1 of the First Protocol to the European Convention on Human Rights in full:36 Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by the law and the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

If national authorities find it necessary to limit or restrict the use of cryptocurrencies 3.22 in any way,37 then it is conceivable that the compatibility of those measures with Article 1 may have to be considered by the courts. In line with general principles, the relevant measures would of course have to be examined to ensure that they are proportionate to the desired objective. Beyond that, however, a court must be likely to find that measures to preserve financial stability and to prevent money laundering will satisfy the ‘general interest’ test, and the second of Article 1 specifically contemplates laws designed to ensure the payment of taxes. Furthermore, the fact that a cryptocurrency may lose some of its value as an incidental consequence of governmental action would not appear to involve an infringement of Article 1.38 Although inevitably subject to exceptions and reservations, it will be apparent 3.23 from this brief discussion that virtual currencies have limited impact from the perspective of public international law. Indeed, even in the context of traditional currencies, customary international law adopts a relatively passive role in the monetary sphere. It recognizes national monetary sovereignty but does little to regulate the exercise of that sovereign power.39 In short, public international law does not prohibit or limit the creation of virtual currencies, but, equally, it does

35 Money consisting of the national currency of a State has been treated as a ‘possession’ for these purposes: see, for example, the decisions of the European Court of Human Rights in Dolneanu v Moldova App no 17211/​2003 (ECtHR, 13 November 2007) and Lesina v Ukraine App no 9510/​03 (ECtHR, 19 June 2008). 36 The provision, of course, does have effect in the United Kingdom via the Human Rights Act 1998. 37 eg in the interests of financial stability, or to prevent money laundering or tax evasion, see the discussion at paras 3.46–​3.57 below. 38 Compare the reasoning in Rudzinska v Poland App no 45223/​99 (ECtHR, 7 September 1999) where the European Court of Human Rights decided that Article 1 did not require a State to protect individuals against the ravages of inflation, or to provide an index-​linking system for bank deposits. 39 By way of exception, there are certain reservations with respect to monetary sovereignty where the national legislation may be regarded as confiscatory or may involve unfair treatment of non-​ nationals: see, generally, Proctor (n 3) ch 20.



Cryptocurrencies nothing to promote or enhance these developments. This is more especially the case because—​thus far—​virtual currencies have been promoted within the private sector, which is less amenable to the general reach of public international law.

V.  Public Law 3.24 In contrast, cryptocurrencies may have a greater influence in the domestic mon-

etary sphere. Both the existence of cryptocurrencies and their use as a medium of exchange challenge the accepted State monopoly power over the currency. The central bank’s influence over the wider financial system and over interest rates and monetary conditions depends in part upon its ability to broaden or limit access to credit, as well as the cost of that credit. This power is undermined if equivalent monetary value is available outside the control of the central bank.

3.25 It is, therefore, perhaps unsurprising that both the nature of cryptocurrencies

and their classification as ‘money’ have provoked much more debate at a domestic level. For example, in the United Kingdom, the Financial Markets Law Committee has stated that there is ‘strong support [for] the view that virtual currencies which have become a medium of exchange and which are capable of passing in currency should, in their legal aspect, be viewed as money’.40 Others, however, have taken the firm view that virtual currencies are not to be regarded as money in any real sense.41

3.26 But the present section is about the impact of cryptocurrencies in the specific

sphere of public law. To the extent to which public law is concerned with the relationship between individuals and the State, this expression may be taken primarily to comprise criminal law, including legislation that provides sanctions for contravention of laws governing the banking and financial system.42 To the extent to which public law deals with the functions and the institutions of the State, then, clearly, the central bank, with its responsibilities for financial stability and

40 Financial Markets Law Committee, ‘Issues of Legal Uncertainty Arising in the Context of Virtual Currencies’ (July 2016) Financial Markets Law Committee 16 accessed 10 August 2018. This report is summarized and discussed by Joanna Perkins and Jennifer Enwezor, ‘The Legal Aspect of Virtual Currencies’ (2016) 31(10) JIBFL 569. 41 See Avinash Persaud, ‘Explaining Why Bitcoin is Fake Reveals Why Regulatory Policy Is Monetary Policy’ (2018) 33(4) JIBFL 207, 207. The same position is taken by the ECB and others (see para 3.11 above). 42 It may be added that the issue and use of cryptocurrencies may have various tax consequences: see, eg, HM Revenue & Customs, ‘Revenue and Customs Brief 9 (2014): Bitcoin and Other Cryptocurrencies’ (3 March 2014) accessed 10 August 2018. See further Chapter  10 in this volume.



Criminal Law monetary policy, will be at the heart of the discussion. These two subjects will be considered in turn.

VI.  Criminal Law In terms of the criminal law, the status of cryptocurrencies may arise in various 3.27 ways. For example: (a) Is a cryptocurrency capable of forming the subject matter of a conviction for theft or fraud? (b) Can the use or transfer of a cryptocurrency form the basis of a charge for a money laundering offence? (c) Are transactions involving cryptocurrencies subject to a requirement for authorization or permission from a financial market regulator? A. Theft and fraud In terms of a charge for theft, the alleged offence must relate to ‘property’ which is 3.28 defined to include ‘ . . .  money and all other property, real or personal, including things in action and other intangible property . . .’.43 For reasons given earlier, a cryptocurrency should not be seen as ‘money’ for these purposes and, consequently, a misappropriation of a cryptocurrency could not ground a theft charge under the ‘money’ heading. It may be thought that this does not greatly matter, because the same charge can 3.29 be based on the theft of ‘. . . other property . . . including things in action and other intangible property’. In this context: (a) on purely pragmatic grounds, it is difficult to categorize a cryptocurrency as a ‘thing in action’ (ie an asset that is only enforceable by legal action), for it is very difficult to identify who would be the defendant in such an action. A cryptocurrency does not, of itself, represent a legal claim against any person;44 (b) it is perhaps more attractive to view a cryptocurrency as a ‘thing in possession’ (ie something that can be transferred and exchanged for goods or other items), since that reflects their use in practice. However, since cybercurrencies are not capable of physical possession, it seems that this approach would not be available;45 and

43 Theft Act 1968, s 4. For a decision relating to the theft of physical notes and coins and whether there was an intention permanently to deprive the victim of the property concerned, see R v Velumyl [1989] Crim LR 299. 44 See further Chapter 6 in this volume. 45 Compare Armstrong DLW GmbH v Winnington Networks Ltd [2012] 3 WLR 835 [51], holding that an asset recorded only in electronic form cannot be a chose in possession.



Cryptocurrencies (c) in the absence of any other option, cryptocurrencies should be regarded as ‘other intangible property’ for the purposes of the 1968 Act.46 In this respect, it may be noted that the expression ‘. . . other intangible property . . .’ has been given an expansive definition by the courts. The prosecution in AG for Hong Kong v Nai-​Keung47 concerned the theft of a transferable export quota, which did not, of itself, confer a right to export goods but did entitle the holder to apply for the formal licence that was necessary for that purpose. The quota did not, of itself, create legally enforceable rights, and did not amount to a thing in action. However, the quota was found to be ‘other intangible property’ within the statutory definition. Having regard to their value as an asset class, this decision would appear to justify the view that cryptocurrencies should themselves be treated as ‘other intangible property’ for these purposes.48 This view is reinforced by the tendency of the English courts to treat official licences and permissions as a form of property even though they are in effect a form of statutory concession.49 3.30 Turning now to the offence of fraud, an individual may be guilty of this offence

if he commits fraud through false representation, through a failure to disclose information or through an abuse of his position.50 In each case, it is necessary to demonstrate that the defendant intended either (i) to make a gain for himself or another person or (ii) to inflict a loss on another person.51 For these purposes, the expressions ‘gain’ and ‘loss’ ‘. . . extend only to gain or loss in money or other property  . . .’.52 In view of the earlier conclusion that cryptocurrencies are not money, and given that the 2006 Act does not include a specific definition of that term, it must follow that a fraudulent act resulting in the acquisition of a cryptocurrency would not be an offence under the 2006 Act in so far as it relates to money. However, the fraudulent activity will still be an offence under that Act because (i) property for these purposes ‘ . . .  means any property, whether real or personal (including things in action and other intangible property) . . .’ and (ii) a 46 For a useful discussion of this aspect of characterization, see Financial Markets Law Committee (n 40) 5–​12. 47 [1987] 1 WLR 1339. 48 It should be said that the Nai-​Keung decision has not escaped criticism:  see Alex Steel, ‘Problematic and Unnecessary? Issues with the Use of the Theft Act Offence to Protect Intangible Property’ (2008) 30(4) Syd LR 574. 49 The point is made in the Financial Market Law Committee Report (n 40) in relation to Swift v Dairyside Farms Ltd [2000] 1 WLR 177 and Armstrong (n 45) with respect to milk quotas and emissions allowances. Fishing quotas may now be added to this list of property following the decision in R (United Kingdom Association of Fish Producer Organisations) v Secretary of State for Environment Food and Rural Affairs [2013] EWHC 1959 (Admin), as may the right to receive fees under a low-​ carbon electricity generation scheme: see Breyer Group Plc and Others v Department of Energy and Climate Change [2014] EWHC 2257 (QB). 50 Fraud Act 2006 (FA 2006), ss 1–​4. Dishonesty is a necessary ingredient of the offence in each case. 51 In relation to each offence, see FA2006, ss 2(2)(b), 3(b), and 4(1)(b). 52 FA 2006, s 5(2).



Criminal Law cryptocurrency would be intangible property for these purposes,53 even though it would not be a thing in action.54 From this brief analysis, it would appear to follow that cryptocurrencies will not 3.31 be money for the purposes of offences involving theft or fraud, but that the dishonest appropriation or acquisition of cryptocurrencies might constitute an offence under the relevant legislation since they will fall within the wider definition of ‘property’. This is consistent with the views expressed earlier, to the effect that for public law purposes, cryptocurrencies should be viewed as a species of property, rather than as money. B. Cryptocurrencies and money laundering The United Kingdom’s criminal law framework to counteract money laundering 3.32 is to be found in the Proceeds of Crime Act 2002. The core offences include (i)  concealing criminal property,55 becoming involved in arrangements for the acquisition or use of criminal property,56 and (iii) acquiring, using, or possessing criminal property.57 Although these offences are to be found under the heading ‘Money Laundering’ 3.33 in Part 7 of the 2002 Act, the offences themselves are framed in wider terms, and they refer to the use or possession of, or arrangements involving, criminal property. For these purposes, ‘property’ is to be regarded as ‘criminal property’ ‘if it constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or in part and whether directly or indirectly)’.58 In its turn, ‘property’ is also widely defined to include ‘all forms of property wherever situate and includes (i) money, (ii) all forms of property, real or personal, heritable or moveable and (iii) things in action and other intangible or incorporeal property’.59 For reasons noted earlier, cryptocurrencies are neither money nor things in action.60 However, the broader part of the definition refers to all forms of property. It is difficult to place cryptocurrencies into the appropriate legal ‘box’ but it is likely that they would be treated as a form of ‘property’ because it is plain that (i) they can be transferred in return for other assets albeit perhaps in limited contexts, and (ii) they have a value in terms of currencies and commodities. It follows that

Compare the discussion of the Nai-​Keung case at para 3.29 above. 54 ie for the reasons explained at para 3.21 above. 55 Proceeds of Crime Act 2002 (PCA 2002), s 327. 56 PCA 2002, s 328. 57 PCA 2002, s 329. 58 PCA 2002, s 326(4). It may be noted that conduct is ‘criminal conduct’ for these purposes if the conduct is an offence in the United Kingdom or would be such an offence if it occurred in this country: PCA 2002, s 326(1). It is also noteworthy that—​for no obvious reason—​the Theft Act 1968, the FA 2006, and the PCA 2002 each have different definitions of ‘property’. 59 PCA 2002, s 326(9). 60 See respectively, paras 3.09–​3.15 and 3.29 above. 53



Cryptocurrencies cryptocurrencies can be a form of ‘property’ for the purposes of the 2002 Act.61 However, they do not thereby become a form of ‘money’ for those purposes. C. Financial markets legislation 3.34 Inevitably, legislation affecting the financial markets will contain numerous refer-

ences to ‘money’. The potential complexities of this legislation in the context of cryptocurrencies can be illustrated by a few examples.

3.35 First of all, it is necessary to consider the application of the Electronic Money

Regulations 2011 to cryptocurrencies.62 Given that the regulatory regime in the field of electronic money was designed to cater for technological developments, it is tempting to assume that cryptocurrencies will be ‘electronic money’ for the purposes of the 2011 Regulations.

3.36 However, closer examination of the 2011 Regulations reveals that this is not the

case. Relevant provisions include the following:

(a) an entity that wishes to issue electronic money must seek authorization from the Financial Conduct Authority in order to carry on that business;63 (b) for these purposes, ‘electronic money’ means ‘electronically . . . stored monetary value as represented by a claim on the electronic money issuer which (a) is issued on receipt of funds for the purpose of making payment transactions [and] (b) is accepted by a person other than the electronic money issuer’; (c) cryptocurrencies do not fit within the ‘electronic money’ definition because they do not represent a ‘claim’ on an electronic money issuer. Indeed, for such currencies, there is no ‘issuer’ in the accepted meaning of that expression; (d) equally, cryptocurrencies are not issued ‘against a receipt of funds’. Rather, they are ‘mined’, or generated through the resolution of mathematical algorithms; and (e) it follows that arrangements involving a direct holding of a cryptocurrency by the owner will fall outside the scope of the 2011 Regulations.64 3.37 There does, however, remain the question of the application of the 2011

Regulations to the market infrastructure such as coin exchanges and electronic

61 The views expressed in this paragraph are supported by the definition of ‘property’ for the purposes of the corresponding provisions of the Theft Act 1968 and decisions such as Swift v Dairyside Farms Ltd [2000] 1 WLR 177: see the discussion at para 3.29 above. 62 The 2011 Regulations implement Directive 2009/​110/​EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit, and prudential supervision of the business of electronic money institutions, OJ L 267 10.10.2009, p7. 63 Art 5 of the 2011 Regulations. 64 It may be noted that, in a case before the European Court of Justice involving the VAT treatment of Bitcoin, the court likewise noted that this differed from electronic money because ‘ . . .  for the virtual currencies, the funds are not expressed in traditional accounting units, such as in Euro, but in virtual units such as the bitcoin . . .’:  Case C-​264/​15 Skatteverket v Hedqvist ECLI:EU:C:C2015:718, para 12. The case has been considered at para 3.11 above.



Criminal Law wallet providers. In this respect, wallets and exchanges may hold both fiat currencies and cryptocurrencies for their customers. The fiat currencies may be held for the purposes of facilitating the purchase of cryptocurrencies when the holder believes the moment to be opportune. At present the 2011 Regulations would apply to the fiat currency balances. However, they would not apply to the cryptocurrency balances because they do not represent money or monetary value for the purposes of those Regulations. Although the owner may be said to have a ‘claim’ against the exchange, this does not amount to a claim against the ‘issuer’ of the cryptocurrency. In addition, a wallet is simply a means of storing the customer’s key and does not create a claim against any person.65 Given that cryptocurrencies are intended to constitute a new medium of payment 3.38 for the discharge of obligations, it is likewise tempting to assume that activities involving such payments will fall within scope of the Payment Services Regulations 2017.66 The list of regulated payment services is set out in Schedule 1 to the 2017 3.39 Regulations. Without seeking to go through these items in depth, the main payment services for which regulatory permission from the Financial Conduct Authority67 is required include the following: (a) services involving the payment or withdrawal of ‘cash’ into or from a payment account (that is, an account used in order to effect ‘payment transactions’); (b) the execution of ‘payment transactions’; (c) the issue of ‘payment instruments’ with a view to effecting ‘payment transactions’; and (d) ‘money remittance’ services. Leaving aside for the moment the ‘money remittance’ service, it is apparent that 3.40 most of the core payment services turn on the existence of a ‘payment transaction’ which is defined as a transaction involving the placing, transfer or withdrawal of ‘funds’. In its turn, the expression ‘funds’ as defined to mean ‘ . . .  banknotes and coins, scriptural money and electronic money  . . . ’.68 In this respect: (a) the expression ‘banknotes and coins’ clearly refers to money issued in a physical form, and thus cannot extend to cryptocurrencies;

65 The comments in this paragraph appear to reflect the current position of the UK regulator. For that position, and for criticism of that stance, see Ross Anderson and others, ‘Bitcoin Redux’ (28 May 2018) Cambridge University Computer Department accessed 10 August 2018. 66 The 2017 Regulations gave effect to Directive 2015/​2366/​EU of the European Parliament and the Council on payment services in the internal market. 67 It is an offence to engage in the business of providing payment services unless such approval has been obtained: see Payment Services Regulations 2017 (PSR 2017), art 138. 68 On these points, see the definitions of ‘funds’ and ‘payment transaction’ in PSR 2017, art 2.



Cryptocurrencies (b) the term ‘scriptural money’ refers to funds credited to a bank account, and, once again, this clearly cannot extend to cryptocurrencies that are held outside the main financial system; (c) cryptocurrencies are not electronic money for reasons that have already been explained;69 and (d) since cryptocurrencies are therefore not ‘funds’ for the purposes of the 2017 Regulations, it must follow that transfers involving a cryptocurrency cannot amount to a ‘payment transaction’ for the purposes of any of the payment services outlined in paragraph 3.39 (a)–​(c) above. 3.41 Turning now to money remittance services, ‘money remittance’ is defined70 as

‘a service for the transmission of money (or any representation of monetary value) . . . where (a) funds are received from a payer for the sole purpose of transferring a corresponding amount to a payee . . . or (b) funds are received on behalf of, and made available to, the payee’. For the reasons given earlier, a transfer of a cryptocurrency is not a ‘transmission of money’ for these purposes, although there may be a more delicate argument about whether it represents a ‘transmission of . . . monetary value’. However, the issue falls away when it is recognized that the effect of a money remittance transaction must involve the transfer of ‘funds’ to the payee. Because cryptocurrencies are not ‘funds’, the result is that a transfer of cryptocurrencies is not a ‘money remittance service’ for the purposes of the 2017 Regulations.

3.42 These views are reinforced by various statements issued by the FCA, to the

effect that, when intended for use as a means of exchange, Bitcoin and other cryptocurrencies are not an ‘investment’ for the purposes of the Financial Services and Markets Act 2000 and, as a result, such assets fall outside the United Kingdom’s regulatory framework for the protection of investors in securities and financial instruments.71

3.43 It must, however, be said that courts in the United States have been confronted

with similar issues and have not always arrived at similar conclusions. In State of Florida v Espinoza,72 the defendant was accused of unlawfully selling Bitcoin on the basis that this involved the conduct of a money service business through

See para 3.36 above. 70 PSR 2017, art 2. 71 See, eg Financial Conduct Authority, ‘Written Submission on Digital Currencies’ (April 2018) Parliament accessed 1 August 2018, submitted as evidence to the Treasury Select Committee on Digital Currencies. It should be appreciated that certain derivative instruments relating to the value of a cryptocurrency may be subject to regulation as a contract for differences or may otherwise fall within the regulatory perimeter. The various alternative cases are illustrated by the table set out in paragraph 6 of the FCA’s written submission, but that is a separate issue. 72 Case no Fl 14-​2923 (FLA CIR 2016). 69



Criminal Law the sale of payment instruments without the requisite licence. For these purposes, a ‘payment instrument’ was defined as ‘a check, draft, warrant, money order, travellers check, electronic instrument or other instrument, payment of money or monetary value, whether or not negotiable’.73 In reliance on a release by the Internal Revenue Service, the court held that (i) Bitcoin was to be regarded as property rather than as money and (ii) as a result, it did not fall within any of the monetary expressions used in the definition of ‘payment instrument’. Consequently, the defendant was not guilty of the offence of operating an unlicensed money service business.74 It was understood that the prosecution was to appeal this decision, but the status is not known. At all events, Florida subsequently took steps to reverse the effect of the Espinoza decision by amending its anti-​money laundering legislation.75 In contrast, in US v Murgio,76 the US District Court for the Southern District of New York held that Bitcoin could be used as a means of payment for goods and services and, thus, constituted ‘funds’ or ‘monetary value’ within the scope of the corresponding legislative provisions. Departing from the decision in Espinoza, the court in Murgio declared that ‘there is no plausible interpretation of monetary value or payment instruments. . . . that would place Bitcoin outside the statute’s ambit’. This conclusion did, however, depend upon the court’s ability to characterize Bitcoin as ‘money’ because it was ‘something generally accepted as a medium of exchange, a measure of value or a medium of payment  . . .’. For reasons given earlier, it is very doubtful that any cryptocurrency passes the general acceptance test, at least at present. Given that each of these cases involved serious criminal offences, there may be scope for the argument that Espinoza was correctly decided, and that Murgio involved a degree of judicial interpretative overreach. But that said, the preponderance of US case law appears to favour the view that cryptocurrencies should be treated as ‘money’ for the purposes of relevant criminal or penal statutes.77 A bankruptcy court decision

S 560.103 (29), Fla Stat. 74 S 560.103 (22), Fla Stat. It may be noted that the defendant was also acquitted of money laundering on the similar bases that (i) a money laundering offence had to involve ‘. . . coin or currency of the United States or any other currency, travellers checks, personal checks, bank checks, money orders, investment securities in bearer form or otherwise in such form that title thereto passes upon delivery . . .’ and (ii) Bitcoin did not fall within any of the stated categories. 75 It may be noted that courts in the Netherlands have taken the view that Bitcoin is a proprietary asset or transferable value, rather than money: see Case no C/​08/​140456/​HAZA/​13.255, Rechtbank Overijssel (14 May 2014)  and Case no C/​13/​642655/​FTRK 18.196, Rechtbank Amsterdam (20 March 2018). However, these cases arose in the context of private contractual claims for damages (and not in a public law context). 76 15-​CR-​769 (AJN) (SDNY, 12 January 2017). 77 See, in particular, (i) SEC v Shavers and Bitcoin Savings and Trust, Case no 4:13-​CV-​416 (ED TEX 2014), where the court noted that Bitcoin can be used to purchase goods and may also be exchanged for other currencies and (ii) US v Robert M Faiella 39 F Supp 3d 544 (2014), where the court decided that Bitcoin must be ‘money’ or ‘funds’ for the purposes of the relevant legislation since it could be used to conduct transactions of a financial nature. 73



Cryptocurrencies that impliedly treated Bitcoin as property or a commodity (rather than money) seems to be a minority view.78

VII.  The Central Bank 3.44 Perhaps the most obvious challenge posed by cryptocurrencies is their possible

growth to a stage at which they could effectively operate as a form of parallel currency and, hence, emerge as a challenger to the national unit of account.

3.45 Central banks are naturally unaccustomed to innovations that erode their

own monopoly over the monetary system. But how could the increased use of cryptocurrencies affect the activities and functions of central banks? This, to some extent, will depend on the details of the central bank’s mandate, but the key areas of concern are likely to include financial stability and monetary policy. These two aspects are considered below by reference to the legislation that governs the Bank of England. A. Financial stability

3.46 To what extent do cryptocurrencies pose a threat to financial stability? So far as

the United Kingdom is concerned, the Bank of England concluded in 2014 that cryptocurrencies do not pose any threat to financial stability and that, hence, no action was necessary to restrict their use. It reached this conclusion on the bases that (i) no more than 20,000 people in the United Kingdom held cryptocurrencies, (ii) only 300 transactions per day were executed by such individuals, and (iii) cryptocurrencies represented only 0.003 per cent of broad money balances.79 The Bank’s views on this subject appear to be broadly unchanged at the time of writing. In its evidence to the Treasury Select Committee on Digital Currencies (May 2018), the Bank noted that: (a) cryptocurrencies are unlikely to replace commonly used payment systems because (i) in terms of their relationship to traditional currencies, they are much too volatile to function as a reliable store of value, (ii) they are not widely accepted as a means of payment, and (iii) as a result, cryptocurrencies are not being used as a unit of account; and (b) cryptocurrencies do not pose a material threat to financial stability because (i) their use in the United Kingdom for payment purposes is minimal, (ii) UK financial institutions have limited exposure to the cryptocurrency business 78 See In re Hashfast Technologies LLC v Lowe, Case no 15-​03011 (ND CAL 2016). The case is discussed by Athanassiou (n 15) 20. 79 See Robleh Ali and others, ‘The Economics of Digital Currencies’ (2014) Q3 Bank of England Quarterly Bulletin 276 accessed 1 August 2018.



The Central Bank area, and (iii) there are limited linkages between the cryptocurrency sphere and the UK financial system.80 However, the nature of cryptocurrencies is such that any potential threats are 3.47 by no means merely a domestic concern. As a result, this issue has been on the agenda in various international fora during recent times. Perhaps, most notably, the Finance Ministers’ and Central Bank Governors’ Communiqué from the G20 Summit held in Buenos Aires on 19–​20 March 2018 noted81 that ‘technological innovation, including that underlying crypto-​assets has the potential to improve the efficiency and inclusiveness of the financial system . . . Crypto-​assets do, however, raise issues with respect to consumer and investor protection, market integrity, tax evasion, money laundering, and terrorist financing. Crypto-​assets lack the key attributes of sovereign currencies. At some point they could have financial stability implications’. The Communiqué then notes that existing standards relating to anti–​money laundering and counter-​terrorism should be applied equally to cryptocurrencies, and calls for positive steps to implement that position. Notably, the Communiqué does not specifically refer to the regulatory challenges arising from the fact that cryptocurrencies are of an essentially private nature and operate outside the recognized financial system, although that feature is perhaps implicit in the commentary. These challenges are to some extent considered in a letter from the Chairman 3.48 of the Financial Services Board that was delivered as part of the preparation for the G20 meeting.82 Whilst that letter concludes that crypto-​currencies are not at present a threat to financial stability, largely because (i) their value is small when viewed against the wider financial markets, (ii) they are not ready substitutes for national currencies and (iii) as a result, there is limited inter-​connectedness between cryptocurrencies and the financial markets as a whole. This assessment, however, could change if the use of cryptocurrencies were to expand significantly, because this would inevitably result in a greater degree of connection with the financial markets. A collapse of the cryptocurrency market would then have the capacity to affect financial stability by causing a lack of public confidence. The materials discussed above, therefore, tend to the view that cryptocurrencies 3.49 are not now a threat to financial stability, but this situation could change, and, thus, the matter needs to be kept under review. 80 These points reflect the views of the Bank’s Financial Policy Committee: see Bank of England, ‘Financial Policy Committee Statement from its policy meeting, 12 March 2018’ (16 March 2018) Bank of England accessed 1 August 2018. 81 ‘Communiqué of the First G20 Meeting of Finance Ministers and Central Bank Governors of 2018’ (20 March 2018) G20 Argentina para 9  accessed 10 August 2018. 82 Mark Carney, ‘To G20 Finance Ministers and Central Bank Governors’ (13 March 2018) Financial Stability Board accessed 1 August  2018.



Cryptocurrencies 3.50 But this relatively relaxed view by no means enjoys universal support. In particular,

the General Manager of the Bank for International Settlements has stated83 that there is already a strong case for regulatory intervention in the cryptocurrency sphere. A number of forceful points were made in support of this proposition. In particular:

(a) money ‘is an indispensable social connection backed by an accountable institution within the State that enjoys public trust’.84 This form of institutional back-​ up is clearly lacking in the case of cryptocurrencies; (b) confidence in a monetary and financial system is created through strict regulation and supervision and through central bank oversight of that system;85 (c) money laundering, tax evasion, and other illegal activities apart, the enthusiasm for cryptocurrencies is a form of speculative mania, rather than a developed form of electronic payment system. They also pose risks to investors and consumers. All of these risk factors justify policy intervention;86 and (d) finally, in a veiled criticism of central banks, it is noted that they do not think that there are any systemic issues because of (i)  the relatively small scale of cryptocurrencies and (ii) their limited interconnectedness with the wider financial system. However, if central banks and other authorities fail to act pre-​emptively, then cryptocurrencies may gradually become more closely connected to the wider financial system and, hence, become a threat to its stability.87 3.51 There thus appears to be a measure of agreement that cryptocurrencies could po-

tentially pose a threat to financial stability, but there is a divergence as to the scale of the probability and the point of time at which the issue should be tackled. It is not really open to a legal commentator to determine the existence of such a threat or the proper timing of any market intervention that may become necessary. However, the writer can consider the relevant legislation and the powers that are available to the Bank of England, should intervention be contemplated.

3.52 What is the nature of the legal instruments available to the Bank of England to

deal with these threats? Since the 2008 financial crisis, it has been an objective of the Bank of England ‘to protect and enhance the stability of the financial system of the United Kingdom’. For these purposes, the Bank must work with other relevant bodies, including the Treasury and the FCA,88 and, to that end, there is 83 On the points about to be made, see Agustín Carstens, ‘Money in the Digital Age: What Role for Central Banks?’ (Goethe University, Frankfurt, 6 February 2018) House of Finance accessed 1 August 2018. 84 ibid 1. This description of money has links to the institutional theory of money, mentioned at n 6. 85 Carstens (n 83) 6. 86 Carstens (n 83) 8. 87 ibid 9. 88 Bank of England Act 1998 (BEA 1998), s 2A as amended by the Banking Act 2009.



The Central Bank a Financial Policy Committee of the Bank.89 The Committee is required to contribute to the achievement of the financial stability objective.90 The Committee is empowered to give directives to the Prudential Regulation Authority91 requiring it to exercise its powers so as to achieve a particular macro-​economic objective, and the regulator is required to implement that direction.92 ‘Macro-​prudential measures’ are measures prescribed as such by the Treasury,93 and thus far such measures have included issues relating to the real estate market94 and bank capital/​leverage ratios.95 It may therefore be that the necessary statutory powers exist that would enable the regulators to counter any threats posed by cryptocurrencies. It, however, would be necessary for the Treasury to introduce a statutory instrument determining that cryptocurrencies posed a threat to financial stability and describing the measures that were required to counteract that threat. Of course, possession of the necessary powers is one thing; the exercise of those 3.53 powers is quite another. If, at some point, the Bank of England believes that cryptocurrencies have become a potential threat, what is the nature of the measures that it could take to counteract that threat? The scope and extent of those powers would be determined by the necessary macro-​prudential order to be issued by the Treasury. However, possible measures could include the following: (a) a power to control the engagement of cryptocurrencies with the conventional financial system by restricting the ability of cryptocurrency exchanges to access accounts and other services within the traditional sector; (b) a power to prohibit banks from holding or exchanging cryptocurrencies; and (c) a restriction or limit on the provision of banking services to corporate customers who were themselves deemed to be exposed to excessive holdings of cryptocurrencies (ie so as to limit the exposure of the banking system to customers that themselves may suffer financial problems in the event of a cryptocurrency collapse). None of the suggested measures would amount to an outright ban on the use of 3.54 cryptocurrencies. It may be difficult to justify a complete ban, because this may be seen as a deprivation of property, which would be unlawful under the terms of the Human Rights Act 1998 and Article 1 of the First Protocol to the European

On the establishment and composition of this Committee, see BEA 1998, s 9B. 90 See BEA 1998, s 9C. 91 References to the Prudential Regulation Authority are now to be read as references to the Bank of England, which exercises the relevant powers through its Prudential Regulation Committee: Financial Services and Markets Act 2000, s 2A. 92 BEA 1998, ss 9H and 9I. 93 BEA 1998, s 9L and Instruments made by the Treasury in reliance on that section. 94 Measures related to regulated mortgages and the buy-​to-​let market are to be found in the Bank of England (Macro-​prudential Measures) Order 2015 (SI 2015/​909) and the Bank of England Act 1998 (Macro-​prudential Measures) Order 2016 (SI 2016/​1240). 95 Bank of England Act 1998 (Macro-​prudential Measures) Order 2015 (SI 2015/​905). 89



Cryptocurrencies Convention on Human Rights.96 However, the measures suggested above would have the effect of limiting cryptocurrencies to their original purpose—​namely, that of serving solely as a means of exchange among the members of the community willing to accept it. Whilst more limited measures of this nature may likewise be open to challenge under the terms of the 1998 Act, it is suggested that the measures would be valid because (i) the United Kingdom needs to protect the stability of its financial system and (ii) the proposed restrictions would amount to a limited, legitimate and proportionate response to any threats posed to the United Kingdom’s currency and financial system. In addition, it is suggested that such measures would fall within the exception to Article 1, which allows States ‘to enforce such laws as it deems necessary to control the use of property in accordance with the general interest’. The stability of the national currency and financial system must surely be an issue that satisfies the general interest test. B. Monetary  policy 3.55 Monetary policy is traditionally taken to refer to a macroeconomic policy dictated

by the central bank. It includes management of interest rates and the supply of money in the national economy. Adjustments to monetary policy may thus affect levels of inflation, consumption, and growth. Changes in interest rates will generally feed directly into the banking system, as banks will correspondingly adjust the deposit and loan rates that they offer to their own customers. More broadly—​but less directly—​changes in monetary policy may affect asset prices and the exchange rate for the currency concerned.

3.56 Changes in monetary policy thus have immediate and direct effects, and may

have consequences for the wider economy. The effectiveness of monetary policy, however, does pre-​suppose the monopoly of the central bank over the issue of the nation’s currency. If cryptocurrencies have become a significant means of exchange for transactions in the country concerned, then the effect and the transmission of monetary policy will necessarily be diluted.97

3.57 These points become more important when one considers the detail of the Bank

of England’s role in the sphere of monetary policy. In this respect, the objectives of the Bank of England in relation to monetary policy are (i) to maintain price stability98 and (ii) subject to that, to support the economic policies of the Government (including policies for growth and employment).99 Since the maintenance of price stability would in turn depend upon the transmission of monetary policy into the broader economy, the Bank’s influence over price stability See the discussion of these materials at para 3.21 above. 97 Changes in monetary policy may affect the prevailing value of cryptocurrencies, but that observation would be true in relation to any form of asset class. 98 ‘Price stability’ is defined by reference to targeted annual inflation not exceeding two per cent. 99 BEA 1998, s 11. 96



Conclusions could be attenuated through the increasing use of cryptocurrencies, which would respond only indirectly to policy changes. In such a situation, monetary policy and financial stability would run hand in hand, and, as a result, it is suggested that the proper response would be through the implementation of macroeconomic measures described in paragraphs 3.53 and 3.54 .

VIII. Conclusions It is a truism that the law is always playing catch-​up with developments in society 3.58 in general and in technology in particular. This is especially the case in the context of cryptocurrencies, and, in due course, their status and treatment will perhaps become clearer as a result of new legislation, regulatory developments, or judicial decisions. Consequently, and whilst the views expressed in this chapter reflect the writer’s own position, it cannot be denied that there is considerable scope for debate and disagreement on these issues. That said, the following conclusions can be drawn from the discussion in this 3.59 chapter: (a) public international law does not have an independent or self-​standing conception of ‘money’. It merely recognizes that States have the sovereign right to issue a currency, and refers to national currencies as a unit of account for settlement of international obligations. In other words, public international law effectively defers to domestic legal systems in the specifically monetary sphere. The creation of cryptocurrencies thus does not affect international legal perceptions of money; (b) however, cryptocurrencies do represent a new asset class, or species of property or possession. They therefore attract a right of protection under international instruments such as the European Convention on Human Rights; (c) in view of their status as property, cryptocurrencies can form the subject matter of civil proceedings (eg on the basis of non-​delivery) or criminal proceedings (eg on the basis that they have been transferred as a result of theft or fraud); (d) on the other hand, given that cryptocurrencies are not ‘money’ in the strict sense, they may fall outside the scope of national legislation dealing with banking, payments, and similar services. As has been shown, however, this will always depend upon close scrutiny of the particular legislation at issue; (e) the increasing use of cryptocurrencies could potentially pose a threat to financial stability and the conduct of monetary policy; and (f ) because cryptocurrencies rank as a species of property, central banks and regulators must take care that any financial stability measures taken to counteract cryptocurrencies do not unjustifiably interfere with proprietary rights. This, of course, may complicate any regulatory steps that are felt to be necessary. 55




I. Introduction A. Scope B. Thesis C. Structure

. Manifestation by possession A 4.63 B. Manifestation by oral or written but uncertificated consent 4.64 C. Manifestation by certificated security 4.65 D. Manifestation by money 4.66 E. Manifestation by intermediated security 4.71 F. Manifestation by entry in a register kept by a trusted party 4.76

4.01 4.01 4.04 4.05

II. Asset and Manifestation: Substance and Form of Monetary Value over the Course of Time 4.06 A. Banknotes B. Central bank reserve balances C. Interim conclusion

III. Modes of Creation of Money and Their Effects on the Substance of an Asset A. Temporary money: created on a temporary basis B. Outright money: created with no connected reversal event C. Helicopter money

IV. Types of Manifestation and Their Effects on Legal Title, Transfer, and Protection of Commercial Dealings

4.06 4.20 4.35

V. Conclusion: Manifestation of Value Data by Entry in a Register Kept by a Trusted Technology


4.80 A. Value data: the rivalrous and excludable 4.80 B. Book entries secured by elliptic cryptography 4.83 C. Legal consequences and recent legislative developments 4.87 D. Closing remark 4.100

4.48 4.51 4.56


Prof Dr Corinne Zellweger-​Gutknecht, Professor, Kalaidos University of Applied Sciences, * Zurich, Switzerland and Private Lecturer in Private and Civil Procedure Law, Financial Market Law and Comparative Law, Faculty of Law, University of Zurich, Switzerland.



Developing the Right Regulatory Regime

I. Introduction A. Scope 4.01 The search for comprehensive characterization of cryptocurrencies in terms of ex-

isting private legal categories has not yet led to a conclusion.1 For this reason, it may be helpful to perform a more in-​depth examination of the State-​sponsored forms of currency that, to a greater or less degree, are related to cryptocurrencies. It may come as a surprise that, in what follows, bank notes, as well as central bank reserves, can be regarded as relatives to cryptocurrencies. The reason becomes clearer when considering the so-​called ‘money flower’: a taxonomy of money recently presented by the Bank for International Settlements (BIS)2 in the form of a Venn-​diagram. It refines the original money flower of Bech and Garatt.3 The BIS version: focuses on the combinations of four key properties: issuer (central bank or other); form (digital or physical); accessibility (widely or restricted); and technology (token-​ or account-​based). Money is typically based on one of two basic technologies: tokens of stored value or accounts ( . . . ). Cash and many digital currencies are token-​based, whereas balances in reserve accounts and most forms of commercial bank money are account-​based.4

4.02 What the BIS labels as ‘technology’ ultimately consists of the various manifest-

ations in which money may appear. These manifestations make a sum of specific monetary units—​which in the first instance is a purely ideational creation—​more readily accessible to human perception. In doing so, the manifestation of money through a certain kind of technology enables the units to be exchanged and stored in a traceable and verifiable way, which enhances legal certainty. What the BIS classifies as ‘form’ likewise takes its place alongside many different manifestations of money.

1 With regard to the definitions given by the FATF, ECB, IMF, and Committee on Payments and Market Infrastructures (CPMI), see Benjamin Geva, ‘Disintermediating Electronic Payments: Digital Cash and Virtual Currencies’ (2016) 31(12) Journal of International Banking Law and Regulation 661. See also Charles Proctor’s Chapter 3, ‘Cryptocurrencies in International and Public Law Conceptions of Money’, in this volume. 2 Committee on Payments and Market Infrastructures and Markets Committee, ‘Central Bank Digital Currencies’ (March 2018) Bank for International Settlements 3 et seq (graph 1)  accessed 23 August 2018. 3 Morten Bech and Rodney Garratt, ‘Central Bank Cryptocurrencies’ (September 2017) Bank for International Settlements Quarterly Review 55, 60 accessed 23 August 2018. 4 Bank for International Settlements (n 2) 4.



Introduction In what follows, any such technology, form, or other appearance will be re- 4.03 ferred to as a manifestation of money. The aim in doing so is to distinguish substance from form. That is to say, a distinction will be made between an asset representing value and the great variety of outer shells in which it may appear. This is because in private law it is the specific manifestation of an asset that determines the legal relationship between this asset (as a legal object) and its holder (as a legal subject), as well as its effects vis-​à-​vis third parties in terms of the rules governing the title, transfer, and protection of commercial dealings. B. Thesis The idea advanced here is that cryptocurrencies are assets consisting of rival- 4.04 rous and excludable data recorded by a trusted technology (instead of being booked by a qualified intermediary). They are rivalrous in the sense that only one person can consume the data by using it in a transaction. Unlike many other forms of data, consumption of them cannot be shared with the world at large. They are excludable in the sense that the holder of the cryptocurrency data can exclude third parties from transacting with them. This manifestation allows cryptocurrencies to be treated as one of many types of what will be termed ‘value data’. The view advanced here is that this new category of asset will eventually be subject to a legal regime, although what form that regime may take has not yet been laid down. It would be appropriate, however, that any regime applied to them should be closely modelled on the set of rules governing entitlements to assets deposited with a prudentially supervised and, hence, trusted party. These rules would include segregation rights and the burden of bearing losses arising from the insolvency of a holder of other parties’ cryptocurrency. They should also be subject to the rules governing the transfer of money using instruction-​based book entries in data records, and in that way, be treated comparably to the accounts used in conventional money transfer systems. C. Structure The rest of the chapter is structured as follows: Section II will analyse the changes 4.05 that selected monetary assets and manifestations—​namely banknotes and central bank reserve balances—​have undergone over time. Section III then distinguishes three modes of money creation: by temporary and outright transactions and by issue of helicopter money. All three lead to different categories of monetary assets. Section IV will discuss the consequences for the rules governing title, transfer, and the protection of commercial dealings in connection with an asset. Section V concludes with a résumé.



Developing the Right Regulatory Regime

II.  Asset and Manifestation: Substance and Form of Monetary Value over the Course of Time A. Banknotes 1. Redeemable banknotes 4.06 The first banknotes issued by central banks were in some ways similar to modern promissory notes. Like the privately issued goldsmiths’ notes that came before them,5 they represented an acknowledgment of debt by the issuer for payment of legal tender in the form of metallic money. For instance, the banknotes that the Banque de France issued by virtue of the Act of 24 Germinal Year XI (14 April 1803) originally contained the name of the individual beneficiary, the subscriber’s signature, the maturity, and a nominal amount that differed from note to note. These restrictions were gradually abandoned. The development reached a peak when banknotes became transferable, free of a third party’s adverse claims and prior parties’ defences.6 From then the banknote was regarded as a negotiable instrument or debt instrument transmissible from hand to hand, bearing in mind that the bearer could demand payment on sight of a certain quantity of specie. In this system the banknote represented a pecuniary right in personam, and hence, a chose in action.7 4.07 Once this transformation was complete, a banknote could no longer be a promis-

sory note in jurisdictions that ratified and implemented the Uniform Law for Bills of Exchange and Promissory Notes (ULB),8 which included twenty European countries and several others outside the Anglo-​common law region. This is because Article 75 ULB excludes instruments from being promissory notes, unless, among other things, they contain the term ‘promissory note’ and disclose the payee’s identity.9

4.08 In Switzerland, the Swiss National Bank commenced operation in 1907. From

the beginning, it issued banknotes in standardized (wholesale) denominations of 1000, 500, 100, and 50 Swiss francs. The banknotes were payable to the bearer in legal tender (which in those days was the gold and silver coins of the member States of the Latin Monetary Union).10 However, the convertibility was only 5  As to the historical origins in the goldsmith banking receipts, see Benjamin Geva, ‘Payment Law: Legislative Competence in Canada’ (2015) 31(1) Banking and Finance Law Review 1, 9. 6  See Benjamin Geva, The Payment Order of Antiquity and the Middle Ages: A Legal History (Hart Publishing, 2011) 583 on material negotiability. 7  Serge Lanskoy, ‘The Legal Nature of Electronic Money’ (2000) 3(2) Revista de Análisis del Banco Central de Bolivia 97, 103. 8  Geva (n 6) 508. 9  The League of Nations, Convention of 7 June 1930, providing a Uniform Law for Bills of Exchange and Promissory Notes. 10 See the Swiss Federal Act on the Swiss National Bank of 6 June 1905 (National Bank Act, NBA), Official Compilation (OC) no 22 p 47, art 22 et seq. Said articles were based on art 39 of the Swiss Constitution as amended by a referendum on 23 December 1891.



Asset and Manifestation effective in two relatively short periods. The first lasted until 1914, and the second from 1930 until 1936. At other periods, the Swiss Federal Council suspended the central bank’s duty to convert banknotes into coins and declared banknotes to be legal tender; this occurred for the first time on the eve of World War I.11 This procedure was repeated when the Great Depression forced the remaining countries off the gold standard, and the Swiss franc was devalued by an average of 30%.12 Swiss banknotes have remained legal tender and been inconvertible ever since. 4.09 Initially, the respective decrees were of a provisional nature only. The same was true for the successor regulation, which the Federal Council enacted in 1954. It had become urgently necessary after an amended version of the Constitution13 excluded the right of the Confederation to suspend the redeemability of banknotes ‘except during periods of war or in disturbed currency conditions’. In consequence, the revised National Bank Act then came into force.14 A comparable situation existed in Canada for some time. As of 1934 (when the 4.10 Bank of Canada was authorized to commence business), sec. 25(1) of the Bank of Canada Act (1934) contemplated the right of redemption of banknotes in gold. However, the Governor in Council passed an order-​in-​council every year pursuant section 25(2) suspending convertibility for that year. This practice continued until 1966, when the right of redemption was abolished altogether.15 By this combination of being legal tender and permanently inconvertible, banknotes became so-​called fiat money.16 To summarize, in the examples listed above, central bank money in the form 4.11 of banknotes conferred on its bearers the right to convert banknotes into legal tender. Seen from the other point of view, it constituted a corresponding liability in the form of a debt of the central bank. Later, during a temporary suspension, the nature of this legal liability was not essentially altered, but only deferred. It therefore remained fundamentally an obligation, and as such a part of the central bank’s debt capital. Only the permanent suspension converted it into what was called a ‘natural obligation’ under civil law principles (the closest common law equivalent would be a moral obligation). It constituted an existing obligatory

11 See Swiss Federal Council Decree of 30 July 1914 on the issue of CHF 20 banknote and the statutory exchange rate for SNB banknotes, OC no 30 p 333 (in German only). It was repealed on 28 March 1930: OC no 46 p 101. 12 See Swiss Federal Council Decree of 27 September 1936 on currency measures, OC no 52 p 741. 13 The vote on the revised art 39 of the Swiss Constitution took place on 15 April 1951. 14 Federal Council Decree of 29 June 1954 on the statutory price for banknotes and on repealing their conversion to gold, OC 1954 p 654. Three days later, the NBA of 1953 entered into force. See Swiss Federal Act on the Swiss National Bank of 23 December 1953, OC 1954, p 599. 15 Bank of Canada v Bank of Montreal [1978] 1 SCR1148 1166 et seq. 16 See already Frederick A Mann, The Legal Aspect of Money (OUP, 1938) 31: also known as forced issue, compulsory tender, cours forcé or Zwangskurs.



Developing the Right Regulatory Regime claim, which nonetheless could not be enforced by legal means.17 The consequences are discussed in more detail below in the context of today’s digital central bank reserves.18 2. Irredeemable banknotes 4.12 France moved to a permanently inconvertible currency system in 1936. By that time, banknotes issued by the Banque de France had already been legal tender for more than half a century, according to the Act of 12 August 1870. In 1914, the redeemability of banknotes was temporarily suspended.19 It was then only partially resumed in 1928, when banknotes became convertible in exchange for a minimum quantity of 12 kg of gold bullion.20 Finally, under the Monetary Act of 1 October 1936, the Banque de France was released from the obligation to reimburse banknotes in specie, so that the currency could no longer be converted into gold.21 As a result of this modification, banknotes were from then on treated as ‘movables of a particular type’,22 in that, unlike all other corporeal movables, they had no intrinsic value.23 4.13 In Switzerland, banknotes definitively became irredeemable in 2000, when the

completely revised Swiss Constitution came into force. Since then, and in contrast to the former constitutional rule, provision was no longer made for an obligation of the central bank to convert any payment instruments into gold, gold exchange, or other assets whatsoever.24 In the same year, the Swiss Federal Act on Currency and Payment Instruments (CPIA) came into force. According to the CPIA, banknotes issued by the Swiss National Bank (SNB) are considered legal tender,25 and everyone must accept them as payment without restriction.26

4.14 The legislative change brought a fundamental shift in the legal nature of central

bank money. It ceased to represent a debt of the issuer. This finding, however,

17 David V Snyder, ‘The Case of Natural Obligations’ (1996) 56(2) Louisiana Law Review, 423 et seq. 18 See para 4.20. 19 Act of 5 August 1914 (OJ of 6 August 1914 p 7127), art 3. 20 Act of 25 June 1928 (OJ of 25 June 1928 p 7085), art 2. 21 Lanskoy (n 7) 103 et seq. 22 Banque de France, ‘Le statut juridique du billet de banque’ (February 1976) Bulletin trimestriel 39 et seq accessed 23 August 2018 (‘Alors qu’il représentait autrefois un titre de créance sur l’institution émettrice, le billet do banque est aujourd’hui considéréé comme un bien meuble d’une nature particulière’.) 23 Lanskoy (n 7) 103. 24 See the pertinent art 99 Constitution 1999. 25 Federal Act on Currency and Payment Instruments of 22 December 1999 (CPIA), OC 2000 p 1144, art 2 let B. 26 CPIA, art 3, para 3.



Asset and Manifestation about the substance of banknotes does not alter the legal characterization of their manifestation. In line with the ius commune and even before the Swiss Civil Code came into force in 1912, scholarly exposition had applied property law concerning chattels to cash where appropriate. However, as none of the existing property law types of acquisition of a right in rem would fit for money, doctrine filled this statutory lacuna by developing a form of acquisition sui generis. It was called acquisition by blending (Vermengung, réunion).27 Later, case law confirmed both the application of property law to coins and banknotes and their acquisition by blending.28 As already mentioned, in Canada, banknotes have been permanently irre- 4.15 deemable since 1966.29 Consequently, the promissory language (ie the Bank of Canada’s promise to pay to the bearer on demand the face value of the note) was eliminated from the banknotes.30 But in 1977 the view that banknotes were promissory notes prevailed in court31—​though in a case relating to banknotes in pre-​1967 form. It was held that even after banknotes had become legal tender and inconvertible, textbooks and treatises had been published or re-​edited with relevant sections still considering notes of central banks as promissory notes.32 In vain, a dissenting opinion argued that to the extent that the liability on an inconvertible banknote can be satisfied by the tender of another banknote of the same nature and value, such a liability was not real and was basically unenforceable. This would have turned the promise of payment into an empty and ‘sterile’ formula.33 Both positions are in line with the arguments advanced in a decision from 1932.34 Speaking for the majority, one of the judges stated that even without an express promise to pay ‘the note has the same effect’ as a banknote containing the promise on the face.35 The dissenting view was summarized as being that a perpetually renewable promissory note would have no value,

27 See eg Carl A  Wieland, ‘Kommentar zum Schweizerischen Zivilgesetzbuch (Zürcher Kommentar), Das Sachenrecht des schweizerischen Zivilgesetzbuchs: art 641-​977 ZGB’ (Schulthess 1909): comments ad art 727 Swiss Civil Code no 6 (and ad art 481 Swiss Code of Obligations, SCO). Namely joining and mixing according to art 727(1) and (2) of the Swiss Civil Code (SCC) did not fit, because, if several pieces of cash are brought together such that the original owners can no longer be identified, this creates neither a new object (para 1) nor two components of primary and secondary nature, respectively (para 2). 28 See decision of 1917 of the Swiss Federal Court 47 II 267 consideration 2, p 270 et seq also with reference to the ius commune. 29 For further details as to what follows, see Geva (n 6) 510–​18 with further references. 30 Act to amend the Bank of Canada Act, Statutes of Canada (SC) 1966–​67, c 88, s 12, amending the Bank of Canada Act, Revised Statutes of Canada (RSC) 1952, c 13, now RSC 1985, c B-​2. 31 Bank of Canada v Bank of Montreal [1978] 1 SCR 1148, of 14 June 1977. 32 ibid 1167. 33 ibid 1157 and 1158. 34 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452 (HL). 35 ibid 487.



Developing the Right Regulatory Regime because it is never payable.36 Both decisions taken together prompted Parliament to provide in 1980 that Bank of Canada notes are not promissory notes under the Bills of Exchange Act 1882.37 4.16 English law does not have a provision comparable to section 25(6) of the Bank of

Canada Act. This helps explain why a more traditional view still prevails, which characterizes a banknote as a promissory note, without any reservation. This is mainly because of the promise to pay38 and because the other formalities meet the definition in section 83 of the Bills of Exchange Act.39 However, the right of a holder of a banknote to redeem it for payment in metallic coin was abolished in 1914. With the abandonment of the gold standard in 1936, this result has remained to this day. Therefore, it is acknowledged that nowadays the promise to pay is more symbolic than real. Yet, it is still said that banknotes ‘continue to take the form of promissory notes’.40

4.17 However, there are contrary views as well. Among the progressive exponents is

Michael Bridge, who explains:

Although a banknote is literally cast in the form of a promissory note ( . . . ), which is a documentary intangible, it is no longer redeemed by the maker of the note, the Bank of England, in gold or other precious metal. ( . . . ) The banknote has therefore become a chattel, and the same applies a fortiori to coins.41 4.18 Getting to the heart of the matter, Benjamin Geva elaborates on the fascinating

evolution of banknotes, as follows:

Undoubtedly, the character of banknotes as ‘money’ has come to overshadow their qualities as ‘promissory note’ so as, possibly, to supersede such qualities altogether. Indeed, it is quite likely that points relating to the juridical nature of the banknote and not explicitly provided for by banknotes legislation may well be decided by analogy to principles governing promissory notes ( . . . ). At the same time, there may be compelling policy reasons to avoid the automatic application of the Bills of Exchange Act to the banknote in a wholesale fashion.42 4.19 This observation is all the more accurate as it describes two general principles that

are equally true for civil and common law systems as will be outlined in an interim conclusion at the end of this section.

ibid 508. 37 SC 1980-​81-​83, c 40 Part III, s 49, now RSC 1985, c B-​2, s 25(6). 38 Cf eg Charles Proctor, Mann on the Legal Aspect of Money (7th edn, OUP 2012) paras 1.36 and 1.46, with reference to the Bank of England’s ‘promise to pay’ on sterling banknotes. 39 Alastair Hudson, The Law of Finance (Sweet & Maxwell, 2009) 49, referring, inter alia, to the signature of the Chief Cashier of the Bank of England reproduced on the note. 40 Kelvin FK Low and Ernie Teo, ‘Legal Risks of Owning Cryptocurrencies’ in David Lee Kuo Chuen and Robert H Deng (eds), Handbook of Blockchain, Digital Finance, and Inclusion Vol 1 (Academic Press, 2017) 225, 226. 41 Michael Bridge, Personal Property Law (4th edn, OUP 2015) 22. 42 Geva (n 6) 518 (emphasizes added). 36



Asset and Manifestation B. Central bank reserve balances In essence, central bank reserves are the account-​based form of central bank 4.20 money, which are currently booked and transferred electronically. According to Kumhof and Noon: Electronic central bank money is not a new concept. It has existed for decades, most ubiquitously as balances (commonly referred to as ‘reserves’) that are held by commercial banks and other selected financial institutions at the central bank to facilitate electronic settlement in Real Time Gross Settlement (RTGS) systems.43

Historically, reserves and other electronic liabilities were an insignificant part of 4.21 central bank’s balance sheet.44 However, when central banks made large-​scale asset purchases in response to the financial and sovereign debt crises and the resulting breakdown of the interbank money market, these purchases were paid for by creating bank reserves, which led to a corresponding increase in those balances.45 1. Initially: claims to payment of legal tender Until recently, most monetary regimes regulated reserves only in connection with 4.22 the central bank’s mandate and scope of business. They did not comment further on the legal nature of those reserves. For instance, the Bank of Canada Act stipulates that the central bank shall, inter 4.23 alia, ‘buy and sell foreign currencies and maintain deposit accounts with banks or foreign banks, either in or outside Canada, to facilitate such operations’.46 In fact, the deposit accounts are provided to the members of the Canadian Payments Association47 in order to facilitate the exchange, clearing, and settlement of financial obligations among financial intermediaries by means of a risk-​free asset. Yet, only banknotes issued by the Bank of Canada and coins of the Royal Mint are declared legal tender.48 In contrast, the Currency Act does not provide for other—​ particularly electronic—​forms of assets being legal tender.49

43 Michael Kumhof and Clare Noone, ‘Central Bank Digital Currencies: Design Principles and Balance Sheet Implications’ (May 2018) Bank of England Staff Working Paper no 725, 4  accessed 19 August 2018. 44 Thomas Haasl and Anna Paulson, ‘The Structure of Federal Reserve Liabilities’ (2018) 395 Chicago Fed Letter 1, 4 et seq accessed 28 August 2018). 45 ibid 11, with further reference. 46 Bank of Canada Act, RSC, 1985, c B-​2, art 18(b) (emphasis added); see also art 18(l) et seq. 47 Canadian Payments Act, SC, 1985, c C-​21, arts 4 and 5. 48 Currency Act, RSC, 1985, c C-​52, arts 8(1) and 8(2); Bank of Canada Act, art 25; Royal Canadian Mint Act, RSC, 1985, c R-​9, art 6. 49 Parliament of Canada, ‘The Standing Senate Committee on Banking, Trade and Commerce Evidence’ (2 April 2014) Parliament of Canada accessed 23 August 2018: ‘In terms of a digital currency, it is not under the current legal framework.’



Developing the Right Regulatory Regime 4.24 A comparable picture can be discerned in the Euro-​Zone. In order to conduct op-

erations, the European Central Bank (ECB) and the national central banks maintain accounts for credit institutions, public entities, and other market participants.50 Beyond that, national central banks may open accounts for other parties, such as insurance companies, based on national regulation.51 Depending on the use, the reserve account balances can be qualified as deposits (with overnight or other fixed-​ term duration),52 holdings of required minimum reserves53 and pure balances. Only the latter, namely balances in TARGET2 Payments Module accounts and those sub-​ accounts,54 are readily available sight deposits. These function as money in settlement procedures predominantly related to monetary policy instruments of the Eurosystem,55 without falling under the definition of ‘legal tender’.56 The EU legal framework does not define the legal nature of the underlying asset itself, ie of the balance’s content. Consequently, this has to be determined in accordance with the national law applicable to the relationship between the account-​keeping central bank and its counterparts. In general, private law governs custody and current accounts.57 Therefore, reserve balances in its substance seem to constitute a debt obligation of the central bank vis-​à-​vis the account holder, which confers upon the latter a claim against the bank for delivery of legal tender. However, this preliminary finding needs to be put into perspective as it highly depends on the mode by which a central bank creates money.58

4.25 Without going into further detail, this finding reflects a general understanding: in

initial form, reserve balances seem to represent a claim on the central bank to supply legal tender on demand.59 The same would be true for a possible future The Statute of the ECB annexed to the EU Treaties, art 17 variant 1 (emphasis added). The competence to maintain accounts is specified in much detail, inter alia, in art 21(1) re public bodies, art 23 lemma 4 re foreign entities, 22 variant 1 re participants of clearing and payment systems and art 24 variant 4 re central bank staff members. 51 See ECB, art 14(4). 52 eg deposit facility and fixed-​term deposit (see arts 4.2 and 3.5 of the Guidelines of the European Central Bank of 20 September 2011 on monetary policy instruments and procedures of the Eurosystem, ECB/​2011/​14). 53 See ECB Statute, art 19. 54 See art 5.3 ECB Guidelines (n 52); also mentioned in art 3 of the Decision of the European Central Bank of 5 June 2014 on the remuneration of deposits, balances, and holdings of excess reserves, ECB/​2014/​23. 55 See art 5.3 ECB Guidelines (n 52). 56 According to art 128(1) TFEU in conjunction with art 10 and 11 of Regulation (EC) 974/​ 1998, only banknotes and coins issued by the Eurosystem and denominated in Euro are deemed legal tender. 57 Christoph Keller, ‘Commentary on art. 17 ECB Statute N 16 seq.’ in Helmut Siekmann (ed), EWU Kommentar zur Europäischen Währungsunion (Mohr Siebeck, 2013). 58 See Section III in this chapter. 59 See eg Antonio Sáinz de Vicuña, ‘An Institutional Theory of Money’ in Mario Giovanoli and Diego Devos (eds), International Monetary and Financial Law:  The Global Crisis (OUP, 2010) para 25.18; Roger Clews and Chris Salmon and Olaf Weeken, ‘The Bank’s Money Market Framework’ (2010) 50(4) Bank of England Quarterly Bulletin 292 accessed 19 August 2018; Ansgar Belke and Thorsten Polleit, Monetary Economics in Globalised Financial Markets (Springer, 2009) 24: ‘Reserves are assets for commercial banks but liabilities for the Fed: banks can demand payment on them at any time and the Fed is required to satisfy its obligation by paying Federal Reserve notes’. 60 For instance, the e-​Peso that the Banco Central del Uruguay tested from November 2017 until April 2018 allowed for conversion at par between cash and e-​Peso: see the presentation of Jorge Ponce, ‘Central Bank Digital Currencies:  A Central Banker Perspective’ (7 June 2018) SUERF Conference, Milan accessed 6 August 2018. 61 See eg Directive 2009/​110/​EC of the European Parliament and Council of 16 September 2009, art 2(2), on the taking up, pursuit and prudential supervision of the business of electronic money institutions established a new legal basis for e-​money issuance in the European Union. Under this set of rules, e-​money is basically a claim on an issuer benefiting from an authorization or from a waiver, denominated in an official currency, issued on receipt of funds for the purpose of making payment transactions, accepted by persons other than the issuer, and convertible on demand to a fiat currency or to commercial bank money. 62 Cf. the Swiss Federal Council in its message regarding the new CPIA: ‘Botschaft zu einem Bundesgesetz über die Währung und die Zahlungsmittel (WZG)’ (26 May 1999) Swiss Federal Bulletin p 7258 et seq, 7270 (in German only) accessed 30 August 2018. 63 Ludwig von Mises, The Theory of Money and Credit (Yale University Press, 1954) 50.



Developing the Right Regulatory Regime 2. Later: legal tender in the form of non-​convertible sight deposits (fiat money) 4.27 In order to enshrine this practice—​ie the use of reserve balances for final settlement—​in a statutory rule, the reserve balances were awarded the official status of legal tender in May 2000. Since then, the Swiss monetary order comprises a third form of legal tender apart from government-​issued coins and central bank–​issued banknotes:64 sight deposits at the SNB.65 However, the relevant provision66 concerns only the manifestation of the reserve balances. By itself, it would not have altered the underlying substance (which is a personal right against the SNB). 4.28 This only occurred in combination with a second provision: Article 3(3) CPIA,

which stipulates that ‘Swiss franc sight deposits at the Swiss National Bank must be accepted in payment without restriction by any person holding an account there’.67 By that, a Swiss reserve balance has become irredeemable in the sense that it no longer obligates the central bank to convert it into cash upon first request of an account holder. Admittedly, the central bank still has the duty to ‘issue banknotes commensurate with the demand for payment transactions’.68 This obligation is no longer linked to individual reserve balances, but rather must be fulfilled in executing the general task to ensure the supply and distribution of cash.69

4.29 In this way, reserve balances have become compulsory tender, no different from

modern fiat money banknotes. Although all central bank money is still recorded as debt on the liability side of the central bank’s balance sheet, neither Swiss banknotes nor all reserve balances are any longer true debts in the traditional sense.70

4.30 With regard to banknotes, this view does not stand alone. The fact that, in sub-

stance, banknotes act more like equity capital than debt obligations, bear no interest and are perpetual in character has led Archer and Moser-​Boehm to suggest that banknotes could be treated as a component of central bank capital, because: they provide a stable funding base for income generation. To the extent that net income can be retained when needed, a large share of banknote liabilities provide a base for rebuilding equity if it has been depleted by a negative shock.71

See CPIA, art 2 let a; art 3(1); art 2 let b; art 3(2) (cf n 25). 65 CPIA, art 2 let c. 66 CPIA, art 2 let c (declaring ‘Swiss franc sight deposits at the Swiss National Bank’ to be legal tender). 67 Emphasis added. 68 CPIA, art 7(1). 69 Swiss National Bank Act of 3 October 2003 (NBA), OC 2004 p 1985, art 5(1)(b). 70 See Corinne Zellweger-​ Gutknecht, ‘  “Negativzins” und Bilanzsituation der SNB aus monetärrechtlicher Sicht’ in:  (9 February 2015) Jusletter paras 25–​29 (in German only) accessed 24 August 2018. 71 David Archer and Paul Moser-​Boehm, ‘Central Bank Finances’ (April 2013) BIS Papers no 71, 33 et seq accessed 19 August 2018. 64



Asset and Manifestation What seems to be true for irredeemable banknotes ought also to apply to ir- 4.31 redeemable reserve balances. It is to be expected that reserve balances will become inconvertible in other monetary systems as well (eg in order to prevent undesirable use of cash—​as can presently be observed72—​or a ‘run’ on the central bank in response to drastically negative interest rates allegedly set in the interest of monetary policy), at the latest once a possible de-​cashing has been completed. But even for convertible reserves, the result does not alter, as far as they do not oblige the central bank to exchange them against an asset on its balance sheet but can only be redeemed against banknotes that are irredeemable for their part. In light of this, and in order to requalify the legal nature of the monetary base, 4.32 it may be helpful to restate this conclusion using an analogy from the Basel III standards. Of course, Basel III does not apply to central banks, but it is informative with regard to general accounting considerations, which are committed to standards reflecting economic reality (as legal order should be). In particular, Basel III defines criteria for liabilities to be classified as additional Tier 1 capital, a form of common equity.73 Special emphasis should be placed on criterion 4, providing that capital has to be ‘perpetual, ie there is no maturity date and there are no step-​ups or other incentives to redeem’.74 In addition, the set of criteria requires full discretion regarding accessory payments, such as interest (cancellation, conditions, etc.).75 Finally, criteria concerned with a default event must not be taken into account. These are tailored to meet the commercial bank’s risk of insolvency, while central banks are not exposed to the same risk and it is well known that they can operate at reduced or even negative capital levels.76 Negative levels, however, would turn to positive levels if base money was no longer classified as debt capital. 72 For instance, Germany’s central bank is changing its terms and conditions to provide for deeper scrutiny of the conversion of reserves to cash. The changes to its business conditions taking effect 25 August 2018 will not only ‘allow the Bundesbank to block cash transfers in the absence of assurances from those involved in a transaction that it doesn’t violate financial sanctions or rules to prevent money-​laundering and the funding of terrorism’. A conversion can also be denied if this could possibly jeopardize ‘important relationships with third countries’ central banks and financial institutions’. Geir Moulson, ‘Germany Tightens Cash Transfer Rules as Iran Seeks Funds’ (4 August 2018) AP News accessed 24 August 2018. Most probably, this will rapidly inspire other central banks to analogous regulations. 73 Basel Committee on Banking Supervision, ‘Basel III:  A Global Regulatory Framework for More Resilient Banks and Banking Systems’ (December 2010/​June 2011) Banking for International Settlements 23 et seq, pt I.B.2 (definition of ‘capital’, ‘detailed proposal’, and ‘additional Tier 1 capital’), criteria 1–​14  accessed 24 August 2018. 74 In Switzerland, this rule has been implemented with art 27(1)b in connection with arts 18, 20, and 29 of the Swiss Capital Adequacy Ordinance of 1 June 2012. 75 See Basel Committee on Banking Supervision (n 73) 24, criteria 7–​9. 76 See recently James Barker, David Bholat, and Ryland Thomas, ‘Central Bank Balance Sheets:  Past, Present and Future’ (3 July 2017) Bank Underground accessed 25 June 2018 (blog for Bank of England staff).



Developing the Right Regulatory Regime 4.33 Bholat and Darbyshire have argued against a requalification of base money’s ac-

counting treatment, because it:

would look through the legal form of banknotes as demand liabilities to the economic reality of their permanent circulation ( . . . ), banknotes are not available to absorb losses, which is one of the purposes of capital. Also, the level of banknotes in circulation is not determined by central banks, whilst other components of capital typically are.77 4.34 The first argument, however, runs the risk of circular reasoning, because, espe-

cially in legal terms, it is highly questionable to characterize something as a debt that does not imply any onerous duty of the alleged debtor. The second argument focuses on the situation where a central bank takes a severe loss on the asset side. Let it be supposed that, as an exception, the bank would not be able to improve its capital situation in due time and would end up having difficulty operating with negative capital: the consequence then would be a devaluation of its currency. In other words, every holder of banknotes or reserve balances would incur a loss in purchasing power; thus, absorbing the losses that arose initially on the asset side in proportion to its holding. Third and lastly, in contrast to central banks, ordinary companies can determine both the components of capital and the components of liability. At least companies should in order to avoid ending up in over-​indebtedness. In other words, the fact that the level of banknotes in circulation (as well as the level of outstanding reserve balances) is not determined by central banks is not due to the alleged liability nature, but rather a consequence of the ‘business model’ of central banks. C. Interim conclusion

4.35 The interim results gained so far can be summarized as follows. It appears that

money is an additional type of manifestation of an asset alongside what are called uncertificated personal rights in civil law or choses in action at common law (such as the pure liability of an ordinary custodian to deliver specified property to the depositor); certificated securities or documentary intangibles (such as a promissory note which reifies a right to the payment of money); and movable physical objects or chattels (such as a gold bullion).

4.36 Obviously, a selected combination of asset and (pre-​monetary) manifestation can

determine whether they are used as means of payment. If ultimately an asset is deemed to be money by social acceptance or even by state recognition, specific monetary legislation becomes applicable and takes precedence in case of conflict. For instance, under Swiss law, the place of performance switches to the creditor’s

77 David Bholat and Robin Darbyshire, ‘Central Bank Accounting’ in Peter Conti-​Brown and Rosa Maria Lastra, Research Handbook on Central Banking (Edward Elgar Publishing, 2018) 314 et seq.



Asset and Manifestation residence,78 and in case of delay of payment special provisions derogate79 and enforcement proceedings are carried out under a completely different type of procedure according to the Swiss Law on Debt Collection and Bankruptcy. This principle was already discernible in the way Lord Mansfield in 1758 de- 4.37 scribed Bank of England bearer notes, which in those days were not legal tender: Now they are not goods, not securities, nor documents for debts, nor are so esteemed: but are treated as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind; which gives them the credit and currency of money, to all intents and purposes.80

In light of the above, it becomes obvious that this remark was solely concerned 4.38 with the manifestation of the banknote, not the asset represented by the note (which was at the time still analysed a claim on the issuing bank). In other words, the fact that an asset is deemed to be money may alter the legal effects of that specific manifestation on third parties (such the rules governing title, transfer etc.), but not its substance. A debt of the central bank does not cease to exist when used as money. But being money, it bears all its economic and legal advantages and disadvantages. Then again, if an asset ceases to be money, the rules governing the pre-​money 4.39 manifestation of the asset are as a general rule reactivated. For instance, if a coin ceases to be money (e.g. because it is withdrawn from circulation), henceforth, property law and contract law regarding moveables will apply without being derogated by any leges speciales monetae. The same principle can be observed in the area of public law.81 Finally, in the absence of specific monetary rules, such legislative loophole 4.40 (Rechtslücke; lacune de droit) is usually filled by way of analogy with the rules

Swiss Code of Obligations (SCO), art 75, para 2 let a. 79 SCO, art 102 et seq. 80 Miller v Race (1758) 1 Burr. 452, 457 et seq; 97 ER 398, 401 (KB). 81 See eg Regina v Thompson (1978) ECR 02247:  The Court of Justice of the European Communities (ECJ) had to decide on the importation into the UK of South African gold coins (Krugerrands) and on the exportation from the UK of English silver alloy coins and whether the UK restrictions on movement of these group of coins were lawful. The ECJ held that Krugerrands are dealt with on money markets of some member-​States as being equivalent to currency and therefore not goods in the sense of art 30 et seq of the EC Treaty. The opposite applied to silver coins as they are neither legal tender nor used as their equivalent in practice any longer. However, the decision is marked by one peculiarity: the export ban for the silver coins was considered to be justified on the grounds of public policy (art 36 ECC) to prevent them from being melted down abroad in order to extract the pure metal from them; in its submissions to the Court, the UK Government had successfully claimed that the right to mint coins implies the interest to ensure that any profit resulting from any increase in the value of metal content of the coin accrues to the State rather than to an individual. As a result, under UK legislation, the State obviously enjoys (and perpetually keeps) a right akin to a property right in the coins. See Stefan Enchelmaier, ‘Article 36 TFEU: General’ in Peter J Oliver and others (eds), Oliver on Free Movement of Goods in the European Union (5th edn, Hart Publishing, 2010). 78



Developing the Right Regulatory Regime governing a pre-​money manifestation of the asset. In the example mentioned above by Geva, a gap in banknotes legislation relating to the juridical nature of banknotes may well be decided by analogy to principles governing promissory notes—​at least in non-​ULB States. 4.41 However, a dogmatic divide can be observed between legal systems that have

undertaken to comply with the ULB82 and systems that have not. In the latter, the discussion centres much more on the manifestation of a banknote and the question whether it qualifies as promissory note. Its substance is in danger of being sidelined, as will be illustrated by two brief examples.

4.42 Firstly, the wording of the ‘promise to pay’ was a cause for discussion during the

passage of the Currency and Bank Notes Act 1954 through the United Kingdom Parliament. Recognizing its anachronistic nature, the Bank of England consulted its solicitors on whether to delete the phrase. Eventually, advice was given to retain it—​owing to the character of the note as a promissory note—​and so it has been preserved, up until the present day.83

4.43 Secondly, staff members of the Bank of England only recently stated that


are an IOU from the Bank of England to the rest of the economy ( . . . ). As stated in their inscription, banknotes are a ‘promise to pay’ the holder of the note, on demand, a specified sum (  . . .  ). This makes banknotes a liability of the Bank of England and an asset of their holders ( . . . ).

It was admitted that: although the Bank of England is in debt to the holder of its money, that debt can only be repaid in more fiat money. The Bank of England promises to honour its debt by exchanging banknotes, including those no longer in use, for others of the same value forever.84

Ultimately, this finding does not alter the conclusion that banknotes are in substance an IOU. 4.44 This perception of money in the form of banknotes has been the dominant view

in the economic and legal writings on money.85 Though it is understandable in the light of the historical roots outlined so far, it is self-​contradictory—​it should be reiterated—​insofar as banknotes nowadays can only be exchanged for other

82 See The League of Nations (n 9). 83 Elizabeth Hennessy, A Domestic History of the Bank of England, 1930-​1960 (Cambridge University Press, 1992) 153 et seq. 84 Michael McLeay and Amar Radia and Ryland Thomas, ‘Money Creation in the Modern Economy’ (2014) Bank of England, Quarterly Bulletin Q1, 1, 8 et seq accessed 19 August 2018. 85 See eg Proctor (n 38) paras 1.36 and 1.46 with reference to the Bank of England’s ‘promise to pay’ on sterling banknotes.



Modes of Creation of Money and Their Effects on the Substance of an Asset banknotes of the same total face value. Therefore, an exchange of central bank money against central bank money never leads to any form of repayment of the central bank’s ‘debt’ capital. In other words, although the packaging or the manifestation has remained the same, the substance of banknotes has changed. Obviously, the converse is also true: even though the substance has changed, the manifestation has remained the same. As described above, the aforesaid holds true for central bank reserves too.86 Therefore, although still recorded as debt capital on the central bank balance sheet, neither banknotes nor all reserve balances are any longer true debts in the traditional sense. The same will also apply to future crypto-​or other digital currency issued by central banks to the public—​whether they are convertible or not.87 This finding is important for the characterization of the nature of cryptocurrencies. 4.45 As demonstrated below, the usual practice is that the legal effects relating to an asset (notably the property and transfer applied to it) depend on its manifestation rather than on its substance.88 Thus, it seems that the rules governing the legal relationship between cryptocurrency 4.46 as a legal object and its holder as a legal subject and the resulting effects towards third parties will have to be determined irrespective of whether such asset in its substance is classed as a liability or as something else. Its status (as a liability or something else) is only important with regard to the legal relations between holder and a potential issuer. The details will be outlined shortly, after tracing the modes of creation of money and their effect on the substance of an asset.

III.  Modes of Creation of Money and Their Effects on the Substance of an Asset Should the substance of central bank money be systematically characterized as a 4.47 form of (quasi) equity capital because it no longer obliges the central bank to exchange it for an asset other than central bank money? The answer is both ‘no’ and ‘yes’. The reason is that three parts of the monetary base have to be distinguished, according to the type of operation by which each was created. The following concerns the substance of any kind of central bank issued money and would even be true if one day central banks were to issue their own cryptocurrencies. In other 86 See para 4.29 et seq. 87 It is an outstanding controversy among economists whether such central bank issued digital currency (CBDC) could be convertible or rather not in order not to avoid the risk of systemic bank runs. See eg Dirk Niepelt, ‘Reserves For All? Central Bank Digital Currency, Deposits, and their (Non)-​Equivalence’ (July 2018) CEPR Discussion Paper no DP13065  accessed 19 August 2018 (endorsing convertibility) and Kumhof and Noone (n 43), strongly opposing. 88 See Section IV in this chapter.



Developing the Right Regulatory Regime words and based on the arguments put forward so far, the observations regarding the substance are true irrespective of the manifestation of such money (eg banknotes or book entries in traditional centralized registers or in distributed and cryptographically secured databases). In addition, the same general result is true for cryptocurrencies created by private parties regardless, again, of whether they are token-​or account-​based—​if only they are issued under the same modes of creation as described now. A. Temporary money: created on a temporary basis 4.48 If money is issued in the course of a temporary operation such as a liquidity repo

or a liquidity swap, then, as a consequence, the central bank is subject to an obligation to execute a reverse transaction later. In other words, the performance of the future leg implies a duty on the central bank to deliver assets in exchange for money. The same result applies if the central bank enters into a short forward contract or a comparable future (ie it promises to acquire its own money later in exchange for another asset) or if it writes a put option. At the maturity date or if the option is exercised by the counterparty, then the money will be sterilized, ie redeemed to the central bank in exchange for an agreed asset.

4.49 In all of cases, the central bank money is bound as to the amount concerned. The

central bank has no discretion about whether it will or will not redeem its money against other assets. The nature of such finite or fixed-​term money is still closer to classical debt capital than equity capital.89

4.50 For the value of temporary money, this means that it is still closely connected to

the intrinsic value of its collateral on the asset side of the central bank’s balance sheet. This becomes particularly apparent if such collateral suffers a decline in value. In this case, the central bank will ‘call for addition margin in the form of extra securities’.90 B. Outright money: created with no connected reversal event

4.51 Alternatively, if money is issued over the course of an outright transaction, then

it remains at the full discretion of the central bank whether it will exchange assets

See, in more detail, Zellweger-​Gutknecht (n 70) para 14 et seq. 90 See eg Garreth Rule, ‘Centre for Central Banking Studies: Collateral Management In Central Bank Policy Operations’ (2012) Bank of England 16. To be precise, the collateral does not appear on the central bank’s balance sheet (but rather remains on the cash taker’s balance sheet, labelled as repo encumbered securities). If a commercial bank repos assets (eg a treasury bond) as a cash taker, then the central bank makes two entries on its balance sheet: it increases the reserves on the capital side and credits a claim on the commercial bank for repayment on the asset side. The asset (bond) serves as collateral for the claim. To this end, it is delivered by the central depository out of the custody account of the cash taker to the account of the cash provider (central bank). 89



Modes of Creation of Money and Their Effects on the Substance of an Asset in order to sterilize a corresponding amount of money. In principle, this portion of the monetary base could circulate permanently and would never have to be redeemed outside of liquidation. Even in a liquidation, it would likely only be exchanged against money of the successor institution, as is customary in currency reforms. This is true even if the collateral acquired in exchange for the money consists of a debt instrument. If the central bank does not wish to have the money due sterilized at maturity, then it will exchange the instruments prior to the expiry date against titles with a later maturity. Since the financial crisis, a number of major central banks have implemented so-​ 4.52 called quantitative easing in the form of outright transactions. Among the banks that have done so are the US Federal Reserve, the Bank of Japan, the ECB, the SNB, and (more moderately) the Bank of England. Based on the arguments put forward above, such outright money can no longer be qualified as debt capital of the central bank. Rather, it is a form of equity capital of its own kind, thus making each bearer, like any bearer of a banknote, a silent partner of the central bank.91 A forerunner of this view was stated by Duden: The idea is that the bearer of money is actually a member of a community.92

The same applies to every bearer of a banknote. Banknotes are a form of central 4.53 bank owned funds, because each is, without exception, issued in outright transactions. Holders of sight deposit accounts, which primarily include commercial banks, withdraw banknotes in exchange for a debit of the counter value to the reserve balance, and individuals exchange (eg damaged) banknotes against legal tender of an equal amount. But under no circumstances, whatsoever, does this give its holders the right to withdraw any assets of the central bank. As a consequence, the value of outright money is definitively disconnected from 4.54 the intrinsic value of individual assets or classes of assets on the central bank’s balance sheet. However, the bank retains the capacity to influence the overall value of its money by its monetary policy—​one option being the sale of foreign reserves in order to support the currency. In this sense, even outright money is not entirely dissociated from the asset side of the balance sheet. But the value of today’s money and, hence, its capacity to be money, is no longer secured by foreign reserves and management alone. Rather, as Sáinz de Vicuña explains: The value of money depends on the central banks’ monetary policy within a given institutional and normative framework.93 ( . . . ) The term ‘institutional’ is borrowed and adapted from the ( . . . ) New Institutionalism, arising within the law and economics movement. It uses the concept of ‘institution’ to encompass structures,

91 See already Zellweger-​Gutknecht (n 70) para 29. 92 Konrad Duden, Der Gestaltwandel des Geldes und seine rechtlichen Folgen (C. F. Müller, 1968) 7 n, 12a: ‘Der Gedanke, dass der Inhaber von Geld Mitglied einer Gemeinschaft sei, klingt an.’ 93 Sáinz de Vicuña (n 59) para 25.07.



Developing the Right Regulatory Regime organizations, rules and customs, shaping economic behaviour with a high degree of resilience and permanence. ( . . . ) it refers to the role and legal set-​up of the currency issuer, the central bank (.. .).94 The institutional theory of money entails not only a duty for states to abstain from interfering with the monetary policy of the central bank, but a positive duty to add their bit to ensure the success of monetary policy: sound fiscal policies. The fiscal policy of the state is made subordinate to the superior objective of monetary stability.95 4.55 The last remark contains a deeper truth. Most of central bank’s foreign reserves

still consist of government securities. As just pointed out, fiat money remains connected to those assets by ensuring leeway for the central bank to sterilize money (decrease liquidity) to support its value. In order to preserve the asset’s intrinsic value, the fiscal soundness of its issuer should be kept as high as possible. C. Helicopter  money

4.56 A third mode by which money can be created is against no collateral or asset ex-

change whatsoever. The same effect would take place if the risk of galloping loss or a forced debt relief affecting the central bank’s foreign reserves were to materialize. If so-​called ‘helicopter money’96 was booked on the capital side of a central bank’s balance sheet, a corresponding counterpart would have to be entered pro memoria on the asset side as well.97 In case its manifestation was the same as collateralized central bank money, this simply would lead to a dilution of the overall assets and would reduce the marge de manoeuvre of the central bank accordingly.

4.57 In order to illustrate the characteristics more clearly, it will be assumed in extremis

that helicopter money is the only form of money issued by a central bank. This is exactly how some of today’s cryptocurrencies, and in particular bitcoin, are set up by default (as they are generally issued against no collateral). Notwithstanding the general concern whether it could fulfil the functions of money in the long run, there is serious doubt as to whether helicopter money could be regarded as central bank (debt or equity) capital at all. Rather, in its ‘substance’, it would have to be categorized as a mere clearing unit—​a unit of account deprived of any intrinsic or derived value.

4.58 Consequently, the central bank would be incapable of active monetary policy

to control money supply by means of exchange contracts at market conditions.

ibid para 25.22. 95 ibid para 25.33. 96 The term refers to the example first given by Milton Friedman, The Optimum Quantity of Money (Macmillan, 1969) 4. 97 This is commonly the practice for special drawing rights allocated by the IMF: the SDR are entered on the asset side whereas the counterpart pro memoria is booked on the passive side of the receiving central bank. See eg Helmut Siekmann, ‘Deposit Banking and the Use of Monetary Instruments’ in David Fox and Wolfgang Ernst (eds), Money in the Western Legal Tradition: Middle Ages to Bretton Woods (OUP, 2016) 489 et seq, 531. 94



Types of Manifestation and Their Effects on Legal Title Instead, if it wished to sterilize a part of the money, then it would have to refer to some form of expropriation (whereas cryptocurrencies would have to change the code98). With regard to central banks, this would raise serious legitimacy issues as it clearly goes against the joint objective envisaged by the fundamental principles of price stability and nominalism: to strengthen and preserve the confidence of the public in a stable currency.99 To conclude, helicopter money (whether issued in a register-​based form, in the 4.59 form of banknotes or in any other manifestation), in the sense of a pure account unit, could only function properly if it was allocated automatically, instantaneously, and in an amount commensurate with the value added by the business economy directly where the value arises. If such an algorithm is ever to be developed, central banks will no longer be needed. However, the cryptocurrencies created thus far are nowhere close to this ideal. Rather, they are neither issued commensurate with the value added within the community of its users (which would make monetary policy obsolete to a great extent) nor in a mode providing for an active money supply or any other form of monetary policy that could realign liquidity with economic growth and temper the intense volatility (price movements compared to state currencies).

IV.  Types of Manifestation and Their Effects on Legal Title, Transfer, and Protection of Commercial Dealings A number of consequences follow from this analysis, which relate to the rules con- 4.60 cerning legal title, transfer, and protection of commercial dealing in connection with an asset. First, the examples have shown that the label of being money is itself a kind of manifestation of an underlying asset. As a result, all other possible types of manifestation—​for instance, movable physical objects or chattels, certificated securities or documentary intangibles, as well as uncertificated personal rights or choses in action—​that comprise such asset before it was chosen as money (by statute, custom, contract, or otherwise) are often overshadowed as soon as an asset is treated as money. Second, an asset can switch from one category of asset to another with its mani- 4.61 festation remaining unchanged. A textbook example is the claim to refund a deposited amount of gold coins comprised in a banknote: as a rule, the banknote

98 Cf. eg Benjamin Geva, The Law of Electronic Funds Transfers (Matthew Bender Elite Products, 2017) 671, who correctly reminds us that bitcoin’s protocol is ‘not engraved in stone and is thus subject to change’. 99 See also the very critical view of economists at the BIS: Claudio Borio, Piti Disyatat, and Anna Zabai, ‘Helicopter Money: The Illusion of a Free Lunch’ (24 May 2016) VOX accessed 19 August 2018.



Developing the Right Regulatory Regime remains money (under a conservative UK law approach it also remains a promissory note), even if redeemability is permanently abolished later. The converse is only true if the change of the asset’s category causes its value to erode, thus eliminating its monetary functionalities. 4.62 Third, questions of title, transfer and protection of commercial dealings need to

be determined by the manifestation of an asset alone (eg as an intermediated security) and by rules governing the substance of the asset (eg as an uncertificated claim). A set of brief examples will illustrate this in the following sections. These are largely based on Swiss law, but the main principles outlined can also be found in other civil law jurisdictions. A. Manifestation by possession

4.63 To begin, an asset in question could be a gold coin, its basic manifestation being

a corporeal thing capable of possession. As a possession is easily observable by external parties (or at least it was in ancient societies with its members having direct contact in everyday life), the law traditionally ties rights and obligations to it with effect erga omnes. For instance, it is presumed in terms of title that the person in possession of the coin is the owner,100 and that acquisition of ownership by long possession is possible (subject, however, to further requirements, such as good faith).101 The transfer of ownership mainly depends, inter alia, on the transfer of possession102 (although the law has developed some exceptions commensurate with business needs). In case of insolvency, assets which do not belong to the bankrupt estate may be recovered by the owner, and the respective roles of claimant and defendant are determined by which party has possession of them.103 B. Manifestation by oral or written but uncertificated consent

4.64 If the coin is deposited in such a way that the depositary acquires legal owner-

ship, the personal claim for the refund of it104 becomes an asset in its own right.

100 SCC, art 930. For civil Law in general, see eg Thomas Glyn Watkin, An Historical Introduction to Modern Civil Law (Routledge 1999) 230. See also 1005 BGB; French Civil Code, art 2279; Spanish Civil Code, art 448; Civil Code of Liechtenstein art 509; and Austrian Civil Code, s 323, in conjunction with s 372. 101 SCO, art 728. See also German Civil Code, s 937; Austrian Civil Code, ss 1460; and 1463 in conjunction with 326; French Civil Code, arts 2258 and 2276; Spanish Civil Code, art 1940; Italian Civil Code, arts 1161 and 1163; and Spanish Civil Code, art 1940 et seq. 102 SCC, art 714 in conjunction with 922 et seq. See also German Civil Code, s 929, and Austrian Civil Code, s 1053. Under French law, however, the principle of consensus prevails (art 1196 and 1583) according to which transfer is executed by conclusion of contract. But towards third parties, the transfer of ownership will only be effective if possession is transferred:  eg in a double sale the transfer is performed in favour of the first acquirer to obtain possession (art 1198). 103 Swiss Federal Act on Debt Enforcement and Bankruptcy (DEBA) of 11 April 11 1889, art 242(3). 104 See SCO, art 481 regarding the depositum irregulare of fungible goods.



Types of Manifestation and Their Effects on Legal Title Since the right is of an intangible nature, possession of it is not possible, and the creditor’s entitlement to the coin applies inter partes only. Transfer has to be made by assignment in written form;105 a requirement that has its roots in the desire to protect the bankrupt estate of the assignor.106 In case of the depositary’s bankruptcy, the claim for refund is satisfied out of the proceeds of the forced sale of the depositary’s estate in proportion to the remaining total unsecured debt (to the extent that the proceeds have not been distributed to privileged creditors).107 C. Manifestation by certificated security If the claim is embodied in a certificated debt security, the security is analysed as 4.65 both an asset in its own right and a manifestation of the claim. The rules of title, transfer, and protection of commercial dealings are then determined by the rules applying to securities of the type in question. In other words, the possession of the certificate is a visible manifestation which, subject to rare exceptions,108 prevails over the legal consequences associated with the barely observable manifestation of an intangible claim. That is to say, in all cases, the transfer of a certificated security requires the transfer of possession of the instrument109 and, as a rule, all rights of the transferor deriving from the security pass to the acquirer (and not only the ones that arise from the instrument itself expressis verbis). D. Manifestation by money Such a security may eventually evolve into money, as banknotes did. As outlined 4.66 in detail before, it will then be governed by all kinds of monetary legislation.110 Only where there is gap in that legislation will the rules governing the pre-​money manifestation of the asset be applied by analogy. In general, if a corporeal money is deposited,111 the same rules apply to it in a 4.67 subsidiary way as apply to ordinary fungible tangible movable assets.112 This is

105 SCO, art 165(1) in addition art 167 requires a notification of the debtor, otherwise payment made to the assignor in good faith will discharge the debtor. See also French Civil Code, art 1322. 106 Bruno Huwiler, ‘Begriff und Rechtswirkung:  Sukzessionsrecht des Obligationenrechts von 1881’ in Pio Caroni (ed), Das Obligationenrecht 1883-​1983 (P Haupt, 1984) 209–​76 (in German only). 107 DEBA, art 219. 108 SCO, art 979(2): Defences based on the direct relations between the obligor and a former bearer are admissible where the bearer intentionally acted to the detriment of the obligor when acquiring the security. 109 See SCO, art 967(1). In addition, other instruments may require endorsement or further formalities. 110 See above, especially the main text between n 27 and 28. 111 Situations where defects (breach of duty etc.) affect the passage of legal title or give rise to claims will not be dealt with. 112 See para 4.63.



Developing the Right Regulatory Regime also true for incorporeal money (ie bank money). In the absence of a specific provision, the rules regarding uncertificated debts apply to it.113 Therefore, it cannot be segregated in the case of the depositary’s bankruptcy, and the claim for repayment is satisfied pro rata out of the remaining proceeds. In two cases the depositor retains ownership of the money. First, if corporeal money is not mixed with the depositary’s own money, so that it remains identifiable, the holder can reclaim it and segregate it from the depositor’s bankruptcy estate (in this respect it is like every other fungible tangible).114 Second, if a bank deposits its client’s corporeal or incorporeal money on a fiduciary basis with a third party, it can be segregated in the case of the bank’s insolvency. Here, the rules developed for assets taking the form of entries in a register kept by a trusted party (which will be described shortly) govern the situation.115 4.68 The transfer of corporeal money is largely governed by statutory provisions re-

garding tangible moveable assets and will not be discussed further. The transfer of incorporeal money is of greater interest, as there exists a specific payment mechanism. Even though incorporeal money consists basically of a debt owed by a commercial bank to its client, transfer does not happen by means of assignment. The same general principle applies in both common law systems116 and civil law systems. Because the pertinent provisions under Swiss law are far less concise,117 it will be described here with the words of Fox: The transfer consists in the reduction of the payer’s bank balance with his or her bank and a corresponding increase in the bank balance of the recipient with his or her bank. The essential feature of the transfer is the payer’s instruction to his or her bank to arrange the adjustment in the value of the debts owed to the payer and recipient by their respective banks. The amount of that adjustment of debts represents the value of the transfer between them.118 As a consequence, the asset which the beneficiary acquires by means of the transfer is wholly distinct from the asset which the originator had before the transfer. As the subject of a proprietary interest nothing passes from the originator to the beneficiary.119

See para 4.64. 114 See eg decision of the Swiss Federal Tribunal 6B_​994/​2010 of 7 July 2011 consideration 115 SBA, art 16, no 2, in conjunction with art 37d; for details cf. below para 4.76 et seq and especially n 146. 116 Proprietary interests in incorporeal money under common law will not be discussed. Cf in that regard David Fox, Property Rights in Money (OUP, 2008) ch 5. 117 See SCO, art 466, et seq, and eg decision of the Swiss Federal Tribunal 4C.149/​2005 of 3 July 2006 consideration 2.1. 118 Fox (n 116) 5.04. See also Foskett v McKeown [2001] 1 AC 102, (HL), 127–​28; Eliahu Peter Ellinger and Eva Z Lomnicka and Christopher VM Hare, Ellinger’s Modern Banking Law (5th edn, OUP, 2011) 300. 119 Fox (n 116) 5.23. 113



Types of Manifestation and Their Effects on Legal Title To that end, Geva is right to note that ‘the characterization of the process as a 4.69 “transfer” is certainly a misnomer’.120 The reduction of the payer’s bank balance reflects the claim to reimbursement of expenses incurred by his or her bank,121 whether because the bank directly credits the account of the payee (thereby creating a new debt owed to the payee) or whether it has to cover the claim to reimbursement of the payee’s bank or of a corresponding bank. Based on the arguments put forward thus far, it is claimed that the payment 4.70 mechanism does apply even if the money ‘transferred’ no longer exists as a debt, as long as the manifestation is maintained as an entry in a register kept by a trusted party.122 Here, the reserves of the Swiss National Bank can serve as an example. As described above, they used to be claims on the central bank and were later converted into sui generis rights with either a (temporary) claim-​like or an (outright) equity-​like nature.123 Nonetheless, irrespective of their nature, transfers of the reserves are rightly still required to be made under the same payment mechanism.124 Such transfers amount to an average turnover of CHF 159’060 million Swiss francs per day.125 E. Manifestation by intermediated security Instead of becoming money, a certificated debt security may become an inter- 4.71 mediated security. This happens if a qualified custodian accepts it and credits it to a so-​called securities account. From then on, the legal treatment of it is determined by the special provisions concerning intermediated securities. However, a qualification has to be entered at this point: as is well known, the commercial law of securities is an inherently complex and disparate field, especially since it has transcended its old roots in negotiable instruments law and moved into a more abstract framework of intermediation. The very nature of assets in the form of intermediated securities continues to be subject to widely varying views, and the same is true with regard to the entitlement of securities account holders.126 In the words of Bjerre:

Benjamin Geva, ‘Payment Finality and Discharge in Funds Transfers’ (2008) 83(2) Chicago-​ Kent Law Review 632, 635 et seq. 121 SCO, art 402(1); see also Fox (n 116) 5.13. 122 For details see para 4.76 et seq. 123 See para 4.22 et seq and para 4.27 et seq. 124 See eg Peter Gauch, Walter R Schluep, and Susan Emmenegger, Schweizerisches Obligationenrecht, Allgemeiner Teil ohne ausservertragliches Haftpflichtrecht (10th edn, Schulthess, 2014) para 2314 (in German only). 125 See Payment transactions via Swiss Interbank Clearing (SIC), Swiss National Bank, ‘Zahlungsverkehr Swiss Interbank Clearing SIC’ SNB accessed 30 June 2018. 126 See for an overview with further references Carl S Bjerre, ‘Intermediated Securities:  Legal Problems and Practical Issues (Book Review)’ (2012) 27(4) Banking & Finance Law Review753, 755. 120



Developing the Right Regulatory Regime Intermediation in this context refers to the maintaining and transfer of property rights in securities by means of book entries in accounts maintained by brokers, banks, or other custodians acting as intermediaries, often in several tiers, between an issuer and its ultimate investors. Transactions between buyers and sellers or other commercial actors are carried out by debits and credits to the appropriate accounts, with the intermediaries themselves being linked as needed on their respective books or on those of a central securities depository.127 4.72 Space prevents a detailed description here of the security entitlement model ap-

plied the United States and Canada,128 and the direct legal ownership model used in Germany and Austria,129 as well as on the pragmatic French approach of transferable securities (valeurs mobilières)130 that has inspired Italy and Spain to implement comparable solutions.131 As a consequence of such diversity, the Unidroit Convention132 that was meant to complement the Hague Securities Convention133 and to harmonize parts of this legal minefield, tackles only matters located at the periphery of the right of ‘ownership’.

4.73 Switzerland enacted a special law regarding intermediated securities in 2009.134

It puts their legal nature as a sui generis form of property right on a statutory basis.135 In case a custodian is subject to proceedings for compulsory liquidation, the holder’s assets are segregated ex officio. Shortfalls are borne by depositors in proportion to the number of assets of the missing kind credited to the respective securities accounts.136 Transfer is executed by instruction-​based booking entry or by a control agreement between holder and custodian.137 Finally, good faith 127 ibid 753 et seq (emphasis added). 128 See Uniform Commercial Code, s 8-​503; Securities Transfer Act (2006) (Ontario), SO 2006, c 8, s 97. 129 Eva Micheler, ‘The Legal Nature of Securities: Inspirations from Comparative Law’ in Louise Gullifer and Jennifer Payne (eds), Intermediated Securities: Legal Problems and Practical Issues (Hart Publishing, 2010) 131 et seq. 130 It literally translates to mobile values and could first be found in the Budged 1982 Act no 81–​1160 of 30 December 1981, Official Journal (OJ) of 31 December 1981, p 3539, 3555, art 94, para 2 of: ‘Les valeurs mobilières émises en territoirs français et soumises à la législation française, quelle que soit leur forme, doivent être inscrites en comptes tenus par la personne morale émettrice ou par un intermédiaire habilité’. 131 Real decreto legislativo no 4/​2015 of 23 October 2015; OJ no 255 of 24 October 2015. 132 See Unidroit, Convention on substantive rules for intermediated securities (Geneva Securities Convention), adopted on 9 October 2009. So far, it has only been signed by Bangladesh and is—​in the absence of two more signatories—​not effective yet. 133 See Hague Conference on Private International Law, Convention on the law applicable to certain rights in respect of securities held with an intermediary (Hague Securities Convention), adopted on 17 January 2002 and effective as of 1 April 2017 after ratification of the third signatory state (Switzerland, Mauritius, United States). 134 Federal Act on Intermediated Securities (Federal Intermediated Securities Act, FISA) of 3 October 2008, Systematic Compilation of Federal Legislation (SC) 957.1, OC 2009 p 3577. 135 See FISA, arts 1–​3. Even then, the entitlement model prevails if securities were first intermediated under this model: art 10 FISA provides that the account holder only receives the rights that the Swiss custodian received from the foreign custodian (nemo plus juris principle). 136 FISA, arts 17–​19. 137 FISA, arts 24 et seq.



Types of Manifestation and Their Effects on Legal Title acquisition is possible.138 What is required, however, is that all pre-​existing manifestations are ‘immobilised’.139 The custodian accepts collective custody either by collecting certificated securities, global certificates, or by registering uncertificated securities in a main register.140 Such special rules are much needed. Without them, the legal regime governing 4.74 asset manifestation by written but uncertificated consent would apply. In particular, transfer would be made by written assignment141 and, as seen, clients’ assets could not be segregated in the case of a custodian’s bankruptcy.142 What is most important, however, is that for the time being these rules (namely 4.75 the segregation right and the pro-​rata loss bearing rules) brought a drawn-​out legislative process to a close. These rules consist of a growing number of regulations that confer quasi-​property status on intangible assets. They apply where the assets are recorded by a particularly trustworthy entity, such as one whose accounts are prudentially supervised.143 F. Manifestation by entry in a register kept by a trusted party In Switzerland this process started half a century ago. Previously, scholars had tried 4.76 rather desperately to explain why investors in collective investment schemes could be thought to have co-​ownership of assets entrusted to fund management.144 By such interpretation the investors’ right of segregation was ensured in the event that a contractual fund manager became bankrupt. But the co-​ownership analysis never caught on. Instead, from 1967, a new Federal Act granted investors a right of segregation even though the investment was based on mere contractual agreement and consisted of uncertificated rights.145 Thirty years later, in 1997, a corresponding solution for banks came into force. Since then, selected deposit items,

FISA, art 29. 139 See already Corinne Zellweger-​Gutknecht, ‘Vermögenswerte im Finanzmarktrecht: Das Ende aller dinglichen Prinzipien?’ in Tanja Domej and others (eds), Einheit des Privatrechts, komplexe Welt: Herausforderungen durch fortschreitende Spezialisierung und Interdisziplinarität, Jahrbuch Junger Zivilrechtswissenschaftler (Boorberg, 2008) 87, 94 et seq. 140 FISA, art 6, in conjunction with SCO, art 973a et seq. 141 SCO, art 973c(4), in conjunction with arts 165(1) and 11(2) and 13 et seq. 142 See DEBA (n 107)  and Changmin Chun, Cross-​ border Transactions of Intermediated Securities:  A Comparative Analysis in Substantive Law and Private International Law (Springer, 2012) 329. 143 FISA, art 4 deems that qualified custodians are banks, securities dealers, fund management companies, and central securities depositories (all prudentially supervised), as well as two public entities: SNB and Swiss Postal Service. 144 Cf. the Swiss Federal Council in its message regarding the Federal Act on Investment Funds (Investment Fund Act, IFA), Swiss Federal Bulletin 1965 III p 258, 291 (in German only). 145 Swiss Federal Act on Investment Funds (IFA) of 1st July 1966, OC 1967 p 115, art 17, later revised Act of 18 March 1994, OC 1994 p 2523, art 16, and today Federal Act on Collective Investment Schemes (Collective Investment Schemes Act, CISA) of 23 June 2006, OC 2006 p 5379, art 35. 138



Developing the Right Regulatory Regime including uncertificated claims,146 can be segregated. (This happens today in accordance with the FISA147 rules.) In 2004 securities dealers followed suit, as did Swiss mortgage bond institutions in 2011, and financial market infrastructures.148 4.77 The goal of all these rules is identical:  an equivalent substitute to Article 242

DEBA149 should be made available for intangible assets in case of bankruptcy. The article is not directly applicable, since its wording only allows the segregation of tangible assets.150 Tangible assets are manifested in a form that allows them to be identified and controlled by the holder. As a consequence, tangible assets are in a form that allows them to be possessed and owned, which allows them to be claimed back.

4.78 Intangible assets lack these qualities. Instead, their capacity for identification de-

pends exclusively on book entries in accounts maintained by an individual legal person.151 Furthermore, false entries (particularly double bookings) can occur. As a result, even though obligors may issue so-​called uncertificated securities created by entry in a book established for that purpose,152 the rules governing title and transfer follow the rules for simple debts153 because the obligors do not enjoy any exceptional trustworthiness.

4.79 As a result, the aforementioned leges speciales have been created in order to avoid

the legal uncertainty about a possible analogous application of Article 242 DEBA to intangible assets. To this end, book entries with an increased level of credibility are allowed the privilege of segregation in bankruptcy. In Switzerland, this credibility is enjoyed by prudentially supervised financial intermediaries and selected

146 Swiss Federal Act on Banks and Savings Banks (SBA), art 16 in conjunction with art 37d of: tangible assets and securities belonging to the depositor; tangible assets, securities, and claims which the bank safekeeps on behalf of the depositor as well as freely available delivery claims of the bank against third parties arising from spot transactions, completed forward transactions, collateral transactions, or issues for the account of depositors. 147 See nn 134 and 136. 148 Swiss Stock Exchange and Securities Trading Act of 24 March 1995, art 36a; Swiss Federal Act on Swiss Mortgage Bond Institutions of 25 June 1930, art 42; Federal Act on Financial Market Infrastructures and Market Conduct in Securities and Derivatives Trading (Financial Market Infrastructure Act, FMIA) of 19 June 2015, art 88. 149 See n 10. 150 For the very reason the rule now comprised in SBA, arts 16 and 37d, was initially meant to be added as a new art 242bis DEBA: see Beat Kleiner and Thomas S Müller, ‘Commentary on art. 16 para. 1’ in Dieter Zobl and others (eds), Kommentar zum Bundesgesetz über die Banken und Sparkassen (Schulthess, 2014) (in German only); Thévenoz Luc, ‘La fiducie, cendrillon du droit suisse: propositions pour une réforme’ (1995) Zeitschrift für Schweizerisches Recht II 253 et seq, II.E.2. 151 This is the case for uncertificated securities in the sense of SCO, art 973c: the obligor has to keep a book of uncertificated securities (para 2), whereby the assets are created on an entry in the book (para 3). The obligors do not enjoy any special credibility, entitlement and transfer of these assets, and follow the rules of simple debts (para 4). 152 SCO, art 973c(2) and (3). 153 SCO art 973c(4).



Conclusion public entities.154 This closed list of trusted parties is complemented by the rule of pro-​rata participation in the event of a loss arising from the insolvency of a trusted party. Thus, the risk of a false entry is borne jointly by all holders in the class of assets affected. The holders of each class of fungible book entries at a trusted custodian form, to some extent, a separate and privileged bankruptcy class. They share the fate of the ordinary bankruptcy class only in relation to a potential claim for compensation after a shortfall in recovery.

V.  Conclusion: Manifestation of Value Data by Entry in a Register Kept by a Trusted Technology A. Value data: the rivalrous and excludable Now, what does all this mean for cryptocurrencies? As mentioned in the intro- 4.80 duction, these assets are data recorded by trusted forms of technology rather than being recorded as account entries by a qualified intermediary.155 As data, they are what has been called ‘rivalrous’ and ‘excludable’. Rivalrous assets are those where one person’s consumption of the asset necessarily causes some reduction in another person’s consumption of it. They contrast with non-​rivalrous assets, which are goods ‘which all enjoy in common, in the sense that each individual’s consumption of such a good leads to no subtractions from any other individual’s consumption of that good’.156 They are excludable in the sense that it is possible, or at any rate economically 4.81 feasible, to exclude non-​purchasers from consuming them.157 However, it is the rivalry in use that provides the main rationale for so-​called absolute rights in the form of the exclusive property rights created over physical assets. Accordingly, data, although an excludable resource, do not generally support an analogy to

See nn 145–​48. 155 The rivalry of cryptocurrencies was recently highlighted by Gianluca Miscione and others, ‘Tribal Governance: The Business of Blockchain Authentication’ (Hawaii, 2018) 51st Hawaii International Conference on System Sciences 4484 et seq accessed 11 July 2018. See also Christian Meisser, Luzius Meisser, and Ronald Kogens, ‘Verfügungsmacht und Verfügungsrecht an Bitcoins im Konkurs’ (24 May 2018) Jusletter IT no 4 et seq accessed 24 August 2018 (in German only); Benedikt Seiler and Daniel Seiler, ‘Sind Kryptowährungen wie Bitcoin (BTC), Ethereum (ETH) und Ripple (XRP) als Sachen im Sinne des ZGB zu behandeln?’ [2018] sui generis 149 accessed 24 August 2018 (in German only). 156 The definition was given by Paul A Samuelson, ‘The Pure Theory of Public Expenditure’ (1954) 36(4) Review of Economics and Statistics 387, in his theory of public goods. 157 The criterion has its roots in a theory first put forward by James M Buchanan, ‘An Economic Theory of Clubs’ (1965) Economia 32(125) 1 et seq in order ‘to move one step forward in closing the awesome Samuelson gap between the purely private and the purely public good’ (p 1). A pure public good exhibits both non-​rivalry and non-​excludability. 154



Developing the Right Regulatory Regime physical property. Data are generally non-​rivalrous in nature, ‘which means that the use of data by one market player does not limit the availability of the same data for use by other market players’.158 4.82 With the introduction of distributed ledger technology, however, a new class of

data has emerged, which is both of an excludable and rivalrous nature.159 We can call this ‘value data’ (Wertdaten, données de valeur). In the case of cryptocurrencies, the units of value booked on a specific address are of just this sort. They are either non-​itemizable, like bitcoin,160 or itemizable like wingcash.161 B. Book entries secured by elliptic cryptography

4.83 What makes this kind of data both excludable and rivalrous assets is the elliptic

curve cryptography used to protect and transfer them in a permanent and traceable way. Thus, by reducing the risk of double spending to a negligible probability, the private key (which is itself a non-​rivalrous asset since it is publicly viewable to other users of the system)162 gives its holder exclusive access to the rivalrous balance.

4.84 In practice distributed ledger technology is still very young and not yet fully de-

veloped. Since the emergence of bitcoin, the underlying technology has been used countless times as a base protocol layer, on top of which new layers with new rules are being built. The same is happening to alternative base protocol layers, such as Ethereum. As was predicted in 2012, these layers allow for the production of new digital creations that ‘provide initial funds to hire developers to build software which implements the new protocol layers’.163 In 2013, the first so-​called initial coin offering of its kind took place.164 Since, a vast number of digital creations

158 Sebastian Lohsse, Reiner Schulze, and Dirk Staudenmayer, Trading Data in the Digital Economy: Legal Concepts and Tools (Nomos, 2017) 13 et seq, 15. 159 See n 155. 160 There exist no such data as ‘a’ bitcoin or ‘a’ satoshi, but rather an identifiable address with a balance. The balance corresponds to the aggregate of all unspent transaction outputs (UTXO): every value ever transferred to this address and not yet spent. Accordingly, a UTXO does not have a single alphanumeric identifier but is rather identifiable by its data profile: a set of data relating to each and every preceding transaction (outgoing address, time stamp, amount, etc.). Therefore, a fund transfer on the bitcoin blockchain does not lead to the ‘movement of any specific data but rather the UTXO of the sending address being replaced by a new UTXO on the receiving address (and, additionally, to a new UTXO on the sending address comprising the rest, if not the whole UTXO was spent). 161 See eg Geva (n 1)  661 et seq, 672 with further reference and Bradley W Wilkes, ‘Faster Payments Network: Solution Proposal: Faster Payment Task Force’ (29 April 2016) Wingcash 12, accessed 30 June 2018. 162 Meisser, Meisser, and Kogens (n 155) n 7 et seq. 163 John R Willett, ‘The Second Bitcoin Whitepaper:  vs. 0.5 (Draft for Public Comment)’ (6 January 2012) 1 accessed 26 June 2018. 164 John R Willett, ‘MasterCoin Complete Specification vs. 1.0 (First Complete Specifica­ tion)’ (31 July 2013)



Conclusion have been programmed on a variety of distributed ledgers. Although commonly referred to as cryptocurrencies (or cybercurrencies or virtual currencies), only a small fraction has been built with the aim of functioning with the usual attributes of money as a means of exchange, as a store of value and as a measure of value. Whether this small fraction indeed is yet capable of fulfilling these functions is a different question. Cryptocurrencies can be analysed as a specific asset consisting of data. The ques- 4.85 tion of whether they are categorized as a kind of monetary data, a digital commodity, an investment contract, or something else, will be decided by their substance rather than their form. But only the form in which cryptocurrencies manifest themselves will be relevant 4.86 to the legal rules governing title, transfer, and the protection of commercial dealings that are applied to them. In essence, the manifestation of cryptocurrencies consists of book entries secured by elliptic cryptography. For that reason, it is vital that the credibility of the underlying algorithms reaches or even exceeds the level of credibility of prudentially supervised financial intermediaries. Only then, can cryptocurrencies be deemed value data and subject to legal rules closely modelled on the regime governing an absolute entitlement to assets deposited with a trusted party who is prudentially supervised. C. Legal consequences and recent legislative developments 1. Static dimension: legal title The rules governing title would mainly require the recognition of an absolute 4.87 right to recovery of value data of a similar kind and quality (economically comparable to the rei vindicatio); a remedy against unlawful interferences similar to the actio negatoria; and, in insolvency proceedings, segregation rights and pro-​rata loss bearing burden. Who would be the bankrupt person? Intermediaries have emerged even in dis- 4.88 tributed networks such as the bitcoin blockchain. For instance, wallet providers and cryptoasset exchanges offer their services which often imply custody of either the value data or the means of access (private key) of the beneficial holder. Moreover, insolvency questions arise if value data can only be transferred by a multi-​signature transaction, and, for example, one of two persons authorized to sign becomes insolvent.165 Likewise, the recipient of an unauthorized transfer can go bankrupt.

accessed 26 June 2018. For every bitcoin invested (by sending it to an indicated address on the blockchain) within a month’s time, one hundred mastercoins were received. 165 See the examples given by Pedro Franco, Understanding Bitcoin:  Cryptography, Engineering and Economics (John Wiley & Sons, 2015) ch 4, 39 et seq; ch 8, 123 et seq; and ch 12, 183 et seq.



Developing the Right Regulatory Regime 4.89 If such bankrupt person is subject to proceedings for compulsory liquidation, a

person allegedly entitled to the value data has to provide proof of his or her right of disposition in order to segregate such assets. At the same time, the bankrupt person will indicate and make available to the liquidator the value data held for its own account and for the account of third parties, as well as claims related to value data against third parties. The latter will have the same obligation to inform as the bankrupt.

4.90 The liquidator will then exclude value data, as well as claims to receive delivery

of value data from the bankrupt’s estate up to the quantity of value data owing to third parties and credited to addresses maintained by the bankrupt. In case of doubt, any value data held by the bankrupt would be presumed to belong to its creditors. If the value data segregated from the bankrupt person’s estate are not sufficient to satisfy its creditors in full, value data of the same kind held by the bankrupt’s own account would also be segregated insofar as necessary. Finally, shortfalls would allocated pro-​rata to all creditors in proportion to the quantity of value data of the missing kind owed to them.

4.91 In view of this, a legislative proposal recently introduced by the Liechtenstein

Government, and intended to come into force in summer 2019, comes as no surprise.166 At first sight, it seems revolutionary, as it acknowledges data created and stored by a trusted technology (vertrauenswürdige Technologie) as a new form of absolute right (called Token) that can be segregated in the case of bankruptcy. However, even though the trusted technology does not need to be maintained by a legal entity subject to approval, issuers will be supervised, and custodians will be subject to licensing requirements. To that extent, tokens under future Liechtenstein Law will ultimately be comparable to existing legal systems that reify assets according to their manifestation as an entry in a register kept by a trusted party. This should, however, not lead to the—​overly conservative—​argumentum e contrario that value data booked outside a trusted party’s responsibility should never enjoy protection against third parties generally. Rather, all tokens held by parties (called ‘delegatees’) in their own name but for account of a third party (called ‘delegator’) benefit of a legal position comparable to the one of physical objects. In particular, a delegator they can demand surrender of tokens held in custody by a delegatee that has become subject to insolvency proceedings, even if the bankrupt delegatee has been acting on a private basis and thus had not been licensed. In that regard, Liechtenstein indeed is about to pioneer, as it confers 166 So far, only slides are available (University of Liechtenstein, ‘Blockchain-​Gestz’ (21 June 2018) Vimeo accessed 20 July 2018) with the legal portion at 33:40–​59:30. The law will define tokens, terms of the trusted technologies ecosystem, the minimum standards for service providers, and conditions of regulatory supervision. It will further address power of disposition (comparable to possession) and right of disposition (comparable to ownership) over a token, irrevocable and final transfer of tokens, and acquisition by good faith. Finally, it will comprise bankruptcy regulation and address conflict of laws.



Conclusion an absolute legal title to the holder of data, even if they are not held by a trusted party, provided that they are booked on a trusted technology. The focus of the Lichtenstein Law, however, remains on delegates acting on a 4.92 commercial basis. This seems to be a prudent choice until distributed ledger technology matures to the point where it is so safe and reliable that it will no longer depend on the guardianship of a trusted party. The latter probably will go hand-​in-​hand with a change in meaning given to 4.93 legal persons (as opposed to natural persons).167 Scholars in the United States and Europe have demonstrated how existing company laws already offer the option of establishing a company entirely controlled by nonhuman autonomous systems. That control can be wide-​ranging in the United States168 or permitted within narrower confines in the European Union.169 As a result, such a system can have legal personality. The legal effects of the transformation from robots being objects of property to subjects of property cannot be considered in detail here.170 2. Dynamic dimension: mode of transfer In conclusion, the appropriate mode of transfer for cryptocurrencies will be ana- 4.94 lysed. It is fascinating to observe the basic similarities between payment mechanisms,171 the disposition of intermediated securities,172 and even other types of disposition over rights by modification of a register entry.173 In essence, the transfer requires an instruction to the record-​keeping entity and corresponding book entries. In the case of cryptocurrencies, it is particularly interesting to see

167 Regarding the gradual historical development of the corporate personality of religious units, see eg Frederick Pollock, Frederic W Maitland, History of English Law Vol. 1 (Cambridge University Press, 1968) 497–​500. 168 Shawn Bayern, ‘The Implications of Modern Business-​Entity Law for the Regulation of Autonomous Systems’ (2015) 19 Stanford Technology Law Review 93. 169 Regarding American, German, Swiss and UK Law:  Shawn Bayern and others, ‘Company Law and Autonomous Systems: A Blueprint for Lawyers, Entrepreneurs, and Regulators’ (2017) 9 Hastings Science and Technology Law Journal 135–​62. 170 See, however, Committee on Legal Affairs (of the European Parliament), Report with recommendations to the Commission on Civil Law Rules on Robotics, 27 January 2017, 2015/​2103 (INL); European Parliament, Resolution with recommendations to the Commission on Civil Law Rules on Robotics, 16 February 2017, P8_​TA(2017)00 51, recom 59 let, f; Commission, Follow up to the resolution of 16 February 2017 on civil law rules on robotics, 16 May 2017, SP(2017)310. A very helpful legislative observatory can be found here: Legal Observatory, ‘Civil Law Rules on Robotics’ European Parliament accessed 30 August 2018. 171 See para 4.68 et seq. 172 See para 4.73 et seq. 173 See eg art 69 et seq of the Swiss Merger Act of 3 October 2003: Legal entities and sole proprietorships registered in the commercial register may transfer all or part of their assets and liabilities to other private law corporate persons by means of a transfer agreement and an application for registration in the commercial register. Hence, the assets and liabilities specified in the transfer agreement pass to the acquiring corporate person automatically when the transfer of assets is registered in the commercial register.



Developing the Right Regulatory Regime that the transfer of value de facto results in the extinction of existing value data (an unspent transaction output (UTXO)174 of the sender in the case of bitcoin), as well as in the creation of new value data (a UTXO of the recipient/​s). The parallel to the payment mechanism is obvious: there, the transfer of value de jure leads to the extinction of an existing asset (bank money of the payer/​originator in the form of a claim on the bank) and the creation of a new asset (bank money of the recipient/​beneficiary in form of a claim on the bank). 4.95 Admittedly, unlike the transfer of corporeal assets, which requires only two par-

ties, transfer through a classic payment mechanism ‘needs at least three participants if it is to operate’.175 In the case of cryptocurrencies and especially in the case of bitcoin, however, there is not necessarily176 an entity with legal personality that could be identified as intermediary. Rather, the distributed ledger technology assumes the corresponding role. As outlined before, this gap might be overcome by a broader interpretation of what is a legal person in the future.177

4.96 Nevertheless, it seems more appropriate to justify the application of the payment

mechanism by analogy to the freedom of contract: whoever acquires value data booked on a distributed ledger accepts the uncertainty due to the absence of a trusted intermediary (and sometimes even welcomes it for ideological reasons) or simply does not care. As a consequence, if the parties are ready to entrust a nonhuman autonomous system with duties and responsibilities traditionally assumed by intermediaries, the same regulatory regime governing payment mechanisms should be applied to them.

4.97 First, this means that for regulatory purposes book entries should be treated as

fully effective and legally valid inter partes just as if they had been executed by a

See n 160. 175 Fox (n 116) 5.11. 176 It is worthwhile to mention that a growing number of start-​ups raising money by ICOs are structured as Swiss foundations, limited liability companies, or as Delaware corporations. Ethereum, for instance, is run by a foundation seated in Switzerland (founded in February 2014 as a limited liability company governed by Swiss law and converted a few months later; see Swiss Central Business Name Index: Ripple Inc. is a corporation registered in Delaware and headquartered in San Francisco, California. It is a wholly owned subsidiary. XRP II, LLC was incorporated in South Carolina on 1 July 2013 in order to engage in the sale and transfer of the fully pre-​mined convertible virtual currency, XRP, to various third parties on a wholesale basis; see Financial Crimes Enforcement Network (FinCEN), Matter no 2015-​05, Attachment A: Statement of Facts and Violations, 5 May 2015, paras 1, 3, and 22. Even NEM (an abbreviation for ‘New Economic Movement’), another issuer of a cryptocurrency not associated with a legal person at first, has, in July 2017, set up the NEM Foundation ( Foundation Ltd.), a company limited by guarantee (CLG) in Singapore, to represent the roof international organization; see NEM, ‘A Major Announcement’ (7 July 2016) NEM accessed 30 June 2018. Therefore the missing identifiable legal issuer of a cryptocurrency is likely to be considered a problem of a rather temporary nature. 177 See above para 4.93 and n 167 et seq. 174



Conclusion traditional intermediary. The sender’s asset ceases to exist and a new asset is created in the hands of the recipient. Second, the parties would be deemed to have waived any claims that could 4.98 arise out of relation to a traditional intermediary. They would therefore have no claims against any person who had responsibility for setting the rules of the cryptocurrency system. Third, finality in the sense of an irrevocable transfer and, hence, the discharge 4.99 of a respective obligation would coincide with the first node confirming a transaction. After confirmation, it is not possible for the payer to replace an existing transaction with a new one by means of a so-​called (legitimate) replace-​by-​fee attempt. Here, the payer tries to use the same inputs (value data) spent in one transaction in a second transaction again by increasing the fee offered to miners for the second transaction.178 In contrast, other attempts of double spending can only be reduced to a negligible probability after several confirmations (six by rule of thumb).179 However, none of them is deemed legitimate. Therefore, a party may well require six confirmations to pass before it accepts a transaction in order to reduce the risk of fraud. But this is not to be confused with irrevocability of a transfer that occurs, when no legitimate cancellation is possible any longer. D. Closing  remark The legal effects of book entries made by nonhuman autonomous systems in rela- 4.100 tion to third parties would need to be clarified. Provided that such a system complied with the standards of elliptic cryptography and thus is capable of creating rivalrous and excludable value data, it would be appropriate to acknowledge that the holder of the data had an absolute legal title to it. It would therefore be entitled to have it segregated in the event that a custodian became bankrupt and it would have to bear pro rata the burden of any loss of that data. This does not turn value data into property for all legal purposes. Property was 4.101 developed even before humanity was capable of understanding that electricity was more than thunder and lightning, and perceived it to be exclusively controlled by gods. Today, electricity and electronic means are used to shift growing parts of our material world into digital, virtual equivalents. These deserve a separate set of rules which should be modelled along the broad lines of the general property law (or rather asset law) that has evolved over centuries and which has been partly explained in this chapter.

178 See Vitalik Buterin, ‘On Slow and Fast Block Times’ (13 September 2015) Ethereum accessed on 30 July 2018. 179 ibid.





I. Introduction

A. Virtual currencies and cryptocurrencies in outline B. The conflict of laws in outline C. Regulatory challenges for the conflict of laws

III. Cryptocurrencies as ‘Money’ in the Conflict of Laws


5.73 A. Cryptocurrencies and the ‘lex monetae’ 5.73 B. Illegality of transactions involving cryptocurrencies 5.81 C. Judgments in a cryptocurrency 5.89

5.01 5.04 5.07

II. The Law Applicable to the Relationships between Participants within a Cryptocurrency System 5.15 A. Introduction B. Key features of the Bitcoin and Ripple cryptocurrency systems C. Conflict of laws characterization of the relationships between participants in cryptocurrency systems D. The law applicable to relationships between participants in cryptocurrency systems E. Reflection

IV. Cryptocurrencies as ‘Property’ in the Conflict of Laws

5.93 A. Introduction 5.93 B. The proprietary character of cryptocurrencies 5.96 C. The law applicable to assignments of claims under the Rome I Regulation 5.103 D. Beyond legal rights: the law applicable outside the Rome I Regulation 5.106


5.18 5.27 5.35 5.72




Andrew Dickinson, Fellow and Tutor, St Catherine’s College and Professor of Law, University * of Oxford, UK. Acknowledgements:  Work on this chapter was completed during a visit to the Max Planck Institute for comparative and international private law, and I am grateful to Professor Reinhard Zimmermann and his colleagues for their hospitality during my stay. Tobias Lutzi (Somerville College, Oxford) provided valuable comments on an earlier draft of this article.



Cryptocurrencies and the Conflict of Laws

I. Introduction A. Virtual currencies and cryptocurrencies in outline 5.01 Virtual currencies have been defined as ‘digital representations of value, issued

by private developers and denominated in their own unit of account’1 and, more comprehensively, as: a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.2

They ‘can be obtained, stored, accessed, and transacted electronically, and can be used for a variety of purposes, as long as the transacting parties agree to use them’.3 5.02 The expression ‘virtual currencies’ is capable of describing a wide variety of con-

structs, including private IOUs (eg online vouchers or reward points), asset-​backed units of account, in-​game currencies used within online gaming communities, and so-​called cryptocurrencies, of which Bitcoin provides the best known example. Cryptocurrencies use encryption technology to ensure the security and confidentiality of transactions within a network.4 They can operate via a centralized or decentralized model (or a hybrid model combining elements of the two), with the core functions of a currency system—​including issuance and redeemability,

1 Dong He and others, ‘Virtual Currencies and Beyond: Initial Considerations’ (January 2016) International Monetary Fund para 8  accessed 22 July 2018. 2 Directive (EU) 2018/​843 of the European Parliament and the Council amending Directive (EU) 2015/​849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing [2018] OJ L156/​43, art 1(2)(d). See also European Central Bank, ‘Virtual Currency Schemes’ (October 2012) European Central Bank para 2.1  accessed 22 July 2018; ‘a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community’. European Central Bank, ‘Virtual Currency Schemes: A Further Analysis’ (February 2015) European Central Bank para 2.2  accessed 22 July 2018; ‘a digital representation of value, not issued by a central bank, credit institution or e-​money institution, which, in some circumstances, can be used as an alternative to money’. 3 He and others (n 1) para 8. 4 According to a 2015 report of the European Central Bank, the number of crypto-​currencies at that time was around 500 but rising rapidly (see European Central Bank, ‘Virtual currency schemes—​a further analysis’ (n 2)  para 1.2. As at 2 May 2018, the number of cryptocurrencies recorded by was 1602, almost double the number at the end of June 2017. Bitcoin, Ethereum, and Ripple are the largest in terms of market capitalization and daily trading volume. Coin Market Cap, ‘Top 100 Cryptocurrencies by Market Capitalization’ (2018) Coin Market Cap accessed 2 May 2018.



Introduction controls over use, and circulation, payment, and settlement—​being controlled either by a central authority or by some or all of the system participants.5 Many cryptocurrencies operate via decentralized ‘distributed ledger’ technology 5.03 in which a constantly updated record of transactions is transmitted and retained by a large number of participants within the system, as a means of guaranteeing its integrity.6 A  distributed ledger may be public and accessible to all Internet users (as in the case of Bitcoin’s blockchain) or restricted to particular persons or classes of person.7 Transactions within cryptocurrency systems of this kind are validated by the participants or by self-​executing coding (protocols) embedded in the system software or by a combination of those processes.8 B. The conflict of laws in outline This chapter considers the particular challenges presented by cryptocurrencies for 5.04 the conflict of laws in England and elsewhere in the European Union, and suggests possible avenues for resolving those challenges. The leading English work on the ‘conflict of laws’ defines the subject as ‘that part 5.05 of the law of England which deals with cases having a foreign element’.9 In performing this task, English law, in common with other legal systems, has a toolbox of legal rules, foremost among which are rules of jurisdiction and rules concerning the law applicable to the matters in issue.10 Rules of jurisdiction are employed to decide whether an English court is competent to determine a case with a foreign element and, if so, whether it will exercise that competence; applicable law rules—​often labelled ‘choice of law rules’—​are employed to decide whether rules of local origin (ie the laws of the United Kingdom, as applied to England) or rules originating in another legal system are to be applied by the court in determining the case and how the rules applicable to particular matters are to be identified and applied. At present, the conflict of laws rules applied by the English courts are predom- 5.06 inantly rules of EU law. Although the legal landscape will undoubtedly change

5 He and others (n 1) para 12. In Bitcoin, operating on a decentralized model, many Key functions are carried out by a relatively small number of the system participants who engage in mining activities (see Section II.B.1 below). 6 He and others (n 1)  para 21. See also European Securities and Markets Authority, ‘The Distributed Ledger Technology Applied to Securities Markets’ (7 February 2017) European Securities and Markets Authority 2.1  accessed 22 July 2018. 7 He and others (n 1) para 21, Box 2. 8 Gavin Smith and others, ‘Blockchain Reaction’ (September 2016) Allens 13 accessed 22 July 2018 9 Lord Collins of Mapesbury and others (eds), Dicey, Morris & Collins on the Conflict of Laws (15th edn, Sweet & Maxwell 2012) para 1-​01. 10 ibid paras 1.003–​1.004.



Cryptocurrencies and the Conflict of Laws in the coming years in consequence of the UK’s decision to withdraw from the European Union, it remains too early to say what impact that decision will have on the rules of jurisdiction and of applicable law. It seems reasonably likely, however, that there will be substantial continuity in terms of applicable law rules, which are the principal focus of this chapter.11 The continuation of the rules of EU law which currently apply in the UK to determine the law applicable to contractual and non-​contractual obligations is not dependent upon a settlement between the UK and the remaining EU Member States. C. Regulatory challenges for the conflict of laws 5.07 Cryptocurrencies represent a form of ‘disruptive technology’ which present sig-

nificant challenges for legal systems, including within the domain of the conflict of laws.

5.08 Such challenges are familiar. Rules of jurisdiction and applicable law operate prin-

cipally on the basis of territorial connecting factors whose efficacy depends on the ability to locate acts and actors within the territory of a particular legal system, and whose rationale depends on the existence of a real and substantial connection to that legal system.12 Incorporeal (intangible) property and, more recently, Internet activities have placed a strain upon this territorial paradigm. How does one ascribe a location to a thing which exists only in law13 or to acts which take place in a virtual environment and which may be communicated instantaneously

11 The UK government has expressed an intention to incorporate the Rome I  and Rome II Regulations (n 17)  into UK law after the end of any transition period (see HM Government, ‘Providing a Cross-​Border Civil Judicial Cooperation Framework:  A Future Position Paper’ (22 August 2017) HM Government para 19  accessed 23 July 2018, and Law Applicable to Contractual Obligations and Non-​Contractual Obligations (Amendment) (EU Exit) Regulations (Draft) 2018  accessed 23 July 2018. With respect to rules of jurisdiction and closely related rules governing the recognition and enforcement of judgments (currently governed by the Brussels I Regulation), the position is much more complex, as such arrangements will require agreement and co-​operation between the UK and the ‘EU27’. As to the prospects of an agreement of this kind, see HM Government (n 11); Adrian Briggs, ‘Secession from the European Union and Private International Law:  The Cloud with a Silver Lining’ (Speech delivered to the Commercial Bar Association, 24 January 2017) accessed 23 July 2018; Andrew Dickinson, ‘Close the Door on Your Way Out –​Free Movement of Judgments in Civil Matters –​A Brexit Case Study’ [2017] Zeitschrift für Europäisches Privatrecht 539.See also arts 67 and 68 of the Agreement on the withdrawal of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community 2018 https://​​government/​publications/​withdrawal-​agreement-​and-​ political-​declaration> accessed 15 December 2018. 12 Adrian Briggs, Private International Law in the English Courts (OUP 2014) para 1.10. 13 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 22-​025–​22-​054; Pippa Rogerson, ‘The Situs of Debts in the Conflict of Laws:  Illogical, Unnecessary and Misleading’ (1990) 49 CLJ 441.



Introduction across the globe?14 Cryptocurrencies, and other forms of virtual currency, lie at the confluence of these two problematic areas, with the difficulties that they present for the conflict of laws being heightened by the facts that (i) the use of self-​executing protocols and distributed ledger technology rather than traditional contractual arrangements to manage private law relationships within cryptocurrency networks represents a more fundamental challenge to traditional techniques of regulation of private transactions by legal rules and judicial or arbitral dispute resolution procedures15—​many systems using these technological tools rely not on legally binding commitments and State-​sanctioned measures of coercion to compel performance but on non-​binding user consensus and self-​executing computer algorithms,16 and (ii) the pseudonymity of users within cryptocurrency systems (one of the features that makes them attractive to their participants) may make it difficult to locate not only the rights and acts in question but also the actors. Any account of the conflict of laws as it relates to cryptocurrencies must acknow- 5.09 ledge and seek to overcome these challenges. Yet, the difficulties arising in this area should not be overstated. Most questions relating to the use of cryptocurrencies and the operation of cryptocurrency systems can be analysed, without undue difficulty, within the existing framework of private international law rules applied by the English courts in civil matters.17 Most obviously, contractual relationships which provide (for example) for the transfer of tangible goods in exchange for units of a cryptocurrency, or for the provision of electronic wallet, currency exchange or other services in connection with a cryptocurrency system, or legally binding arrangements between the participants in a system18 are not fundamentally different 14 Tobias Lutzi, ‘Internet Cases in EU Private International Law:  Developing a Coherent Approach’ (2017) 66 ICLQ 687, 688 referring to the characteristics of ubiquity and virtuality of Internet communication and observing that ‘[w]‌here these two phenomena overlap, courts are confronted with an overwhelming amount of increasingly tenuous connections to a multitude of legal systems’. 15 Karen Yeung, ‘Blockchain, Transnational Security and the Promise of Automated Law Enforcement: The Withering of Freedom under Law’ (2017) TLI Think! Paper 58/​2017  accessed 23 July 2018; Pietro Ortolani, ‘Self-​Enforcing Online Dispute Resolution: Lessons from Bitcoin’ (2016) 36 OJLS 595, Philipp Paech, ‘The Governance of Blockchain Financial Networks’ (2017) 80 MLR 1073, 1076. 16 Smith and others (n 8) 13: ‘A public, unpermissioned system such as Bitcoin is primarily governed by technical code because no single entity controls the system. This is why attempts to regulate Bitcoin by legal code have tended to focus on regulating the businesses that deal with Bitcoin such as exchanges and wallet providers’; also Aaron Wright and Primavera De Filippi, ‘Decentralized Blockchain Technology and the Rise of the Lex Cryptographia’ (2015) accessed 23 July 2018. 17 Predominantly, Regulation (EU) 1215/​2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L351/​1 (Brussels I  Regulation), Regulation (EC) no 593/​2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L177/​6 (Rome I Regulation), and Regulation (EC) no 864/​2007 on the law applicable to non-​contractual obligations (Rome II) [2007] OJ L199/​40 (Rome II Regulation). 18 A formal contractual framework between the participants in a cryptocurrency system is most likely in the case of a private, closed system; Smith and others (n 8) 13.



Cryptocurrencies and the Conflict of Laws from other contracts for the supply of goods or services or joint venture contracts, and questions of jurisdiction and of applicable law can be addressed on settled lines.19 5.10 That is not to say that the application of these well-​settled rules to relationships

of these kinds will never be problematic. For example, it seems an open question as to whether a contract requiring the transfer of tangible goods in exchange for units of a cryptocurrency is ‘a contract for the sale of goods’ within the meaning of Article 7(1)(b) of the Brussels I  Regulation or Article 4(1)(a) of the Rome I Regulation. In Car Trim GmbH v Key Safety Systems Srl, the European Court of Justice stated that ‘a contract which has as its characteristic obligation the supply of a good will be classified as a “sale of goods” within the meaning of the first indent of Article 5(1)(b) of Regulation No 44/​2001’, suggesting a flexible approach focussing on the contract’s ‘characteristic performance’ (the delivery of goods) rather than the promised counter-​performance.20 The European Court has also expressed the opinion, albeit in the different context of VAT legislation, that ‘the “bitcoin” virtual currency has no purpose other than to be a means of payment and that it is accepted for that purpose by certain operators’.21 Moreover, as the connecting factors in the two Regulations focus (in the case of jurisdiction) on the place of delivery of the goods in the European Union22 and (in the case of applicable law) on the habitual residence of the seller of the goods,23 the use of a cryptocurrency as the medium of exchange does not present any difficulties in terms of identification of the designated court or legal system. On this basis, there seems a very strong argument for extending the category of ‘sale of goods’ to include transactions involving cryptocurrencies instead of a national (fiat) currencies.24 Even so, in the absence any decision in point, there remains some doubt, given that the European Court suggested in its decision in Falco Privatstiftung v 19 With particular reference to Brussels I Regulation, arts 4, 7(1), 17–​19, and 25 and to Rome I Regulation, arts 3, 4, and 6. 20 Case C-​381/​08, [2010] ECLI:EU:C:2010:90, para 32; also Case C-​196/​15, Granarolo SpA v Ambrosi Emmi France SA [2016] ECLI:EU:C:2016:559, para 33. In Case C-​64/​17, Saey Home & Garden NV/​SA v Lusavouga-​Máquinas e Acessórios Industriais SA [2017] ECLI:EU:C:2018:173, para 40, the CJEU held that the remuneration for a supply of services within art 7(1)(b) of the Brussels I Regulation need not consist of the payment of a sum of money. 21 Case C-​264/​14, Skatteverket v Hedqvist [2015] ECLI:EU:C:2015:208, para 52. Although this statement is too emphatic (see Ortolani (n 15), 608: ‘the Bitcoin system can be used not only for a simple transfer of money but also for more complex arrangements: the Bitcoin protocol allows for the creation of contracts, whose contents can be automatically modified by writing software scripts’), one can readily accept that payment is a function of the Bitcoin system, even if it is not widely accepted as an instrument of payment (see Kelvin FK Low and Ernie GS Teo, ‘Legal Risks of Owning Cryptocurrencies’ (2016) Singapore Management University School of Law Research Paper no 23/​2016, 29–​30 accessed 23 July 2018). 22 Brussels I Regulation, art 7(1)(b). 23 Rome I Regulation, art 4(1)(a). 24 An exchange of cryptocurrency for national currency would likely be characterized as a contract for the supply of services by the party who acts within the cryptocurrency system to deliver units of a cryptocurrency (see Section II.D.2 in this chapter).



Introduction Weller-​Lindhors that (i) the characterization of a transaction for VAT purposes is not necessarily to be carried across to the European Union’s private international law instruments, and (ii) the categories used in Article 7(1)(b) (‘contract for the supply of goods’; ‘contract for the supply of services’) are to be construed narrowly given that it is an exception to Article 7(1)(a).25 Moving from contractual to non-​contractual obligations, it may similarly be ob- 5.11 served that many allegations of wrongdoing in relation to the functioning of a cryptocurrency system present no new challenges in terms of identifying the applicable law or jurisdiction. For example, cases involving alleged fraudulent misrepresentations inducing a transfer of cryptocurrency, or theft of computer equipment and misappropriation of confidential cryptographic keys, concern the behaviour of real persons (the alleged perpetrator and victim) in the real world, such that it should be no more difficult to locate the event giving rise to damage and the damage26 than in similar cases in other contexts. Cases of alleged wrongful conduct targeted at a cryptocurrency system, such as 5.12 hacking or ‘denial of service’ attack, are more challenging conceptually. However, acknowledging the evidential difficulties in the way of identifying the perpetrator, the event giving rise to damage still consists of conduct of the perpetrator which takes place in the real (not virtual) world.27 Moreover, given that the victims of that conduct remain individuals and businesses with a physical location, it appears perfectly possible, and consistent with the approach taken by the European Court in other categories of wrongdoing, to ascribe a location to damage suffered by affected participants within the system by reference to their habitual residence or relevant place of business, which is where the consequences for them of the attack upon the system are manifested and felt. 28 Claims that the defendant has violated intellectual property rights, which may offer an alternative route to legal protection in cases of this kind, must be analysed separately.29 25 Case C-​533/​07, [2009] ECR I-​3327, paras 37–​40, 43, but cf Saey Home & Garden (n 20). 26 Brussels I Regulation, art 7(2); Rome II Regulation, art 4(1). See the approach of the CJEU in Case C-​12/​15, Universal Music International Holding BV v Schilling [2016] ECLI:EU:C:2016:449, paras  30–​40. 27 Wintersteiger AG v Products 4U Sondermaschinenbau GmbH [2012] ECLI:EU:C:2012:220, paras  34–​37. 28 See, by analogy, Case C-​352/​13, Cartel Damage Claims Hydrogen Peroxide SA v Evonik Degussa GmbH [2015] ECLI:EU:C:2015:335, paras 51–​53. Note also that, in cases concerning the alleged violation of personality rights by publication of material on the internet, the CJEU has authorized claimants to sue not only in the place(s) where material is accessible to the detriment of the claimant’s reputation or privacy but also—​for the entirety of that detriment—​in the Member State where the claimant’s ‘centre of interests’ is located (see Joined Cases C-​509/​09 etc., eDate Advertising GmbH v X [2011] ECR I-​10269, paras 48–​50; Case C-​194/​16, Bolagsupplysningen OÜ v Svensk Handel AB [2017] ECLI:EU:C:2017:766, paras 32–​43). 29 The CJEU has not followed its case law relating to personality rights jurisdiction (n 28) in the context of infringements of intellectual property rights and unfair competition via the Internet, see Wintersteiger (n 27), paras 21–​25. Instead, its focus in these cases, in assigning jurisdiction, has been on the source of the territorial legal protection (in the form of an intellectual property right or unfair



Cryptocurrencies and the Conflict of Laws 5.13 The following sections of this chapter will address three areas in which

cryptocurrency systems are likely to present greater challenges to the existing legal framework: first, characterization of the relationships between participants within a cryptocurrency system, and identification of the law governing those relationships (Section II); second, whether cryptocurrencies are to be treated as ‘money’ within the conflict of laws, and the consequences of that analysis (Section III); and third, the treatment of cryptocurrencies as ‘property’ within the conflict of laws (Section IV).

5.14 Although the focus of this book, and of this chapter, is on cryptocurrencies, it is

hoped that the framework of analysis in the following sections may prove to be equally valuable with respect to other forms of virtual currency and other systems which share technological features in common with virtual currency systems.

II.  The Law Applicable to the Relationships between Participants within a Cryptocurrency System A. Introduction 5.15 It may be necessary to address the question of what law or laws (if any) govern the

relationships between participants within a cryptocurrency system in the event that civil proceedings are brought between two or more participants in connection with the operation of the system, alleging, for example, fraud or want of good faith or breach of a statutory rule by one participant in the course of instituting, processing, or benefitting from a transaction within the system resulting in detriment to another participant. Such relationships must be analysed separately from relationships that are external to the cryptocurrency system (such as the case of a sale of goods discussed in the preceding section). Relationships of the latter kind are typically bilateral, whereas the relationships within the virtual currency system are multilateral.

5.16 Before sailing into open water, it is necessary to enter a significant caveat. The

sheer variety of cryptocurrency systems is such that a single, homogenous analysis is not possible. Rather, the analysis must be tailored according to the structures and features of the particular system. Most obviously, if the cryptocurrency system (most obviously, a private, closed system) is regulated by a formal contract between the participants, there will be no difficulty in classifying the relationships

competition laws) on which the claimant relies (Wintersteiger (n 27) paras 26–​29; Case C-​441/​13, Hejduk v Energie.Agentur.NRW GmbH [2015] ECLI:EU:C:2015:28, paras 29–​37; Case C-​618/​15, Concurrence SARL v Samsung Electronics France SAS [2016] ECLI:EU:C:2016:976, paras 30–​35). This approach aligns with the so-​called lex loci protectionis rule concerning the law applicable to infringements of intellectual property rights in art 8(1) of the Rome II Regulation.



The Relationships between Participants within a Cryptocurrency System between them as ‘contractual’ for the purposes of applying rules of both jurisdiction and applicable law.30 For present purposes, this chapter focusses on relationships that are not labelled 5.17 or identified by the system participants as contractual in nature. By reason of their current size and the wealth of publicly available information, two cryptocurrencies, Bitcoin and Ripple, will be used to illustrate the way in which these questions of applicable law should be approached, although the analysis of the underlying legal framework has wider resonance. The focus will be on the rules contained within the Rome I  Regulation, which apply in the UK and elsewhere in the European Union. B. Key features of the Bitcoin and Ripple cryptocurrency systems 1. Bitcoin In summary,31 Bitcoin operates using a public, distributed ledger using ‘blockchain’ 5.18 technology32 and that is accessible to anyone with an Internet connection. The Bitcoin blockchain is a data file, larger than 166,000 megabytes and growing rapidly,33 containing a record of all validated transactions within the Bitcoin system that are compatible with its protocol (a computer algorithm). The transactions relating to a Bitcoin or fragment of a Bitcoin are linked to one another so as to create a provenance that can be traced back to an original (coinbase) transaction generating a credit within the system. Participants join the Bitcoin system by downloading software (normally in the 5.19 form of an offline or online wallet). They create a pseudonymous address and a public and private key to verify transactions. They may become the ‘owner’ of a Bitcoin, or a fragment of a Bitcoin, by being identified, through their user identity, in the output string of a Bitcoin transaction, either generated by the system or by another user.

30 Text to n 18. 31 For more detailed accounts of the workings of the Bitcoin system, seeSatoshi Nakamoto, ‘Bitcoin: A Peer-​to-​Peer Electronic Cash System’ Bitcoin accessed 23 July 2018; European Central Bank, ‘Virtual Currency Schemes’ (n 2) 21–​27; Bitcoin, ‘Bitcoin Developer Guide’ Bitcoin accessed 23 July 2018; Michael Nielsen, ‘How the Bitcoin Protocol Actually Works’ Data-​Driven Intelligence (6 December 2013) accessed 23 July 2018; Ken Shirriff, ‘Bitcoins the Hard Way: Using the Raw Bitcoin Protocol’ Ken Shirriff’s blog accessed 23 July 2018; Ken Shirriff, ‘Bitcoin Mining the Hard Way: The Algorithms, Protocols, and Bytes’ Ken Shirriff’s blog accessed 23 July 2018. 32 Blockchain, ‘Latest Blocks’ Blockchain accessed 23 July 2018. 33 Blockchain, ‘Blockchain Size’ Blockchain accessed 10 August 2018 (data as at 2 May 2018).



Cryptocurrencies and the Conflict of Laws 5.20 A computer that connects to the Bitcoin system is called a node. Each fully par-

ticipating node within the system downloads a copy of the blockchain. New transactions are broadcast to all nodes, which verify them for compliance with the protocol. Some of the nodes undertake ‘mining’ activities, whereby they gather transactions into blocks and undertake a computationally difficult ‘proof-​of-​work’ task for the privilege of creating the next block in the chain. Upon succeeding in this task, the successful miner broadcasts the new block to other nodes within the system. The system protocol also contains rules to resolve the situation in which two or more miners broadcast different, incompatible blocks (eg two miners process the same transaction at about the same time). Successful miners are rewarded in two ways: by receiving a credit under a new, automatically generated coinbase transaction and by being entitled to receive fees expressed in the output string of the mined transactions.

5.21 The Bitcoin system operates according to ‘consensus rules’ comprised within the

protocol, which bring together the participants in a single, unified system. Those consensus rules change from time to time by reason of changes in the software being used by participants. In principle:34 Nodes that have different consensus rules are actually using two different networks/​ currencies. Changing any of the consensus rules requires a hard fork, which can be thought of as creating a new currency and having everyone move to it.

5.22 In practice, such ‘hard forks’ are a cause of difficulty only insofar as differences

in the consensus rules lead to divergences in the version of validated blockchain distributed among the participants.35 If such divergence persists, the unity of the system is lost, leading to a split in the cryptocurrency. Bitcoin’s recent history is littered with hard forks, for example those resulting in the separation of Bitcoin Cash36 and Bitcoin Gold37 as distinct, viable cryptocurrencies.38

2. Ripple 5.23 Ripple, which has developed independently of Bitcoin, also uses a public, distributed ledger using open source software.39 The Ripple system enables participants 34 accessed 23 July 2018. 35 See ‘Bitcoin Developer Guide’ (n 31) under ‘Consensus Rule Changes’; also Low and Teo (n 21) 30–​35. 36 Bitcoin Cash, ‘Homepage’ Bitcoin Cash accessed 23 July 2018. 37 Bitcoin Gold, ‘Homepage’ Bitcoin Gold accessed 23 July 2018. 38 See also, ‘Bitcoin Forks and Airdrops’ Forkdrop accessed 10 August 2018 for a full list of recent Bitcoin forks. Hard forks are a form of ‘community decision-​ making’ (Sarah Jeong, ‘The Bitcoin Protocol as Law, and the Politics of a Stateless Currency’ (2013) 29–​32 accessed 23 July 2018), which results in a division of the system. This is not a peculiarity of the Bitcoin system (see Low and Teo (n 21) 24–​27, 33–​35, for discussion of a well-​known example: the separation of Ethereum Classic from Ethereum in 2016). 39 For more detailed accounts of the Ripple system, see Frederik Armkneckt and others, ‘Ripple:  Overview and Outlook’ in Mauro Conti, Matthias Schunter, and Ioannis Askoxylakis



The Relationships between Participants within a Cryptocurrency System not only to trade XRP, Ripple’s in-​house currency, but also to engage in transactions involving national currencies and other cryptocurrencies.40 The most significant difference between the consensus rules of Ripple and Bitcoin 5.24 concerns the means by which transactions are verified in the ledger. Whereas Bitcoin relies on proof of work by individual miners, Ripple relies on verification by validators. Nodes within the Ripple system designate a list (the Unique Node List or UNL) of ‘trusted’ nodes from among the Ripple participants running the Ripple software in the validator mode.41 By using this methodology, hard forks within the Ripple network become extremely difficult to generate.42 Ripple Labs Inc., a company incorporated in Delaware and headquartered in 5.25 California, maintains on its website a list of validators (currently over seventy in number).43 Ripple Labs, which founded the system in 2012, has always played a key part in its operation: it operates five validators itself which are listed in the default UNL and are recommended to participants—​and it verifies the web domains of other validators. Ripple Labs holds a significant number of XRP.44 To date, Ripple Labs’ ownership and control of key validator nodes has given it de facto control of the network.45 In recent years, however, the company has sought to implement a ‘decentralization strategy’ to diversify the identity, location, and technological resources of validators. The terms and conditions of use of Ripple’s website contain the following wording: Ripple developed the original protocol for Ripple Technology, and continues to promote its use as a distributed open source payment network. Additionally, as a member of the open source community, Ripple may contribute updates and modifications to the Ripple Technology source code. However, Ripple does not own or control Ripple Technology.

In this provision ‘Ripple’ refers to Ripple Labs and its subsidiaries and affiliates, and ‘Ripple Technology’ refers to ‘Ripple open source client software or the

(eds), Trust and Trustworthy Computing (Springer International 2015) 163–​80; Dave Cohen, David Schwartz, and Arthur Britto, ‘The XRP Ledger Consensus Process’ Ripple accessed 23 July 2018. 40 Armkneckt and others (n 39) 164–​67. 41 Ripple, ‘Managed the rippled Server’ Ripple accessed 23 July 2018. 42 Armkneckt and others (n 39) 171–​74, suggesting that the occurrence of hard forks within the Ripple system is theoretically possible. 43 Cohen, Schwartz, and Britto (n 39); ‘Validator Registry’ XRP Charts accessed 23 July 2018. 44 As of 2 May 2018, Ripple Labs held over 7% of the total (finite) supply of XRP with a further 53% unallocated in an escrow account (see Ripple, ‘Market Performance’ Ripple accessed 23 July 2018; data as at 2 May 2018. 45 In 2015, the authors of one paper stated with confidence that ‘In Ripple, the same entity, Ripple Labs, controls the fate of the entire system’ (Armkneckt and others (n 39) 171).



Cryptocurrencies and the Conflict of Laws Ripple distributed open source global payment network accessed through that software’.46 5.26 Notwithstanding these developments, the preceding summary suggests that, for

the time being, Ripple Labs maintains a significant degree of overall control over the system. C. Conflict of laws characterization of the relationships between participants in cryptocurrency systems

5.27 How then should the relationships between the participants in cryptocurrency

systems such as Bitcoin and Ripple be characterized in the conflict of laws? The obvious starting point is to suggest a contractual classification, given that the cryptocurrencies are identified and transactions processed by reference to the system’s consensus rules, to which the participants subscribe by downloading and operating software.

5.28 In EU private international law, the common definition of a ‘matter relating to a

contract’ (for jurisdiction purposes) and of a ‘contractual obligation’ (for applicable law purposes) fixes upon the consensual basis of the relationship which is the source of obligations. According to the European Court:47 It is clear from the case-​law of the Court on the Brussels I Regulation that only a legal obligation freely consented to by one person towards another and on which the claimant’s action is based is a ‘matter relating to contract’. . . . By analogy . . . it must be held that the concept of ‘contractual obligation’ within the meaning of Article 1 of the Rome I Regulation designates a legal obligation freely consented to by one person towards another.

5.29 In an earlier case,48 the European Court had held that obligations which have

their basis in the relationship existing between an unincorporated association and its members constituted ‘matters relating to a contract’ within the Brussels I regime. In the Court’s view, ‘membership of an association creates between the members close links of the same kind as those which are created between the parties to a contract and that consequently the obligations to which the national

46 Ripple, ‘Terms of Use’ (16 February 2016) clause 5 Ripple accessed 23 July 2018. Note that the terms, which are governed (clause 17) by the laws of California, expressly apply only to the use of the website and not to the Ripple virtual currency system. See also Rome Reginelli, ‘Decentralization Strategy Update’ (17 October 2017) Ripple accessed 23 July 2018. See Jon Holmquist, ‘Who Are the Ripple Validators?’ (19 June 2017) John HQ accessed 23 July 2018. 47 Joined Cases C-​ 359/​ 14 etc., Ergo Insurance SE v If P&C Insurance AS [2016] ECLI:EU:C:2016:40, para 44 (Rome I/​Rome II Regulations) referring to Case C-​373/​13, Kolassa v Barclays Bank plc [2015] ECLI:EU:C:2015:37, para 39 (Brussels I Regulation). 48 Case 34/​82, Martin Peters Bauunternehmung GmbH v Zuid Nederlandse Aannemers Vereniging [1983] ECR 987.



The Relationships between Participants within a Cryptocurrency System court refers may be regarded as contractual’.49 No distinction was, for this purpose, to be drawn between obligations arising simply from the act of becoming a member and obligations arising from such act in conjunction with a decision of the organ of the association. The European Court has also held that a statutory obligation to pay a prize offered 5.30 as an incentive to conclude a contract for the sale of goods fell within the description of a ‘matter relating to contract’ when the prize had been offered by a trader and accepted by a consumer even if no contract for the sale of goods had been concluded.50 In this connection, it is to be noted that an obligation arising ‘under’, ie founded on the existence of, a ‘contractual’ relationship, in the sense described above, is to be given a contractual classification under the European Union’s private international law instruments, even if that obligation is not itself freely assumed but is imposed by law as an incident of the relationship,51 and even if that obligation is not classified as contractual under national law.52 This body of case law strongly supports a contractual characterization of relation- 5.31 ships within a cryptocurrency system such as Bitcoin or Ripple. It must, however, be emphasized that to attach such characterization to the relationship between the participants in a cryptocurrency system is not to conclude that substantive contractual obligations exist between them. Rather, it involves the recognition that the participants’ relationships are sufficiently akin to that between parties in a relationship that is indisputably contractual to justify applying a common set of rules to identify a court of competent jurisdiction for disputes between them53 (including disputes about the existence of contractual obligations54) and to identify the rules of law that will be applied to determine the existence55 and extent56 of the parties’ contractual obligations towards one another. A measure of caution is nevertheless required before affirming this conclusion. 5.32 As appears from the following section of this paper, the decentralized nature of many cryptocurrency systems (notably Bitcoin) and of the relationships between its participants is such that the connecting factors presently used within the European Union’s private international law framework are less than perfectly

49 Martin Peters (n 48) para 13. 50 Case C-​27/​02, Engler v Janus Versand GmbH [2005] ECR I-​481, paras 45–​59. See also Case C-​180/​06, Ilsinger v Dreschers [2009] ECR I-​3961, paras 48–​59. 51 Joined Cases C-​274/​16 etc., Flightright GmbH v Air Nostrum [2018] ECLI:EU:C:2018:160, para 59. 52 Case C-​548/​12, Brogsitter v Fabrication de Montres Normandes EURL [2014] ECLI:EU:C:2014:148, paras 21–​26 (noted Andrew Dickinson, ‘Towards an Agreement on the Concept of “Contract” in EU Private International Law’ [2014] LMCLQ 466). 53 Brussels I Regulation, art 7(1). 54 Case C-​366/​13, Profit Investment Sim SpA [2016] ECLI:EU:C:2016:282, paras 52–​58. 55 Rome I Regulation, art 10. 56 Rome I Regulation, art 12.



Cryptocurrencies and the Conflict of Laws suited for the task. The ‘practical advantages’ that led the European Court in the Martin Peters case to assimilate the case of an unincorporated association to that of an ordinary contract are lacking here. According to the Court in Martin Peters, ‘under national legal systems it is usually stipulated that the place in which the association is established is to be the place of performance of obligations arising out of the act of becoming a member’, thereby ensuring a close connection between the court designated as having jurisdiction (that of the place of performance) and the dispute.57 That evidently does not hold true within the Bitcoin and other decentralized cryptocurrency systems. If it is not possible to interpret the connecting factor in Article 7(1) of the Regulation in such a way as to identify a court territorially qualified to determine cases involving relationships of this kind, that might provide a reason to reject the application of this rule of special jurisdiction to them.58 Rules of applicable law are similarly not to be interpreted and applied mechanistically without regard to the practical consequences of adopting a particular characterization.59 5.33 These concerns notwithstanding, no obviously better solution to the character-

ization question presents itself within the current legal framework. The Rome II Regulation, which fixes the law applicable to a large body of non-​contractual obligations, seems even less well suited for the task of determining the law applicable to relationships within a cryptocurrency system, and the further possibility of concluding that neither Regulation fixes the law applicable to these relationships is highly unlikely to tempt the Court of Justice, as it would reduce the influence of EU private international law and lead to the application of diverse national rules of applicable law in the Member States.

5.34 Accordingly, the analysis in the following sections proceeds on the basis that it is

correct to characterize the relationships between participants in cryptocurrency systems such as Bitcoin and Ripple as contractual for the purpose of determining questions of jurisdiction and of applicable law. D. The law applicable to relationships between participants in cryptocurrency systems

5.35 As noted above, the first question to be determined is whether any contractual

obligations exist at all between the participants in a cryptocurrency system. Article 10(1) of the Rome I Regulation (as well as Article 8(1) of the Rome Convention which preceded it60) provides that ‘the existence and validity of a contract . . . shall Martin Peters (n 48) para 14. 58 See Case C-​256/​00, Besix SA v Wasserreinigungsbau Alfred Kretzschmar GmbH & Co KG [2002] ECR I-​1699, para 35. 59 Raiffeisen Zentralbank Österreich AG v Five Star Trading LLC [2001] EWCA Civ 68, [2001] QB 825 [27] (Mance LJ). 60 Convention on the law applicable to contractual obligations ([1980] OJ L266/​1). As to the temporal effect of the Regulation and Convention, see text to nn 72–​74. 57



The Relationships between Participants within a Cryptocurrency System be determined by the law which would govern it under this [Regulation/​ Convention] if the contract  . . .  were valid’. This reference leads in turn to an examination of the rules of applicable law in the Regulation/​Rome Convention, in particular Article 3 (freedom of choice), Article 4 (applicable law in the absence of choice) and Regulation, Article 6/​Rome Convention, Article 5 (consumer contracts), which apply to determine the law applicable to a contract. 1. Choice of the applicable law (Article 3) a)  The Rome I Regulation: choice of national law  Under Article 3(1) of the 5.36 Rome I Regulation and the Rome Convention, ‘[a]‌contract shall be governed by the law chosen by the parties’. That choice ‘shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case’. Article 3 has no obvious role to play in determining the law applicable to rela- 5.37 tionships within the Bitcoin or Ripple systems or other systems operating along similar lines. The ‘consensus rules’, contained in the Bitcoin and Ripple protocols, cannot be regarded as a ‘law chosen by the parties’, as the Regulation and Rome Convention only validate a choice of a national legal system and not a choice of a non-​State rules.61 The participants in the Bitcoin and Ripple systems have not made any choice of that kind.62 As Article 3 does not apply, it is necessary to turn to Article 4, which contains 5.38 rules for determining the law applicable to a contract in the absence of choice (see Section II.D.2 in this chapter). b)  Possible future alternatives to choice of national law  By contrast with Article 5.39 3 of the Rome I  Regulation, Article 3 of the (non-​binding) Hague Principles on choice of law in international commercial contracts63 provides that ‘[t]‌he law chosen by the parties may be rules of law that are generally accepted on an international, supranational or regional level as a neutral and balanced set of rules, unless the law of the forum provides otherwise’. Even if that provision were to be given legal force within the English legal system by a future legislative act, there seems no realistic prospect of the Bitcoin ‘consensus rules’ being classified as ‘rules of law’ within the scope of this provision. The Commentary to the Hague

61 Rome I Regulation, Recital (13), provides that the Regulation ‘does not preclude parties from incorporating by reference into their contract a non-​State body of law or an international convention’, but there is a fundamental difference between choosing a law and incorporating provisions of law by reference (see Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 32-​049 and 32-​036; Halpern v Halpern [2007] EWCA Civ 291, [2008] QB 195) cf text to nn 63–​67. 62 Note that, although the terms of use of Ripple’s website (n 46) contain a choice of the laws of California, those terms expressly do not apply to the Ripple virtual currency system. 63 Hague Conference on Private International Law, ‘Hague Principles’ Hague Conference on Private International Law accessed 23 July 2018.



Cryptocurrencies and the Conflict of Laws Principles64 provides that the requirement within Article 3 that the ‘rules of law’ be ‘generally accepted on an international, supranational or regional level as a neutral and balanced set of rules’ is not satisfied by ‘a set of rules contained in the contract itself, or to one party’s standard terms and conditions, or to a set of local industry-​specific terms’.65 Although the wording of Article 3 is riddled with subjectivity and uncertainty,66 the Bitcoin and Ripple consensus rules do not have the level of external validation necessary to satisfy this criterion, even if they otherwise qualify as ‘rules of law’ in the sense understood by Article 3 (which appears doubtful67). They have no existence or function outside the system, but are tantamount to ‘a set of rules contained in the contract itself ’. 5.40 If it were thought desirable at a policy level to accommodate within the frame-

work of choice of law rules for contractual matters the fundamental premise on which the Bitcoin, Ripple and similar systems operate, it would necessary to consider amending those rules to permit the system participants to choose to exclude the application of all national rules of contract law to their relationships. In a case in which the system participants expressly or clearly demonstrate a choice that ‘no law’ should apply to their relationships,68 giving effect to that choice would strengthen party autonomy and improve legal certainty.

5.41 Allowing the participants to contract out of legal regulation would not—​to use

the words of Lord Diplock69—​result in their relationship ‘existing in a legal vacuum’. Rather, by reason of the participants’ choice, validated by the applicable conflict of laws rule, their relationships would be taken outside the domain of contract law, but would remain within the domain of the conflict of laws and be subject to the possible overriding effect of mandatory provisions of the law of the forum or of a third country.70 By adopting this solution, the rule of English and

64 Hague Conference on Private International Law, ‘Hague Principles Commentary’ Hague Conference on Private International Law accessed 23 July 2018. 65 Hague Conference on Private International Law (Hague Principles Commentary) (n 64) para 3.4. 66 Andrew Dickinson, ‘A Principled Approach to Choice of Law in Contract?’ (2013) 28 JIBFL 151, 152. 67 Hague Conference on Private International Law (Hague Principles Commentary) (n 64), refers (para 3.10) to ‘a set of rules and not merely a small number of provisions’, which ‘allow for the resolution of common contract problems in the international context’. 68 cf Rome I  Regulation, art 3(1); Hague Conference on Private International Law (Hague Principles) (n 63), art 4. It is doubtful whether such a choice could be ‘clearly demonstrated’ within the Bitcoin or Ripple consensus rules, but (assuming no technological impediment) those rules could be changed to make such a choice in express terms. 69 Amin Rasheed Shipping Corporation v Kuwait Insurance Co [1984] AC 50, 64. 70 See Hague Conference on Private International Law (Hague Principles) (n 63), art 11 and Commentary. See also Rome I Regulation, art 9. Public policy (ordre public) which may have the effect of denying the application of an otherwise applicable rule of the lex causae would not be relevant in this case, in the absence of an applicable system of contract law.



The Relationships between Participants within a Cryptocurrency System other contract laws, whereby parties lacking in the requisite contractual intention cannot assume contractual obligations,71 would find a counterpart in private international law. The solution suggested here is nevertheless open to the objection that it could not 5.42 sensibly be restricted to relationships within cryptocurrency systems, and would undermine the fundamental assumption within the Rome I Regulation and the Hague Principles that contractual obligations are an appropriate subject matter for legal regulation. It would enable the parties making such a choice to escape all non-​derogable rules other than the exceptional category of rules given ‘overriding mandatory’ status. Although that might be to their advantage, an immunity of this kind would seem go against the current of increasing regulatory scrutiny of cryptocurrency systems. There is, in any event, no basis for this approach in the Rome I Regulation or the 5.43 Hague Principles or—​so far as the author is aware—​in the conflict of laws rules of any legal system. Current State practice admits a choice of the law of a country, but not a choice of the laws of no country. 2. Law applicable in the absence of choice (Article 4) Several difficulties arise when one turns, as in many cases one must (see Section 5.44 II.D.1 in this chapter), to consider the law applicable to relationships within a cryptocurrency system in the absence of choice of law by the participants (Rome I Regulation/​Rome Convention, Article 4). a)  Temporal application of the Rome I Regulation  The first issue to be ad- 5.45 dressed is one of temporal application of the Rome I Regulation, as the rules in Article 4 of the Regulation differ in important respects from those in Article 4 of the Rome Convention, which preceded it. It is, therefore, necessary to consider which set of rules would apply to determine the law applicable to relationships within a particular cryptocurrency system. The Rome I Regulation applies (Article 28) to determine the law applicable to 5.46 contracts concluded on or after 17 December 2009; the Rome Convention to contracts concluded before that date. The Ripple system was established in 2012, resulting in the unquestionable application of the Rome I Regulation to determine the law applicable to relationships within that system. By contrast, the genesis block in the Bitcoin cryptocurrency system was established on 3 January 2009 and the first Bitcoin transaction occurred on 12 January 2009, in each case before the date of application of the Rome I Regulation. If the relevant ‘contract’ were taken to have been concluded at that time, the Rome Convention and not the

71 Hugh Beale and others (eds), Chitty on Contracts (32nd edn, Sweet & Maxwell 2015) para  2-​167.



Cryptocurrencies and the Conflict of Laws Rome I Regulation would apply to determine the law applicable to relationships within the Bitcoin system. 5.47 The European Court has emphasized, however, that an autonomous approach

must be taken in determining the date of ‘conclusion’ of a contract72 and that a new contract may be regarded as having been ‘concluded’ at a later date than the original contract if the parties’ relationship has been subject  ’to a variation agreed between the contracting parties of such magnitude that it gives rise not to the mere updating or amendment of the contract but to the creation of a new legal relationship between the contracting parties, so that the initial contract should be regarded as having been replaced by a new contract’.73 Although not every change in the Bitcoin consensus rules would be sufficiently fundamental to trigger the conclusion of a new ‘contract’ for this purpose, it seems highly likely that changes in the size, scale, and operation of the system over time, in particular after 17 December 2009, have been sufficiently fundamental to render the Rome I Regulation applicable to determine the law applicable to relationships within that system as well. In particular, the ‘hard forks’ in 2017 which led to the splitting off of Bitcoin Cash and Bitcoin Gold74 appear to constitute changes of that nature giving rise to a new legal relationship between participants in the Bitcoin system.

5.48 Accordingly, the following discussion will proceed on the assumption that the

Rome I Regulation applies to determine the law applicable to relationships between participants in cryptocurrency systems such as the Bitcoin and Ripple systems. In the final analysis, however, the differences between the Rome I Regulation and Rome Convention are unlikely to lead to materially different results in such cases in practice.

5.49 b)  Particular categories of contract (Article 4(1)) and characteristic perform-

ance (Article 4(2))  The next question is whether the relationships between the participants in cryptocurrency systems such as the Bitcoin and Ripple systems fall within any of the categories of ‘contract’ listed in Article 4(1) of the Regulation, to which specific rules of applicable law apply.75 5.50 Of the categories listed in Article 4(1), only two merit further consideration.

Article 4(1)(h) refers to:

a contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-​party buying and selling interests in

Case C-​135/​15, Republik Griechenland v Nikiforidis [2016] ECLI:EU:C:2016:774, para 29. 73 ibid, para 37. 74 Text to nn 36–​38. 75 Art 4(1) has no equivalent in the Rome Convention. 72



The Relationships between Participants within a Cryptocurrency System financial instruments, as defined by Article 4(1), point (17) of Directive 2004/​39/​EC (MiFID), in accordance with non-​discretionary rules and governed by a single law.76

This provision almost certainly does not apply to cryptocurrency systems such as 5.51 Bitcoin and Ripple. Two reasons may be given for this conclusion. First, although systems such as Bitcoin and Ripple undoubtedly bring together large numbers of participants to facilitate transactions in cryptocurrencies,77 cryptocurrencies such as Bitcoin and Ripple XRP probably fall outside the categories of ‘financial instrument’ listed in Section C of Annex I  to Directive 2004/​39/​EC and Directive 2014/​65/​EU (MiFID II), which has now replaced it.78 In particular, insofar as cryptocurrencies constitute ‘instruments of payment’,79 they fall outside the categories of ‘transferable securities’80 and ‘money-​market instruments’.81 Second, the Bitcoin and Ripple systems are not ‘governed by a single law’ within the meaning of Article 4(1)(h). Although the wording leaves much to be desired,82 it is evident from the fact that Article 4(1)(h) uses the law governing the system as a connecting factor to fix the law applicable to transactions within a multilateral system that there must be some external reason for concluding that a single law ‘governs’ the system—​otherwise the provision would be entirely circular in its operation. The better view83 is that the reference to a single governing law is to the system of law exercising regulatory oversight over the system, but even a reference to a choice of law provision contained within the rules or terms of the system84 would not permit the conclusion that cryptocurrency systems such as Bitcoin and Ripple are ‘multilateral systems’ within the meaning of Article 4(1)(h).85 Directive 2004/​39/​EC on markets in financial instruments ([2004] OJ L145/​1), art 4(1), point 15; Directive 2014/​65/​EU on markets in financial instruments ([2014] OJ L173/​349), art 4(1), point (19). The latter Directive, which repeals and replaces the former directive, entered into force on 1 January 2018. 77 Ripple also facilitates exchanges of different virtual currencies and of virtual currencies with national currencies (text to n 40). 78 Directive 2004/​39/​EC (n 76), art 4(1), point 17; Directive 2014/​65/​EC (n 76), art 4(1), point 17. The same conclusion would follow for art 6(4)(d) of the Rome I Regulation. 79 See Skatteverket (n 21), esp at paras 38–​43 and 54–​56. 80 Directive 2004/​39/​EC (n 76), art 4(1), point 18; Directive 2014/​65/​EC (n 76), art 4(1), point 44; cf Sergii Shcherbak, ‘How should Bitcoin be Regulated?’ (2014) 7 European Journal of Legal Studies 41. 81 Directive 2004/​39/​EC (n 76), art 4(1), point 19; Directive 2014/​65/​EC (n 76), art 4(1), point 17. 82 Matthias Lehmann, ‘Financial Instruments’ in Franco Ferrari and Stefan Leible (eds), Rome I Regulation (Sellier 2009) 85, 90–​91. 83 Lehmann (n 82); Dicey, Morris & Collins on the Conflict of Laws (n 9) para 33-​394. See also Directive 98/​26/​EC on settlement finality in payment and securities settlement systems [1998] OJ L166/​45, art 8. The Directive does not apply to virtual currency systems. 84 Michael McParland, The Rome I Regulation on the Law Applicable to Contractual Obligations (OUP 2015) para 10.286. 85 Section II.D.1 of this chapter. The same conclusion would follow for art 6(4)(e) of the Rome I Regulation. 76



Cryptocurrencies and the Conflict of Laws 5.52 That conclusion leaves as the only viable option within Article 4(1) the category

of ‘contract for the provision of services’ in Article 4(1)(b) of the Regulation. In Skatteverket v Hedqvist, the European Court held that transactions to exchange a national currency for Bitcoin, or vice versa, constituted transactions for the supply of services for VAT purposes.86 The same analysis does not, however, necessarily follow here in the application of a different set of rules to relationships of different kinds.87 It is necessary, therefore, to examine the point in a little more detail.

5.53 In applying the rules of jurisdiction within the Brussels I Regulation, the European

Court has held that the concept of a contract for the provision of services ‘implies, at the least, that the party who provides the service carries out a particular activity in return for remuneration’.88 On this basis, a credit agreement has been held to fall within the category: in that case ‘the supply of services lies in the transfer of a sum of money by the credit institution to the borrower, in return for fees paid by the borrower, in principle, in the form of interest’.89 The relevant remuneration need not, however, take the form of a monetary payment.90

5.54 The European Court has also emphasized that, in identifying the service pro-

vider, it is necessary to focus on the contract’s ‘characteristic performance’.91 This concept is also used in Article 4(2) of the Rome I Regulation, under which—​in a case to which Article 4(1) does not apply—​‘the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence’.92 In both contexts, ‘characteristic performance’ refers to the contract’s ‘centre of gravity and socio-​economic function’.93

5.55 With respect to the Bitcoin system, it is necessary to pay close attention to the

important role played by miners in validating transactions and extending the blockchain. As noted above (Section II.B.1), some participants within the Bitcoin system (the ‘miners’) perform activities (the proof-​of-​work exercise) in return for remuneration (the benefit of the coinbase transaction and transaction fees). It appears possible, without undue artificiality, to describe the miners as providing services to other participants (operators of nodes) within the Bitcoin system and to identify those services as central to, and characteristic of, the operation of the cryptocurrency system.

Skatteverket (n 21) paras 22–​31. 87 Falco Privatstiftung (n 25) paras 38–​39. 88 ibid para 29. 89 Case C-​249/​16, Kareda v Benko [2016] ECLI:EU:C:2017:472, para 41. 90 Saey Home & Garden (n 20) para 40. 91 ibid para 40. 92 See also Rome Convention, art 4(2). 93 Report on the Convention on the law applicable to contractual obligations (Giuliano-​Lagarde) [1980] OJ C282/​20; Rome I Regulation, Recital (19). 86



The Relationships between Participants within a Cryptocurrency System Within the Ripple system, a similar role to that performed by miners within the 5.56 Bitcoin system is performed by the operators of the validator nodes. Nevertheless, for the time being at least, it appears possible to conclude that the role played within the system by Ripple Labs, through the operation of key validator nodes and the vetting of others, represents the system’s ‘centre of gravity’, being distinct from the role played by nodes not controlled by Ripple Labs. The ‘remuneration’ received by Ripple Labs from other system participants may be considered to take the form of the roles that those participants’ nodes perform which has the effect of enhancing the economic value of the Ripple system, in which Ripple Labs holds a significant financial stake.94 On that basis, Article 4(1)(b) of the Regulation would apply not only to the re- 5.57 lationships between the Bitcoin miners/​Ripple Labs (as service providers) and other participants but also to the other relationships between operators of nodes within the system. The classification of those relationships follows the ‘characteristic obligation’.95 In the case of Bitcoin, this conclusion immediately presents a further difficulty. 5.58 The law applicable under Article 4(1)(b) is that of the service provider’s habitual residence. On the basis of the reasoning adopted above, however, there are multiple ‘service providers’ within the Bitcoin system (ie the miners) who do not share a common habitual residence. The same difficulty exists even if Article 4(1)(b) is bypassed and Article 4(2) of the Rome I Regulation is held to apply instead, assuming that the activities of the miners would be regarded as the ‘characteristic performance’96 within the system. Article 19 of the Rome I Regulation defines habitual residence for a company or 5.59 other body in terms of its place of central administration (Article 19(1)) or other relevant establishment (Article 19(2)) at the time of conclusion of the contract (Art 19(3)). In practice, mining within the Bitcoin system requires vast computational power (with concomitant levels of energy consumption), and it is conducted by groups of participants acting in pools. It appears possible, based on published data, to draw certain (provisional) conclusions regarding the places of establishment of those pools.97 That body of data suggests that a substantial proportion of mining activity within the Bitcoin system is undertaken by pools based

Text to n 44. See Saey Home & Garden (n 20) para 40. 95 See Kareda (n 89) paras 40–​44 (Brussels I Regulation). Art 4 of the Rome I Regulation (unlike art 4 of the Rome Convention) does not contemplate that a separable part of a contract may be governed by a different law. 96 Text to nn 91–​93. 97 Mining data from Blockchain, ‘Hashrate Distribution’ Blockchain accessed 23 July 2018, (reflecting blocks mined in four days to 2 May 2018; home country information from Jordan Tuwiner, ‘Bitcoin Mining Pools’ Buy Bitcoin Worldwide accessed 23 July 2018). 94



Cryptocurrencies and the Conflict of Laws in China: five of the six largest pools mining over 65% of blocks are all ostensibly based in that country.98 5.60 Nevertheless, even if the above position is accepted, that may not provide a suf-

ficient basis for the conclusion that the ‘party required to effect the characteristic performance’ of the ‘contract’ between participants in the Bitcoin system has its habitual residence in China, and that Article 4(1)(b) or Article 4(2) of the Regulation thereby designate Chinese law as the law applicable to the relationships within the system. Any participant within that system may choose to undertake (or not to undertake) mining activity and the success rates of the mining pools have fluctuated significantly over time.99 The fact that, on a particular date (ie the ‘contract’ date100), mining activity appears to be predominantly carried out by pools based in a particular country101 is no more than an observable fact: it does not of itself guarantee that the pattern will continue or establish the requisite strong connection between the future contractual performance (ie the operation of the system) and the ‘economic and social life’ of the relevant country.102

5.61 For Ripple, the analysis under Article 4(1)(b) appears more straightforward if,

as suggested above, the ‘characteristic performance’ within the system is that of Ripple Labs. On that basis, the law applicable to the Ripple system would be the law of California, as Ripple Labs’ place of central administration in 2012, there being no prospect of concluding that the relationships between system participants are manifestly more closely connected to another law. 98 (27.4%), AntPool (13.2%), ViaBTC (10.6%), BTC.TOP (8%), F2Pool (6.9%). Only SlushPool (10.3%), based in the Czech Republic, bucks the trend. See also Rob Price, ‘The 18 Companies that Control Bitcoin in 2016’ (30 June 2016) Business Insider accessed 23 July 2018 giving data for the period 22–​29 June 2016 and showing the top-​four pools with over 68% of mining activity as being Chinese based (F2 Pool (22.06%); AntPool (16.82%); BW Pool (15.33%); and BTCC (14.34%)). For earlier data, see Bitcoin Chain, ‘Bitcoin Mining Pools’ Bitcoin Chain accessed 23 July 2018 (discussed at n 99). Note, however, that it seems likely that the regulatory environment for Bitcoin mining activities will be less favourable in future (see Zheping Huang, ‘China Wants an “Orderly Exit” from Bitcoin Mining’ (8 January 2018) Quartz accessed 23 July 2018). 99 See the data presented in the form of a chart at Bitcoin Chain (n 98). This shows Chinese mining pools holding five of the top-​nine positions for overall mining activity during the life of the system, with a combined mining power totalling over 58% (F2Pool (20.5%); AntPool (17.9%); BTCC (8.6%); BW.COM (6.2%); and (5.1%)) (data as at 2 May 2018). In certain periods, however, non-​Chinese mining pools have held the majority of the mining power. In 2014, the now defunct and Eligius (a US mining pool) held between them more than half the mining power, with a combined share that in some months exceeded 70%. In 2013, six non-​ Chinese mining pools (SlushPool (Czech Republic); GHash.IO, BitMinter (US/​Germany); Eligius (USA); EclipseMC (Canada); and Ozcoin (Australia)) held between them more than 90% of the mining power. 100 Text to nn 72–​74. 101 The location of servers appears of much more limited significance (see Wintersteiger (n 25) para 36). 102 Giuliano-​Lagarde Report (n 93) 20.



The Relationships between Participants within a Cryptocurrency System c)  The closest connection test (Article 4(4))  If Article 4(1) and (2) fail to iden- 5.62 tify the law applicable to relationships within a cryptocurrency system, that leaves only Article 4(4) of the Rome I Regulation under ‘the contract shall be governed by the law of the country with which it is most closely connected’.103 In this connection, the court must ‘conduct an overall assessment of all the objective factors characterising the contractual relationship and determine which of those factors are, in its view, most significant’.104 In applying this final (default) rule, it is difficult to avoid the conclusion that the 5.63 law governing the internal relationships between participants in that system, insofar as they are characterized as involving ‘contractual obligations’, is that of the country which at the time of the contract’s conclusion105 has the most significant objective connections with the cryptocurrency system.106 That conclusion is no less valid even if it is liable to frustrate the apparent intentions of participants in the Bitcoin system of avoiding regulation by legal rules, for Article 4 does not rest on the divination of the contracting parties’ implied intentions.107 As mining activity plays a fundamentally important part in the life of the Bitcoin system, there is a significant prospect that that the law of China, the place where that activity has been centred in recent years, would be held by a court in England or elsewhere in the European Union to apply under the Rome I Regulation to relationships between participants in the system.108 Under Article 10(1) of the Rome I Regulation, the law to which Article 4 refers 5.64 would determine whether and, if so, to what extent the system participants are subject to ‘contractual obligations’ towards each other.109 Of course, to specify that the law of China (or another country) applies to questions of contract formation does not exclude the possibility that the applicable rules of Chinese (or other) contract law mandate the conclusion that the participants in the Bitcoin system did not enter into a binding contractual relationship, and did not owe each other any contractual obligations.

See also Rome Convention, art 4(1). 104 Case C-​305/​13, Haeger & Schmidt GmbH v Mutuelles du Mans Assurances IARD [2014] ECLI:EU:C:2014:2320, para 49 (in relation to Rome Convention, art 4(5), but equally relevant here). See also Rome I Regulation, Recital (16) (‘The courts should, however, retain a degree of discretion to determine the law that is most closely connected to the situation.’). 105 For this purpose, it is legitimate ‘to take account of factors which supervened after the conclusion of the contract’ (Giuliano-​Lagarde Report (n 93) 20), at least to the extent that those factors shed light on the identification of the country with which the contract was most closely connected at the time of its conclusion (Dicey, Morris & Collins on the Conflict of Laws (n 9) para 32-​037). 106 Haeger & Schmidt (n 104)  [49]; Case C-​ 64/​ 12, Schlecker v Boedeker [2013] ECLI:EU:C:2013:551, paras 40–​41. 107 Giuliano-​Lagarde Report (n 93)  17; Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Ltd [2013] EWCA Civ 365, [2013] 1 Lloyd’s Rep 98, [34]. 108 The timing of the ‘contract’ (nn 72–​74) is of vital importance here. 109 As to art 10(2), see text to nn 117–​20. 103



Cryptocurrencies and the Conflict of Laws 5.65 d)  Does a tenuous connection to the country of closest connection suffice? It

may be possible to counter the foregoing analysis with an argument to the effect that there is no systemic reason for the Rome I Regulation to favour the application of the law of the country with the strongest connection to a contract in circumstances when the ‘contract’ in question (comprising all of the relationships within the cryptocurrency system) has only a tenuous connection to that country. Some decentralized cryptocurrency systems may fit that description, even if the Bitcoin and Ripple systems do not by reason of substantial connections of their most important activities to China and to California respectively. 5.66 The obvious weakness in that argument is that to accept it would leave a lacuna

in Article 4 of the Rome I Regulation. If neither Article 4(1) nor Article 4(2) nor Article 4(4) applies, Article 4 would fail entirely to specify the governing law. That outcome appears not only contrary to the mandatory formulation of those rules (‘the law governing the contract shall be determined as follows’, ‘the contract shall be governed by’) but also liable to undermine the Regulation’s objective of ensuring that the Member States’ rules of applicable law ‘designate the same national law irrespective of the country of the court in which an action is brought’.110 The most likely default rule (if Article 4 is rejected) would be the application of the law of the forum, faute de mieux,111 but this would undermine legal certainty insofar as the outcome of the dispute would be a function of rules of jurisdiction and party choice in the selection of the forum for dispute resolution. The counter-​argument should be rejected.

5.67 In conclusion, it is undoubtedly far from straightforward to apply Article 4 of

the Rome I Regulation in relation to cryptocurrency systems such as Bitcoin and Ripple. Moreover, its application may produce a result in terms of the law applicable to relationships within the system that runs contrary to the expectations of many system participants. Neither conclusion provides, however, a reason to disregard it under the current state of the law.

3. Other  issues 5.68 Two further provisions of the Rome I Regulation merit brief consideration. 5.69 First, Article 6 (the successor to Article 5 of the Rome Convention) regulates the

law applicable to certain contracts concluded by a natural person acting for non-​ trade purposes (a ‘consumer’) with another person who acts in the exercise of a trade or profession (a ‘trader’). Under Article 6(2), the consumer party to such a contract may not be deprived of the protection of non-​derogable rules of the law of his or her country of habitual residence, even if the parties choose another law

Rome I Regulation, Recital (6). 111 cf Dicey, Morris & Collins on the Conflict of Laws (n 9) para 9-​025 (‘where foreign law is not proved, the court applies English law’). 110



The Relationships between Participants within a Cryptocurrency System to govern the contract. Under Article 6(1), the law of the consumer’s country of habitual residence applies to the contract in the absence of choice. Virtual currency systems such as Bitcoin and Ripple comprise, as well as those 5.70 who participate for trade purposes (including members of the mining pools and validators), individuals who participate for private, non-​trade purposes and who fall within the definition of ‘consumer’. Nonetheless, that fact does not entitle the consumer participants, without more, to rely on Article 6 to seek the application of the laws of their countries of habitual residence in their relationship with professional participants in the system.112 Article 6 applies only if the ‘contract’ falls within the scope of commercial or professional activities which the trader pursues in, or directs to, the consumer’s country of habitual residence or to several countries including that country.113 For this purpose, under the Rome I Regulation, there must be a causal connection between the activities in question and the conclusion of the contract.114 Participation in a decentralized cryptocurrency system should not be taken as an indicator that the trader is pursuing or directing activities to the countries in which other participants in that system are located.115 Moreover, the pseudonymity of participants within many cryptocurrency systems may justify the conclusion that the protection should be unavailable on account of the fact that other participants ‘could reasonably have been unaware of the private purpose of the supply’.116 It may nevertheless be possible to reach different conclusions on the facts of a particular case in circumstances where the parties have a pre-​existing relationship to which Article 6 applies and the transaction within a cryptocurrency system falls within the scope of that relationship. Secondly, Article 10(2) of the Rome I Regulation (following Article 8(2) of the 5.71 Rome Convention) provides that ‘a party, in order to establish that he did not consent, may rely upon the law of the country in which he has his habitual residence if it appears from the circumstances that it would not be reasonable to determine the effect of his conduct in accordance with the law specified in [Article 10(1)]’. Although not designed with this situation in mind,117 and likely to be confined within narrow parameters,118 there may be room for argument that in 112 None of the exceptions to art 6 set out in art 6(4) would seem to apply to virtual currency systems such as Bitcoin and Ripple. As to art 6(4)(d) (financial instruments etc) and (e) (multilateral systems), see text to nn 76–​85. 113 Rome I Regulation, art 6(1). 114 Rome I Regulation, Recital (25), but cf, in a jurisdictional context, Case C-​218/​12, Emrek v Sabranovic [2013] ECLI:EU:C:2013:666. 115 See, by analogy, Joined Cases C-​585/​08 etc., Pammer v Reederei Karl Schlüter GmbH & Co KG [2010] ECR I-​12527, esp at paras 90 and 94. 116 Case C-​464/​01, Gruber v Bay Wa [2005] ECR I-​439, para 51. 117 See Giuliano-​Lagarde Report (n 93) 28; Dicey, Morris & Collins on the Conflict of Laws (n 9) para 32-​114. 118 Egon Oldendorff v Libera Corp [1995] 2 Lloyd’s Rep 64; Welex AG v Rosa Maritime Ltd [2003] EWCA Civ 938, [2003] 2 Lloyd’s Rep 509; Lupofresh Ltd v Sapporo Breweries Ltd [2013] EWCA Civ 948, [2013] 2 Lloyd’s Rep 444.



Cryptocurrencies and the Conflict of Laws the circumstances (and having regard in particular to the legitimate expectations of system participants119) it would not be reasonable to determine the contractual effect of participation in a cryptocurrency system such as the Bitcoin system according to the law of the country with which that system is most closely connected.120 Article 10(2) does not require that it be ‘reasonable’ or ‘more reasonable’ to apply the law of the contracting party’s habitual residence to determine questions of contractual consent. Such an argument would need to be addressed on its merits if it should arise. E. Reflection 5.72 The conclusion that the relationships between the participants in a cryptocurrency

system are properly classified as ‘contractual’ and are potentially subject to national rules of contract law may not be welcome to those who have embraced cryptocurrencies, given that the attraction and rapid expansion of those systems have in large part been attributable to their claimed detachment from traditional legal orders. Participants in the Bitcoin system may be very surprised to learn that their relationships may be held to be governed, for example, by Chinese contract law. Participants in the Ripple system may equally take issue with the application of the law of California to their relationships on the basis that the headquarters of Ripple Labs are located there. As present, however, a court in the UK and elsewhere in the European Union can only apply the rules within the Rome I Regulation, and they require that contractual relationships be subject to national rules of contract law. The participants in cryptocurrency systems must therefore rely upon the law applicable to their relationships, whatever that may be, to immunize them from contractual responsibility towards each other.

III.  Cryptocurrencies as ‘Money’ in the Conflict of Laws A. Cryptocurrencies and the ‘lex monetae’ 5.73 There is a lively debate as to whether cryptocurrencies are capable of consti-

tuting ‘money’ alongside national (fiat) currencies. The answer to this question must depend on context, in terms both of the legal question being asked and the particular cryptocurrency system.121 That said, it is widely recognized that

119 See Section II.E of this chapter. 120 The same argument appears less forceful in the case of the Ripple system, given its strong, readily identifiable connection to California, where its founder and key participant Ripple Labs has its headquarters. 121 European Central Bank, ‘Virtual Currency Systems:  A Further Analysis’ (n 2)  23–​25; He and others (n 1)  19; Financial Markets Law Committee, ‘Issues of Legal Uncertainty Arising in the Context of Virtual Currencies’ (July 2016) 12–​22 accessed 10 August 2018. See Chapter 3 in this volume. See also Caroline



Cryptocurrencies as ‘Money’ in the Conflict of Laws cryptocurrencies can perform some or all of the functions of money, and may be treated as money or its equivalent for some purposes. An example in the conflict of laws, given above, is the characterization of an exchange of tangible goods for cryptocurrency as a contract for the sale of goods in resolving questions of jurisdiction and applicable law.122 This debate can be put to one side here. The question with which we are con- 5.74 cerned in this section is the significance and effect of a cryptocurrency (such as Bitcoin or Ripple XRP) being either designated as the unit of account or payment in a contract or as an element within a claim for breach of a contractual or non-​ contractual obligation. The closing chapter of Dicey, Morris & Collins on the Conflict of Laws,123 the 5.75 leading English work of reference in this field, deals with ‘foreign currency obligations’. Its principal function is to define the sphere of operation of the so-​called ‘lex monetae’, ie ‘the law of the country in whose currency the debt is expressed’,124 and its relationship to the law of the forum and the law applicable to the contractual or non-​contractual obligation in question.125 Thus, the editors describe an apparent rule of the English conflict of laws (and not only of English contract law) that an obligation denominated in the currency of a country involves an obligation in principle126 to pay the nominal amount of the debt, or its equivalent, in the legal tender of that country at the time of payment under its monetary laws.127 It is, by contrast, a matter for the law applicable to an obligation, either Kleiner, ‘Money and Currency’ in Jürgen Basedow and others (eds), Encyclopedia of Private International Law (vol II, Edward Elgar 2017) 1255–​62. 122 Text to nn 20–​25. 123 Dicey, Morris & Collins on the Conflict of Laws (n 9) ch 37. The author of this chapter is one of the specialist editors of Dicey, Morris & Collins on the Conflict of Laws, but it has no involvement with this chapter. 124 ibid para 37R-​001. 125 See also the masterful analysis by the late Francis Mann, The Legal Aspect of Money (first published 1938, 5th edn, OUP 1992) Part II. Following Dr Mann’s death, the baton has passed to others (see Charles Proctor, Caroline Kleiner and Florian Mohs, Mann on the Legal Aspect of Money (7th edn, OUP 2012) Part II). 126 Other terms of the parties’ agreement (including as to the currency of payment) and the law of the country of payment may influence the content of the monetary obligation (see Rome I Regulation, arts 9(3) and 12(2) (text to nn 131–​32); Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 37R-​051–​37R-​060; also Michael Howard, John Knott, and John Kimball, Foreign Currency: Claims, Judgments and Damages (Informa Law 2016) ch 6, esp paras 6.32–​6.33 and 6.52–​ 6.66, criticizing some of the reasoning in Dicey, Morris & Collins on the Conflict of Laws). 127 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 37R-​001–​37-​016. To the extent that this rule mandates the application of the law of a country which is neither the law of the forum nor the law applicable to the contractual or non-​contractual obligation in question, its compatibility with the overriding mandatory provisions within the Rome I and Rome II Regulations may be called into doubt (see Republik Griechenland (n 72) paras 40–​50). Nevertheless, the better view is that the lex monetae is merely taken into account as a matter of fact in the application of the law applicable to the obligation in question whenever that application involves a reference to the currency of a country. On that basis, there is no incompatibility with the Rome Regulations (see Republik Griechenland (n 72) para 51).



Cryptocurrencies and the Conflict of Laws contractual or non-​contractual, to determine whether the obligation is denominated in a particular currency128 and to specify the further legal consequences for the parties of a depreciation in the currency between the date of contracting and the date of payment.129 Finally, the editors note that English law, as the law of the forum, allows a judgment to be given for an amount expressed in foreign currency, although that amount must for practical reasons be converted to sterling at the point of enforcement.130 5.76 It will be apparent from the discussion in Section II of this chapter that there is no

equivalent of the lex monetae (the monetary laws of the currency of obligation) in relation to obligations denominated in Bitcoin, Ripple, or analogous cryptocurrencies. Cryptocurrency systems, although operating on the basis of consensus rules within their protocols, do not depend on a legal system for their existence and indeed have relied to a large degree for their success on the absence of legal regulation.

5.77 The starting point for investigation of the significance of references to a

cryptocurrency in framing a contractual or non-​contractual obligation must be the law (or laws) applicable to the obligation in question. Under the Rome I Regulation (contractual obligations), questions of interpretation and performance of a contractual obligation are in general a matter for the law applicable to the contract,131 save that (i)  in relation to the manner of performance and the steps to be taken in the event of defective performance regard must be had to the law of the country in which performance takes place,132 and (ii) effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful.133 Under the Rome II Regulation, the law applicable to a particular non-​contractual obligation shall determine, among other matters, the existence, the nature, and the assessment of damage or the remedy claimed and (within the limits of the powers conferred on the court by its procedural law) the measures which a court may take to prevent or terminate injury or damage or to ensure the provision of compensation.134

5.78 Nevertheless, the principle of nominalism which underpins the application of

the lex monetae in the English law135 may have a counterpart in the substantive

128 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 37R-​017–​37-​034. 129 ibid paras 37R-​035–​37-​050. 130 ibid paras 37R-​081–​37-​099. 131 Rome I Regulation, art 12(1)(a)–​(b). 132 ibid, art 12(2). 133 ibid, art 9(3) (see Section III.B of this chapter). 134 Rome II Regulation, art 15(c)–​(d). As to the role of the law of the forum in defining the limits of the court’s remedial powers, see III.C in this chapter, discussing the court’s power to give judgment in a virtual currency. 135 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 37-​005–​37-​010.



Cryptocurrencies as ‘Money’ in the Conflict of Laws law applicable to contractual or non-​contractual obligations involving units of a cryptocurrency. If, for example, a contract governed by English law requires a party to deliver ‘1 Bitcoin’ or ‘1 XRP’, that obligation must be interpreted, in accordance with ordinary principles of English contract law, by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’.136 That exercise in interpretation is to be undertaken by reference to the facts and circumstances known or available at the time of contracting, and not at the time of performance or the date of trial.137 In this case, the contractual reference to ‘Bitcoin’ or ‘XRP’ should ordinarily be understood as designating a particular cryptocurrency system having regard to the nomenclature prevailing at the date of the contract. Such a reference in a contract concluded in early 2018 would almost certainly be understood as designating the cryptocurrency system described in Section II.B in this chapter, and not any other cryptocurrency system (such as Bitcoin Cash) resulting from a hard fork in that system prior to the date of contracting.138 Nevertheless, a reasonable bystander would also recognize that the consensus 5.79 rules of a particular system, which define a cryptocurrency, have the propensity to change over time, and this may point strongly to a conclusion that the obligation to deliver a unit of cryptocurrency must involve compliance with the consensus rules prevailing in the system at the time of performance. This may be seen as an application of the principle of nominalism: a reference to ‘1 Bitcoin’ must be understood as requiring delivery of one unit within the designated system according to the consensus rules prevailing at the delivery date. A more problematic situation will arise if one or more hard forks (or reversal of 5.80 earlier hard forks) have occurred within the particular system between the time of contracting and the time of performance. As a matter of English contract law, the obligation to deliver a unit of cryptocurrency may be interpreted in one of two possible ways. First, the contractual reference to a particular cryptocurrency system existing at the contract date may be interpreted as referring to all cryptocurrency systems in existence at the time of performance whose consensus rules trace their ancestry to the consensus rules of the contractually designated system via a hard fork. Second, the contractual reference to a particular cryptocurrency system existing at the contract date may be interpreted as referring only to the single cryptocurrency system in existence at the time of performance that can trace its ancestry to the designated system through the consensus rules applied by the participants exercising the majority of processing power (and, therefore, having control over the system) from time to time. For example, in the case of a contract Arnold v Britton [2015] UKSC 36, [2015] AC 1619 [15] (Lord Neuberger). 137 ibid [15], [19]. 138 Text to nn 36–​38. 136



Cryptocurrencies and the Conflict of Laws concluded at the beginning of 2017 requiring the delivery of ‘1 Bitcoin’ at the beginning of 2018, the first approach would lead to the conclusion that the principal obligation requires delivery of the relevant unit of account not only within the ‘legacy’ Bitcoin system but also within Bitcoin Cash, Bitcoin Gold and other cryptocurrency systems created as a result of a hard fork between the time of contracting and the time of performance, whereas the second approach would likely lead to the conclusion that the principal obligation requires delivery only of a unit within the Bitcoin system. On balance, although the first approach may require the delivery of cryptocurrency within more than one system, it seems the more straightforward of the two interpretations to apply in practice and less likely to result in an outcome that distorts the parties’ contractual bargain. B. Illegality of transactions involving cryptocurrencies 5.81 Further challenges for the conflict of laws will likely be presented in the future

by the increasing body of national legislation (including exchange control legislation) making some or all transactions using cryptocurrencies illegal.139 The application of legislation of this kind should be relatively straightforward to the extent that it forms part of the law applicable to the contract in question, or is an overriding mandatory provision of the law of the forum.140 Much less straightforward is the case in which the relevant legislation is of a third country141 with which the transaction is closely connected, either by reason of its participants or the involvement of that country’s currency.

5.82 Art 9(3) of the Rome I  Regulation provides that ‘[e]‌ffect may be given to the

overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful’. Separately from this rule of the conflict of laws,142 (i) English contract law will presently143 not countenance the enforcement of a contract which requires,

139 For examples, see Buy Bitcoin Worldwide, ‘Countries Where Bitcoin is Banned’ Buy Bitcoin Worldwide accessed 24 July 2018; Noelle Acheson, ‘Is Bitcoin Legal?’ Coindesk accessed 24 July 2018. 140 Rome I Regulation, art 9(1)–​(2). 141 ie a country which is not the forum and whose law does not apply to the contract in question. 142 Although art 9(3) of the Rome I Regulation exhaustively defines the circumstances in which a Member State court may give effect to overriding mandatory provisions of a third country’s law (Republik Griechenland (n 72) paras 40–​50), these rules of English law remain justifiable as instances of taking account of foreign illegality as a matter of fact in the application of substantive rules of contract law (Republik Griechenland (n 72) para 51) or in the application of the public policy (ordre public) of the forum in accordance with art 21 of the Regulation. 143 It remains unclear whether, and if so to what extent, recent developments in the English law concerning claims founded on illegal conduct (and in particular the decision of the Supreme Court in Patel v Mirza [2016] UKSC 42, [2017] AC 467) require the rules of English law applicable to cases of foreign illegality to be re-​examined. See Dicey, Morris & Collins on the Conflict of Laws (n 9) para 32-​102.



Cryptocurrencies as ‘Money’ in the Conflict of Laws according to its express or implied terms, a party to perform an illegal act in a foreign country,144 and (ii) an English court will consider a contract which constitutes, or forms part of, a joint venture to break the laws of a friendly foreign country by conduct in that country145 to be contrary to public policy and unenforceable on that ground.146 The application of each of these rules depends on being able to locate an element 5.83 of the contractual performance, or of the implementation of the joint venture, which it is said to be unlawful according to the law of the place of performance. That is highly problematic if the regulatory target is a transaction effected within a cryptocurrency system such as the Bitcoin or Ripple systems. A cryptocurrency such as Bitcoin or Ripple XRP exists only through consensus rules controlling the content of the decentralized ledger, which are applied by nodes around the globe. A transaction within the cryptocurrency system involves, of necessity, communication to and between those nodes as part of a network. On one view, the obligation to deliver a unit of cryptocurrency within a system of this kind may be considered to have no identifiable place of performance, acts which merely prepare for performance being irrelevant for this purpose;147 on another view, the delivery of cryptocurrency involves a performance which is truly global and likely touches every developed legal system. On the former view, the rules described in the preceding paragraph would be neutered; on the latter view, they would be a significant impediment to cross-​border transactions involving cryptocurrencies. There is, it is submitted, no clear answer to this dilemma on current authority.148 A possible middle way would be to locate performance of the obligation to deliver cryptocurrency solely at the place(s) from which the relevant actors (the contracting parties or participants in the joint venture) exercise day-​to-​day control over their activities within the system. It is also, in this connection, necessary to consider the potential impact of Article 5.84 VIII(2)(b) of the Bretton Woods Agreement, establishing the International Monetary Fund (IMF), which provides that ‘[e]‌xchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of any member maintained or implemented consistently with this

144 Ralli Bros v Compania Naviera Sota y Aznar [1920] 1 KB 614; Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 32-​097–​32-​103. 145 The illegal conduct in question need not be of a contracting party (see Dicey, Morris & Collins on the Conflict of Laws (n 9) para 32-​191 referring to Regazzoni v KC Sethia Ltd [1956] 2 QB 490, 514 (Denning LJ)). 146 Foster v Driscoll [1920] 1 KB 470; Regazzoni v KC Sethia Ltd [1958] AC 301; Dicey, Morris & Collins on the Conflict of Laws (n 9) para 32-​193–​32-​192. This principle, unlike that referred to in the text to nn 143–​44 , probably applies even if the contract in question is not governed by English law (Dicey, Morris & Collins on the Conflict of Laws (n 9) para 32-​193). 147 Dicey, Morris & Collins on the Conflict of Laws (n 9) para 32-​098. 148 For an illustration of the difficulties that arise in applying these rules to payment systems operating across borders, see Libyan Arab Foreign Bank v Bankers Trust Co [1989] QB 728.



Cryptocurrencies and the Conflict of Laws agreement shall be unenforceable in the territories of any member’.149 The application of this provision to contracts involving cryptocurrency leads rapidly into areas of doubt and controversy.150 5.85 Article VIII(2)(b) applies to ‘exchange contracts which involve the currency of

any member’ of the IMF. This wording has proved to be extremely problematic in practice, with widely different approaches among national courts and commentators. The current editors of Mann on the Legal Aspect of Money support the view that the words ‘involve the currency of any member’ are not limited to contracts denominated in an IMF member’s own national currency but consider a contract’s broader economic impact.151 On this view, it seems arguable that a contract requiring the delivery of units of a cryptocurrency by a resident of one country to a resident of another country may sufficiently implicate the exchange resources of one or both countries and thereby ‘involve’ their national currencies. The fact that controls have been placed on transactions of this kind in order to protect the national currency may evidence this inter-​relationship.

5.86 It is, however, necessary to consider the wording of Article VII(2)(b) as a whole,

and this draws attention to the concept of an ‘exchange contract’, which has been interpreted in widely different ways. Whereas the courts of some IMF members, including the English courts, have construed the expression narrowly as limited to contracts which involve the exchange of the currency of one country for the currency of another,152 courts in other legal systems (particularly in continental Europe) have adopted a broader interpretation extending to any contract which affects a country’s exchange resources in a manner likely to reduce them.153

5.87 The English case law referred to in the preceding paragraph, as well as the

fact that the Bretton Woods Agreement was concluded at a time when cryptocurrencies were not a viable means of payment, make it extremely difficult (but perhaps not impossible) to argue that a contract between parties resident in different countries to exchange a cryptocurrency for a national currency, or one cryptocurrency for another, constitutes an ‘exchange contract’ within the meaning of Article VIII(2)(b).

149 This provision has force of law in England under the Bretton Woods Agreements Order in Council, SR & O 1946 no 36, art 3, as preserved by International Monetary Funds Act 1979, s 6(2). 150 For discussion as to the application of art VIII(2)(b) generally, see Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 37R-​061–​37-​080; Proctor, Kleiner, and Mohs (n 125) ch 15. 151 Proctor, Kleiner, and Mohs (n 125) 15.28–​15.29. See Wilson, Smithett & Cope Ltd v Terruzzi [1976] QB 683, 693–​94, where Lord Denning MR expressed sympathy for this view but left the point open, 152 Wilson, Smithett & Cope Ltd v Terruzzi (n 151); United City Merchants v Royal Bank of Canada [1983] 1 AC 168; Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 37-​073–​37-​074. 153 See Proctor, Kleiner, and Mohs (n 125) para 15.27.



Cryptocurrencies as ‘Money’ in the Conflict of Laws Nevertheless, it is important to note that the English courts have also taken the 5.88 view that it is the substance, not the form, of the transaction that matters and that ‘a monetary transaction in disguise is also an exchange contract’.154 In consequence, they have applied Article VIII(2)(b) to individual elements of a wider set of arrangements involving the conversion of one currency to another, even if the element in question, of itself, involves no cross-​border payment and involves a counterparty who is not in any way engaged in the avoidance or evasion of exchange controls.155 On this view, even if a narrow interpretation is given to the words ‘exchange contracts which involve the currency of any member’, a transaction involving the exchange of national currency for cryptocurrency (or vice versa) as a step in an arrangement which has the effect of enabling a party to convert one national currency for another would likely fall within the scope of Article VIII(2)(b). C. Judgments in a cryptocurrency The final question to be considered in this section is whether the remedial 5.89 powers available to an English court include the power to give judgment in a cryptocurrency. Both the Rome I Regulation and the Rome II Regulation recognize that, although the law applicable to a contractual or non-​contractual obligation plays the dominant role in determining questions of remedy, the limits of a court’s remedial powers are ultimately a matter for the law of the forum.156 The leading decision of the English courts in relation to judgments expressed 5.90 in foreign currency, Miliangos v George Frank (Textiles) Ltd, established that the English courts have the power to make a monetary award in a foreign currency which may be exercised in an appropriate case in order to give effect to the substance of the underlying obligation.157 The power extends beyond debt claims to situations involving claims to recover compensation for the performance of contractual and non-​contractual obligations, allowing the court to award compensation in the currency that most truly expresses the claimant’s loss.158 Although no decision in point can be found, it appears highly unlikely that this 5.91 line of case law would be extended to allow monetary awards in cryptocurrencies as a matter of course. An obligation to deliver a cryptocurrency such as Bitcoin

154 Dicey, Morris & Collins on the Conflict of Laws (n 9) para 37-​074, referring to United City Merchants (n 152). 155 United City Merchants (n 152); Mansouri v Singh [1986] 1 WLR 1391. Both decisions, and the concept of ‘a monetary transaction in disguise’, are forcefully criticized by Proctor, Kleiner, and Mohs (n 125) paras 15.15 and 15.27. 156 Rome I Regulation, art 12(1)(c); Rome II Regulation, art 15(c)–​(d) (n 134). 157 [1976] AC 443, esp 462–​67 (Lord Wilberforce), departing from the decision in Re United Railways of Havana and Regla Warehouses [1961] AC 1007. 158 Services Europe Atlantique Sud v Stockholm’s Rederiaktiebolag SVEA (The Foleas) and Owners of MV Eleftherotria v Owners of MV Despina R, The Despina R, both reported [1979] AC 685.



Cryptocurrencies and the Conflict of Laws or Ripple XRP is more closely analogous to the performance of a service than the payment of foreign currency—​it can only be discharged by initiating a transaction within the cryptocurrency system. The ordinary remedy in English law for non-​delivery of a cryptocurrency will be a claim for unliquidated damages for breach of contract, with judgment being denominated in sterling or in an appropriate foreign currency in accordance with the authorities referred to above.159 5.92 That said, the English courts unquestionably have power to order specific per-

formance of an obligation in an appropriate case; indeed, this was one of the foundations of the House of Lords judgment in the Miliangos case.160 If, therefore, the proper remedy for a particular claim under the law applicable to a relevant contractual or non-​contractual obligation would be an order requiring delivery of cryptocurrency, there appears no reason why an English court could not (and should not) give effect to the requirements of that law in accordance with the Rome I and Rome II Regulations by making an order for specific performance, although the court would no doubt retain a discretion to refuse an order of this kind if there were a good procedural reason to do so (for example, that the performance of the obligation would require constant supervision by the court).161

IV.  Cryptocurrencies as ‘Property’ in the Conflict of Laws A. Introduction 5.93 The final section of this chapter considers the law applicable to the proprietary

effects outside a cryptocurrency system of transactions whose subject matter is, or includes, cryptocurrency. Such transactions include purported transfers of interests in cryptocurrency (whether by way of security or otherwise), as well as attachments by judgment creditors and governmental acts such as expropriation targeting cryptocurrency or participation in a cryptocurrency system. Questions concerning the effect of transactions within a cryptocurrency system engage the relationships between the participants of that system and will be resolved by reference to the system’s consensus rules within and any rules of law applicable to those relationships (as discussed in Section II of this chapter).

159 Howard, Knott, and Kimball (n 126) para 15.17 reach the same conclusion on the basis that what they describe as ‘alternative money’ is in the nature of a commodity. 160 [1976] AC 443, 463, 467–​68 (Lord Wilberforce). 161 See Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 32-​155 and 34-​059. Under art 1(3) of both the Rome I and Rome II Regulations, questions of ‘evidence and procedure fall outside their scope’ (see Actavis UK v Eli Lilly & Co [2015] EWCA Civ 555, [2016] 4 All ER 666 [130]–​ [145] (Floyd LJ)). By contrast to the example given in the text, an English court could not refuse to make an order for specific performance required under the law applicable to the obligation on the ground that damages would be an adequate remedy, for that is a reason relating to the substance of the obligation. For the approach of the common law to the harmonization of remedies when foreign law applies, Cox v Ergo Versicherung [2014] UKSC 22, [2014] AC 1379 [19]–​[23] (Lord Sumption).



Cryptocurrencies as ‘Property’ in the Conflict of Laws This distinction between internal effects, governed by the consensus rules and the 5.94 law applicable to the cryptocurrency system, and external effects, to which distinct choice of law rules apply, is important. For example, parties wishing to create a security interest over units of a cryptocurrency have two broad options. First, the parties may enter into an arrangement which involves a transaction within the cryptocurrency system initiated by the grantor for the benefit of the grantee. Second, the parties may enter into an arrangement which involves no such transaction, but relies (for example) on the grantor giving the grantee control over or access to a cryptocurrency wallet. In the first case, but not the second, the initiation of a transaction within the cryptocurrency system engages the separate relationships of the grantor, grantee, and many others as participants in the system. Moreover, without an understanding of the effect of a transaction upon relation- 5.95 ships within the system, it is not possible to analyse questions of property in cryptocurrencies which exist outside that system, for the proprietary character of a cryptocurrency depends on those relationships (Section II.D of this chapter). If, for some technical reason, the transaction within the system is ineffective, the grantee may need to rely instead on a proprietary entitlement arising outside the system; equally, if the transaction within the system is successfully validated but the system lacks the functionality necessary to re-​vest the cryptocurrency in the grantor upon redemption, the grantor may need to rely for protection on a proprietary entitlement arising outside the system. B. The proprietary character of cryptocurrencies It is necessary to begin by considering how cryptocurrencies should be character- 5.96 ized as property in the conflict of laws. Cryptocurrencies constitute a form of intangible property within the conflict of 5.97 laws. In this connection, it is important to distinguish the proprietary aspect of a cryptocurrency from questions of title to any computer or other device on which information relating to a cryptocurrency (including, for example, a private key or a copy of the blockchain) is held.162 Title to a piece of tangible moveable property, such as a computer or mobile device, may be transferred in accordance with the law of the place where it is located at the time of the transaction (lex situs).163 To seek to apply the same choice of law solution to cryptocurrency controlled from that device would be to conflate distinct items of tangible and intangible property. To give an analogy, involving distinct items of tangible property, questions of property in a house are determined by the lex situs of the house and not the lex situs of the front door key, unless the former law mandates application of

162 cf Max Raskin, ‘Realm of the Coin:  Bitcoin and Civil Procedure’ (2015) 20(4) Fordham Journal of Corporate and Financial Law 969. 163 Dicey, Morris & Collins on the Conflict of Laws (n 9) para 24R-​001.



Cryptocurrencies and the Conflict of Laws the latter.164 Moreover, the suggested solution would not align with the way in which cryptocurrency systems such as the Bitcoin system actually work. The private key is simply a piece of information, and need not be held on a single device or any device at all. If a person held the key in their memory, or if a thumbprint is used to verify transactions: would the cryptocurrency be identified and located with that person? A  copy of the blockchain is a record of transactions within the cryptocurrency system, and it plays an important role in maintaining the integrity of the system but in itself, is without value—​it is its conformity with the consensus rules and identity with other copies held in other locations that matters.165 5.98 Equally, it is necessary to distinguish the proprietary aspect of a cryptocurrency

from intellectual property (eg copyright and database rights) and the entitlement to use (confidential) information relating to that cryptocurrency. That is not to say that those matters are unimportant, or less important in practice than the matters addressed in the following paragraphs. Rather, the above proposition recognizes that the operation of cryptocurrency systems may generate entitlements of different kinds, which require separate examination within the conflict of laws. The importance of making distinctions of this kind is particularly evident in a case involving allegations of wrongdoing directed against a cryptocurrency system, in which intellectual property rights may provide a valuable source of protection for affected persons or in a case involving alleged misuse of a cryptocurrency account, in which the central question may be whether a particular use of confidential information, such as a private key, is lawful or not.

5.99 In many cases, questions of property in a cryptocurrency may, at best, be of sec-

ondary or consequential importance. For example, you sell me your computer on which your Bitcoin wallet and private key are stored. I use that information to initiate a transaction within the Bitcoin system from which I benefit. You may

164 ibid para 23R-​062. The qualification in the text above might result from an application of the principle of renvoi, or from applying a substantive rule of the lex situs of the house which ascribes significance to the effects of a transaction involving the key, wherever it may be located. Similarly, although the case law is divided, the better view is that questions of property in shares are governed by the law of the place of incorporation, which may, however, ascribe significance to the effects of a transaction involving another thing (a share register or document of title), wherever that thing may be located (Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 22-​044–​22-​045). In this connection, the proposition in the second limb of Rule 128 within Dicey, Morris & Collins on the Conflict of Laws (n 9) para 22R-​001 (‘The law of a country where a thing is situate (lex situs) determines whether . . . (2) any right, obligation or document connected with the thing is to be considered an interest in an immovable or a movable’) would seem to be too broadly stated and may need to be reviewed (the cases referred to in the following commentary are more than a century old and concern succession to immovable property). cf Dicey, Morris & Collins on the Conflict of Laws (n 9) para 33-​386, concerning the treatment of bearer instruments. 165 Paech (n 15) 1078.



Cryptocurrencies as ‘Property’ in the Conflict of Laws pursue claims against me for violation of contractual or non-​contractual obligations without the need to assert ‘title’ to any Bitcoin. Indeed, the irreversible nature of the transaction that I instigated is likely to be an essential part of your claims. If, however, I am insolvent or have disappeared, it may be of much greater benefit to you to establish a proprietary entitlement. You might assert a proprietary right in the Bitcoin that I transferred to another address within the system or in property acquired using the Bitcoin. That right is one arising outside the cryptocurrency system, as a result of the transaction that we entered into or as a remedial response to my wrongful acts, and it will be necessary to consider the law or laws applicable to its creation. Cryptocurrencies gain their value by reason of the relationships between the par- 5.100 ticipants in the cryptocurrency system. In broad terms, the intangible property in a cryptocurrency consists of a bundle of ‘entitlements’ arising by reason of participation in a cryptocurrency system, comprising claims exercisable against, and benefits other than claims derived from, other system participants. The most important and valuable of these entitlements is a claim or legitimate expectation to be associated with and have the power to engage in transactions in relation to particular units of cryptocurrency within the system. Within this description, the term ‘claim’ should be understood in the limited 5.101 sense of a legally enforceable right166 arising under the law(s) applicable to relationships between participants in the system.167 The reason for distinguishing claims (legal rights) from other entitlements derived from a cryptocurrency system is that Article 14 of the Rome I  Regulation contains rules concerning the assignment of claims, including (Article 14(3)) outright transfers, transfers by way of security and pledges of other security rights.168 Those rules do not apply, at least directly, to the transfer of intangible property falling outside the definition of claim, including the legitimate expectation of association with cryptocurrency units. In the remainder of this section, the relevant provisions of the Rome I Regulation 5.102 will be briefly summarized (see Section IV.C in this chapter) before turning to more difficult questions concerning the law applicable to intangible property which falls outside the scope of that Regulation (see Section IV.D in this chapter).

166 Art 2(d) of the European Commission’s Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the third-​party effects of assignments of claims (COM (2018) 96 final) defines ‘claim’ as ‘the right to claim a debt of whatever nature, whether monetary or non-​monetary, and whether arising from a contractual or non-​contractual obligation’. 167 Section II.D of this chapter. 168 These rules also apply to contractual subrogation. A  separate rule (art 15)  applies to legal subrogation.



Cryptocurrencies and the Conflict of Laws C. The law applicable to assignments of claims under the Rome I Regulation 5.103 Under Article 14(1) of the Rome I Regulation, the law that applies to the contract

between assignor and assignee shall govern their relationship.169 Under Article 14(2), the law governing the claim assigned shall determine (i) its assignability, (ii) the relationship between the assignee and the debtor, (iii) the conditions under which the assignment can be invoked against the debtor, and (iv) whether the debtor’s obligations have been discharged.

5.104 The Rome I Regulation does not regulate questions concerning the effectiveness

of an assignment of a claim against third parties or the priority of the assignee’s right over the right of another person (such as a second assignee of the same claim or a judgment creditor who has taken measures of execution against the claim).170 In the past there have been significant divergences between the legal systems of the Member States, and disagreement between academic commentators, as to what law(s) should apply to these questions.171 The English conflict of laws on this topic is similarly riddled with uncertainty,172 with arguments being advanced from different quarters for the application of the law governing the claim assigned,173 the law applicable to the transaction between assignor and assignee,174 169 This includes property aspects of that relationship in legal orders where such aspects are treated separately from aspects under the law of obligations (Rome I Regulation, Recital (38)). 170 Rome I Regulation, art 27(2). 171 COM (2018) 96 final (n 166) 4–​5, 13, and 14–​16; British Institute of International and Comparative Law, ‘Study on the Question of Effectiveness of an Assignment or Subrogation of a Claim Against Third Parties and the Priority of the Assigned or Subrogated Claim over a Right of Another Person’ (2011) Directorate-​General for Justice (European Commission ‘BIICL Study’), esp at 29–​39; 168–​364; and 384–​400  accessed 24 July 2018. See also Michael Bridge, ‘The Proprietary Aspects of Assignment and Choice of Law’ (2009) 125 LQR 671; Trevor Hartley, ‘Choice of Law Regarding the Voluntary Assignment of Contractual Obligations under the Rome I Regulation’ (2011) 60 ICLQ 29; Roy Goode, ‘The Assignment of Pure Intangibles in the Conflict of Laws’ [2015] LMCLQ 289; Catherine Walsh, ‘The Law Applicable to the Third-​ Party Effects of an Assignment of Receivables: Whither the EU?’ (2017) 22 UnifLRev 781. 172 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 24R-​050–​24-​054; BIICL Study (n 171) 346–​63. 173 See eg Dicey, Morris & Collins on the Conflict of Laws (n 9) para 24-​063, although this appears to be founded on a misreading of Recital (38) to the Rome I Regulation Dicey, Morris & Collins on the Conflict of Laws (n 9) (paras 24-​056 and 24-​065) and a willingness to read too much into the decision of the Court of Appeal in Raiffeisen Zentralbank Österreich (n 59) (Dicey, Morris & Collins on the Conflict of Laws (n 9) para 24-​062). The latter case centred on the relationship between assignee and debtor and not the relationship between the assignee and third parties or questions of priority (see Raiffeisen Zentralbank Österreich (n 59) [21]–​[24] (Mance LJ)). See also Briggs (n 12) paras 9.95 and 9.111; Paul Torremanns (ed), Cheshire, North & Fawcett: Private International Law (15th edn, OUP 2017) 1282–​91. 174 This solution, favoured by the Dutch courts (see Teun Stuycken, ‘The Proprietary Aspects of International Assignment of Debts and the Rome Convention, Article 12’ [1998] LMCLQ 345), is mentioned by the editors of Dicey, Morris & Collins on the Conflict of Laws (n 9) para 24-​053 without any apparent enthusiasm. See also Axel Flessner and Hendrik Verhagen, Assignment in European Private International Law (Sellier 2006).



Cryptocurrencies as ‘Property’ in the Conflict of Laws and the law of the place where the claim is properly recoverable or can be enforced (its fictional lex situs175).176 The European Commission has recently presented a proposal for harmonization 5.105 of the laws of the Member States concerning the law applicable to third-​party effects of the assignment of claims and questions of priority involving such assignments.177 The Commission’s favoured general rule provides for the application of the law of the country in which the assignor is habitually resident at the time of the assignment.178 The Commission presents strong arguments179 in support of that general rule, in terms of the predictability for third parties, suitability for assignments of different kinds (including bulk and future assignments), and compatibility with other instruments adopted by the European Union180 and internationally.181 D. Beyond legal rights: the law applicable outside the Rome I Regulation Important as the rules described in the preceding paragraphs are to financial 5.106 transactions taking place within the European Union or otherwise subject to the jurisdiction of Member State courts, they may prove to be of only limited relevance in relation to transactions involving cryptocurrencies for the reason that the species of intangible property dealt with in such transactions (Section III.B in this chapter) will frequently not involve a ‘claim’ in the sense of a legal right. In cryptocurrency systems such as the Bitcoin and Ripple systems, the value of 5.107 the participants’ ‘entitlements’ does not depend on the existence of a legal right to be associated with units of cryptocurrency but instead relies upon a legitimate

175 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 22R-​023–​22R-​032. The general rule is that a debt is properly recoverable in the country where the debtor resides. 176 Dicey, Morris & Collins on the Conflict of Laws (n 9) para 24-​053. See also Mark Moshinsky, ‘The Assignment of Debt in the Conflict of Laws’ (1992) 108 LQR 591, also favouring the application to receivables assignments of the law of the assignor’s habitual residence or place of business. 177 COM (2018) 96 final (n 166). 178 ibid, draft art 4(1) containing also a tiebreak rule for a case in which the assignor has changed his habitual residence between the time of two competing assignments. Draft art 4(2)–​4(4) contains exceptions to the general rule for assignments of cash credited to an account in a credit institution, claims arising from a financial instrument and securitization transactions, but these are not relevant for present purposes. 179 ibid,  15–​16. 180 Regulation (EU) no 2015/​848 on insolvency proceedings ([2015] OJ L141/​19), arts 3(1) and 7. Under art 7, the law applicable to insolvency proceedings falling within the scope of the Regulation is generally that of the Member State in which insolvency proceedings are opened. Under art 3(1), main insolvency proceedings (extending to all of the debtor’s assets: Recital (23)) may be brought only in the Member State in which the debtor has his centre of main interests, ie the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. 181 United Nations Convention on the Assignment of Receivables in International Trade (New York, 12 December 2001), art 22.



Cryptocurrencies and the Conflict of Laws expectation, founded on technological features of the system, that the consensus rules which underpin the system will be applied and will not be altered fundamentally such as to deprive each participant of the association to particular units within the system and the power to deal with those units.182 This is a factual and not a legal benefit, but should, nevertheless, be capable of being characterized as a species of intangible property in the same way as (for example) goodwill in a business. 5.108 Indeed, goodwill provides a potentially valuable analogy for treating such legit-

imate expectations as a species of intangible property in the English conflict of laws insofar as case law and commentary support the view that the goodwill of a business constitutes a distinct species of intangible property located, for the purposes of applying the English common law’s lex situs rule, in the country where the premises to which the goodwill is attached are situated.183

5.109 That analogy with goodwill supports the submission that the benefits accruing

to a person as a participant in a cryptocurrency system such as Bitcoin or Ripple (i) are a species of intangible property in the English conflict of laws, which (ii) arises from the participation of an individual or entity in the cryptocurrency system, and (iii) is appropriately governed by the law of the place of residence or business of the participant with which that participation is most closely connected. Rather than assigning a fictional situs, the choice of law rule can be more straightforwardly, and appropriately,184 expressed in terms that the proprietary effects outside the cryptocurrency system of a transaction relating to cryptocurrency shall in general185 be governed by the law of the country where the participant resides or carries on business at the relevant time or, if the participant resides or carries on business in more than one place at that time, by the law of the law of the place of residence or business of the participant with which the participation that is the object of the transaction is most closely connected.

5.110 The rule, so formulated, retains the advantage of being an incremental devel-

opment of the common law’s lex situs approach (which, whatever the position may be for voluntary assignments,186 continues to prevail for attachments/​

182 Paech (n 15) 1095. Cf Kelvin Low and Ernie Teo, ‘Bitcoins and Other Cryptocurrencies as Property’ (2017) 9(2) Law, Innovation and Technology 235, 252, referring to ‘the right to have one’s public [B]‌itcoin address appear as the last entry in the blockchain in relation to a particular [B]itcoin’. 183 Dicey, Morris & Collins on the Conflict of Laws (n 9) para 22-​050, referring to IRC v Muller & Co’s Margarine Ltd [1901] AC 217, 235 (Lord Lindley); RJ Reuter Co Ltd v Mulhens (no 2) [1954] Ch 50, 95–​96 (Romer LJ). 184 Rogerson (n 13). 185 If the dispute arises solely between the parties to the transaction, there is a strong argument for applying the law governing that transaction, in line with art 14(1) and Recital (38) to the Rome I Regulation. 186 Text to nn 172–​76.



Cryptocurrencies as ‘Property’ in the Conflict of Laws garnishments187 and governmental acts affecting property188). It also aligns closely, although not exactly,189 to the European Commission’s proposed rule to determine the law applicable to the third-​party effects of assignments of claims190 and may equally be supported on grounds of (relative) predictability and ease of application in comparison with other possible choice of law solutions,191 suitability for transactions involving more than one type of cryptocurrency, or cryptocurrency alongside claims, or future interests in cryptocurrency192 and close alignment with the rules that apply in the case of insolvency.193 That is not to claim that a solution along the lines set out in above is problem 5.111 free or will be straightforward to apply in every case. The Financial Markets Law Committee (FMLC) suggests that a choice of law rule formulated in terms of the participant’s location:194 (a) artificially splits up the distributed ledger record, leading to the application of different laws to transactions involving different participations; (b) will be time consuming and costly to apply; (c) fails to deal with a situation in which there is a change of (habitual) residence between transactions; and (d) will often give no clear answer to questions of entitlement in circumstances of joint transferors or chains of transaction. The first of these criticisms appears to underestimate the force of the point made 5.112 above, that the choice of law rule under consideration concerns only the effects of transactions outside a cryptocurrency system (Section IV.A in this chapter). The integrity of the distributed ledger record, and the consensus rules which underlie

187 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 24R-​080–​24-​089. 188 Dicey, Morris & Collins on the Conflict of Laws (n 9) paras 25R-​001 and 25-​003–​25-​004. 189 Under the Commission’s proposal, ‘habitual residence’ for a company or other body corporate or unincorporated refers to the place of central administration and for a natural person acting in the course of his business activity refers to the principal place of business (COM (2018) 96 final (n 166), draft art 2, discussed in that document, 18). By contrast, the rule suggested in this paragraph refers, consistently with the English case law concerning goodwill, to the law of a particular place of business, or residence, with which the benefits of participation in a virtual currency system are connected: see IRC v Muller (n 182) 235 (Lord Lindley: ‘Such business may be carried on in one place or country or in several, and if in several there may be several businesses, each having a goodwill of its own.’). 190 Text to nn 177–​81. 191 Text to nn 195–​96. 192 cf Financial Markets Law Committee, ‘Distributed Ledger Technology and Governing Law:  Issues of Legal Uncertainty’ (March 2018) Financial Markets Law Committee para 6.22  accessed 24 July 2018, regarding such benefits as ‘questionable’. 193 Regulation (EU) no 2015/​848 (n 180). See also art 3(2) of Regulation (EU) no 2015/​848 concerning insolvency proceedings in a Member State where the debtor has an establishment, limited to assets of the debtor situated in that Member State. Virtual currencies would appear to fall outside the classes of assets listed in arts 2(9) and 8(2) of that Regulation. 194 Financial Markets Law Committee (n 192) para 6.22.



Cryptocurrencies and the Conflict of Laws it, is not challenged by the approach suggested above—​the consensus rules operate within the cryptocurrency system and the proposed choice of law rule outside it. Although it is possible to formulate a rule in terms that would promote the application of a single law to all transactions in a cryptocurrency, such uniformity would come at the cost of greater uncertainty without any obvious advantages for participants in the system or third parties. For example, applying the law governing the relationships between participants in that system (Section II.D in this chapter) to govern the proprietary effects of a transaction outside the system would, for the affected third parties and in many cases for the participants also, be highly unpredictable and likely to result in their legal rights being determined according to a law with which neither they nor the transaction(s) in question have a close connection. Other uniform solutions considered by the Financial Markets Law Committee in its paper195 seem no more attractive, being difficult to apply to cryptocurrency systems such as Bitcoin and Ripple and requiring harmonization efforts at an international level for their promotion. 5.113 The second, third, and fourth criticisms made by the FMLC may be taken to-

gether for they are familiar in the debates concerning the law applicable to the proprietary effects of assignments of claims,196 as criticisms of rules of the kind now favoured by the European Commission, favouring the law of the assignor’s place of habitual residence. The concerns do not appear stronger here than in the latter context, but it will be necessary to address them in turn.

5.114 The second criticism, that establishing the location of the relevant person will ne-

cessitate complex investigations and legal opinions and increase costs significantly, may prove well-​founded in some cases. It must be recalled, however, that the rule will most commonly be applied to determine the proprietary effects of one or more transactions to which the participant is a party, and which will usually be documented in writing.

5.115 The third criticism, concerning the possibility of a change in the participant’s

place of residence or business between transactions, is well-​placed, but situations of this kind should be relatively rare and capable of being addressed either by a tie-​break rule such as that proposed by the European Commission with respect to the third-​party effects of assignments of claims197 or by resolving questions of priority by reference to the law of the participant’s place of residence etc. at the 195 ibid Part  6, considering (i)  elective lex situs (paras 6.4–​6.8); (ii) modified elective lex situs (paras 6.9–​6.10); (iii) deemed election (para 6.11); (iv) place of the relevant administrator/​operator/​ private encryption master-​key holder (paras 6.16–​6.19); (v) location of the issuer master account (para 6.20); and (vi) lex codicis or lex digitalis (para 6.28). Other solutions considered by the FMLC, namely (i) chosen law of the transaction/​transfer/​assignment (paras 6.12–​6.15) and (ii) law of the assigned claim (paras 6.25–​6.28) would also not lead to a single law applying to the proprietary effects of all transactions involving a virtual currency. 196 Text to nn 170–​81. 197 See n 178.



Cryptocurrencies as ‘Property’ in the Conflict of Laws time of the later of the two transactions (on the basis that no question of priority can have arisen before that time). The situations, of joint and connected transactions, referred to in the FMLC’s 5.116 fourth criticism are undoubtedly more vexing, but there is no obvious reason why the proposed rule could not be formulated, or applied, in such a way as to deal with them in a satisfactory manner. In particular, the proposed rule could be applied to joint transactions involving participants resident or carrying on business in more than one country in the same way as it would apply to a single participant residing or carrying on business in more than one country, by identifying the place of residence or business with which the participation is most closely connected. As to chains of transactions, there is no reason why the proposed rule should 5.117 prove materially harder to apply in this context than the equivalent rule for other transfers of intangible property, including assignments of claims. It will be important in each case to identify with precision the question that the court is called upon to determine and to consider the proprietary effects of each transaction in turn according to the law that applies to it. For example if A (an individual acting for private purposes) grants security inter- 5.118 ests in units of a cryptocurrency to B and to C in turn, by transactions taking place outside the cryptocurrency system, the proprietary effects of both transactions (whether, and if so to what extent, they are capable of binding third parties), and questions of priority between B’s and C’s interests will, under the rule formulated above, be determined by the law of A’s residence at the time of the two transactions.198 If, in the meantime, B has purported to transfer the cryptocurrency absolutely to D by a transaction taking place outside the cryptocurrency system, it is then possible to present the issue for determination as being one of priority between C and D (or A and D), and to raise the prospect of a conflict of connecting factors if A and B are resident in different countries.199 The conflict can, however, be seen to be more apparent than real if D’s legal rights are recognized as being dependent upon the proprietary effects of the earlier transaction between A and B and the priority of B’s interest in relation to that of C, both matters determined under the proposed rule by the law of A’s residence. Even if the law of B’s residence would favour D’s proprietary claim over that of C or A, that law should not be capable of affecting the entitlements of those parties which were, on proper analysis, never vested in B. It is not apt here to deploy an analogy200 of a chain of transactions involving a tangible moveable, such as a car, for it would be wrong to understand the benefits arising from participation in a cryptocurrency system as a

Assuming that this has not changed (see text to n 197). 199 For a similar example in the context of assignment of claims, see Hartley (n 171) 55–​56. 200 cf Goode (n 171) 290–​91, 312. 198



Cryptocurrencies and the Conflict of Laws single indivisible thing with a single location.201 B cannot be treated in the same way as a mortgagee in possession of a chattel. B may have the means of effecting transactions within the cryptocurrency system (for example, the public and private keys within the Bitcoin system), but so does A and, probably, C. Moreover, no transaction has taken place within the cryptocurrency system. The justification for giving potentially overriding effect to the lex situs of a tangible moveable, that the legal system referred to has exclusive control over the asset at the time of the transaction,202 is not present here. Instead, the choice of law rule formulated above requires that the nature and extent of B’s participation (as distinct from A’s participation and C’s participation) in the cryptocurrency system at the time of the transaction with D be determined, and that requires the proprietary effects of the earlier transactions to be analysed and respected. 5.119 Finally, it is worth repeating that this rule (or any other rule performing the same

function) would apply only to the effects of a transaction outside the cryptocurrency system as between, on the one hand, one or more parties to the transaction and, on the other, one or more third parties. Consistently with the structure established within the Rome I Regulation,203 (i) the entire relationship (contractual or proprietary) between the parties to the transaction involving a cryptocurrency would be governed by the law applicable to the contract between them, and (ii) the effects of that transaction within the cryptocurrency system will be governed by the consensus rules of that system and any rules of law applicable to the relationships between the system participants.

5.120 If, in the above example, B uses the information provided to him by A to ini-

tiate an irreversible transaction within the cryptocurrency system in favour of an address controlled by D, A’s participation in the system that was the object of the transactions with B and C will be changed in substance, for neither A nor B nor C will now have a legitimate expectation as against other system participants to be associated with and to have the power to engage in transactions in relation to the units now linked to D’s address. A and C may nevertheless pursue claims against

201 If, contrary to the submission in the text, it is correct to regard the participation as a single indivisible entity, it should be identified as being the (original) participation in the virtual currency system, vested in the first user of an address within the system. Applying the law of the place of residence of the original participant would, it is submitted, be a better solution than giving priority to the last transaction. 202 Dicey, Morris & Collins on the Conflict of Laws (n 9) para 24-​005. 203 Text to nn 169–​ 70. COM (2018) 96 final. Note, however, that Recital (15) of the Commission’s recent legislative proposal (n 166) suggests a blurring of the lines between the different relationships arising from an assignment. This is in apparently stark contrast to the statement earlier in the proposal (COM (2018) 96 final, 21) that ‘all aspects affecting the debtor are . . . governed by the law of the assigned claim’. The statement also appears to overlook Recital (38) to the Rome I Regulation, under which art 14(1) ‘also applies to the property aspects of an assignment, as between assignor and assignee, in legal orders where such aspects are treated separately from the aspects under the law of obligations’.



Conclusions B and, possibly, D with respect to B’s conduct, which may provide a basis for the assertion of proprietary claims against D’s participation in the cryptocurrency system under the principles here discussed.204

V. Conclusions Cryptocurrencies, and other forms of virtual currency, undoubtedly present 5.121 new challenges for the conflict of laws in England and elsewhere, but there is no need to panic and throw the existing toolbox away. The existing sets of rules for regulating matters of jurisdiction and applicable law in disputes involving cryptocurrency will work perfectly well in the large majority of cases, without any need for specifically tailored solutions, and will likely need only relatively small adjustments or refinements in other cases. Although this chapter has highlighted a number of areas in which difficulties may arise in the future, and in which courts or legislators at a national or international level may need to develop or mould the existing rules, it is important that this process of development should build upon existing legal foundations, including205 the EU’s private international law acquis. The survey in this chapter is intended to provide a scaffold upon which others may work in the future.

See the example of misuse of a Bitcoin wallet discussed in Section IV.B of this chapter. 205 Subject to the qualifications expressed above (n 11) in relation to the UK’s impending withdrawal from the European Union. 204





I. Introduction

A. Approach and terminology

6.01 6.08

IV. Mixture, Following, and Tracing

6.67 . Mixtures of cryptocurrencies A 6.67 B. Tracing and cryptocurrencies 6.74 C. Attribution in cryptocurrency transactions 6.79 D. Tracing through mixtures 6.81 E. Cryptographic and legal rules for tracing through mixtures 6.83 F. Notice in cryptocurrency payments 6.97

II. A Crypto-​Coin as an Object of Property

6.11 . Data strings recording transactions A 6.12 B. Fungibility, specificity, scarcity, and exclusion 6.20 C. Crypto-​coins in the law of personal property 6.28

III. Rules of Title and Transfer A. General B. Derivative transfers of title

6.45 6.45 6.48

V. Remedies

6.101 6.102 6.105

VI. Conclusion


. Common law remedies A B. Equitable remedies

I. Introduction The language of property is familiar enough in discussions of cryptocurrencies. 6.01 People who control a private key are commonly said to ‘own’ the crypto-​coins accessed by it. Investors are encouraged to ‘buy’ cryptocurrencies, where ‘buying’ implies some acquisition of rights in the coins and their realizable value. But once we enter the technical realm of common law property, we find that 6.02 cryptocurrencies do not make an easy fit. The difficulty goes beyond commonplace assertions about the law being slow to react to technological change.1 To say David Fox, Professor of Common Law, School of Law, University of Edinburgh, UK. * 1 eg Shawn Bayern, ‘Dynamic Common Law and Technological Change: the Classification of Bitcoin’ (2014) 71 Wash & Lee L Rev Online 22 (Bayern’s paper stands as a rare consideration of the status of cryptocurrencies in private law.); Katie Szilagyi, ‘A Bundle of Blockchains? Digitally Disrupting Property Law’ (2017–​18) 48 Cumb L Rev 9. For recognition of the general problem in common law doctrine, see Sarah Green and John Randall, The Tort of Conversion (Hart 2009)



Cryptocurrencies in the Common Law of Property that common law conceptions of property originally developed for a world consisting of physical objects is only to state the obvious. The reasons for the difficulty run deeper. They stem from the autonomous motivations of cryptocurrency users and the technical design of the cryptocurrency systems themselves. 6.03 The development of cryptocurrency technology has been driven by a desire to

create autonomous systems for carrying out digital transactions. The people who use them may neither seek nor want extraneous legal intervention. Their motivations are part of a more general argument for cyber-​space exceptionalism, which would limit the State’s role in regulating virtual communities.2 Property law is as much a kind of State intervention as all the more familiar rules of financial or securities regulation that have attracted so much attention from legal commentators.3 Property law is default law.4 If a certain resource can be characterized as an object of property, then the rules of property law apply to it as far as the nature of the resource allows. The parties are bound by property law whether they realize it or not. They need to contract out of it to exclude its operation. Experience shows that users of cryptocurrencies do not contract out (if only perhaps because the rules of private law seldom occur to them).

6.04 In their technical operation, cryptocurrency systems seem designed to frustrate

property law. Systems designed to obscure the claims of strangers to payment transactions, to eliminate the need for adjudication in payment transactions, and to hide the real-​world identity of the people behind them are not an easy object for traditional rules of property law. The systems come close to being self-​regulating. Transactional outcomes are determined by cryptographic design rather than legal rules.

ch 5, responding to OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1; and Your Response Ltd v Datateam Media Ltd [2014] EWCA Civ 281, [2015] QB 41, [9]‌–​[10] (Moore-​Bick LJ) [38]–​[39] (Davis LJ). 2 See generally Nicolas Suzor, ‘The Role of the Rule of Law in Virtual Communities’ (2010) 25 Berkeley Tech LJ 1817. 3 For a small sample, see Eric P Pacy, ‘Tales from the Cryptocurrency: on Bitcoin, Square Pegs and Round Holes’ (2014) 49 New Eng L Rev 121; Omri Marian, ‘A Conceptual Framework for the Regulation of Cryptocurrencies’ (2015) 82 U Chi L Rev Dialogue 53; Nicole D Swartz, ‘Bursting the Bubble: The Case to Regulate Digital Currency as a Security or Commodity’ (2014) 17 Tul J Tech & Intell Prop 319; Kavid V K Singh, ‘The New Wild West: Preventing Money Laundering in the Bitcoin Network’ (2015) 13 Nw J Tech & Intell Prop 37; Kevin Tu and Michael W Meredith, ‘Rethinking Virtual Currency Regulation in the Bitcoin Age’ (2015) 90 Wash L Rev 271; Jeffrey E Glass, ‘What is a Digital Currency?’ (2017) 57 IDEA: J Franklin Pierce for Intell Prop 455. 4 The theory of default law has been most fully developed in relation to contracts (eg Alan Schwartz, ‘The Default Rule Paradigm and the Limits of Contract Law’ (1993) 3 S Cal Interdisc L J 389), but it has been extended to explain the relationship between third parties and property-​ holding institutions such as corporations and trusts:  Henry Hansmann and Reinier Kraakman, ‘The Essential Role of Organizational Law’ (2000) 110 Yale LJ 387; and Henry Hansmann and Ugo Mattei, ‘The Functions of Trust Law: A Comparative Legal and Economic Analysis’ (1998) 73 New York University LR 434.



Introduction Despite these problems, the view advanced here is that many features of a 6.05 common law system of property would apply to cryptocurrencies. They do not exist in a property void. Individual crypto-​coins consist of specific units of transactional information that, properly understood, would make suitable objects of property.5 Ownership rights in them could be created and transferred by the usual rules of derivative acquisition of title. A  former holder of crypto-​coins would retain a title to them if a transaction on the blockchain was void or voidable according to the property transfer rules of common law and equity.6 Rules of tracing would allow titles to cryptocurrencies to pass through transactions on the blockchain, and might even to allow mixtures of them to be unscrambled.7 Property law might allow misapplied crypto-​coins or their value to be recovered by a claimant even when transactions on the blockchain were, in a cryptographic sense, irreversible. Property law matters both internally and externally to a cryptocurrency system. 6.06 Internally—​among the users of the system—​property law is a justifiable ground for the recovery of coins or their value when they are stolen or transferred by fraud. The irreversibility of cryptocurrency transactions, in a purely technological sense, need not bar the reversal of their legal effect or the recognition that they are legally defective. Property law has its own systemic norms. Externally—​to third parties dealing with users of the system—​the recognition of 6.07 cryptocurrencies as objects of property is no less important. It is only a matter of time before cryptocurrencies are used in transactions external to the blockchain. Property is a gateway to many standard forms of transaction. A crypto-​coin can never become the subject matter of a trust or a proprietary right of security, nor will it be an asset in a deceased person’s estate, unless it is first recognized as an object of property.8 The same is true of a secured creditor or trust beneficiary enforcing their claim in priority to the unsecured creditors of an insolvent coin-​holder.9 The development of a viable cryptocurrencies derivatives market may sometimes require that the primary assets from which secondary claims are constructed are capable of legal recognition as property.10

5 See paras 6.20–​6.44. 6 See paras 6.48–​6.56. 7 See paras 6.67–​6.101. 8 Value measurable in monetary units cannot be the subject matter of a trust unless is embodied in a specifically ascertainable item of property: Fortex Group v Macintosh [1998] 3 NZLR 171. The difficulty of accommodating digital assets within inheritance rules developed for traditional forms of personal property has led to the promulgation in 2016 of the model Revised Uniform Fiduciary Access to Digital Assets Act by the United States Uniform Law Commission. 9 eg Insolvency Act 1986, ss 283(1), 306. 10 For regulatory recognition of developments in cryptocurrency derivatives, see US Commodity Futures Trading Commission, ‘Release No 7731-​18, Advisory for Virtual Currency Products’ (21 May 2018) US Commodity Futures Trading Commission accessed 11 August 2018; and Financial Conduct Authority, ‘Cryptocurrency derivatives’



Cryptocurrencies in the Common Law of Property A. Approach and terminology 6.08 This chapter takes Bitcoin as the main example of a cryptocurrency since it is

most commonly used in practice. From time to time, the chapter refers to other cryptocurrencies, such Ethereum and Zerocash, when their different functionality might affect the property analysis.

6.09 The technical design of cryptocurrencies determines the kind of legal explanation

applied to them. In explaining the computer science of cryptocurrencies, this chapter draws heavily on the writings of Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller, and Steven Goldfeder at Princeton, Stanford, and Maryland,11 and on conversations with Ross Anderson, Ilia Shumailov, Alessandro Rietmann, and Mansoor Ahmed at the University of Cambridge Computer Laboratory.12

6.10 Finally, property is by nature concerned with legal rights that affect strangers to

bilateral transactions.13 Property problems usually come with at least three parties. For clarity’s sake, this chapter uses the familiar alphabetical names used in the computer science literature. Alice, Bob, and Carol are named as the parties in the cryptocurrency transactions, and, in complex cases, David and Erica are recruited to the transactional cast.

II.  A Crypto-​Coin as an Object of Property 6.11 This section considers how a crypto-​coin might be considered as an object

of property. That task requires a closer look at what a crypto-​coin actually is since its correct characterization as a thing affects the kind of property explanation that we apply to it. The first part of the inquiry is theoretical. We ask whether a crypto-​coin could make a suitable object for any regime of property rights at all.14 This then leads to the legal doctrinal question of how, if at all, a crypto-​coin would fit within the established common law rules of personal property.15

(6 April 2018) Financial Conduct Authority accessed 11 August 2018). 11 Principally, Arvind Narayanan and others, Bitcoin and Cryptocurrency Technologies:  A Comprehensive Introduction (Princeton University Press 2016). 12 The responsibility for any errors in understanding the computer science lies with me alone. 13 This is the ‘third party impact’ explained by Kevin Gray and Susan F Gray, Elements of Land Law (5th edn, OUP 2008) para 1.5.28. 14 See paras 6.12–​6.27. 15 See paras 6.28–​6.44.



A Crypto-Coin as an Object of Property A. Data strings recording transactions As a specific locus of monetary value, a crypto-​coin is an ideational construct.16 6.12 Both its function and value as a medium of exchange or investment commodity exist only in the shared understanding of the users who make transactions on a cryptocurrency system. The coin itself has no intrinsic value. The source of its value is extrinsic to itself, imposed by the collective belief of the people who use it.17 A crypto-​coin takes its form from the recording of transactions on a cryptocurrency 6.13 system. Stripped to its elements, the coin consists of a string of data, manifested as a readable sequence of characters, which has been generated by a transaction on the system. The transaction might have been the original one where the coin was first mined or a later one where a user transferred a coin already in existence. The data string records a transactional output of value at the public key of the person who now has the power to transact with it by using his or her private key. For this reason, the coin is often called ‘an unspent transaction output’ (‘UTXO’). Spending the coin requires the holder of the output to use it as the input for the next transaction on the system. If, for example, Alice transfers 5 BTC from her public key, pkA, to Bob at pkB, then the string representing the 5 BTC output at pkA becomes the input to this new transaction. The string representing 5 BTC at pkB is the new output. The blockchain works on a transaction ledger rather than on an account ledger 6.14 system.18 It records the existence and value of transactions between public keys rather than the net balance of coin value associated with each public key and available for spending from it. To return the example just given, the blockchain records the 5 BTC transaction between pkA and pkB and that, for the present, the 5 BTC output remains unspent at pkB. Each transaction leading to an output has a distinct identity. What the system does not do is to record the total BTC balance of unspent transactions associated with pkB.19 The blockchain record differs in this way from an account kept in a conventional 6.15 bank money system. A bank account records every credit and debit transaction 16 This technical description draws on Narayanan and others (n 11) chs 1–​3; Satoshi Nakamoto, ‘Bitcoin: a Peer-​to-​Peer Electronic Cash System’ Bitcoin 2 accessed 21 July 2018. 17 The legal distinction between the intrinsic and extrinsic value of money dates from the precious metal coinages of the middle ages:  see Wolfgang Ernst, ‘The Legists’ Doctrines on Money and the Law from the Eleventh to the Fifteenth Centuries’ in David Fox and Wolfgang Ernst (eds), Money in the Western Legal Tradition: Middle Ages to Bretton Woods (OUP 2016). The difference with cryptocurrencies is that the extrinsic value is imposed by an informal consensus rather than by a legal act of a sovereign monetary authority. 18 See Narayanan and others (n 11) 52–​53. 19 Bitcoin differs in this way from the Ethereum system, which directly calculates the balance of token value available for spending.



Cryptocurrencies in the Common Law of Property into the account but then goes on to calculate the running balance after each transaction. The account holder spends out of the debt representing the net balance, which in legal analysis is a thing in itself and the primary object of the account holder’s legal right.20 6.16 With a transactional ledger, however, the recorded network of transactional links

is the thing in itself. Granted, the balance generated by all those links would be ascertainable by Bob and, indeed, by any other user of the system who knew the address of his public key.21 By Bob’s lights, as a human user of the system, he would probably think of each transaction output at pkB as combining to form a single balance of fungible value available to spend. But such an understanding of the transaction is secondary to the primary information recorded on the blockchain. It is that primary information which, if anything, has to be object of any property right that Bob may assert in relation to it.

6.17 The transaction record on the blockchain differs in one other important way from

the record of debits and credits to a conventional bank account. The blockchain gives every transaction a unique identifier. It enables the most recent transactional output at pkB to be identified by reference to the input at pkA that was consumed in creating it. In turn, the input in the pkA-​pkB transaction derives its identity as an output of an earlier transaction, going back to the first output on the system when the coin was mined. By this series of recorded transactional links, every coin keeps a unique identity.

6.18 It is important however to clarify what is meant by saying that every coin has

a unique identity since this has a bearing on the correct form of property law analysis. The coin is only a notional entity, a convenient way of imagining the BTC value represented by the output associated with a public key. The coin representing the input to the transaction at pkA is destroyed and replaced by another coin representing the transaction output at pkB. We should not imagine the data string representing the coin at pkA as being transferred to pkB. The data strings at each public key, before and after the transaction, are distinct. We can, however, identify the one with the other because of the recorded transactional link between them, going back to a specific mining transaction. The BTC value formerly associated with a specific data string at pkA is now associated with the data string at pkB. Value flows from pkA to pkB by the consumption and creation of distinct informational entities at each public key.

20 On the relationship of debtor and creditor between bank and customer, see Foley v Hill (1848) HLC 28; N Joachimson v Swiss Bank Corporation [1921] 3 KB 110. 21 Bitcoin balances are searchable by entering the address of a public key into a number of Bitcoin user interfaces, such as​easybalance/​ or https://​bitcoinwhoswho. com/​(accessed 14 August 2018).



A Crypto-Coin as an Object of Property To this very limited extent, there is an analogy with the way conventional bank 6.19 payment systems operate. Suppose that Alice pays Bob £100 by bank transfer. The flow of monetary value between them consists in the destruction (or reduction in value) of the debt owed by Alice’s bank to herself and the creation (or increase in value) of a debt owed by Bob’s bank to himself.22 Nothing which could be the subject of a property right passes directly from Alice to Bob. Any false analogy with the payment of corporeal money, such as coins or banknotes, is best avoided, in both explaining bank transfers and transfers of a cryptocurrency. If Alice pays Bob £100 in banknotes, then the transfer of monetary value tracks the movement of a continuing thing, an object of property, between them. All that happens in the bank and the cryptocurrency payments is that value flows through the consumption and creation of distinct entities, although with the difference that in the bank transaction the entities are debts, while in the cryptocurrency transaction they are unique items of digital information. B. Fungibility, specificity, scarcity, and exclusion 1. Fungibility as an aim of cryptocurrency design The fungibility of cryptocurrencies has been one of the main concerns of the 6.20 designers who develop them and the users who transact with them.23 The ideal is that a coin representing an unspent transaction output on the system should have the same exchange value in payments as any other coin on the system. This goes beyond saying that all coins on the system should carry a nominal value of 1 BTC each. The concern is that every coin nominally worth 1 BTC should be equally acceptable at 1 BTC when it is paid in a transaction for a debt of 1 BTC or when it exchanged in a ‘real-​world’ transaction for a State-​issued currency, such as pounds sterling or US dollars. The concern is that the exchange value of individual coins is not fungible: it may differ from coin to coin because their traceable transactional history can identify certain of the coins as tainted. If some coins can be traced as the proceeds of criminal conduct, then some parties to payment transactions, notably coin exchanges, reject them or discount their exchange value to reflect their tainted origins. Coins that derive from clean sources—​or at least sources that cannot be identified as tainted—​pass in transactions at their full nominal value, which gives them a premium over those that are tainted. The solution proposed to this problem has been to develop cryptographic techniques with stronger anonymity or forms of payment transaction that obscure the traceability of coins.24 For want of any competing evidence to taint their origins and 22 R v Preddy [1996] AC 815, applying the former Theft Act 1968, s 15. See generally David Fox, Property Rights in Money (OUP 2008) paras 5.23–​5.24. 23 See Narayanan and others (n 11) 219; and David Vorick, ‘Ensuring Bitcoin Fungibility in 2017 (and Beyond)’ (28 December 2016) Coindesk accessed 21 July 2018. 24 See further paras 6.69–​6.73.



Cryptocurrencies in the Common Law of Property their value in exchange, all coins would be fungible with one another in payment or investment transactions. 2. Fungibility and specificity in property law 6.21 The concern with fungibility in property law is quite different. The specificity of a resource is essential to its characterization as an object of property. Property must relate to some identifiable and discrete resource. It cannot confer a floating entitlement to all resources of the same generic type.25 Alice’s ownership of one £10 note does not entitle her to replace it with any other £10 note currently owned by Bob. 6.22 The requirement of specificity relates to another hallmark of property, which is

the power in the holder of the right to exclude non-​entitled third parties from access to a resource.26 As a minimum, any resource that is made the object of property lends itself to protection against unauthorized interference or use by others. It is a kind of resource from which it is practically possible to exclude others.27 A resource that is practically open to all takers or all users may never be a suitable or at least an easy candidate for exclusive appropriation to one person through a regime of property rights. Resources that are suitable for a property regime also tend to be scarce.28 Resources which are abundantly available or which can be reproduced by anyone at will, do not naturally lend themselves to a property regime. Their existence as property depends entirely on the strength of the ‘trespassory’ rules that control access to them and penalize unauthorized exploitation of them.29

6.23 In law, the fungibility or specificity of a thing is not an absolute property of the

thing itself. The characterization of the thing as fungible or specific depends instead on the perspective of the parties to a transaction and the kinds of legal right at issue between them.30 If Alice owes Bob a debt for £100, then she can satisfy the obligation by tendering any combination of coins, notes, or incorporeal bank balances with a nominal value of £100. The money here is fungible since the

25 A proprietary right of security, such as a mortgage charge, must attach to some specific asset or assets, even though the money raised by enforcing it may be less than the full value of the assets it attaches to. 26 The exclusivity of property has been extensively considered in the literature. For a small sample, see Jim W Harris, Property and Justice (OUP 1996) 24–​26 (discussing ‘trespassory rules’); James E Penner, ‘The Bundle of Rights Picture of Property’ (1995–​96) 43 UCLA L Rev 711, 807–​813 (discussing a duty of non-​interference); James E Penner, The Idea of Property in Law (OUP 2000) ch 4; Thomas W Merrill, ‘Property and the Right to Exclude’ (1998) 77 Neb L Rev 730; Larissa Katz, ‘Exclusion and Exclusivity in Property Law’ (2008) 58 U of Toronto LJ 275; Gray and Gray (n 13) para 1.5.38. 27 Kevin Gray, ‘Property in Thin Air’ (1991) CLJ 252, 269–​273. 28 Harris (n 26) 23–​24. 29 ibid 43. 30 The implication is that any specific asset can for some purposes be regarded as a repository of fungible wealth: Bernard Rudden, ‘Things as Things and Things as Wealth’ (1994) 14 OJLS 81. For the fungibility of money, see generally Fox (n 22) paras 1.78–​1.86.



A Crypto-Coin as an Object of Property identity of the things tendered in payment is irrelevant to the performance of Alice’s debt for a monetary amount. As it happens, the law of property applied to traditional State-​denominated currencies is structured to ensure that the exchange value of each of those means of payment corresponds, without a discount, to its nominal value. It has already come close to the end-​point that developers of cryptocurrency technology are working to reach.31 But when money as the object of property then it as specific as any item of unique 6.24 property we might imagine. The ten £10 notes owned by Alice are as uniquely and specifically hers as any specially commissioned work of art she may happen to own. If Carol takes those same notes, intending to replace them with ten others of equal value, she is as much a thief of the notes as she would be if she had appropriated one of Alice’s art works.32 3. Cryptocurrencies as either fungible or specific in law From the perspective of private law, a crypto-​coin would be fungible or specific 6.25 like any other asset. It would be fungible when the system users treat it as a certain quantity of nominal BTC value. If Alice owed Bob a 5 BTC debt, then she would be free to use any unspent output or outputs held at her public keys, provided that they together equated to 5 BTC. As the possible object of a property regime, however, the data string constituting each coin is a specific thing. It is uniquely identifiable as the latest output of a chain of traceable transactions which connect it back to the original output on the system when the coin was first mined. It is in this sense as specific as the value traced through the bank transfer between Alice and Bob explained earlier.33 If anything, the specific connection in the crypto-​ coin payment is even stronger. When Alice pays 5 BTC from pkA to Bob at pkB, the transactional output at Bob’s public key would carry a cryptographic record connecting it with the input at Alice’s public key. Unlike the bank transfer, it would not depend on artificial legal rules of attribution, which were extraneous to the payment system, to identify the value in the input and output with each other. 4. Scarcity and exclusivity A  crypto-​coin also stands up well against the tests of scarcity and exclusivity. 6.26 Bitcoins, for example, are scarce by systemic design. The Bitcoin protocol is designed with a cap on the number of new coins that can be mined. No more than 21 million of them can ever be created. This constraint on unlimited monetary

31 For the relationship between property transfer rules and the exchange value of money, see Fox (n 22) ch 2. The historical development of the law of property in money has generally been skewed against the assertion of adverse titles to money by a former holder of it: see David Fox, ‘Banks v Whetson (1596)’ in Simon Douglas, Robin Hickey and Emma Waring (eds), Landmark Cases in Property Law (Hart Publishing 2015) 3–​24. 32 eg R v Velumyl [1989] Crim LR 299. 33 See para 6.19 above.



Cryptocurrencies in the Common Law of Property creation is one of its characteristic features. It was intended to give Bitcoin a credibility that central bank State currencies were thought to have lost after the financial crisis of 2008.34 Scarcity is also inherent in the working of individual coin transactions. The system prevents double spending of the same coin. The cryptography that protects Alice’s exclusive capacity to sign payment transactions and to pay her coin to Bob connects a finite quantity of BTC value to a unique coin. She cannot multiply the nominal BTC value in the system by first consuming 5 BTC of unspent value in a transaction with Bob and then consume it again in a second transaction with Carol.35 6.27 Access to the data string representing the 5 BTC value is, in a practical sense,

exclusive to whichever of the users, Alice or Bob, controls the private key that the data is associated with. It makes no difference that all transactions between public keys are public and discoverable by other users of the system. The publicity of the information constituting the data string does not enable the public to transact with it on the system. Mere knowledge that a certain data string is associated with a public key does not enable the public at large to use its one meaningful incident, which is its capacity to be consumed in a transaction. Like any other form of currency, the only real way to use a crypto-​coin is to spend it.36 That power lies exclusively with the person who controls its private key. C. Crypto-​coins in the law of personal property

1. Choses in possession and choses in action 6.28 As far as existing private law doctrine goes, cryptocurrencies do not fall into either of the conventionally recognized categories of personal property. According to the classical statement of Fry LJ in Colonial Bank v Whinney in 1886, these categories refer to either choses in possession or choses in action. No intermediate category exists to cover other forms of intangible property that cannot be analysed as choses in action.37 The definition of property in criminal law may be wider. The Theft Act 1968 defines ‘property’ for the purposes of theft as ‘including things in action and other intangible property’.38 The inclusion of ‘other intangible property’ apart from choses in action may be a deliberate extension of the private law

34 See Robleh Ali and others, ‘Innovations in Payment Technologies and the Emergence of Digital Currencies’ (2014) Bank of England Quarterly Bulletin 227, 281 accessed 22 July 2018. 35 For double spending, see Nakamoto (n 16); Narayanan and others (n 11) 21–​25, 34–​38. See further Chapter 1 in this volume. 36 See paras 6.12–​6.19. 37 Colonial Bank v Whinney (1885) LR 30 Ch 261, 285–​86 (Fry LJ), adopted (1886) LR 11 App Cas 426 (HL). 38 Theft Act 1968, s 4. A similar definition applies for the purpose of identifying a relevant gain or loss under the Fraud Act 2006, s 5.



A Crypto-Coin as an Object of Property definition of personal property or at least mark a preference for leaving the category of intangible property open to development. It is easy to explain why cryptocurrencies cannot be characterized as choses in 6.29 possession. The data strings comprising the coins are intangible and cannot be physically possessed. The coins consisting in an unspent transactional output are just an ideational entity. It follows that some standard common law methods of proprietary protection would not be available to enforce a title to them. Tortious actions, such as trespass or conversion, would not lie to protect a putative owner’s title.39 The prevailing view in English law, which the House of Lords confirmed in OBG Ltd v Allan, is that these actions depend on proof of interference with actual possession or a right to immediate possession of the subject matter of the claim.40 Possession has been confined to its traditional sense which requires some physical control over a tangible thing. This view was strongly challenged in OBG Ltd v Allan, but the House of Lords affirmed it.41 An intangible thing cannot be possessed for the purposes of common law tort claims simply because one person can exercise exclusive control over access to it.42 Neither are cyber-​currencies choses in action. This follows from the defining dif- 6.30 ference between cyber-​currencies recorded on a distributed ledger and the conventional currencies that depend on the existence of centralized intermediaries.43 In the simplest case, where Alice directly controls her own private key for making transactions on the system, she is the putative owner of the data string representing the coin. Her ownership does not consist in the power to enforce another person’s obligation for the delivery of the coin. Her situation would be different from Bob’s if he had £100 in his bank account. Bob’s ‘money in the bank’ is essentially his contractual right to compel the bank to pay legal tender in discharge of the debt owed to him and to authorize the bank to make payments from the account as an agent on his behalf.44 The characterization of Bob’s entitlement as the right to enforce a debt is the flipside the economists’ observation that fiat money and bank money consist in circulating credit. Money consists in a notional

39 The common law lacks an action for the direct enforcement of ownership in tangible property. Ownership is instead enforced indirectly by actions founded on a title to possession. Hence the remark commonly made that English law does not recognize an action equivalent to the vindicatio of classical Roman law: OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1, [308] (Baroness Hale). 40 OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1. For title to sue in conversion, see Kuwait Airways Corporation v Iraqi Airways Co (nos 4 and 5) [2002] 2 AC 883, 1083–​98 (Lord Nicholls). 41 Your Response Ltd v Datateam Media Ltd [2014] EWCA Civ 281, [2015] QB 41. For the argument to the contrary, see Green and Randall (n 1). 42 Your Response Ltd v Datateam Media Ltd [2014] EWCA Civ 281, [2015] QB 41; Environment Agency v Churngold Recycling [2014] EWCA Civ 909, [2015] Env LR 13. 43 Nakamoto (n 16). For the operation of the distributed consensus protocol, see Narayanan and others (n 11) ch 2. 44 Foley v Hill (1848) HLC 28; Lipkin Gorman v Karpnale (a firm) [1991] 2 AC 548, 573–​4 (Lord Goff).



Cryptocurrencies in the Common Law of Property loan enforceable by a creditor against a debtor (although in practice the creditor never calls in the loan for payment in legal tender).45 6.31 We need to add a refinement here to explain the rights of the users or investors

in cryptocurrencies who have hold accounts with wallet service providers or cryptocurrency exchanges.46 At its simplest, a wallet is a place where the user stores the private and public keys that give access to the coins associated with them. Rather than hold the keys as a paper record or as a file on his or her own hardware, the user may instead hold it remotely through an online wallet service.47 The arrangement between the service provider and the user is more akin to that of a conventional banker and its customer. The service provider holds the coins as things in themselves at public keys controlled by them. The account holder’s right is to direct payments with the coins or to realize their capital value by selling them.48 Here the depositor’s rights are indeed in the nature of a chose in action. The account holder could enter into real-​world transactions with the chose in action, such as declaring a trust or granting an equitable security over it. But any interest of the trust beneficiary or grantee of the security would ultimately depend on enforcement of a personal claim against the service provider. If the service provider became insolvent, the beneficiary or the grantee would not have any special priority against the service provider’s assets.49

2. Intangible personal property other than choses in action 6.32 Cryptocurrencies could only be the direct objects of property in private law if a third category of personal property were recognized apart from choses in possession or choses in action. The view of Fry LJ in Colonial Bank v Whinney was that there was no such third category. It is worth considering his reasons since they affect the status of the case as a general precedent. 6.33 The question in Colonial Bank v Whinney was a narrow point of statutory inter-

pretation: whether shares in a public company were ‘choses in action’ within the meaning of the reputed ownership provisions of the Bankruptcy Act 1883. Fry LJ dissented from the majority view of Cotton and Lindley LJJ in the Court of Appeal, and held that they were choses in action. The House of Lords upheld Fry LJ’s analysis and adopted his reasons.50 Fry LJ said that there could be no 45 Antonio Sáinz de Vicuña, ‘An Institutional Theory of Money’ in Mario Giovanoli and Diego Devos, International Monetary and Financial Law: The Global Crisis (OUP 2010). 46 For the variety of wallet services and their legal characterization, see Chapter 9 in this volume. 47 See Coindesk, ‘How to Store Your Bitcoin’ (20 January 2018) Coindesk accessed 30 July 2018. 48 Malte Möser, ‘Anonymity of Bitcoin Transactions’ Münster Bitcoin Conference, University of Münster (July 2013) 2.3  accessed 27 August 2018. 49 Compare Space Investments Ltd v Canadian Imperial Bank Trust Co (Bahamas) Ltd [1986] WLR 1072 where trust moneys were held by a trustee on deposit at a bank which became insolvent. 50 (1886) 11 App Cas 426.



A Crypto-Coin as an Object of Property occupation or enjoyment of the shares themselves although there could be of the fruits (such as dividends and other benefits) arising from them. The only way to obtain the fruits was by an action at law. This should have been enough to dispose of the point. But Fry LJ went on to say that there was no third category of personal property. He disagreed with the majority’s view of what a share consisted in. In their view, the registered proprietor of shares held them as things in themselves: ‘He has the ownership of the share, and he cannot get anything more than he has already got.’51 On the majority view, the shareholder’s right to the dividends due under the shares might be a chose in action but not the shares themselves. Thus the real disagreement in the case was about the proper characterization of shares: whether they were things in themselves, over and above the entitlements associated with them, or merely an aggregation of those entitlements, all of which could be enforced by action. The authority for Fry LJ’s binary categorization of personal property was drawn 6.34 from Sir William Blackstone’s Commentaries on the Laws of England (1765–​69).52 Blackstone wrote: Property, in chattels personal, may be either in possession; which is where a man hath not only the right to enjoy, but hath the actual enjoyment of, the thing: or else it is in action; where a man hath only a bare right, without any occupation or enjoyment.’53

This explanation followed his description of the variety of ‘chattels personal’ 6.35 which, he said, were things moveable, ‘which may be annexed to or attendant on the person of the owner, and carried about with him from one part of the world to another.’54 He proceeded in the next section to take ‘a short view of the nature of property in action’ where a person’s property was ‘but merely a bare right to occupy the thing in question; the possession whereof may however be recovered by a suit or action at law: from whence the thing so recoverable is called a thing or chose, in action’.55 He gave examples of money recoverable on a contract or rights to damages recoverable by legal judgment and execution. Blackstone’s understanding was that all ‘chattels personal’ were tangible objects 6.36 ultimately capable of physical possession. The purpose of his exposition was to describe ‘the nature of a person’s property or dominion, to which they [the chattels personal] are liable’.56 Property in a moveable object did not depend on the holder keeping it in his or her physical possession. Property in the object subsisted, albeit 51 ibid 284 (Lindley LJ). 52 William Blackstone, Commentaries on the Laws of England (first published 1766, University of Chicago Press 1979). 53 William Blackstone, Commentaries on the Laws of England (first published 1766, University of Chicago Press 1979) vol 2, 396–​97. 54 ibid 387. 55 ibid 396–​97. 56 ibid 388



Cryptocurrencies in the Common Law of Property in ‘bare’ form, if a legal action was available to recover possession of it. When a thing was ‘in action’, it was in potentia rather than in esse.57 6.37 Seen in this way, Blackstone’s argument had more to do with the nature and en-

forcement of property in tangible objects than the larger categorization of things in which property might exist. He demonstrated that property in things was not so fragile that it required continuing possession to sustain it. The legal relationship between the holder and tangible things subsisted so long as an enforceable cause of action could bring the thing back into the holder’s physical possession. Blackstone did not say that no third category of personal property existed. He did not turn to the question whether property did (or could) exist in things without any tangible foundation at all. His silence on that point may have had more to do with the way he understood the proper taxonomy of public and private law than any doctrinaire position about the content of personal property. Rights such as patents, which would nowadays be candidates for a third category of personal property, belonged to a different part of Blackstone’s scheme. In his view, patents for new inventions were statutory exemptions from the general common law prohibition on monopolies.58 He treated them as an exemption from a larger category of public wrong instead of a species of thing that needed to be fitted into a binary scheme of common law property.

3. The current authorities 6.38 Reading Blackstone in this way, it should at least to be open to question whether the private law category of intangible property consists exclusively in choses in action, as Fry LJ said in Colonial Bank v Whinney. The recent authorities are divided on the point. On the one hand, Stephen Morris QC, sitting as a Deputy High Court Judge in Armstrong DLW GmbH v Winnington Networks Ltd, accepted that the categories of personal property were not confined to choses in action and choses in possession.59 He returned to first principles about the defining features of property in the law, and held that an allowance under an EU carbon emissions trading scheme was a species of property. The allowance created a transferable immunity from prosecution for exceeding a carbon emissions target. On the other hand, dicta of Moore-​Bick and Floyd LJJ in Your Response Ltd v Datateam Business Media Ltd stand against the view that there is a third category of personal property.60 A second objection from that case was Floyd LJ’s

57 ibid 397. 58 William Blackstone, Commentaries on the Laws of England (first published 1766, University of Chicago Press 1979) vol 4, 159. For the place of intellectual property rights in the modern scheme of property law, see Chapter 7 in this volume. 59 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch); [2013] Ch 156, considered Kelvin F K Low and Jolene Lin, ‘Carbon Credits as EU Like It’ (2015) 27 J of Environmental L 377–​404. 60 Your Response Ltd v Datateam Media Ltd [2014] EWCA Civ 281, [2015] QB 41.



A Crypto-Coin as an Object of Property remark that information has never as such been treated as property, although the physical medium on which it is recorded may be property.61 It is instructive to apply the tests from Armstrong DLW GmbH v Winnington 6.39 Networks Ltd for determining whether an intangible asset might be treated as property. The Deputy High Court judge, Stephen Morris QC, held that the intangible carbon allowance under an EU carbon trading scheme was property, and that the holder from whom it was stolen could sue on a proprietary restitutionary claim to enforce its retained legal title. The allowance was definable (to the extent of having a unique reference number), and identifiable by third parties. Its value derived partly from the possibility of trading with it in a market. It was designed to be transferable to third parties. It had permanence and stability. It subsisted over time.62 Cryptocurrencies satisfy all these criteria. Each crypto-​coin is definable by its own 6.40 unique transactional history which is discoverable from the blockchain record. The very purpose of the coins is to be transferable to third parties. Even when they are used as investment media, they need to be transferable so that their holder can realize their capital value in a conventional State-​denominated currency. Once the coins are associated with a new public key, the new holder has the same exclusive power to transact with them as the former holder. They are as permanent and stable in their existence as the software protocol that creates them. Admittedly, the crypto-​coins are vulnerable to changes in the system design. One person’s ownership of a coin does not confer any absolute veto over changes to the system that might affect the security, the transferability, or, ultimately, the very existence of the coin. But that is no different from the ownership of conventional property outside the digital world. Ownership of a thing is not a guarantee against deterioration in or destruction of the thing. An account holder with money in a bank is the owner of a chose in action but he or she takes the risk that the bank may default on its debt. Cryptocurrencies are in one way different from the carbon trading allowance in 6.41 Armstrong DLW GmbH v Winnington Networks Ltd. The allowances were created under a statutory scheme: they were transferable exemptions from the fine that the holder would have had to pay for emitting CO2 beyond a permitted level. They were rather like the cases of the export quota, waste management licence, and milk quota in the earlier cases that considered the meaning of property in criminal law and insolvency law.63 The difference is that cryptocurrencies are not created under statute so a court has no duty to recognize their existence or their ibid [42] (Floyd LJ). 62 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156, [50]. 63 Attorney General of Hong Kong v Nai-​Keung [1987] 1 WLR 1339; Re Celtic Extraction Ltd [2001] Ch 475; Swift v Dairywise Farms Ltd [2001 WLR 1177. 61



Cryptocurrencies in the Common Law of Property method of operation. But they are at least created by a scheme with defined public rules of operation. The rules bind users of the system unless the participants agree to a systemic change.64 6.42 The issue in Your Response Ltd v Datateam Business Media Ltd65 did not turn

on the existence of a third category of personal property. The main issue was whether an IT service provider could exercise a possessory lien over the client’s database of magazine subscribers when the client failed to pay the full fees due under the service contract. The service provider’s arguments tried to extend the traditional common law actions and remedies that depend on possession to the intangible database. The Court of Appeal did not agree. The legal notion of possession could not extend to include the service provider’s control over an intangible thing, such as the database. To have done so would have conflicted with the decision of the House of Lords in OBG Ltd v Allan that the tort of conversion would not lie where a person interfered with the performance of a contractual obligation to pay a debt.66 All that made sense in the case, but it was not a reason for saying that there was no intermediate category of intangible personal property. We are left nonetheless with the objections raised by Floyd LJ to treating information as property.67 There are good reasons for distinguishing his dicta.

6.43 The law’s general reluctance to treat information as property does not neces-

sarily touch the unique data strings that constitute a crypto-​coin. To be sure, information is not an easy object of property. It is hard to exclude the knowledge or use of information from the public at large and confine it to one person. The free flow of ideas is usually in the public interest. It would need some special reason to restrict the use of information by making one person the owner of it. But we have seen how the exclusivity of a crypto-​coin stems from a holder’s power to transact with it rather than from mere knowledge of its existence and knowledge of the blockchain data that comprise it.68 The digital information recording the unspent transaction output is understood as something more than the information itself. It is a medium of payment, very like a conventional currency. The whole, seen in terms of its functions, is perhaps greater than the sum of its parts.

64 See Narayanan and others (n 11) ch 7, and for Bitcoin stakeholders as a currency community, see Chapter 11 of this volume. 65 [2014] EWCA Civ 281, [2015] QB 41, considered by Kelvin F K Low, ‘Perils of Misusing Property Concepts in Contractual Analysis’ (2014) 130 LQR 547. 66 OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1. 67 Your Response Ltd v Datateam Media Ltd [2014] EWCA Civ 281; [2015] QB 41, [42] (Lloyd LJ). 68 See paras 6.26–​6.28.



Rules of Title and Transfer The real objection to treating information as property should depend on the func- 6.44 tions it is used for rather than on the plain fact that it is information. Information can be used in different ways. Society willing accepts that conventional forms of money can be the objects of property when they are used as means of payment and stores of value. Experience shows the criminal law and private law have no problem about treating coins, banknotes, and incorporeal bank balances as property. If so, the reasons for treating crypto-​coins differently, simply because they consist in information, should not be compelling. If both kinds of asset serve as means of payment and stores of nominal monetary value, then the reasons for treating one as the object of property, but not the other, seem weak.

III.  Rules of Title and Transfer A. General If crypto-​coins were indeed recognized as a kind of personal property at common 6.45 law, then some, but not all, settled rules of property law would apply to them. Owing to their intangibility, some rules would only apply by analogy. It can at least be said that the lawful holder of a crypto-​coin would be the legal 6.46 owner of it. At common law, personal property is either owned or possessed, since the common law theory of estates does not apply to it.69 The holder’s power to transact with the crypto-​coins would not amount to possession in the formal legal sense. As we saw, OBG Ltd v Allan confirmed that the common law understanding of possession is confined to tangible things with a physical location in space.70 As far as the intangible nature of the crypto-​coin allowed, the owner could create 6.47 equitable rights in relation to it. If Alice is the lawful owner of the crypto-​coins at pkA, then she could declare a trust of them for Bob or grant a charge over them for Carol to secure payment of a debt. Both these transactions would happen off the blockchain, in the real world. There are well-​settled rules of construction to hand that would help resolve uncertainties about the parties’ intentions in identifying the specific coins that the trust or charge related to or the precise interest that Bob or Carol were intended to take.71

69 See Ewan McKendrick, Goode on Commercial Law (5th edn, LexisNexis Butterworths 2016) paras 2.25–​2.27. 70 See para 6.29. 71 eg Hunter v Moss [1993] 1 WLR 934 (Colin Rimer QC); [1994] 1 WLR 452 (CA); White v Shortall (2006) 206 Federal Law Reports 254 (SCNSW) (considering the declaration of trust over a fund of fungible property).



Cryptocurrencies in the Common Law of Property B. Derivative transfers of title 1. General 6.48 The starting point is that the usual rules of derivative transfer of title would apply to crypto-​coin transactions between users of the system. The rules are summed up in the maxim nemo dat quod non habet. If Alice pays 5 BTC at pkA to Bob at pkB, then the starting point is that Bob only gets an indefeasible right of ownership in the coins if Alice was the owner of relevant transactional input and if the transaction was valid in terms of the common law and equitable rules governing derivative transfers of title. Alice can confer no better title on Bob than she has to give, and the transaction between them must be legally effective to vest her title in him.72 These propositions are laid down as starting point for the way title transfer rules would operate to keep open the argument, considered later, that the special defence of good faith purchase for value may apply to crypto-​coins, owing to their functional similarity to conventional State-​denominated currencies.73 2. Legal title and the blockchain record 6.49 Bob’s title to coins would not be legally indefeasible simply because the transaction was valid and irreversible according to the operating rules of the Bitcoin system. The general law of property defines a standard of legal validity that is external to the software protocol governing the system. The blockchain may provide a definitive record of the links between discrete transactions on the system, but it cannot be a record of their legal effect. Registration of a transaction is not legally constitutive of the system users’ title to the coins associated with their public key. It does not have the same effect, for example, as registering a person as the proprietor of a legal estate in land.74 Thus the block recording that Alice paid her 5 BTC to Bob does not necessarily make Bob the holder of the coins with an indefeasible title. His title may be defeasible for reasons external to the Bitcoin system. If Bob had wrongfully used Alice’s private key to activate the transfer to himself, then his title would be void at law and in equity.75 If he had procured the transfer to himself by a fraudulent misrepresentation, then he would be the legal owner of the 5 BTC, but his title would be voidable.76 Cyber-​currency systems could

72 See generally James Crossley Vaines, Personal Property (E L G Tyler and Norman Palmer eds, 5th edn, Butterworths 1973) ch 9; Fox (n 22) ch 3. 73 See paras 6.57–​6.66. 74 The contrast is clearly drawn in land registration systems between registration as a system of recording title and registration as a system for constituting title: see generally, Gray and Gray (n 13) para 2.2.5. 75 Clarke v Shee (1774) 1 Cowp 197 (common law); Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 715–​16 (Lord Browne-​Wilkinson) (equity). For other cases making the thief a constructive trustee of stolen money, see Black v Freeman & Co (1910) 12 CLR 105 and generally John Tarrant, ‘The Theft Principle in Private Law’ (2006) 80 ALJ 531. 76 El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 734 (Millett LJ) (rvsed on other grounds [1994] 2 All ER 685 (CA)); Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281.



Rules of Title and Transfer only opt out of the general rules of property law if all users of the system agreed to dis-​apply them. There would need to be a system-​rule to this effect, which users accepted when they made transactions on the system. Only then could the blockchain record be constitutive of a person’s title to the coins.77 3. The blockchain record as presumptive evidence of title Ideas analogous to physical possession would have some relevance. When the 6.50 blockchain records that a certain crypto-​coin is associated with a certain public key, it raises an evidential presumption that the holder of the public key is the owner of it. Absent any other indication, it tends to show that the person holding the public key owns the coin associated with it. This is the intangible analogue to the familiar common law presumption that possession is evidence of title.78 Its main effect is to allocate the burden of proof in a dispute over title. The person who seeks to challenge the current possessor’s title to property bears the burden of proving that he or she has a better title to it. If Alice stole a car from Carol and then sold it to Bob, his possession of the car places the burden of proof on Carol in her action for conversion against him. She must prove the identity of the car and the theft of it by Alice. The presumption of title from possession has been especially relevant to ex- 6.51 plaining title to money. Until the decision in Miller v Race (1758), a person’s title to tangible coins was explained by his or her possession of them.79 Coins were designed and struck to be physically indistinguishable from each other. Money had ‘no earmark’, and one piece of money was said ‘not to be known’ from another.80 If Alice paid coins to Bob, then he was presumed to have the best title to them unless another person, Carol, successfully challenged him. But Carol’s challenge was very unlikely to succeed even if she could prove that equivalent coins had been stolen from her by Alice. Since all the coins were physically alike, it was practically impossible for her to prove the specific identity of the coins in Bob’s possession with those that Carol had stolen from her.81

77 The analogy here is with the rules governing conventional inter-​bank payment systems. The rules are implied into the contracts between the participants in the system. 78 The Winkfield [1902] P 42, 60 (Collins MR). See generally Frederick Pollock and Robert Wright, An Essay on Possession in the Common Law (Clarendon Press 1888), 22–​25; Luke Rostill, ‘Relativity of Title and Deemed Ownership in English Personal Property Law’ (2015) 35 OJLS 31. For the similar rule in Scots common law, see George J Bell, Principles of the Law of Scotland (4th edn, Archibald Constable & Co 1821) vol 1, para 182. 79 (1758) 1 Burr 452 explained in David Fox, ‘Bona Fide Purchase and the Currency of Money’ (1996) CLJ 54. 80 eg Whitecomb v Jacob (1710) 1 Salk 160; Scott v Surman (1742) Willes 400, 404 (Lord Willes CJ); Banks v Whetston (1596) Cro Eliz 457*; Isaack v Clark (1615) Bulstrode 307, 310 (Dodderidge J); 1 Rolle 126, 131. 81 See Fox, ‘Banks v Whetston (1596)’ (n 31) 3–​24.



Cryptocurrencies in the Common Law of Property 6.52 A  similar principle would apply to crypto-​coins. Although the blockchain re-

cord of transactions cannot be legally constitutive of Bob’s title to the coins at his public key, it must be the best evidence of it. If Carol seeks to allege that the 5 BTC at Bob’s pkB are the proceeds of a fraud or theft then, if all other things are equal, the burden is on her to prove it by challenging Bob’s title. Bob can stand on his presumed title to the coins in any action that Carol may bring to recover the coins or their value from him. The principle is especially relevant, as we shall see, to the resolution of mixtures of crypto-​coins and the possibility of tracing them.82

4. Derivative transfers of title and tracing 6.53 One small gloss needs to be added to what we would understand by a derivative transfer of title to a crypto-​coin. The coin is just an ideational construct. It consists in the recorded transaction input that was consumed in the payment and the newly recorded transaction output that was created by it. The data strings at either side of the transaction are distinct from each other. But they are related by the transactional link between them and by the flow of monetary value that they are understood to represent. Unlike a physical coin that passes as a continuing thing from payer to payee, the object of the cryptocurrency payment is not the same thing on each side of the payment transaction. 6.54 Despite this difference, the derivative transfer explanation still holds good for

transactions between users of a cryptocurrency system. In strict analysis, the object of the payment is traced from one public key to another rather than followed between them.83 The output at Bob’s public key is the traceable product of the input at Alice’s public key because the system rules substitute Bob’s output for the consumption of Alice’s original input. Again we can make an analogy with the way conventional bank payment systems operate. Money transfers between bank accounts work by the simultaneous cancellation (or reduction) of a debt owed by the originator’s bank and the creation (or increase) of a debt owed by the beneficiary’s bank. The debt owed to the beneficiary at the end of the transaction is a different legal entity from the debt that was once owed to the originator.84 The rules of the payment system define the transactional link between the two debts, which allows the one to be treated as the traceable product of the other.

6.55 The rule of derivative transfer of title applies to payments through bank pay-

ment systems. If £100 in Alice’s bank account derived from a fraud that she had practised on Carol, then she would hold it subject to Carol’s proprietary right of rescission. Her title would be defective to that extent.85 If Alice then transferred

See paras 6.67–​6.100. 83 See further para 6.79. 84 R v Preddy [1996] AC 815, discussed at para 6.19. 85 Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281 (fraudulently induced payment traced through payment system). 82



Rules of Title and Transfer the sum to Bob’s account, then he would hold it subject to that defect in her title. Carol’s right of rescission is enforceable against its traceable proceeds and against a transferee (provided that the transferee has not extinguished the right by receiving the payment as a good faith purchaser for value without notice). Likewise with a cryptocurrency payment, Bob can take no better title to the trans- 6.56 actional output at his public key than Alice had to her input to the same transaction.86 Conventional rules of tracing would allow any defect in Alice’s title to be traced to the output at Bob’s public key.87 Bob’s title would not be indefeasible simply because it related to a newly created transactional output that was distinct from Alice’s input that generated it. 5. Purchase for value in good faith There is an important exception to the general rules of derivative transfer of title 6.57 which may be relevant to cryptocurrencies.88 These are the defences of good faith purchase for value. The defences come in an equitable and a legal form. An equitable title to any kind of personal property is extinguished against the 6.58 purchaser of the legal ownership of the property if he or she purchases for value and without notice of the competing equitable title.89 This defence would apply to cryptocurrency transactions. It would not depend on whether cryptocurrencies were characterized for legal purposes as a kind of money. The defence would mean for example that if Alice held her 5 BTC on trust for Carol but transferred them in breach of trust to Bob, then Bob would hold the output of the transaction free of Carol’s equitable claim, provided that he was a purchaser for value without notice. The same reasoning would apply if the 5 BTC held by Alice were the proceeds of a fraud she had earlier perpetrated against Carol. Carol’s right of proprietary rescission and restitution of the coins would be barred if Bob received them for valuable consideration and without notice of Carol’s claim. The valuable consideration for the transfer would have to be found in some real-​world transaction between Bob and Alice that was extraneous to the coin transaction recorded on the blockchain. As with most equitable claims enforced against third parties, Carol’s recovery against Bob would come down to kind and rigour of the inquiries that Bob was expected to make if he was to assert that he had no notice of her 86 For a general comparison between fraud and theft in relation to conventional bank accounts and cryptocurrencies, see Kelvin F K Low and Ernie Teo, ‘Legal Risks of Owning Cryptocurrencies’ in David Lee and Robert Deng (eds), Handbook of Blockchain, Digital Finance, and Inclusion, Volume 1 (Reed Elsevier 2017) 225–​48. 87 For examples where an unexercised equity to avoid a transaction was traced through payment systems, see El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 734 (Millett LJ) (rvsed on other grounds [1994] 2 All ER 685 (CA)); and Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281. 88 See generally in relation to money, Chapter 2 of this volume. 89 See generally John McGhee (ed), Snell’s Equity (32nd edn, Sweet & Maxwell 2015) paras 4.017–​4.041.



Cryptocurrencies in the Common Law of Property claim. A body of case law on notice has been developed to explain the meaning of notice in conventional money payments by bank transfer. It would need to be adapted to explain how notice would work in a pseudonymous cryptocurrency system. We return to this point later.90 6.59 Alongside the equitable defence is the less-​known common law defence of good

faith purchase for value. It applies uniquely to money and, in its codified form, to negotiable instruments such as bills of exchange and promissory notes.91 Although it is usually thought of as a defence, it is really a rule for the original acquisition of title. The rule creates a fresh, indefeasible legal title in a transferee who receives money in good faith and for value. It makes the recipient immune from the claim of any previous holder who might otherwise have retained a proprietary interest in the money. As a rule of English law, it was first formulated in 1758 to explain the currency of bank notes. It allowed a remote transferee of a stolen bank note to acquire a legal title to it. He could enforce against a bank teller who claimed to hold the note for the original owner from whom it had been stolen. Applied to cryptocurrencies, the rule would mean that if Bob was a good faith purchaser for value of 5 BTC that Alice had stolen from Carol, then he would defeat any proprietary claim by Carol to recover the coins or their traceable proceeds. He would also defeat a restitutionary claim for money had and received brought by Carol. Since Bob is an indirect recipient of Carol’s money, her claim would require her to prove that she had a legal title to the money received by Bob.92

6.60 Unlike its equitable counterpart, the common law rule of good faith purchase for

value would only apply to cryptocurrencies if the common law characterized them as money for the purposes of the rule, and if the parties to transaction chose to treat them as money rather than as an investment commodity bought with a conventional State-​denominated currency. Apart from this one case, it matters actually very little to the common law of property whether or not cryptocurrencies are characterized as money. Property and money are not opposite legal categories: all the assets used as means of monetary payment are property of one kind or another. The characterization of some of them as money only affects the kind of property rules that apply to them. If they are money, then the common law rule of good faith purchase for value applies to them and they are exempted from the full force of the rule nemo dat quod non habet.

6.61 As the authorities now stand, it is uncertain whether cryptocurrencies would

be characterized as money in the law of property. The view advanced earlier in

See paras 6.97–​6.100. 91 Miller v Race (1758) 1 Burr 452; Clarke v Shee (1774) 1 Cowp 197; Bills of Exchange Act 1882, s 29. 92 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, discussed at para 6.103. 90



Rules of Title and Transfer this book is that they are not money, at least for the purposes of monetary regulation and the criminal law.93 Historical experience shows that the application of the common law rule turns on whether a certain asset performs the usual functions of money rather than on the category of asset it belongs to. These functions are generally understood to mean that the asset is used as a medium of exchange, a unit of account, and as a store of nominal monetary value. The decision in Miller v Race applied to rule to banknotes because by the middle of the eighteenth century the public at large treated them as functionally equivalent to coins.94 But Lord Mansfield’s central argument that banknotes were treated ‘as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind’95 might become a reason against characterizing cryptocurrencies as money for the purposes of the rule. The number of people who use cryptocurrencies is still relatively small, and the number of cryptocurrency transactions counts as only a small fraction of the payments made with conventional State-​denominated currencies. The argument for characterizing cryptocurrencies as money would become stronger if they became more commonly accepted as alternative payment media alongside traditional currencies.96 Even so one possible objection would remain. Unlike the bank notes considered 6.62 in Miller v Race, cryptocurrencies are not denominated in a State-​authorized unit of account. The understanding shared by users of a cryptocurrency is that each crypto-​coin has a nominal value expressed in units special to its own system. Thus a transactional output representing five Bitcoins is valued in terms of Bitcoin units even though it can be exchanged for a real-​world currency denominated in State-​authorized units of account, such as pounds sterling or US dollars. This limitation may be the one remaining stricture of the State theory of money, advanced by the early twentieth-​century economist Georg Knapp and adopted by Dr Francis Mann in the early editions of his book on The Legal Aspect of Money.97 In its strongest form, the State theory would have limited the legal definition of ‘money’ to things issued by a State-​sanctioned monetary authority and denominated in its national unit of account.98 Money would have been confined to assets with legal tender status. The growth of other forms of money, whether created privately or by central banks, has made the strong form of the State theory too narrow to be practically tenable.99 But its requirement that money assets be

93 See Chapters 2 and 3 of this volume. 94 Fox (n 79); and Fox (n 22) paras 8.10–​8.13. 95 (1758) Burr 452, 457. 96 See further Geva and Geva in Chapter 11 of this volume. 97 Frederick A Mann, The Legal Aspect of Money (1st edn, OUP 1938). 98 ibid 7. 99 Sáinz de Vicuña (n 45).



Cryptocurrencies in the Common Law of Property denominated in a legally sanctioned national unit of account probably remains essential to a common law understanding of money. 6.63 Even if a cryptocurrency were eventually characterized as money in some gen-

eral legal sense, the parties to a transaction would need to treat it as money if the common law rule of good faith purchase were to apply to it. It would need to have been tendered at its nominal value in discharge of a debt or obligation denominated in the units of the currency system. The rule would not apply if the cryptocurrency were bought and sold as an investment, or where it was tendered, not for its own nominal value, but for speculation on its variable capital value against real-​world currencies.

6.64 This is the effect of Moss v Hancock.100 Hancock owned a £5 gold coin that had

been presented to him as a gift. Like many specially issued commemorative coins nowadays, £5 gold pieces were legal tender, although the coin in the case had never been put into circulation. A  thief stole the coin and exchanged it at the appellant’s second-​hand jewellery shop for five sovereign coins of £1 each.

6.65 The question was whether the shopkeeper was liable to make restitution of

the £5 gold piece to Hancock under criminal legislation for the restoration of stolen property then in force.101 The shopkeeper’s contention was that he was not liable since he had received the coin as a purchaser for value in good faith, so that he had an indefeasible title to it. Darling and Channell JJ in the Divisional Court disagreed with him: the gold piece was the subject of a sale (as a medal might have been) to a dealer in curios, and the fact that it had been exchanged for an equivalent face value in sovereigns did not weigh against this conclusion. The appellant could only have availed himself of the bona fide purchase rule if he had received the coin in payment for goods purchased or in discharge of a debt. The case shows how an asset can switch between monetary and non-​monetary status, depending on how the parties to a transaction choose to treat it.

6.66 For the time being, therefore, cryptocurrencies denominated in their own cur-

rency unit are unlikely to count as money for the purposes of the common law good faith purchase rule, particularly if the parties to a transaction treat them as investment commodities. It may be, however, that that limitation will make little difference to the recovery prospects of person whose crypto-​coins have been stolen or taken by fraud. The victim of a theft or fraud usually has concurrent rights of recovery in equity, and they would in any event be barred by the operation of the separate equitable defence of purchase for value without notice.

100 [1899] 2 QB 111. 101 Larceny Act 1861, s 100.



Mixture, Following, and Tracing

IV.  Mixture, Following, and Tracing A. Mixtures of cryptocurrencies A consequence of treating cryptocurrencies as an object of property is that the 6.67 standard rules of following and tracing would apply to them. They may allow cryptocurrencies to be identified in and traced through mixtures. An example of a mixture would be where a 5 BTC input from a legitimate transaction between Alice and Bob and another 5 BTC input from a fraudulent transaction between Alice and Carol were each identifiable with two outputs associated with the same public key controlled by Bob. The combined balance of 10 BTC value associated with his public key would derive from two distinct transactions. If Bob then paid 5 BTC to David, the question would be whether the output at David’s public key derived from the legitimate Alice-​Bob transaction or the fraudulent Carol-​Alice transaction or in some proportion between the two. Some modifications to the standard tracing rules may be needed to allow ana- 6.68 lytical differences between cryptocurrencies and conventional State-​denominated currencies issued in the form of bank notes, coins, and incorporeal bank balances. But if tracing is successful, it may provide the evidential foundation for an equitable proprietary claim against the real-​world holder of a public key. Bob (or David) may find himself liable to restore 5 BTC to Carol as the proceeds of the fraud perpetrated on her by Alice. Significantly, if Bob (or David) were insolvent the specific traceability of Carol’s coins might exempt them from the definition of the defendant’s bankrupt estate so that Carol could recover them in priority to his general creditors. Tracing may also support a personal claim for restitution through an equitable action for knowing receipt.102 1. Mixing in practice Obviously, the actual mixing of crypto-​coins is more complex than the simple 6.69 example just given.103 Users of cryptocurrencies may deliberately mix their coins to frustrate the proof of transactional links between payments or to obscure their real-​world identity. Dishonest users resort to some distinctive payment techniques. They split large amounts of stolen coins between multiple public keys. A sophisticated version of splitting involves setting up ‘peeling chains’ where small amounts

See para 6.105. 103 For surveys, see Sarah Meiklejohn and others, ‘A Fistful of Bitcoins: Characterizing Payments among Men with No Names’ (December 2013) The Advanced Computing Systems Association accessed 26 August 2018; Möser (n 48) 2.1–​2.3; Joseph Bonneau and others, ‘Mixcoin: Anonymity for Bitcoin with Accountable Mixes’ in Nicolas Christin and Reihaneh Safavi-​Naini, Financial Cryptography and Data Security FC 2014 (Springer 2014); Narayan and others (n 11) 151–​59. 102



Cryptocurrencies in the Common Law of Property are peeled off large holdings held at a single public key. The peeled chains are then recombined, and the peeling process repeated. 6.70 Mix services and shared wallet services obscure the connection between input and

outputs in payment transactions. The aim is not necessarily dishonest. Suppose that Alice wishes to pay 5 BTC to Bob without disclosing her public key.104 Alice transfers her coins to one of many designated public keys controlled by a mixer service. If the service provider has enough clients, it will receive payments from many different users, with each payment going to one of its many keys. It then pays 5 BTC to Bob, using coins from another public key and paid in by a different client. This breaks the specific transactional connection between the initial input at Alice’s public key and the output at Bob’s.105

6.71 Wallet service providers may routinely make payments in this way on their clients’

behalf. The system requires the service provider to keep records to match inputs with outputs. Alice’s anonymity in the process is only secure so long as the provider destroys the records after each transaction, which it usually undertakes to do. If the inputs and outputs were in the same amount, then it would generally be possible to identify one as the proceeds of the other. Users of shared wallets are therefore encouraged to divide their inputs into a number of smaller output units.

6.72 Some mixer services deliberately operate to obscure the transactional history of

stolen coins. Despite their name, so-​called coin laundries do nothing to clear the taint of illegality carried on the coins and their proceeds. They merely make proof of the coins’ unlawful origins very difficult indeed for law enforcement agencies or honest users of the system. They exploit to an extreme the legal rule the burden of proving a competing title to money lies on the person who wants to challenge the title of the person currently in control of it.106

6.73 Blockchain transactions are not entirely anonymous. Blockchain cluster analysis

can ascertain the probability that a certain public key is associated with an identified person in the real world.107 When inputs at distinct public keys are consumed to make a single output or when the change from a transaction is paid to a new public key, it can be shown that the public keys are controlled by the same person. Combined with test purchases made to known public keys, it is possible to identify the real-​world organization that controls them. The clustering of coins known to be stolen at certain public keys might taint all coins associated with the same key with doubts about the lawfulness of how the key-​holder obtained them. This

104 See Möser (n 48). 105 In principle, the private law rules of tracing would allow the output at Bob’s public key to be identified as the proceeds of the input at Alice’s public key. The terms of the mixer service contract would allow the one to be attributed to the other. See further para 6.75. 106 See para 6.50. 107 See Meiklejohn and others (n 103).



Mixture, Following, and Tracing has a direct bearing on taint analysis of the blockchain and the meaning of constructive notice applied to cryptocurrency transactions.108 B. Tracing and cryptocurrencies Three general points run through this whole account of tracing and 6.74 cryptocurrencies. 1. Cryptocurrencies are traced not followed The identification of cryptocurrencies in payments and mixtures would strictly be 6.75 an exercise in tracing rather than following. The distinction was explained by Lord Millett in Foskett v McKeown: ‘Following is the process of following the same asset as it moves from hand to hand. Tracing is a process of identifying a new asset as the substitute for the old.’109 Crypto-​coins are data strings recording the inputs and outputs of identifiable transactions on the blockchain. As we saw, the input data string does not pass from one public key to another.110 It is instead consumed in the transaction and replaced by a new output at the payee’s public key. The output data string is the substitute for the original data string that was used as the input to the transaction. Strictly, the two data strings are distinct assets. It is only the BTC value associated with the input that is traced into the output. To this extent, the process is the same as tracing value through a payment of incorporeal bank balances. 2. The blockchain and traceability The unique transactional history recorded in some crypto-​coins, such as Bitcoins, 6.76 may mean that it can never be mixed in an absolute sense. So long as the transactional history of the data representing the coin (or a fractional part of it) is verifiable on the system, then it may never completely lose its distinguishing identity. It is different from an ordinary coin or banknote, which carries none of its transactional history with it as it passes from hand to hand. Following a coin or a banknote requires the claimant to prove its transactional history by extrinsic evidence or by relying on the artificial rules of identification developed by the courts. But the theoretical traceability of crypto-​coins should not make the victims of 6.77 cyber-​theft or cyber-​fraud unduly optimistic about the prospects of recovering their property. The unscrambling of a mixture always depends on the sophistication of the identification processes at hand and a choice about the artificial identification rules that the courts apply to the mixture. As we have seen, the splitting, peeling, and mixer services that have been developed to make Bitcoins

See paras 6.97–​6.100. 109 Foskett v McKeown [2001] 1 AC 102, 127 (Lord Millett). 110 See paras 6.18–​6.19. 108



Cryptocurrencies in the Common Law of Property fully fungible in their exchange value are designed to make the specific traceability of Bitcoin value very difficult indeed.111 3. Pseudonymity and tracing 6.78 The final point relates to pseudonymity. Even if the transactional history of a crypto-​coin is traceable, evidence extrinsic to the blockchain would be needed to identify the people in the real world who control the public keys recorded on it. Unlike the tracing of traditional currencies, the challenge may be less in plotting the passage of the money from its source to its destination than in identifying the people behind each stage of the process. This goes beyond saying that the victim of a cyber-​theft or cyber-​fraud needs to find a real person to sue, rather than just their public key. The artificial rules of identification developed by the courts depend on the fault or innocence of the person handling the money.112 The identity of the person behind the public key may therefore be relevant to deciding which tracing rule a court should apply. C. Attribution in cryptocurrency transactions 1. Attribution by the blockchain record or by an external transaction 6.79 We begin with the simple case outlined earlier:113 Alice defrauds Carol of 5 BTC at her public key, pkC, and pays it to a newly created public key, pkA, that has no other transaction outputs associated with it. She then transfers the sum from pkA to Bob at pkB. Provided that the usual pre-​conditions to tracing are satisfied,114 Carol could trace the value of her original 5 BTC into the transactional output now at pkB. They are linked by two transactions on the system (pkC -​pkA and pkA -​ pkB), each of which consists in the corresponding consumption and creation of inputs and outputs. There is no need to look to any evidence extraneous to the blockchain to prove that the parties would have intended the outputs to be attributable to the inputs. The attribution link is inherent in the operation of the system, and the parties must be taken to have understood this. 6.80 It may be, however, the parties were using the payments recorded on the

blockchain to carry out some external transaction between themselves in the real world. For example, Alice might have been buying goods from Bob, and the 5 BTC represented the purchase price due to him. If so, Carol would have to elect between two possibilities for tracing. She could trace into either the 5 BTC 111 See paras 6.69–​6.73. 112 eg Re Hallett’s Estate (1880) 13 Ch D 696, 727–​28 (Jessel MR); Re Diplock [1948] Ch 465, 525–​26 per curiam; see generally Lionel D Smith, Law of Tracing (OUP 1997) 85–​88; 177–​81. 113 See para 6.67. 114 The original asset must have been held on a fiduciary relationship or the transaction between the claimant and the first transferee must have generated a distinct equitable title to the asset. The logic of the requirements has been widely criticized, but they have not yet been overruled: Foskett v McKeown [2001] 1 AC 102, 128–​29 (Lord Millett).



Mixture, Following, and Tracing payment received by Bob or the goods received by Alice in return. Tracing into the goods might seem the better option since very likely Bob would have received the 5 BTC as purchaser for value without notice. Any equitable title that Carol might otherwise have asserted against him or the 5 BTC output at pkB would have been extinguished. But tracing into the goods now in Alice’s hands would require Carol to rely on evidence external to the blockchain. She would need to know that there was a sale between Alice and Bob which identified the goods as the consideration given in return for her money. Alice and Bob’s intentions expressed in the real-​world transaction between them would define the goods as the traceable product attributable to the coins. D. Tracing through mixtures 1. Balances and transactional outputs Suppose next that Bob already has 5 BTC associated with his public key, pkB, be- 6.81 fore the 5 BTC from Alice is paid to it. There would then be a net balance of 10 BTC units of value. But each transactional output generating the balance would be separately recorded on the blockchain since, as we saw earlier, the blockchain maintains a transaction ledger rather than an account ledger. While the value derived from the two sources may be mixed, the data strings that embody them remain distinct. Each keeps its unique transactional history just as it would if it had been the only transaction output associated with the public key. The distinction between transactional outputs at the same public key is important 6.82 to our analysis of the next transaction from the same public key. We suppose now that Bob pays 5 BTC from pkB to David at pkD. The question is whether he uses the 5 BTC derived from Carol or the 5 BTC derived from Alice as the input. The answer may not be provided by the system itself. Provided that there was an unspent balance of 5 BTC at pkB, the system would validate the transaction to David. The consumption of one coin or the other would be arbitrarily determined by the system. Unlike the simpler transaction where Alice drew on an ‘unmixed’ balance at pkA to pay Bob, the system rules could not resolve the legal problem of how to attribute the output at pkD to a specific previous input. An evidential impasse would have been reached which could only resolved by resorting to artificial presumptions. E. Cryptographic and legal rules for tracing through mixtures Cryptographers have proposed three possible ways out of the impasse: ‘poison’, 6.83 ‘haircut’, and ‘first in first out’.115 The cryptographers' concern is slightly different

115 The explanation in this section draws heavily on Ross Anderson and others, ‘Bitcoin Redux’ (May 2018) Cambridge University Computer Laboratory 28 accessed 23 July 2018.



Cryptocurrencies in the Common Law of Property from the one here, which is to prove a specific tracing link with a view to asserting a property right over a certain transactional output. Their concern is to find a formula for determining which coins in the system are clean and which are ‘tainted’ because they derive in some way from criminal activity. Coin exchanges try to maintain the integrity of the system by only selling clean coins to their customers. They use blockchain analysis techniques to test the origins of the coins they sell.116 1. The poison approach: a punitive causation rule 6.84 The poison approach takes the most extreme approach to tainting. Any output that derives from a criminal transaction is treated as 100% tainted by it. On that approach, the 5 BTC remaining at Bob’s pkB would be completely tainted, as would the 5 BTC at David’s pkD. The result of the poison approach is that the taint spreads ever wider, infecting more and more coins as transactions with them extend and spread. 6.85 The poison approach to taint analysis would not be the right starting point for

rules of attribution in private law tracing. It works by a punitive theory of causation rather than a theory of exchange attribution, which was the rationale of tracing explained in Foskett v McKeown.117 In the end the private law rules are concerned with identifying a specific asset which is the object of a property right. They are not concerned with penalizing people because their money derives in a loose causal sense from criminal wrongdoing.

2. The haircut approach: proportionate division 6.86 The haircut approach works by determining proportionate shares. Outputs are tainted in proportion that the coins at the payer’s public key were tainted. In our example of the Bob-​David transaction, the remaining 5 BTC at Bob’s pkB would be deemed 50% tainted, as would the 50% at David’s pkD. The approach has an intuitive appeal: the unspent transaction outputs at each public key are treated as a mixture of fungible value, which passes to each new output of a transaction. The haircut approach is the default method of taint analysis used by blockchain analysts. The taint spreads with every new transaction, but, unlike the poison analysis, it divides the BTC value of the taint into ever-​smaller amounts. The proportion of the taint diminishes as outputs are mixed again. Eventually, the proportion of a taint associated with outputs at a public key becomes too small to be easily discovered. 6.87 The haircut approach has a strong analogy in the private law rules of tracing.

Proportionate sharing is the default approach taken at common law and in equity when fungible property is mixed or where an asset is bought with mixed money.

116 See further paras 6.84–​6.88. 117 [2001] 1 AC 102, 137 (Lord Millett).



Mixture, Following, and Tracing In Indian Oil Corporation Ltd v Greenstone Shipping SA (Panama),118 oil belonging to different parties was mixed. They held it as owners in common in proportion to their actual ascertained contributions. In Foskett v McKeown, a trustee wrongfully paid £20,440 trust money to himself and used it to pay two of the five annual premiums on a life insurance policy. The trust beneficiaries were awarded a 40% proportionate share in the policy proceeds when the trustee died. The trend of recent cases on tracing payments through current bank accounts has also been to allocate any remaining balance in the account in proportion to the credits of individual trust claimants’ money. If, for example, Carol wrongfully mixed £100 money from the Alice trust with £100 belonging to the Bob trust, and then withdrew £100 from the account, the remaining balance and the withdrawal would be attributed in half shares between Alice and Bob.119 When applied to a current bank account, the proportionate allocation approach has the virtues of relative simplicity and analytical accuracy. When there are many transactions in the account, it is easier to take a proportionate approach to division than to match specific debits and credits. It is also consistent with the modern analysis of a current bank account. The account consists in a debt for a single net balance rather than a series of individuated debts, each of which is created by a specific deposit.120 3. The first-​in-​first-​out approach: Clayton’s Case Applying the first-​in-​first-​out approach to a blockchain transaction means that 6.88 the earliest unspent transactional outputs associated with a key (in this sense, ‘first in’) are deemed to be the first consumed as inputs to the next transaction (in this sense, ‘first out’). The rule is relatively easy to apply because every transaction is time-​stamped. In our example of the Bob-​David transaction, the 5 BTC transferred to David would be deemed to consume the earlier 5 BTC unspent transactional output attributable to Bob. The 5 BTC remaining at Bob’s pkB would represent the proceeds of Carol’s original money. The advantage of the first-​in-​ first-​out approach is that it tends to concentrate the taint in fewer but larger transactional outputs. Unlike the haircut approach, the taint is not spread ever more widely and thinly across transactions. The cryptographers’ first-​in-​first-​out approach also has an analogy in private 6.89 law: the rule in Clayton’s Case.121 Traditionally, Clayton’s Case was used as the default method of allocating mixed funds in a current bank account which were

118 [1987] QB 345. 119 eg Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22; Re French Caledonia Travel (2004) 22 ACLC 498. See also Russell-​Cooke Trust Co. v Prentis [2002] EWHC 2227 (ch), [2003] All ER 478. 120 N Joachimson v Swiss Bank Corporation [1921] 3 KB 110. For the historical evolution of the notion of a bank account as a debt, see Re French Caledonia Travel Ltd [2003] NSWSC 1008, (2003) 48 ACSR 97, paras 48–​55 (Campbell J). 121 Devaynes v Noble, Clayton’s Case (1816) 1 Mer 529, 572.



Cryptocurrencies in the Common Law of Property attributable to two or more contributors (unless the fault of one of them justified favouring the other contributor with a more advantageous identification rule that tended to preserve his or her contribution to the mixture).122 Withdrawals from the account are treated as consuming credits to the account in the order that they were made in. The rule in Clayton’s Case has fallen out of favour in recent tracing cases. It is difficult and expensive to apply to complex mixtures with many contributors.123 6.90 More significantly, its use in bank money tracing cases rests on an illogical foun-

dation.124 The rule was originally devised to allow the appropriation of debits to credits between the holder of a bank account and the bank. It rested on the theory that a bank account was a series of debts, each created by a single deposit and then reduced or cancelled as withdrawals were made against it. That is no longer the modern analysis: the current balance on the account stands as single and undivided debt without regard to the several items which, as a matter of history, contribute to that balance.125 The rule was never intended to be used for apportioning the balance due to the holder of a bank account between two or more third-​party claimants whose money had been paid into the account.126

6.91 Nonetheless the first-​in-​first-​out rule in Clayton’s Case may still be appropriate

starting point for tracing cryptocurrency payments through a mixture at a public key. The transactional record on the blockchain corresponds more closely to the series of individuated debts that the rule in Clayton’s Case was originally developed for. Each unspent transactional output at the public key retains its distinct transactional history. Outputs are not combined to generate a new entity equal to the total unspent balance at the key. The first-​in-​first-​out approach may work more naturally on a transactional ledger than it would on the account-​based ledger system used for conventional bank money. It has been described as ‘deterministic and, at least in principle, straightforward.’127

6.92 First in first out would therefore be the appropriate tracing rule to apply where the

money of two or more innocent claimants was mixed at a single public key. In our example of the Bob-​David transaction,128 the 5 BTC transferred to David would See further paras 6.93–​6.96. 123 Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22; Commerzbank AG v IMB Morgan Plc [2004] EWHC 2771 (ch); [2005] 2 All ER (Comm) 564. 124 DA McConville, ‘Tracing and the Rule in Clayton’s Case’ (1963) 79 LQR 388; Smith (n 112) 183–​94. 125 Roy M Goode, Payment Obligations in Commercial and Financial Transactions (Sweet & Maxwell 1983) 12–​13; Sheelagh McCracken, The Banker’s Remedy of Set-​Off (2nd edn, Butterworths 1998) 24; and Re Footman Bower & Co Ltd [1961] 1 Ch 443, 450 (Buckley J). The pivotal decision was N Joachimson v Swiss Bank Corporation [1921] 3 KB 110. 126 See Re French Caledonia Travel Ltd [2003] NSWSC 1008, (2003) 48 ACSR 97, paras 48–​55 (Campbell J), and Fox (n 22) paras 1.46–​1.51. 127 Anderson and others (n 115). 128 See para 6.82. 122



Mixture, Following, and Tracing be treated as a payment of Bob’s own money. The 5 BTC remaining at Bob’s pkB would represent the proceeds of Carol’s original money. If Bob then made a second payment of 5 BTC to Erica at pkE, Carol would trace to the unspent output at pkE. 4. Variations from Clayton’s Case The first-​in-​first-​out rule of appropriation would only be a starting point for tra- 6.93 cing flows of BTC value through transactions. The legal tracing rules are artificial presumptions designed to resolve evidential uncertainty. They could be displaced if the parties to the transaction had a different intention or if one of the parties who created the mixture was at fault.129 Even if the two contributors to the mixture were innocent of any wrongdoing to 6.94 the other, the rule in Clayton’s Case could sometimes be displaced, as it would in mixtures of conventional bank money. The mixed fund of value remaining at the public key and the outputs of any further transactions from it would be divided proportionately between the contributors regardless of the sequence of transactions associated with the public key. The examples given in the cases are where the claimants were victims of a common fraud in a shared investment scheme. The understanding that they would share the risks and returns of investment proportionately between them would extend to the risks of fraudulent appropriation of their funds.130 In the end, the proceeds of their value would be traced and recovered on the haircut or proportionate-​share approach. More commonly, however, the rule would be displaced where the holder of the 6.95 public key was guilty of some wrong against the claimant.131 Wrongdoing usually consists of some fraud or breach of fiduciary duty committed against the claimant, or in receiving funds with notice of their tainted origins. The holder could not rely on his or her own wrong to take advantage of the evidential uncertainty created by the mixture. Let us return to the example where Alice defrauds Carol of 5 BTC and procures a transfer of them to herself at pkA. Alice then transfers 5 BTC to Bob at pkB, who then transfers an additional 5 BTC to the same public key. Suppose also that Bob receives the 5 BTC from Alice with notice of her fraud. Even if he then pays 5 BTC to David, Carol could treat the remaining 5 BTC unspent output at pkB as the traceable proceeds of her money. Since Bob is a wrongdoer, the actual order of transactional outputs would be

129 See generally Smith (n 112) 77–​89, 195–​206. 130 Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22, 31 (Dillon LJ), 41 (Woolf LJ); Russell-​Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch); [2003] All ER 478; Ontario Securities Commission and Greymac Credit Corp (1985) 55 OR (2d) 673. For a similar approach to distributing the unspent residue of a public appeal, see Re British Red Cross Balkan Fund [1914] 2 ch 419. 131 The leading examples involving conventional bank money are Re Hallett’s Estate (1880) 13 e Otway [1903] 2 ch 356.



Cryptocurrencies in the Common Law of Property displaced when Carol traced against him. It would be irrelevant that the system rules would demonstrate a prima facie transactional link between Carol’s money and the first output at Bob’s public key. Bob’s fault would displace the operation of the first-​in-​first-​out rule. The legal rules of tracing would supplant the system rules recording transactional links on the blockchain. 6.96 Attributing fault to one of the parties requires the claimant to rely on evidence

extraneous to the blockchain record. It requires at the very least that the claimant can identify the real-​world identity of a person who controls the public key. It would therefore be vulnerable to the special evidential difficulties of tracing in a pseudonymous and decentralized system. F. Notice in cryptocurrency payments

6.97 The equitable doctrine of notice would be relevant to cryptocurrency payments

in two main ways. It would determine whether the transferee of crypto-​coins took them as a purchaser for value without notice of any equitable claim affecting them.132 It would determine also whether the transferee took them as a wrongdoer for the purposes of the special rules of tracing.133

6.98 The meaning of notice in payments of conventional bank money is now reasonably

settled. Notice can be either actual or constructive.134 Since most cryptocurrency payments happen pseudonymously, it would be rare that a recipient would directly know enough about the origins of a coin or the real-​world identity of a payer to have actual notice that it derived from a fraud. A recipient might have actual notice if the fraud had been well publicized and the public key from which the payment came was notorious for unlawful activity. In practice, if notice was to figure at all, it would be constructive notice that mattered. The test supposes that the recipient is fixed with notice of facts that it would have discovered if it had made reasonable inquiries. The due level of inquiry is defined by the norms commonly accepted as usual and proper in the kind of transaction in question. Notice resolves itself into a mixed question of ‘industry practice’ and the commercial propriety of taking risks in relation to unknown third-​party interests.135 The recipient can start with the assumption that it is dealing with honest people.136 But it must make inquiries if there is a ‘serious possibility’ a third party has a proprietary right to the money received or if the facts known to it would give a reasonable person

See para 6.58. 133 See para 6.95. 134 Barclays Bank plc v O’Brien [1994] 1 AC 180, 195–​96 (Lord Browne-​Wilkinson). 135 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) [2011] EWCA Civ 347; [2012] Ch 453; Papadimitriou v Crédit Agricole Corpn and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265. 136 Macmillan Inc v Bishopsgate Investment Trust Plc (No.3) [1995] 1 WLR 978, 1014 (Millett J). 132



Mixture, Following, and Tracing serious cause to question the propriety of the transaction.137 If this much is known to the recipient, it is fixed with constructive notice of an interest if it made a considered choice to look no further. The test used in bank payment transactions supposes that the recipient has some 6.99 knowledge of the real-​world identity of transferor and the kind of transactions from which the money derives. Bank transactions operate between account holders whose identity can at least be verified against standard KYC checks. In a cryptocurrency transaction, however, none of that information is likely to be known, or at least known with any great probability. The recipient’s knowledge of the provenance of coins would have to be gathered from its analysis of the blockchain record or from published analyses of tainted coin transactions.138 As we saw, there is no consensus yet about the proper approach to identifying tainted coins,139 and taint-​tracking services may differ in the identified probabilities of risk associated with suspected coins.140 The poison and haircut approaches to taint analysis may report a greater degree of tainting than is consistent with the rules of tracing applied in private law. We might imagine that an industry practice would develop that a certain pub- 6.100 lished record of blockchain tainting was regarded as a standard for testing coin transactions. A failure to consult the record might amount to constructive notice of any adverse risk disclosed by it. Eventually, industry norms may emerge among coin exchanges that hold themselves out as the leading or responsible players in the market. Even so, a tension is unavoidable between traditional court-​enforced standards of notice and the aims of cryptocurrency designers and users. The courts’ approach to risk-​taking in conventional payment transactions has been informed by standards of commercial ethics, which require a recipient to have some regard to the risk that he or she is handling money that may belong to another.141 The designers of cryptocurrency technology, however, are aiming to develop complete anonymity and fungibility in payments, so as to reduce transaction costs.142 The price of that development is the elimination of adverse legal titles that might otherwise have been recognized in the victims of fraud. The development favours an extreme form of security of transaction over security of interest, achieved by

137 Papadimitriou v Crédit Agricole Corpn and Investment Bank [2015] UKPC 13, [2015] 1 WLR 4265, [20] (Lord Clark JSC). 138 eg Department of Computer Science and Technology, ‘The Taint Chain’ (University of Cambridge) accessed 24 July 2018. 139 See paras 6.83–​6.88. 140 See Anderson and others (n 115) s 3.4. 141 Compare the approach to dishonest risk-​taking in claims for dishonest assistance in breach of trust: Royal Brunei Airlines Sdn Bhd v Tan [1995] AC 378, 389–​90 (Lord Nicholls); and Cowan de Groot Properties v Eagle Trust [1992] 4 All ER 700, 707 (Knox J). 142 One of the systemic aims of the Bitcoin protocol was to eliminate the cost of mediating disputes between users: see Nakamoto (n 16). For the attempts to develop powerful forms of anonymity by the Zerocash and Zerocoin system, see Narayanan and others (n 11) 159–​67.



Cryptocurrencies in the Common Law of Property technical design rather than by legal rules.143 In the end, general law tests of constructive notice can only be as good at protecting the security of a defrauded owner’s interest as the kinds of technology they are applied to.

V. Remedies 6.101 The recognition of property in cryptocurrencies is pointless unless private

law also supplies effective remedies to enforce the claimant’s interest. Titles to cryptocurrencies would in fact lend themselves well to enforcement by some kinds of non-​possessory remedies at common law and in equity. A. Common law remedies

6.102 Since crypto-​coins are intangible, a legal title to them could not be directly

enforced by a tort action for wrongful interference with goods. Actions in conversion or trespass, which are the usual means of enforcing legal titles to personal property, would not be available. This follows, as we saw, from the decision in OBG Ltd v Allen144 which confined the possessory torts to their traditional domain in protecting titles to corporeal property capable of physical possession.145

6.103 That limitation would not apply to a proprietary restitutionary action which

aimed at the direct enforcement of the claimant’s legal title in the crypto-​coins and awarded the claimant the value of the crypto-​coins at the point when the defendant first received them. It would not rest on any theory of tortious interference with possession.146 The claim would commonly be enforced through an action for money had and received. Despite its name, the availability of the action would not depend on whether crypto-​coins received were characterized as money. The action has been used, for example, to allow the value of stolen intangible carbon credits to be recovered. The credits were a kind of intangible property but were clearly not money.147

6.104 Some indirect protection through the possessory tort actions would also be pos-

sible. The actions would be available to protect wrongful conversion of computer hardware or a written document that recorded a user’s private key. Where the 143 The distinction is a classic theme in the literature on commercial law: eg Mitchell Franklin, ‘Security of Acquisition and Transaction’ (1931) 6 Tul LR 589; Lindsay Ellis, ‘The Transfer of Moveables by a Non-​Owner’ (1980) 55 Tul LR 145. 144 OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1. 145 See para 6.29. 146 Lipkin Gorman v Karpnale Ltd. [1991] 2 AC 548; Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch); [2013] Ch 156, [92] (Stephen Morris QC). 147 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch); [2013] Ch 156, [84]–​[94] (Stephen Morris QC).



Remedies defendant’s interference was directed at using the crypto-​coins accessed by the private key, the claimant’s damages should include the market value of the crypto-​ coins, at least in cases where the conversion was permanent.148 The same would be true if defendant detained the hardware or record only temporarily but in the meanwhile used the private key to spend the crypto-​coins.149 B. Equitable remedies A claimant’s best prospects for proprietary protection of title would be in equity. 6.105 An equitable title enforced through a constructive or resulting trust or through an equitable lien does not require the object of the claimant’s interest to be corporeal. Indeed, in many of the leading cases, the claimant has enforced a title against a fund of incorporeal bank money.150 A personal remedy to recover the value of cryptocurrency would also lie through an action for knowing receipt.151 It would not matter whether the cryptocurrency was characterized as money or as a commodity. In Re Montagu’s ST, Megarry V-​C assumed that the action would—​in principle—​lie even when the defendant received personal chattels.152 The claimant would need to prove that the defendant received the crypto-​coins with some unconscionable knowledge of the claimant’s interest, which would bring into play some of the factual inquiries needed to prove constructive notice of it.153 A cryptocurrency user who was the victim of a theft or fraud might not in fact 6.106 be limited in his or her prospects of recovery by the need to be found on an equitable, rather than a legal, title. The trend of recent authorities has been to recognize concurrent equitable titles to trace and recover misapplied money.154 The claimant is not left to rely on a retained or revested legal title, which would have been vulnerable to the old rule that the common law cannot follow or trace money through a mixture.

148 BBMB Finance Ltd v Eda Holdings Ltd [1990] 1 WLR 409. On the distinction between permanent and temporary conversions, see generally Anthony Hudson, ‘Money Claims for Misuse of Chattels’ in Norman Palmer and Ewan McKendrick (eds), Interests in Goods (2nd edn, Taylor & Francis Ltd 1998). 149 cf Sollaway v McLoughlin [1938] AC 247; IBL v Ltd v Coussens [1991] 2 All ER 133. 150 Re Hallett’s Estate (1880) 13 ch D 696; Foskett v McKeown [2001] 1 AC 102. 151 BCCI (Overseas) Ltd v Akindele [2001] ch 437. 152 Re Montagu’s ST [1987] Ch 264. 153 See paras 6.97–​6.100. 154 A  thief is said to hold stolen property on a constructive trust:  Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669, 715–​16 (Lord Browne-​Wilkinson). The victim of a fraudulent misrepresentation can rely on an equitable title to proprietary rescission which leads to the recognition of a resulting trust: eg El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717, 734 (Millett LJ) (rvsed on other grounds [1994] 2 All ER 685 (CA)); Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281, 321-​23 (Rimer J).



Cryptocurrencies in the Common Law of Property

VI. Conclusion 6.107 Fitting cryptocurrencies into the common law of property may not be an easy task,

but it is not impossible. Once the data comprising crypto-​coins are understood for what they are, they should be a suitable object of property at common law and in equity. The old binary conception of personal property consisting of choses in possession and choses in action should not be an obstacle, if indeed it ever was. With some necessary adaptation to allow for the intangibility of crypto-​coins, the usual rules of derivative transfer of title and tracing could apply to them.

6.108 Granted, the common law has no ready-​ made rules especially designed for

cryptocurrencies. But that very absence of rules may be as much an adaptive strength as a systemic failing. The common law grows by a process of principled analogy between the old and the new. Incremental responses to practical innovation have been the driver of all common law development. It has rarely been left with no answer at all. The common law can therefore provide a default set of property principles to govern cryptocurrency transactions.




I. Introduction II. Cryptocurrencies as Res


7.05 A. What is a unit of cryptocurrency? 7.06 B. Fixed lists or numerus clausus 7.09 C. Possession? 7.15 D. Specificity 7.16 E. Publicity 7.18 F. Analogical addendum 7.21

III. Implications of Recognizing Cryptocurrencies as Res

A. ‘Ownership’? B. Vindication and possessory actions C. Acquisitive prescription and original acquisition

IV. Conclusion

7.23 7.24 7.26 7.31 7.36

I. Introduction Cryptocurrencies have developed quickly: governments’, regulators’, and markets’ 7.01 reactions to them have not been uniform. As with most new technological or societal innovations, the appropriate application of laws and existing legal principles to the new is in the process of being explored. The interaction between the law of property and such cryptocurrencies is an important new frontier, which poses questions about cryptocurrencies as objects of property. While civilian and mixed legal systems of property law diverge substantially from the common law approach to property law, they are all faced by the same challenge as regards cryptocurrency. The nub of the matter is that property lawyers are confronted with what is arguably a new variety of res (ie object of property), which, in turn, triggers deeper questions about the applicability of traditional property law rules, particularly the specialized subset of property rules which are concerned with money. The present chapter considers how mixed and civilian legal systems of property law might

Dr Daniel Carr, Senior Lecturer in Private Law, School of Law, University of Edinburgh, * Edinburgh, UK.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems approach this challenge of adapting to cryptocurrencies and what broader implications that might have for other areas of law. 7.02 The chapter begins by questioning whether cryptocurrencies are truly res in the

sense that they are objects of property, to which property rights can apply. It will conclude that while cryptocurrencies are a novel variety of incorporeal property, that novelty is not necessarily fatal to their recognition as things when assessed in the light of general property principles. From there, if a cryptocurrency can be conceptualized as a res, it is necessary to question further whether it constitutes money in a legal sense. If such cryptocurrency can be said to constitute money, then particular specialized rules of property law are triggered with respect to the cryptocurrencies, which are explored in some detail.

7.03 Beyond the questions of cryptocurrencies as objects of property and their status as

money, the chapter further considers what challenges such recognition would present in terms of the operation of classical property law rules. Foremost among such challenges is that of possession, actual or constructive, which is the basis for many doctrines of property law (and delict). It will also be possible to make some observations, often but not always related to the specialized money rules, about property law rules concerning good faith acquisition, original acquisition, the law of mixtures, and their interaction with the law of unjustified enrichment. Yet, while there is scope, there is certainly no space to consider each jurisdiction’s commercial code, money, and finance laws.1 It is therefore an abstract and thematic reflection upon how cryptocurrencies might interact with selected civilian property law rules and values. This treatment will be necessarily broad-​brush since the civilian tradition of property law is not manifested uniformly in each particular civilian jurisdiction. Mixed systems, by their very nature, consist of different composites of civilian and common law principles. Nevertheless, mixed systems tend to have a strong civilian property law, so considering examples of mixed and civilian property principles at a level of some abstraction will, it is hoped, provide an interesting perspective on how cryptocurrencies might apply in such jurisdictions. The civilian systems most often referred to as exemplars are France and Germany, whereas Scotland fulfils that role for mixed legal systems; there are also occasional references to the Principles, Definitions, and Model Rules of European Private Law: Draft Common Frame of Reference.2

7.04 Finally, why might a common lawyer be interested in such matters? One answer

might be that property law tends to be quite resistant to attempts at harmonization, let alone plans for unification.3 That resistance to harmonization has at least

1 For a consideration of some of these points in selected civil law jurisdictions of Europe, see Chapter 4. 2 Christian von Bar and Eric Clive (eds), Principles, Definitions, and Model Rules of European Private Law: Draft Common Frame of Reference (OUP, 2010). 3 J Michael Milo, ‘Property and Real Rights’ in Jan Smits (ed), Elgar Encyclopaedia of Comparative Law (2nd edn, Edward Elgar Publishing, 2012) ch 58, 726–​27.



Cryptocurrencies as Res presumptive implications for the prospects of cryptocurrencies’ global recognition as property, leaving aside the related questions about the extent to which they are ‘money’ or ‘currency’ more generally. A  key objective for advocates of cryptocurrency is to win global recognition and acceptance, which is contingent upon the extent to which States recognize private currencies or issue their own public cryptocurrency. The debate addressing those questions should be informed by as many legal traditions as possible. Different approaches to property laws, and scant prospects of harmonization or unification of such laws, pose questions whether the universality or globalness of cryptocurrencies might be affected, or even undermined, by those property laws with implications for the utility and success of such cryptocurrencies.

II.  Cryptocurrencies as Res It is axiomatic that for property law rights to exist there must be a legally rec- 7.05 ognized object over which such rights can apply. In civilian terminology such an object is described as a thing or a res. Our initial enquiry must be whether cryptocurrencies are (or can) be recognized as such objects. If the answer to this question is ‘no’, then the law of property has little more to add. If cryptocurrencies are indeed res, then it is possible to go further and ask if they are properly to be seen as ‘currency’ or ‘money’. A. What is a unit of cryptocurrency? A cryptocurrency is a type of cybercurrency which utilizes cryptography to allow 7.06 electronic payments without an intermediary bank or financial institution.4 The cryptocurrency is not denominated in a conventional currency such as the US dollar or UK pound, though it might be exchanged for one. The best-​known example of cryptocurrency is Bitcoin, which makes it a convenient exemplar for the current discussion. Bitcoins can be divided into fractional amounts of a single coin (such units are known as ‘satoshi’, which are worth 0.00000001 of a bitcoin) in the same way that, for example, there are 100 pennies in £1 GBP. The units which make up the Bitcoin cryptocurrency are referred to as ‘coins’, but they have no physical manifestation.5 Rather, they are abstract objects generated by system participants’ common investiture of value upon encrypted but partially publicly

4 For a technical explanation of the cryptocurrencies themselves, see Green, Chapter 2 in this volume. 5 The legal term would be that they are ‘incorporeals or ‘intangibles’. Sometimes ‘physical bitcoins’ are marketed (eg, but while they resemble physical conventional coins, they are not bitcoins themselves, rather they are ‘cold wallets’ in which bitcoins are stored offline: see Primavera De Filippi and Aaron Wright, Blockchain and the Law: The Rule of Code (Harvard University Press, 2018) 21.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems accessible information, which is itself stored (as bits) across many different physical locations.6 That is what is meant by a currency and transaction system based upon ‘cryptographic proof ’:7 the value of the coins and security of transactions ultimately rest upon faith in mathematics.8 Crucially, the publicly available information concerning the transactional history of particular bitcoins, which reflects and constitutes the current status of any and all bitcoins,9 is combined with the fact that a unique and private cryptographic key is required to authorize (or ‘sign’) any transaction involving the use of a particular bitcoin. Therefore, while many elements of the bitcoin’s transactional history are publicly available, the private key gives exclusive control over the bitcoin to the holder of that key. Using that private key to authorize a transaction with the particular bitcoin prompts the participants in the network to compete to be first to check and confirm the cryptography behind the transaction, which will be rewarded with a windfall of bitcoins. Participants in the competition to verify the cryptographic transaction are known as ‘miners’ because of the ready labour analogy between carrying out physical work in order to derive and ‘create’10 precious metal from the earth and carrying out computational work to derive and create notionally precious new bitcoins.11 A further feature of the underlying Bitcoin protocol is that the potential number of bitcoins has been designed to be finite, which strengthens the analogy with traditional mining. 7.07 From a technological or cryptographic perspective, the remarks above are rudi-

mentary, and the omit discussion of many other features of bitcoins. But from a property law perspective, they set out their salient features and some challenges that they pose. The first point is that they are incorporeals, which presumptively rules out a number of doctrines relating to property law on the basis that few accept the concept of possession of an incorporeal. Moreover, they are a particularly odd type of incorporeal insofar as they do not themselves constitute a right which has a concomitant obligation in another.12 On the other hand, the function of the 6 See generally Green, Chapter 2 of this volume. 7 Satoshi Nakamoto, ‘Bitcoin:  A Peer-​to-​Peer Electronic Cash System’ Bitcoin 1  accessed 22 August 2018. 8 Bitcoin, ‘Frequently Asked Questions’ Bitcoin accessed 22 August 2018. 9 A bitcoin can be ‘lost’ in the sense that the private key needed to authorize a transaction is no longer available, thereby rendering the bitcoin transactionally inert, but the bitcoin does not cease to exist. This is not dissimilar to losing a £1 coin in deep silt at the bottom of a lake: the £1 continues to exist, but it is out of circulation. 10 Obviously physical minerals are not entirely ‘created’ by the miner upon extraction, but they are functionally ‘created’ upon extraction in the sense that they become separated from the ground. 11 See Green, Chapter 1 of this volume at para 1.10. 12 See Fox, Chapter 6 of this volume at para 6.30. For example, leading Scottish texts take it for granted that the transfer of an incorporeal moveable (near enough a chose in action) is the transfer of a right: see eg Andrew McDouall, An Institute of the Laws of Scotland, vol 1 (Gale ECCO, 1751) I.1.86 and I.3.20; George J Bell, Commentaries on the Laws of Scotland, vol 1 (5th edn, T & T Clark, 1826) 19 and 105; GJ Bell, Principles of the Law of Scotland (4th edn, T & T Clark, 1839) ss 1338



Cryptocurrencies as Res private key cryptographic control of transactions is to provide an effective degree of exclusion of third parties from transacting with the coin, itself a first principle of property theory.13 In these respects, such units of cryptocurrency are a distinctive form of incorporeal, 7.08 which is potentially problematic as a result of a generally invoked civilian principle that there is a ‘fixed list’ of property rights and of things which can be the object of property rights. B. Fixed lists or numerus clausus A less commonly enunciated counterpart to the civilian principle of the fixed 7.09 list of property rights14 is the idea of a fixed list of things or forms of property which can subjected to property rights.15 Both are familiar to common lawyers conceptually and philosophically,16 though it is at least open to question whether the two traditions adopt as strong a stance on each matter.17 The fixed list is commonly stated to be an integral principle of civilian property law,18 at least so far as the number and form of real rights limb of the concept is concerned, though it has also been criticized.19 Yet while the list is normally said and 1476 et seq; John Erskine, An Institute of the Law of Scotland (James Badenach Nicholson ed, Bell & Bradfute, 1871) II. 2. 1; William W McBryde, The Law of Contract in Scotland (3rd edn, W Green, 2007) paras 12–​26; RG Anderson, Assignation (Edinburgh Legal Education Trust, 2008) paras 1.09–​1.10. Cf George Wallace, A System of the Principles of the Law of Scotland (Gale ECCO, 1760) ss 142 and 146. 13 See Thomas W Merrill, ‘Property and the Right to Exclude’ (1998) 77 Nebraska Law Review 730; Thomas W Merrill, ‘Property and the Right to Exclude II’ (2014) 3 Brigham-​Kanner Property Rights Conference Journal 1. See also the idea of property as monopoly: Eric Posner and E Glen Weyl, ‘Property is Only Another Name for Monopoly’ (2017) 9 Journal of Legal Analysis 51. 14 By this means the number of real rights which have proprietary effect are limited to a list of known property rights, which is often said to be a closed list. 15 See Sjef van Erp, ‘Ownership of Data:  The Numerus Clausus of Legal Objects’ (2017) 6 Brigham-​Kanner Property Rights Conference Journal 235, 236. 16 Thomas W Merrill and Henry E Smith, ‘Optimal Standardization in the Law of Property: The Numerus Clausus Principle’ (2000–​2001) 110 Yale LJ 1; Henry Hansmann and Reiner Kraakman, ‘Property, Contract, and Verification’ (2002) 31 Journal of Legal Studies 373; Michael Weir, ‘Pushing the Envelope of Proprietary Interests: The Nadir of the Numerus Clausus Principle’ (2015–​ 16) 39 University of Melbourne Law Review 651. 17 Jacob H Beckius, ‘Civil Law’ in René David (ed), International Encyclopedia of Comparative Law, vol 6 (Nijhoff, 1986) 10; Sarah Worthington, ‘Revolutions in Personal Property: Redrawing the Common Law’s Conceptual Map’ in Sarah Worthington, Andrew Robertson, and Graham Virgo (eds), Revolution and Evolution in Private Law (Hart, 2018) ch 11. 18 Sjef van Erp, ‘Property’, in Mathias Reimann and Reinhard Zimmermann (eds), The Oxford Handbook of Comparative Law (OUP, 2006) 1053. 19 See the suggestion that international trade and commercial realities have put pressure on the principle which will (and should) lead to liberalization and change: Jan H Dalhuisen, ‘European Private Law: Moving from a Closed to an Open System of Proprietary Rights’ (2001) 5 Edinburgh Law Review 273. The same author made a broader argument later—​in Jan H Dalhuisen, ‘Legal Orders and their Manifestation:  The Operation of the International Commercial and Financial Legal Order and Its Lex Mercatoria’ (2006) 24 Berkeley Journal of International Law 129—​about the general need for greater legal appreciation of international finance and commerce realities,



Cryptocurrencies as Property in Civilian and Mixed Legal Systems to be a closed one, its chief objective and function is to prevent persons from creating new property rights by agreement with others or unilaterally; in most systems the fixity of the list yields to competent legislative intervention. In part this is because the traditional civilian (and mixed) perspective has been upon property rights as real rights, that is to say rights in or attached to a particular object or thing.20 That understanding therefore places much of the intellectual and conceptual emphasis of property law upon the thing itself, and it has been, speaking very broadly, traditionally less influenced21 by common law ideas about the exigibility of rights22 that can be termed property rights.23 In mixed systems, which generally follow a civilian approach to property law, the position is similar; for example, in a leading Scottish case, the classificatory distinction between personal and real rights was described as an ‘unbridgeable division’.24 7.10 But could such an intellectual bridge be built to incorporeal property which is not

a right? Cryptocurrencies present novel features in this respect, because, as noted above, as a potential res, they are neither a corporeally manifested thing nor an incorporeal right. Furthermore, such exclusivity as is generated by the private key cryptography arises from the control over the authorization of transactions, which does not fully explain a civilian conceptualization of property. Controlling the transferability of a thing is not exactly the same as saying that there are property rights in that thing as traditional civilian property theory requires. Indeed, transferability is but one of the traditional indicia of ownership, albeit an important which although written before the arguable retrenchment in ‘globalist’ attitudes now politically extant in the world, could nonetheless be applied to cryptocurrencies if they take practical hold as appears to be the case: see Carla L Reyes, ‘Conceptualizing Cryptolaw’ (2017–​18) 96 Nebraska Law Review 384, 443. 20 See Athanassios N Yiannopoulos, ‘Real Rights in Louisiana and Comparative Law:  Part  1’ (1963) 23 Louisiana Law Review 161, 162 ff. 21 Scholars within ‘civilian and mixed traditions’ have certainly sometimes pondered such questions at the level of those traditions, but such ruminations have tended not to disturb orthodoxies of particular civilian or mixed legal systems; for examples of such writings, see eg Shalev Ginossar, ‘Rights in Rem—​a New Approach’ (1979) 14 Israel Law Review 286; George L Gretton, ‘Ownership and its Objects’ (2007) 71 RabelsZ 803. See generally, Beckius (n 17) 7–​9; van Erp (n 18) 1051–​53. 22 See William Swadling, ‘Property: General Principles’ in Andrew Burrows (ed), English Private Law (3rd edn, OUP, 2013) paras 4.17–​4.18. 23 The best-​known theory emphasizing such matters is Wesley N Hohfeld, ‘Some Fundamental Legal Conceptions as Applied in Legal Reasoning’ (1913–​1914) 23 Yale LJ 16. The influence of property law theory and writing which related to the rise of common law legal realism in the United States seems far less pronounced (if there is any effect at all) in mainstream civilian property writing, but it has given rise to a rich and contested idea of a thing, the nature of ownership, and hence the very nature of property law in the common law tradition: amongst many see eg Henry Smith, ‘The Persistence of System in Property Law’ (2014) 163 University of Pennsylvania Law Review 2055; Simon Douglas and Ben Macfarlane, ‘Defining Property Rights’ in James Penner and Henry Smith (eds), Philosophical Foundations of Property Law (OUP, 2014) ch 10. 24 Burnett’s Trs v Grainger 2004 SC (HL) 19, [87]–​[88] (Lord Rodger of Earlsferry), quoting, and seemingly adopting, Barry Nicholas, An Introduction to Roman Law (Clarendon Press, 1962) 100.



Cryptocurrencies as Res one.25 The nature and function of money elevates the importance of such transferability and control: the ability to spend money is fundamental to its existential function.26 The cryptocurrencies’ status as res or otherwise is the most pressing question, 7.11 which, incidentally, is distinct from the question whether they constitute currency. If the relevant cryptocurrency is not considered technically speaking to be ‘a res’, then presumptively it can neither generate nor sustain property rights. That is not to say that such cryptocurrencies would necessarily be beyond legal regulation, but it would put them outwith property law’s protections (or its restrictions, depending upon one’s perspective27). It would also, certainly in most civilian and mixed jurisdictions, suggest that they could not constitute parts of a trust fund, though they might form a component of a patrimony. Patrimonies are generally considered to be composed of personal and real rights;28 more problematic is the suggestion in many systems that to create a trust, there must be a transfer of ownership—​but if something is outwith property law, then how can it be transferred?29 Returning to the novel features of cryptocurrency poses an interesting question for property law: can an object be transferred without technically being a thing? Recognition as a formal res or thing in modern civilian and mixed systems can 7.12 depend on corporeality:30 does the res have a physical manifestation?31 Yet many 25 See eg Anthony M Honoré, ‘Ownership’ in Anthony G Guest, Oxford Essays in Jurisprudence (OUP, 1961) 118–​21. 26 James W Harris, Property and Justice (OUP, 2002) 5, 47–​48 and 159. 27 Some are attracted to cybercurrencies on the essentially political-​philosophical perception that such currencies are beyond the sphere of influence or control of States, governments, and other entities or institutions which challenge the autonomy or sovereignty of individuals. To such thinkers the law of property, perhaps especially when compared to contract law, might be seen as an unwelcome or even illegitimate manifestation of State power by means of the legal system. Indeed, one of the most interesting aspects of the development of cryptocurrency has been this philosophical imperative, which poses question about the law and State in civilian and common law systems alike. It is not clear if the allegedly more restrictive property law of the civilian tradition would constitute a concomitantly greater objection to those holding such views. 28 Indeed, in jurisdictions which observe a modern division between the patrimonial and non-​ patrimonial (generally those in the French tradition) it is taken as a higher organizational premise than the real and personal division, blending and instantiating the person alongside the legal abstractions: see eg Marcel Planiol and Georges Ripert, Treatise on the Civil Law, vol 1 (12th edn, Louisiana State Law Institute 1959) pt 2, paras 2147–​52; Nicholas Kasirer, ‘Translating Part of France’s Legal Heritage:  Aubry and Rau on the Patrimonie’ in Remus Valsan (ed), Trusts and Patrimonies (University of Edinburgh Press 2015) 170–​71. 29 This issue touches much deeper questions about whether all personal and real rights are property, and the implications which arise from taking that approach to a logical conclusion: see George L Gretton, ‘Ownership and its Objects’ (2007) 71 RabelsZ 803. 30 The German Civil Code and systems of law which have been inspired by it tend to insist upon corporeality: see Athanassios N Yiannopoulos, 2 Louisiana Civil Law Treatise: Property (2017 supp, 5th edn, Thomson West 2015–​17) s 1.2. 31 A move away from the primacy of the physical in property law is becoming more pronounced with important implications for all categories of rules associated with property:  see Roderick A Macdonald, ‘Fruit Salad’ (2008) 38 Revue Generale du Droit 405.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems civilian and mixed32 systems recognize incorporeal res, and therefore the extent to which an item or right can be said to command a tradeable pecuniary value is also an important element in determining whether it is a res.33 Here we might return to the particular features of a bitcoin, particularly recalling their incorporeality without a right and the cryptographic control of transactions. Taken together, one might conclude that we have an object which can be transferred but which is not formally a res. The implication of that would be that it is not formally ‘owned’ by anyone, but which is nonetheless capable of being transferred into the control or power of another. One might object that this characterization is a bar to transfer—​how can a transfer from one to another, which constitutes an example of derivative acquisition, operate when there is no ownership or title in the transferor? This could pose more difficulty for civilian and mixed legal systems and their preference for the ownership concept over the more flexible and expansive concept of ‘title’. But one might also move the intellectual goalposts entirely in this context to achieve a similar result: while one might in lay terms talk of a ‘transfer’ of a bitcoin, the legal reality at a technical level might be seen differently. One might say that the control over the ‘transfer’ of a bitcoin is not the same as saying that the holder of a physical coin transfers it to another. It might be said that with each transaction involving a bitcoin, the correct cryptographic proof triggers the Bitcoin system to newly vest control of the existing coin in another by something akin to original acquisition. But the acquisition is not of ownership of a res; rather it is acquisition of control of a tradeable commodity (a uniquely generated item of information). The common law with its flexible concepts of ‘title’ and the tracing of monetary value from one asset to another34 might be capable of sustaining such an analysis, but civilian doctrines of ownership and the numerus clausus of rights arguably face greater difficulties. 7.13 Yet, at a secondary claims level it is possible to move into the more familiar territory

of rights, whereupon an individual’s interaction with a cryptocurrency exchange or wallet provider generates rights which can be conceptualized as incorporeal property as rights/​claims in the traditional manner. In turn, this is conceptually little different from a traditional understanding (at least in the UK) of a bank account standing in credit, which, after all, is a contractual arrangement between the bank and account holder which generates a debt and concomitant right—​it does not amount to constructive possession of particular physical money.35 Some civilian and mixed systems allow ‘ownership’ of such secondary rights, as they 32 South African Breweries International (Finance) BV v Laugh it Off Promotions CC [2005] FSR 30, para 10 (Harms JA). 33 Bernard Rudden, ‘Things as Things and Things as Wealth’ (1994) 14 OJLS 82. 34 See Fox, Chapter 6 of this volume, at paras 6.67–​6.96. 35 Foley v Hill (1848) 2 HLC 28; 9 ER 1002; Ross v Lord Advocate 1986 SC (HL) 70.



Cryptocurrencies as Res would of the account holder’s right to payment from a bank account, while others (eg Germany) operate an obligations-​based approach because of property law’s refusal to treat an incorporeal as a res.36 Even if there are no concerns about general concepts of corporeality or pecu- 7.14 niary value, then a specific policy decision concerning that particular type of thing can also result in the denial or exclusion of status as a res. For example, Roman law and successor civilian and mixed systems of law all knew the concept of res extra commercium whereby a thing was said not to be a tradeable item.37 In the modern world such sentiments are common in relation to objects which raise ethical questions concerning exchangeability or the appropriateness of subjecting them to ownership:38 such a body parts,39 embryos,40 or cultural property.41 While bitcoins are still in the process of recognition as res, it is likely that threats to their recognition as res will come from the more technical aspects of the doctrinal law than from policy-​based arguments such as have traditionally underpinned the explanation of res extra commercium.42 Indeed, even where there are doctrinal objections, the law sometimes moves into new territory in pioneering spirit when recognizing new concepts or devices,43 sometimes with unfortunate consequences. While historically the common law of property has been arguably more enterprising in such developments than civilian property law has, it seems unlikely that widespread recognition of Bitcoin would be ignored in civilian and mixed jurisdictions; though they might regulate cryptocurrencies outwith property law for such doctrinally conservative reasons.

36 See Stephan Meder, ‘Giro Payments and the Beginnings of the Modern Cashless Payment System’ in David Fox and Wolfgang Ernst (eds), Money in the Western Legal Tradition: Middle Ages to Bretton Woods (OUP, 2016) ch 21. 37 Robin Evans-​Jones and Geoffrey MacCormack, ‘The Sale of res Extra Commercium in Roman Law’ (1995) 112 Zeitschrift der Savigny-​Stiftung für Rechtsgeschichte. Romanistische 330. 38 See generally Athanassios N Yiannopoulos, ‘Common, Public and Private Things in Louisiana: Civil Tradition and Modern Practice’ (1960–​1961) 21 Louisiana Law Review 697. 39 See eg for mixed systems with markedly civilian property law:  Niall R Whitty, ‘Rights of Personality, Property Rights and the Human Body in Scots Law’ (2004–​2005) 9 Edinburgh Law Review 194 and Safia Mahomed and others, ‘The Legal Position on the Classification of Human Tissue in South Africa: Can Tissues Be Owned’ (2013) 6 South African Journal of Bioethics and Law 16. There are many common law works on this matter: eg Simon Douglas and Imogen Goold, ‘Property in Human Biomaterials:  A New Methodology’ (2016) 75 CLJ 478; Imogen Goold and others, Persons, Parts and Property: How Should we Regulate Human Tissue in the 21st Century (Hart, 2015). 40 Parrillo v Italy (2015) 62 EHRR 300 (Grand Chamber). 41 Kurt Siehr, ‘Legal Aspects of the Mystification and Demystification of Cultural Property’ (2011) 16 Art Antiquity and Law 173. 42 As Honoré tritely observed: ‘When the legislature or courts think that an interest should be alienable and transmissible they will reify it and say that it can be owned, that it is property.’ (n 25) 130. 43 FH Lawson, ‘The Creative Use of Legal Concepts’ (1957) 32 New York University Law Review 909, 925.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems C. Possession? 7.15 Related to the question of whether a cryptocurrency is a res, is the question

of whether such an incorporeal res would be amenable to being possessed. One might think possession of an incorporeal is an ‘uncouth’ concept; most civilian (and common law) legal systems certainly appear to take that view, on the basis that the physical or corpus element of possession cannot be satisfied.44 That being so, it seems unlikely that the law of possession will be directly applicable to cryptocurrencies in civilian systems, at least without retreating to the recondite realms of ‘quasi-​possession’.45 Possession is important because many property law (and some unjustified enrichment) rules rely upon an act or state of possession to be engaged. If there is to be no possession of incorporeal cryptocurrencies, then there are unlikely to be any questions of acquisitive prescription, possessory remedies or liabilities for the ‘bona fide (or mala fide) possessor’ applying to them. The same obstacles may apply to recognizing the possession of cryptocurrency ‘wallets’, at least when a user operates them through an online wallet service provider.46 That said, a wallet may be susceptible to some indirect control through property law to the extent that it can be located on any physical infrastructure or computer hardware. It is unlikely that such possessory property law could apply directly to the cryptocurrencies without stretching concepts, or at least provide compelling or analogical reasons for extending them. D. Specificity

7.16 All civilian and mixed legal systems recognize a form of the specificity principle,47

whereby an identifiable thing must exist over which a real right can take effect. The principle is often invoked where there is a bulk of some type of thing to deny the creation of property rights until the separation of specific things from that bulk.48 It is also important because it indicates that civilian systems exclude the possibility of creating property rights in relation to future goods.49 44 For the rejection of the concept of possession of intangibles in common law doctrine, see Chapter 6 in this volume. 45 A doctrinally robust instantiation of possession—​insofar as the physical or corpus element of possession is problematic—​which has been most often associated with acquisitive prescription of servitudes in Scotland: see eg McDouall (n 12) II.1.28. 46 See Hare, Chapter 9 in this volume. 47 Wolfgang Mincke, ‘General Principles of Property Law:  A Traditional Continental View’ in Paul Jackson and David C Wilde (eds), The Reform of Property Law (Dartmouth Publishing, 1997) 198. 48 cf the well-​known solution adopted by the Sale of Goods Act 1979, s 20A (which, incidentally, applies in Scotland’s ‘mixed’ legal system), whereby in some circumstances of prepayment the buyer in a sale of goods transaction will be given a co-​ownership title in the unseparated bulk. 49 Mincke (n 47)  201. For a general discussion from a Scottish perspective, see Scottish Law Commission, Report on Moveable Transactions, Volume 1: Assignation of Claims (SLC no 249, 2017) paras 5.81ff.



Cryptocurrencies as Res The ambiguity of a bitcoin as a res has implications for the specificity principle. 7.17 As noted above, a bitcoin is not physically manifested and nor is it a particular right held against an identified debtor, which makes the application of the specificity principle a delicate one. Yet, as noted above, the bitcoin has elements of exclusivity and control. It consists of digitized information that is accessed by private keys, and proven by the ‘mining’ process. All this at least shows some congruence with the spirit of the specificity principle. Ultimately, specificity is a principle concerned with the precise match between a property right holder and a particular object, in order to give effect to the key purpose of property law: who owns what?50 The bitcoin definitely cannot be seen as a particular physical object manifested in space, nor can it easily be viewed as a particular right which can be abstractly identified as unique. Its partially fungible existence as a representation of value is trumped by its cryptographic uniqueness.51 The control exercised through the private key is what matches the value to a particular person. These features arguably satisfy the specificity principle’s demand for an identifiable asset in a functional way. E. Publicity Most civilian systems follow a principle of publicity, even if it is not always ex- 7.18 pressly conceived and set out in those terms.52 The principle states that the creation or transfer of a property right must be duly publicized, because of the potential effect of such property rights upon third parties.53 One of those effects is the effectiveness or otherwise of a purported transfer: publicity, so the theory goes, provides an indication of an earlier title from which a valid title can be derived. In the context of cryptocurrency, the scope for elements of publicity is open to question, predominantly as a result of the lack of a physical manifestation (the traditional means of publicizing transfer of a corporeal moveable) or a ‘debtor’ to whom intimation might be made (an historic means of publicizing transfer of an incorporeal moveable in Scotland).54 Yet, a cryptocurrency is not entirely without a public face. The importance of public keys to controlling the ‘transfer’

50 Mincke (n 47) 199. 51 ‘Complexity’ might be technically preferable to saying ‘unique’, but I say ‘unique’ here as an attribute to reflect my understanding of current technological reality due to computing capabilities. As a code it is theoretically possible to crack it, and presumably exactly reproduce it, which indicates that at a deeper level of abstraction, its uniqueness could be undermined. This risk/​feature is likely to increase in prominence for the current cryptographic currencies as computer capabilities become more advanced, though it seems that there will be concomitant advances in cryptography to offset this. 52 It is sometimes referred to as (or part of ) a principle of ‘transparency’: eg van Erp (n 18) 1059–​ 61 (who combines publicity and specificity to form the transparency principle). 53 von Bar and Clive (n 2) commentary to VIII–​2:101. 54 G Campbell Paton (ed), Baron David Hume’s Lectures 1786–​1822, Volume III (Stair Society 15, 1952) 4. Hume explains the intimation’s function by analogy with the more venerable publicity effect of possession for corporeal property. See Anderson, Assignation (n 12) ch 6.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems of cryptocurrency provides something of a public function which third parties can see. The blockchain technology means (in theory) that a form of transactional history of a crypto-​coin is publicly available, which is a strong dimension of publicity. That is a particularly robust (and unusual) form of publicity, because this transaction history is automatically generated as part of the very existential fabric of a crypto-​coin; traditional corporeal or incorporeal things do not generate such publicly available information, and instead would rely upon record keeping and (more) fallible human actors to create an equivalent chain of information. But as much as this unusual and inherent transactional history of public key validations creates a dimension of publicity, it is only a dimension of the publicity situation—​ it is not a complete public record of the legal effects of the transactions. It is at best evidence of a transfer of property having occurred, and one could surmise that the absence of transactional evidence on the blockchain would exclude any transfer. On the other hand, other forms of publicity such as delivery or registration (not registration of title) provide imperfect evidence of the legal effect of any transactions underlying the act of publicity. 7.19 A  further drawback, in terms of adherence to the publicity principle and its

animating purposes, is that while the blockchain can be seen, the actors in the transaction are normally pseudonymous and difficult to unmask. The blockchain transactional history demonstrates a transaction has occurred, but does not provide information about the identity of the real-​world parties to the transaction. Transacting with a legal person or agent can produce similar opacity, but with different legal effect: a company or agent might be used to hide the identity of someone, yet the transaction is undertaken with an identifiable company or agent. Nevertheless, the effect can be similar—​difficulty discerning the identity of the ‘true’ person with whom one is transacting. These traditional forms of transacting while protecting identity have not been fatal to the publicity principle, even if they are in some respects in tension with it, and there is no real reason that the perhaps stronger pseudonymity of a crypto-​transaction should be either.55

7.20 Related to the question of identity is a further dimension of the publicity prin-

ciple: it is said to allow parties to make informed decisions about the creditworthiness of someone who publicly appears to hold a property right. The traditional means of complying with the publicity principle were possession of the object, normally considered to be restricted to corporeal property, and the registration of property rights with respect to corporeal or incorporeal property. Both classical methods remain formally important in many civilian legal systems, but it is probably not an exaggeration to say that the prevalence and importance of registration is increasing, whilst the importance (or at least the reliability) of actual possession 55 Leaving aside the fact that this privacy feature is one of the main attractions of the cryptocurrency to its advocates, and one which its critics fasten upon when discussing the use of cryptocurrency in illicit transactions.



Cryptocurrencies as Res has declined as society and law increase in complexity and the importance of the incorporeal increases. For example, in the field of rights in security, the use of registration has been increasingly prevalent in common law and civilian traditions, with still more recent attention on electronic registration.56 Many common law systems follow a similar principle, of course, though, again, not always in the same terms or to the same degree. Creditworthiness as publicity in cryptocurrency might be thought to be problematic as a result of the pseudonymous blockchain. However, the spendable balance associated with a public key is publicly accessible information; in relation to ‘creditworthiness’ (or at least its cryptocurrency analogue, capacity to spend), the blockchain offers publicity par excellence, more so than with bank money where an account holder’s identity is unknown. It is like having real-​time access to view your debtor’s bank balance.57 F. Analogical addendum As an addendum, it is perhaps worth recalling that intellectual property rights are 7.21 a species of property, but which are sometimes treated somewhat differently from other property rights, particularly those concerned with corporeal property.58 An essential element relates to their transferability without an obligant to inform: they are essentially standing negative rights allowing their holder to prevent someone from doing something.59 Civilian systems have intellectual property regimes, and 56 See eg for the European context: von Bar and Clive (n 2) DCFR IX.-​3:301 and commentary text; Scottish Law Commission (n 49) ch 6. 57 For examples of services that allow searches of bitcoin balances held at a public key, see Home Bitcoin, ‘Easy Balance’ HomeBitcoin accessed 14 August 2018 or Bitcoin Who’s Who, ‘Homepage’ Bitcoin Who’s Who accessed 14 August 2018. 58 See eg One Step (Support) Ltd v Morris-​Garner [2018] 2 WLR 1353, [119] ff (Lord Sumption). Lord Sumption’s judgment might be considered a dissenting one (see Lord Reed’s remarks at [101] and those Lord Carnwath [127] ff) in terms of damages for invasion of property rights, but it raises interesting questions about the remedial significance of narrow and broad conceptualizations of property. Lord Reed states that ‘user damages’ will be available when rights to tangible property are invaded and certain intellectual property rights [95]. More interesting for present purposes are Lord Reed’s remarks [93], that while all personal rights might be considered property at some level, user damages will likely only be appropriate where the ‘contractual right is of such a kind that its breach can result in an identifiable loss equivalent to the economic value of the right, considered as an asset, even in the absence of any pecuniary losses which are measurable in the ordinary way.’ His Lordship’s examples of such contractual rights include the ‘right to control the use of land, intellectual property or confidential information’ ([2018] 2 WLR 1353, [93]). Lord Reed’s approach here bears some analogy to tax law’s approach to distinguishing income from capital: Able UK Ltd v HMRC [2007] EWCA Civ 1207 [10] (Moses LJ). One of the earliest cases concerned the receipt by trustees of a payment for access to Field Marshal Haig’s war diaries by his biographer Duff Cooper (MP), which was held to be a capital payment since substantial publication of the diaries was found to have exhausted their profit generating potential: Earl of Haig’s Trs v IR 1939 SC 676. 59 Space prohibits a further discussion here, but Scottish law has long recognized an analogy to this analogy in the form of the real right of ‘exclusive privilege’:  see generally Gillian Black, ‘Exclusive Privilege Adam Smith, John Millar, and the Creation of a New Real Right?’ in Ross G Anderson, James Chalmers, and John Macleod (ed) Glasgow Tercentenary Essays (Avizandum Publishing, 2014) 20–​53.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems there is currently a considerable degree of convergence across systems as a result of EU law, particularly as regards the patents in the context of biological research. In Germany, for example, some60 intellectual property rights are treated as property in terms of transfer rules.61 Neither a trademark nor a patent are a claim against another: they are registered information which creates a standing entitlement preventing others from using similar information or techniques to emulate the registered information. 7.22 A crypto-​coin might be conceived in a similar way, and similarly transferred, pro-

tected, and perhaps even licensed. Though one might observe a distinction in emphasis between some forms of intellectual property and cryptocurrencies: the roles of publicity, registration, and confidentiality. Many forms of intellectual property are registered, though the law of confidentiality is also a functional tool used to protect intellectual ‘property’. When an idea is registered as a patent or design, for example, a form of intellectual property is created by publicizing that idea, which is an act of expression of information. Cryptocurrency is arguably much closer to the realm of confidentiality: by its very nature, a cryptocurrency is constituted by encrypted information in the form of code; its value is largely made up by having computing protocols which allow control of access to such information. It might be said, on that view, the law of cryptocurrency is a specialized area of applied confidentiality law. Confidential information has a similar existence. It is trite law that one cannot own (or steal) information, but one can have a standing right to protect and restrict the use of that information, in essentially the same negative or prophylactic way that intellectual property rights operate.

III.  Implications of Recognizing Cryptocurrencies as Res 7.23 If cryptocurrencies are capable of being properly recognized as res, it is possible

to proceed to further questions: do cryptocurrencies’ novel features as things alter property law and unjustified enrichment, or at least create a specialized application of such rules? Alternatively, perhaps cryptocurrencies simply slot into the space previously occupied by traditional forms of money or currency. By examining some of the key principles which are said to underlie civilian (and often mixed) property law, in conjunction with the principles of money law identified 60 But not all intellectual property rights. Copyright law is a complex mixture of personality rights (the ‘moral rights’ in BGB, §§12–​14), and economic exploitation rights incapable of inter vivos transfer (Act on Copyright and Related Rights (UrhG), §§15–​22 and 29(1)). The copyright holder can, however, create a related but new right of use in exchange for remuneration, which can be transferred inter vivos with the consent of the author: UrhG, §§31ff. This can be compared with the transferability of copyright in English (and Scottish) law: Copyright, Designs and Patents Act 1988, ss 1 and 91. 61 BGB, §413. See for particular provisions in relation to types of intellectual property right: Patent Act (PatentG), §15; Act on the Protection of Trademarks and Other Symbols (MarkenG), §§27ff.



Implications of Recognizing Cryptocurrencies as Res above, it will be possible to assess and comment on the extent to which there are civilian implications for the use of cryptocurrencies. A. ‘Ownership’? As with the common law tradition, it is accurate to describe the civilian tradition’s 7.24 idea of ownership as the ‘. . . greatest possible interest in a thing which a mature system of law recognizes.’62 However, the manner in which that ‘greatest possible interest’ is characterized appears to differ significantly when one compares the apparent relativity of title in the common law with the idea of unitary, indivisible, and ‘absolute’ ownership in the civilian tradition.63 From Roman law’s, dominium, the modern civilian idea of [absolute] ownership, developed,64 and it took centre stage within property law as that greatest possible interest in a thing. As Merryman explained, ownership, that most quintessential of civilian concepts, is both ‘very powerful’ and, so he argued, functionally costly.65 The cost of this less flexible understanding of ownership is the arguable limitation of functionality dictated by the rigidity of the absolutism of ownership, taken along with the fixed list, which minimizes the diverse possibilities of property rights and interests.66 In turn, the traditionally powerful and costly civilian idea of ownership is necessarily exclusive: only one person can be the owner at any time.67 62 Honoré (n 25) 108. 63 See eg William W Buckland and Arnold D McNair, Roman Law & Common Law:  A Comparison in Outline (FH Lawson ed, 2nd rev edn, Cambridge University Press, 1965) 67. 64 As Peter Birks explained: ‘Roman ownership was minimally restricted . . . For the content of ownership, ‘absolute’ is not an appropriate word. It suggests some degree of immunity. Conceptually, however, ownership was absolute: distinct, singular, and exclusive’: Peter Birks ‘The Roman Law concept of dominium and the idea of absolute ownership’ (1985) 1 Acta Juridica 1. Cf Boudewijn Bouckhaert, ‘What is Property?’ (1990) 13 Harvard Journal of Law and Public Policy 775, 781 ff. 65 John H Merryman, ‘Ownership and Estate (Variations on a Theme by Lawson)’ (1973–​74) 48 Tulane Law Review 916, 924: Ownership is, as concepts go, a very powerful one, and those who employ it pay its price. The land law of Italy and other civil law nations, based firmly on Roman law, is a law of individual ownership. It is part of the tyranny of the concept of ownership that it strongly resists fragmentation. To say that I own a thing is to imply that you do not, for if it is yours how can it be mine? Such thinking tends to eliminate all intermediate possibilities between ownership and non-​ownership . . . Although its non-​legal composition may vary from time to time with social and economic change, legal ownership remains exclusive, single, and indivisible. Only one person can own the same thing at the same time. 66 ‘[A]‌functional division between beneficial and security title, or between legal and equitable title, or a temporal division into present and future estates, simply does not exist’, in ibid 925. 67 See eg the remarks of Lord Hope of Craighead in a leading Scottish case: Scots law, following Roman law, is unititular, which means that only one title of ownership is recognised in any one thing at any one time. Although this title can be shared, as in the case of common property, only one person can be the owner in competition with others about ownership. There is no opportunity for fragmentation of the concept of ownership, as the transfer of ownership one to the other occurs in a single moment . . . Sharp v Thomson 1995 SC 455 (IH) 469G. See eg David L Carey Miller, Corporeal Moveables in Scots Law (2nd edn, W. Green, 2005) para 1.13.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems 7.25 Uncertainty about civilian recognition of a crypto-​coin as a res might be further

compounded by a more restrictive concept of ownership, but there appears no reason why that should necessarily be so. If such coins are amenable to property law rules as a res, or something functionally like a res,68 then it seems highly likely that the civilian tradition’s insistence upon the centrality and primacy of the undivided ownership right within its taxonomy of property law would extend such a right to cryptocurrency. Perhaps more interesting are the ways in which it will be possible to acquire, secure and protect such a right of ownership given the cryptocurrencies’ status as an awkward form of moveable property. B. Vindication and possessory actions

1. Vindication 7.26 In civilian legal systems, the owner of property has a right to vindicate it in the hands of another, which is sometimes known as a rei vindicatio. The vindicatory right is derived from, and flows from, the right of ownership attached to a thing69 and gives rise to a petitory right or action. Petitory actions can be distinguished from another form of action known as a possessory action, whereby a person seeks to recover property on the basis of an interference with possession. This distinction between petitory and possessory actions can be found in some form in most civilian and mixed legal systems. Theoretically, at least, this dichotomy between actions related to ‘property rights’ and ‘possessory facts’ can be explained by the oft-​cited passage from the Digest:  ‘nihil commune habet proprietas cum possessione’.70 Furthermore, on the face of it, this is a major difference between the civilian and common law traditions of property law: a fixed taxonomic civilian approach, compared with the apparently blurred concepts of possession and title in the common law where possession, far from being separate from the question of ‘title’, is used to determine the question of title based upon temporal priority.71 In fact, matters are considerably more complex, and the two systems approach one another; for example, presumptions of ownership and good faith acquisitions are frequently generated by taking possession in civilian jurisdictions, particularly with respect to moveable property.72 7.27 In Scotland, for example, much depends on the state of possession. If a moveable

is possessed by a non-​owner, there is a presumption of ownership in favour of that

68 See paras 7.05–​7.08 above. 69 ‘The nature of a proper rei vindicatio, or real action for recovery of property is that it attaches to and follows the thing as the possession shifts from hand to hand’: Paton (n 54) 235. 70 D. 71 See Robin Hickey, ‘Possession as a Source of Property at Common Law’ in Eric Descheemaker (ed), The Consequences of Possession (Edinburgh University Press, 2014) ch 4. 72 Spelling ‘moveable’ thus betrays my Scottish legal training and preference for this quirk of spelling.



Implications of Recognizing Cryptocurrencies as Res possessor.73 The owner must—​as a matter of evidence—​demonstrate both the right of ownership and circumstances in which the possession of the thing changed without an intention to convey ownership.74 As with many evidential presumptions, the strength of the presumption and the relevant burdens of proof are tailored to particular hypothetical situations or types of res. Most interesting for the present discussion is the presumption’s operation in relation to money, where the institutional writers considered the presumption to be so strong as to be essentially irrebutable. The modern approach is to treat money as a specialized topic,75 and that it is an exception to the standing nemo plus juris ad alium transferre potest rule which applies to most forms of property: money transferred to a good faith recipient for value is acquired by the recipient.76 Thus, the vindicatory action available when a void transfer is made of corporeal moveable or heritable property is not available (an example would be a purported transfer by someone without any ownership at all). A vindicatory action has not been associated with a defective transfer of an incorporeal moveable, probably because the failure of transfer would not leave the right owned or held by one person and ‘possessed’ by another, and so recourse for a disappointed purported assignee owing to a defective transfer is taken by way of an action raised against the purported assignor. If the transfer is effective as regards the transfer of ownership but is in some other way defective, a variant of the nemo plus rule applies whereby the quality of the assignee’s right is said to be that of the assignor, and therefore it is amenable to the defences which might have been pled against the assignor. This is a more exacting set of restrictions than a mere binary question of whether ownership was present in the transferor to pass or not, and it reflects the more limited interaction between the res (the assigned right) and third parties, while there are now statutory interventions as regards void transfers of heritable property. The question of what to make of a crypto-​coin comes into sharper focus at this 7.28 point, particularly as regards its susceptibility to challenges to title. The exception to the rule for money has been developed with respect to physical coins or notes, ie corporeal moveables, particularly as they are amenable to the traditional understanding of possession. It seems that no one would say a crypto-​coin is a corporeal moveable, but, as noted above, they are not easily described as conventional incorporeals either. Traditionally an incorporeal moveable has been understood in the law of property as a right, which is transferred from an assignor to an assignee, and so the rules about the amenability of the right holder to the infirmities of his

73 See generally Carey Miller (n 67)  paras 1.19ff. A  similar presumption operates in French (Code Civil, art 2276) and German law (BGB, § 1006). 74 Stair, II.1.42., III.2.7, IV. 75 Carey Miller (n 67) para 1.19. 76 See Kenneth GC Reid, ‘Banknotes and Their Vindication in Eighteenth-​Century Scotland’ in David Fox and Wolfgang Ernst (eds), Money in the Western Legal Tradition: Middle Ages to Bretton Woods (OUP, 2016) ch 25.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems author’s situation seem difficult to apply to a cryptocurrency in which such a right is absent.77 Given what was said above concerning the publicity principle, which is a main driver for the requirements of possession or intimation, one might argue that because cryptography and the public keys means that the coin holder has exclusionary power and effective control over the crypto-​coin, there is sufficient policy reason to afford its holder an equivalent to the presumption of ownership generated by possession. It would therefore be for anyone bringing a vindicatory claim—​if such a claim lies for incorporeal property, which it might in this non-​ right class of incorporeal—​to demonstrate a defect in the holder’s right to the coin. Furthermore, since the public record of transactions on the blockchain cannot be falsely manipulated, then gathering facts to attack or support the presumption should be straightforward. The counterargument is that the principle behind the presumption was the difficulty of ascertaining the titular provenance of a moveable, and the potential effects such investigations would have on commerce. Arguably the bitcoin’s ex facie transparent and complete transactional history means that it stands in no need of such a presumption, but against that it can be said that the presumption is still justified because of the incompleteness of the blockchain as regards the legal effects of transactions.78 The blockchain record of transactions does not provide a guarantee of a valid transaction—​there could, for example, have been a hack that caused a public key transaction which is void as a matter of property law. Nevertheless, the blockchain might properly be seen to generate a presumption denoting the owner of the crypto-​coin, like an analogue of possession, until any successful challenge is brought disproving the blockchain by demonstrating transactional invalidity caused by legal rules extraneous to the cryptographically valid transaction on the blockchain. This approach is similar in many respects to the possessory presumption: both give some legal force to the indicia of the status quo, and both are susceptible to challenge. Finally, if the cryptocurrencies were to be legally recognized as ‘money’, then a further layer of policy consideration might point towards protection by a presumption of ownership. 2. Possessory actions 7.29 Beyond the petitory action of vindication—​based upon the right of ownership—​ are possessory actions.79 The possessor of a thing can seek its return if dispossessed, and, crucially, the basis of the action is the disturbance of the possession: it does not rest upon an assertion of a right of ownership.80 Traditionally, before better modes of proof and means of gathering evidence, this action allowed the

77 See above at para 7.07. 78 See above at the discussion of the publicity principle: paras 7.18–​7.20. 79 These are the property law possessory actions. Possession is a necessary ingredient for a number of delictual and unjustified enrichment actions relating to trespass and economic loss. 80 See eg Craig Anderson, ‘The Protection of Possession in Scots Law’ in Eric Descheemaeker (ed), The Consequences of Possession (Edinburgh University Press, 2014) ch 6.



Implications of Recognizing Cryptocurrencies as Res possessor to restore the status quo while any dispute concerning true ownership could be resolved later (sometimes at great length of time). Systems in the civilian and mixed systems all have versions of such possessory actions. It is open to question whether such actions would be applicable to cryptocurrencies, and to what extent they would be useful. It is unlikely that if cryptocurrencies were denied res status, and hence not open to ownership, that they would nevertheless be open to possession. Yet owing to their incorporeal nature, if cryptocurrencies are recognized as res, it 7.30 certainly does not follow that they are capable of being possessed. At first blush, the lack of possession is probably an insurmountable bar to an owner’s reliance on possessory remedies. But possession or some analogous notion of ‘quasi possession’ might be extended to cryptocurrencies to open up such possessory actions if there was sufficient juridical will to do so, perhaps building upon the use of exclusive control in cryptography as a cypher for possession.81 Likewise, in some civilian and mixed legal systems, the courts have been more sympathetic to possession of an incorporeal than in other systems, even going so far as to allow possessory actions in relation to incorporeals, though normally restricted to real rights.82 C. Acquisitive prescription and original acquisition Civilian and mixed legal systems recognize a suite of rules under the organizing 7.31 principle of original acquisition, which bestow ownership upon someone without reference to another person (as in derivative acquisition). In the present context, it is the law of mixtures (commixtio and confusio), occupation, specification, and acquisitive prescription (usucapio) which are the branches of original acquisition that are of most interest. 1. Mixtures, specification, and occupation A classic—​one might say the original—​means of taking ownership in the civilian 7.32 and mixed tradition is by virtue of occupation: taking possession of an ownerless thing.83 An immediate analogy can be seen here with the ‘miners’ of the Bitcoin world, who are awarded freshly created coins upon completion of the mathematical proof. One way to conceptualize this would be as a form of occupation: here, the system creates the coin and bestows it upon the miner. This conceptualization recognizes the miners’ role, but it proceeds on the assumption that the miners

81 The invitation to extend the protection of possessory actions to incorporeal things was specifically rejected by English common law: OBG Ltd v Allan [2007] UKHL 21; [2008] 1 AC 1. 82 Compare Thomas Rüfner, ‘Possession of Incorporeals’ and Duard Kleyn, ‘The Protection of Quasi-​Possession in South African Law’ in Eric Descheemaeker (ed), The Consequences of Possession (Edinburgh University Press, 2014) chs 8 and 9. 83 See eg Stair, II.1.33.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems do not themselves create the coins. The difficulty, once again, is with the concept of possession—​if possession is possible, then occupation could be applied to a bitcoin. Accession, where a thing is subordinated to another thing of which it becomes a part, does not work here because the ‘mined’ coins are newly created things, essentially from thin air, and are not separated or derived from another thing. Specification seems an equally difficult conceptualization because it relies upon fashioning a new thing using existing materials belonging to others. 7.33 The law of mixtures is concerned with a situation where things belonging to

people are mixed together in such a way that they become the same thing entirely, or have been mixed to the extent that while identifiable they are practically inseparable.84 In Scotland, the result of such mixing is that the new or inseparable mass is co-​owned in proportion to the shares of those who contributed to the mass.85 But the rule is different when money has been mixed together: if money has been mixed so that it is not possible to identify particular units, as is normally the case, then the owner’s right is extinguished, and the possessor has an original title.86 It seems unlikely that the cryptocurrencies would ever fall under the rule, as it seems hard to envisage how there could be a mixture of incorporeals.87 Even if there could be such a mixture, a further difficulty would be saying that the cryptocurrency was not identifiable—​the blockchain and detailed transactional history, and the disaggregated ‘storage’ of coins across the Bitcoin network all appear to mitigate against the chance of having a mixture in which it was not possible to identify constituent parts. If both the identification and mixture hurdles could be overcome, then it would be further open to question whether the crypto-​coin was money, and whether there could be someone said to be in possession of the mixed funds for the rule to vest title in. Taken together, these are a pretty formidable obstacle to commingling operating with cryptocurrency. If the mixture was vested in another by such original acquisition, or, indeed, as a result of derivative acquisition in the context of a failed or impugned transaction, then the original holder may have an action in unjustified enrichment.

Carey Miller (n 67) paras 5.01ff. 85 German law requires that the mass itself is in some way specifically identifiable, with the result that money is rarely open to a successful commingling claim owing to the lack of any identifiable mass; though compare the approach to money taken in Austrian law which tends to follow the general rule of common ownership, and so awards co-​ownership shares: see Sjef van Erp and Bram Akkermans (eds), Cases, Materials and Text on Property Law (Hart 2012) 674ff. 86 Lorne D Crerar, ‘Banking, Money and Commercial Paper’ in Thomas B Smith (ed), The Laws of Scotland: Stair Memorial Encyclopaedia (Reissue, 2000) para 144. This is related to the general rule about original acquisition of money by transfer, and similarly requires the possessor of the mixed funds to be in both good faith, and, it seems, to have given value. 87 Even taking into account Wooley v Poole (1820) 4 B & Ald 1, though that might somewhat open to question depending on the extent to which the Scottish (and English) courts would apply Miller v Race (1758) 1 Burr 452. 84



Conclusion 2. Acquisitive prescription Most legal systems have a legal rule which allows for the alteration of legal rights, 7.34 including property rights, under certain conditions with the passage of time. Details vary across jurisdictions, though most recognize rules which can extinguish or create88 property rights. Alternatively, some legal systems do not formally extinguish or create rights; rather, they deprive them of effect following the passage of time. The Roman terminology for creating rights was usucapio, while praescriptio referred to the extinction of a right. Modern terminology and specific requirements such as the requirement for an underlying justa causa, the period of time required to elapse, and the rules for calculating that period of time, vary from system to system,89 but the basic concepts are fairly clear and similar in terms of results: the creation or end of an enforceable property interest. In almost all systems, possession of the thing is required. This has raised questions about the appropriateness of using or adapting the rules concerning possession in cases of incorporeal property, with the somewhat unhappy idea of ‘quasi-​possession’ being relied upon.90 Would such rules apply to a cryptocurrency held in a wallet? If the possession 7.35 question is sidestepped using the ‘quasi-​possession’ device, or if cryptocurrencies are said to be legally possessed, then conceivably one might be able to argue for acquisitive prescription. However, a potential difficulty in many jurisdictions would be the need for a justa causa to underpin the ‘possession’ of the bitcoin, and while there will be some extant transactional provenance on the blockchain, it is unlikely to provide a sufficient record of a legally relevant juridical act sufficient to constitute a justa causa. An alternative is to allow the law of extinctive prescription to do the work: instead of requiring a bitcoin be possessed, with possible violence to the doctrinal underpinnings of the law of possession, it might be better to say that failure to exercise or use the bitcoin extinguishes the right of the holder to it. This would be compatible with systems unwilling to recognize the coin as property because of its incorporeal nature by analogy with a standard personal right, but it is arguably contrary to property theory: the right of ownership tends not to be lost by neglecting to exercise it. That might cause hesitation amongst jurisdictions who opt to treat such coins as subject to an ownership right.

IV. Conclusion This chapter began by noting the rapid development of cryptocurrencies and 7.36 the challenges which the pose for property law. The future property law of 88 Whether acquisitive prescription creates a new title or vests an existing title in another can be open to question. 89 See Scottish Law Commission (n 49) particularly the comparative ch 5, for an accessible and substantial introduction to the topic. 90 Duard Kleyn, ‘The Protection of Quasi-​Possession in South African Law’ in Eric Descheemaker (ed), The Consequences of Possession (Edinburgh University Press, 2014) ch 9.



Cryptocurrencies as Property in Civilian and Mixed Legal Systems cryptocurrency in civilian jurisdictions will be determined in the first place by whether or not they are to be considered things susceptible to ownership and property rights at all. There are certainly reasons to be cautious about answering that question in the affirmative, but as Lawson noted,91 if a sufficient head of steam is gained in commerce and the world, there is a good chance that civilian and mixed legal systems would wish to adopt them as things. Related to that question, but a separate matter, is what happens to the second-​level rules of property and the means by which they can be applied to cryptocurrency. Central to that will be way in which the courts treat possession as a concept, and whether cryptocurrencies will benefit from and be subject to rules which rely upon a possessory basis. Ultimately these questions will be answered by reference to demand and socioeconomic reality, and whether a system will use property law or some other area of law to regulate the new world. Property law could rise to the challenge, but not without doing some violence to long-​settled understandings of certain doctrinal rules.

Lawson (n 43). 91




I. Introduction II. Cryptocurrencies: Reinventing Money? III. The Roman-​Germanic Terrain of East Asian Civil Law IV. The Unbearable Strictness of Owning? A. A fundamental distinction: ownership and its objects

. The objects of ownership in East Asia 8.12 B C. Cryptocurrencies as objects of ownership? 8.16

8.01 8.02 8.06

V. Real Rights without Tangible Objects: Quasi-​Real Rights?

8.22 A. Rei vindicatio 8.28 B. Damages under tort law 8.31 C. Electing between remedies 8.33

8.10 8.10

VI. Conclusion VII. Postscript

8.34 8.35

I. Introduction Cryptocurrencies—​of which Bitcoin is the first and most well-​known—​are de- 8.01 centralized by design. Nevertheless, to the extent that it is possible for these decentralized networks to have a heart, there is little doubt that it lies in Asia, specifically East Asia. Three countries in particular play vital roles in cryptocurrency markets—​China, Japan, and South Korea. In the second half of 2016, transactions in Chinese yuan accounted for 98% of global Bitcoin trading volume.1 Even accounting for the chicanery of the Chinese cryptocurrency exchanges, Bitcoin

*  Kelvin FK Low, Professor, School of Law, City University of Hong Kong. ** Wu Ying-​Chieh, Assistant Professor, School of Law, Singapore Management University.

We would like to thank Professors David Fox, George Gretton, Kung Chung Liu, and Dr Cheol Woong Go for their helpful comments and corrections on an earlier draft of this paper. The usual caveats apply. 1 Gabriel Wildau, ‘China Probes Bitcoin Exchanges Amid Capital Flight Fears’ (10 January 2017) Financial Times accessed 2 August 2018.



Characterization of Cryptocurrencies in East Asia transaction volumes in China were estimated to account for 85% of the global trading volumes.2 In a flurry of activity in September 2017, China banned both ICOs (initial coin offerings)3 and cryptocurrency exchanges.4 Even then, however, China remained at the heart of the Bitcoin network because the key activity which makes Bitcoin work—​mining—​was predominantly conducted in China. By April 2016, Chinese mining pools controlled over 70% of the network’s hash rate.5 Despite the regulatory clampdown in September 2017, more than two-​thirds of new bitcoins were still mined by Chinese mining pools,6 although it remains to be seen if this dominance can be maintained in the light of crackdowns on preferential benefits, particularly in terms of cheap electricity enjoyed by mining companies.7 China’s regulatory crackdowns have seen some cryptocurrency trading activity shift to its neighbours Japan and South Korea.8 However, whilst some of the increased trading activity in Japan and South Korea is probably the result of trading moving offshore from China following the regulatory crackdown,9 there is

2 Willy Woo, ‘Estimating China’s Real Bitcoin Trading Volumes’ (17 January 2017) Coindesk accessed 2 August 2018. 3 Gabriel Wildau, ‘China Central Bank Declares Initial Coin Offerings Illegal’ (4 September 2017) Financial Times accessed 2 August 2018. 4 Gabriel Wildau, ‘Beijing Set to Shut Bitcoin Exchanges to Ensure Price Stability’ (11 September 2017) Financial Times accessed 2 August 2018. 5 Nathaniel Popper, ‘How China Took Center Stage in Bitcoin’s Civil War’ (29 June 2016) The New York Times accessed 2 August 2018. 6 Cao Li and Giulia Marchi, ‘In China’s Hinterlands, Workers Mine Bitcoin for a Digital Fortune’ (13 September 2017) The New  York Times accessed 2 August 2018. 7 Zheping Huang, ‘This Could Be the Beginning of the End of China’s Dominance in Bitcoin Mining’ (5 January 2018) Quartz accessed 2 August 2018. Also see Natalie Obiko Pearson, ‘China’s Crypto Crackdown Floods Market with Used Mining Rigs’ (26 January 2018) Bloomberg accessed 2 August 2018. But see Solomon Kingsley ‘Bitcoin and Bitcoin Cash Hashrates See an Upsurge in Crypto Winter’ (24 April 2018) Tokenquire accessed 2 August 2018. For the latest information on hashrate distribution Blockchain, ‘Hashrate Distribution’ Blockhain accessed 2 August 2018. 8 Nathaniel Popper, ‘Bitcoin Bug Bites Japan and South Korea as China Clamps Down’ (1 October 2017) The New  York Times accessed 2 August 2018; Leo Lewis and Emma Dunkley, ‘Japan and South Korea at Heart of Cryptocurrency Fever’ (22 December 2017) Financial Times accessed 2 August 2018. 9 Liu Xiao, ‘Chinese Bitcoin Platforms Carry On’ (22 December 2017) Caixin accessed 2 August 2018. Also see Krystal Hu, ‘How Chinese Bitcoin Buyers Are Getting Around the Government Ban’ (20 January 2018) Yahoo! Finance accessed 2 August 2018. But see now Xie Yu, ‘China to Stamp Out Cryptocurrency Trading Completely with Ban on Foreign Platforms’ (5 February 2018)



Introduction also genuine interest from local retail investors drawn to the then boom in bitcoin prices.10 Investors’ affinity with leverage in Asia11 doubtless had an impact on the dramatic increases in market share of these three Asian markets, albeit at different times.12 Soon after the regulatory clampdown in China in September 2017, Japan took over from China as the leader in market share in bitcoin trading,13 and it remains the market leader at the time of writing14 despite having the dubious honour of having hosted both of the cryptocurrency exchanges to have suffered the two worst hacks of all time.15 In late 2017, South Korea accounted for about 12–​20% of the world’s bitcoin trades.16 Whilst this was significantly less than the 40% that Japanese trading comprised, this is still a notable figure given that ‘[the Japanese] economy is four times larger than that of South Korea, and bigger in terms of financial investments.’17 Such was the cryptomania in South Korea that for a period of time; prices of cryptocurrencies listed on South Korean exchanges were significantly higher than those of other exchanges elsewhere in the world, a premium sometimes called the kimchi premium.18 This led to South Korean exchanges being briefly excluded from price averages calculated by CoinMarketCap, a leading source for cryptocurrency data, ‘due to the extreme divergence in prices from the rest of the world and limited arbitrage opportunity.’19 For a while, this

South China Morning Post accessed 2 August 2018. 10 Lewis and Dunkley (n 8). 11 Wolfie Zhao, ‘Japan Could Have More Than 3 Million Crypto Traders’ (10 April 2018) Coindesk accessed 2 August 2018. Also cf. Jennifer Hughes, ‘Asia’s Retail Investor Affinity with Leveraged Products’ (11 August 2016) Financial Times accessed 2 August 2018. 12 Lewis and Dunkley (n 8). Also cf Chao Deng, ‘Bitcoin Trading Faces Greater Scrutiny in China’ (19 January 2017) Wall Street Journal accessed 2 August 2018. 13 Joon Ian Wong, ‘One Bitcoin Is Now Worth More Than $5,100, a Record High’ (12 October 2017) Quartz accessed 2 August 2018. 14 Laignee Barron, ‘New Data on Cryptocurrency Trading Underscores Japan as a Major Hub’ (11 April 2018) Fortune accessed 2 August 2018. 15 See text accompanying nn 22–​23. 16 Lewis and Dunkley (n 8). Cf. Ryan Derousseau, ‘Why South Korea’s Cryptocurrency Crackdown Could Pop the Bitcoin Bubble’ (12 January 2018) Time accessed 2 August 2018. 17 Lewis and Dunkley (n 8). Also see Hailey Jo, ‘In a Country Known for Its “Bitcoin Zombies,” One-​ Third of Workers Are Crypto Investors’ (28 December 2017) Quartz accessed 2 August 2018. 18 Derousseau (n 16). 19 Nikhilesh De and Stan Higgins, ‘Crypto Prices Just Dropped on One Data Change’ (8 January 2018) Coindesk accessed 2 August 2018. Cf. JP Buntinx, ‘CoinMarketCap Reinstates South Korean Price Tracking’



Characterization of Cryptocurrencies in East Asia made South Korea the third largest crypto trading market in the world despite only ranking twenty-​seventh in terms of population and eleventh in terms of gross domestic product.20 Whilst it had fallen behind the Eurozone in terms of market size at the time of writing, following a series of regulatory clampdowns by the South Korean government, it remains to be seen whether the government will have the political will to maintain its hard-​line stance.21 Japan, in the meantime, has suffered its second major hack of a cryptocurrency exchange,22 when some 523m XEM tokens worth roughly US$500m were ‘stolen’ from Coincheck, bringing back memories of the infamous Mt Gox hack, which held the previous record for the most serious hack of a cryptocurrency exchange, where roughly US$460m worth of bitcoins were allegedly ‘stolen’ from Mt Gox.23 Coincheck was one of several exchanges set up in the wake of new regulations following the Mt Gox hack, and this more recent hack has called into question the regulatory regime in Japan.24 All of these rapid changes in the regulatory environment have made the study of the law relating to cryptocurrencies very difficult, given the fluid attitudes of the regulatory authorities, who on the one hand are rightly concerned about market excesses and on the other hand are reluctant to accidentally throttle a nascent technological innovation through disproportionate regulation. Whilst the regulatory terrain relating to cryptocurrencies has seen furious activity, little has been articulated about the characterization of cryptocurrencies as a matter of the civil law in any of these three jurisdictions. This, it is suggested, leaves courts untethered as they struggle to deal with disputes relating to cryptocurrencies. Likewise, regulatory efforts are necessarily hampered by the lack of clarity in the law. Owing to the dominance of these three jurisdictions in terms of both exchange activity and mining capacity, this issue is also of importance to courts of other jurisdictions. The decentralized nature of cryptocurrencies dramatically increases the likelihood of disputes relating to them having an international dimension and the pre-​eminence of these three East Asian jurisdictions in terms both of trading and mining activity means that a link with one or more of them

(29 January 2018) The Merkle accessed 2 August 2018. 20 Derousseau (n 16). 21 Cynthia Kim and Heekyong Yang, ‘Uproar Over Crackdown on Cryptocurrencies Divides South Korea’ (12 January 2018) Reuters accessed 2 August 2018. 22 Leo Lewis and Robin Harding, ‘ “Crypto Crazy” Japanese Mystified by Virtual Heist’ (3 February 2018) Financial Times accessed 2 August 2018. 23 Robert McMillan, ‘The Inside Story of Mt Gox, Bitcoin’s $460 Million Disaster’ (3 March 2014) Wired accessed 2 August 2018. 24 Robin Harding, ‘Japan Suspends Trade on 2 Cryptocurrency Exchanges’ (8 March 2018) Financial Times accessed 2 August 2018.



Cryptocurrencies: Reinventing Money? is a prospect that cannot be readily dismissed. Their characterization is therefore also of interest to foreign courts and lawyers as a matter of the conflict of laws.25

II.  Cryptocurrencies: Reinventing Money? Despite comparisons to gold26 and tulips,27 Satoshi Nakamoto, the mysterious 8.02 inventor of Bitcoin, the original cryptocurrency, initially intended it to serve as a peer-​to-​peer electronic cash system,28 ie digital money. This should also be obvious from the name given to Bitcoin and its ilk as a class—​cryptocurrencies. As the name implies, this class of digital money is backed by a cryptographic system, as opposed to fiat currency. It is debatable whether Bitcoin or one of its myriad challenger cryptocurrencies has managed to achieve the economic functions of money, but one thing is clear. So far, as the law of the three jurisdictions under consideration are concerned, they are most definitely not money in the legal sense of the word. This is because all three jurisdictions adopt the so-​called State theory of money,29 meaning only those monies issued under the authority of the law in force within the State of issue would be legally regarded as money.30 Although China has been named as one of numerous countries considering the

25 See ch 5 of this book, ‘Virtual Currencies and the Conflict of Laws’, by Andrew Dickinson. 26 See eg Nathaniel Popper, Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money (HarperCollins 2015). 27 Evelyn Cheng, ‘Bitcoin Bubble Dwarfs Tulip Mania from 400 Years Ago, Elliott Wave Analyst Says’ (20 July 2017) CNBC accessed 2 August 2018). See also Robinson Meyer, ‘How Many Tulips Can You Buy With One Bitcoin?’ (5 December 2013) The Atlantic accessed 2 August 2018; Alex Hern, ‘Bitcoin Hype Worse than “Tulip Mania” Says Dutch Central Banker’ (4 December 2013) The Guardian accessed 2 August 2018; Al Lewis, ‘Tulip Bulbs for Our Time’ (8 December 2013) Wall Street Journal accessed 2 August 2018; Jean-​Pierre Landau, ‘Beware the Mania for Bitcoin, the Tulip of the 21st Century’ (17 January 2014) Financial Times accessed 2 August 2018. 28 Satoshi Nakomoto, ‘Bitcoin: A Peer-​to-​Peer Electronic Cash System’ (October 2008) Bitcoin accessed 2 August 2018. 29 Charles Proctor, Mann on the Legal Aspect of Money (6th edn, OUP 2005) 12; for a more general analysis of this theory, see Georg Friedrich Knapp, The State Theory of Money (J Bonar and H M Lucas tr, Simon Publications 2003). 30 The Bank of Japan Act, art 46 (an English translation is available at accessed 2 August 2018), the Bank of Korea Act, art 47 (an English translation is available at accessed 2 August 2018) and the Law of the People’s Bank of China, arts 15, 17 (an English translation is available at accessed 2 August 2018) respectively accord its national bank an exclusive right to issue legal currencies.



Characterization of Cryptocurrencies in East Asia issue of fiat cryptocurrency,31 neither it nor Japan or South Korea have actually proceeded with such an issue. As such, the only cryptocurrencies presently circulating in all three jurisdictions are of the non-​fiat variety that cannot legally qualify as money. 8.03 On a spectrum of legal accommodation of cryptocurrencies, China and Japan sit

on opposite ends of the spectrum, with South Korea falling somewhere between them. In Japan, ‘virtual currencies’ have recently been included as a means of payment by way of a 2016 amendment to the Payment Services Act.32 Although the Act uses the term ‘virtual currency’, commentators have construed it to encompass cryptocurrencies such as bitcoins.33 This has caused numerous commentators to mistakenly believe that cryptocurrencies have achieved the status of legal tender in Japan,34 but this view is clearly mistaken.35 The amendment was clearly intended to enable the government to regulate cryptocurrencies rather than facilitate their use as a means of payment. Nevertheless, the cryptocurrency

31 Will Knight, ‘China’s Central Bank Has Begun Cautiously Testing a Digital Currency’ (23 June 2017) MIT Technology Review accessed 2 August 2018. 32 See art 2(5), an English translation is available at accessed 2 August 2018. 33 Shiomi Yoshio, The New General Rules of Obligations (Shinzansha Publishing 2017) 225 (潮見佳男, 『新債権総論I』,信山社,東京2017,225 頁); Kohari Yoshiaki, ‘Legal Structure of Virtual Currencies’ (2017) 13 Hiroshima Law Review 1, 2 (小梁吉章, 「仮想通貨の法律構成」, 広島法科大学院論集,第13号2017,1、2頁). 34 See eg Francesca Canepa, ‘Bubble or Breakthrough? Bitcoin Keeps Central Bankers on Edge’ (27 November 2017) Reuters accessed 2 August 2018; Takahiko Wada and Hideyuki Sano, ‘Japan’s FSA Gives Official Endorsement to 11 Cryptocurrency Exchanges’ (29 September 2017) Reuters accessed 2 August 2018; Darryn Pollock, ‘Bitcoin –​It’s Big in Japan’ (8 January 2018) Cointelegraph accessed 2 August 2018; AFP-​JIJI, ‘Japan’s New Cryptocurrency Crooners Sing the Bitcoin Beats’ (10 January 2018) Japan Times accessed 2 August 2018. 35 Yasutake Okano, ‘Virtual Currencies:  Issues Remain after Payment Services Act Amended’ (15 July 2016) Nomura Research Institute Ltd 2 accessed 2 August 2018: The amended PSA defines virtual currency as a store of value that can be used in the settlement, trade or exchange of goods and/​or service transactions among large numbers of unspecified parties and is transferable via information processing systems. In other words, a virtual currency is construed as a means of payment that is not a legal currency. Also see Reuters Staff, ‘ADVISORY-​References to Bitcoin as ‘Legal Tender’ in Japan’ (13 December 2017) Reuters accessed 2 August 2018. See also Staff Writers, ‘Japan Fleshes Out Crypto Market Rules to Prevent Coincheck 2.0’ (6 May 2018) Nikkei Asian Review accessed 2 August 2018; Andreas Townsend,



Cryptocurrencies: Reinventing Money? community has chosen to regard its inclusion in the Act as an endorsement of sorts,36 which is a very curious construction of the Act since payment by cryptocurrency was never prohibited in the first place. Without conferring legal tender status to cryptocurrencies, it is difficult to see how their inclusion in the Act ‘facilitates’ anything other than their regulation. Neither South Korea nor China has promulgated similar legislation. Indeed, in China, cryptocurrency exchanges have been banned since September 2017.37 The government’s refusal to recognize cryptocurrency as money has been clear since December 2013 when the People’s Bank of China and four other ministries and agencies issued a notice curtailing financial institutions’ involvement with bitcoin. According to the notice: [a]‌lthough bitcoin is called a ‘currency’, but as it is not issued by a monetary authority, it does not have the legal tender characteristics of a currency, and so cannot really be regarded as a true currency. Based on its characteristics, bitcoin should be treated as a form of virtual commodity that does not share the same legal status of a currency. Nor can, or should, it be circulated or used in the marketplace as a currency.38

That said, in the absence of an outright ban, cryptocurrencies may presumably 8.04 still be used in isolated transactions in a manner akin to barter in China. In South Korea, although cryptocurrencies have not been accommodated by any legislation, neither has its trade through cryptocurrency exchanges been banned by the authorities. Nevertheless, despite the absence of guidance, it is clear that they are not money as a matter of law. But if Bitcoin and other cryptocurrencies are not money in these three jur- 8.05 isdictions, the next obvious question would be whether they would be regarded as some form of property (ie assets) instead. Can cryptocurrencies be the object of ownership in any of the three East Asian legal systems under consideration? ‘Japan’s Coincheck Removes Monero and Other Privacy Coins On FSA Ban’ (28 May 2018) Oracle Times accessed 2 August 2018. 36 Jonathan Garber, ‘Bitcoin Spikes after Japan Says It’s a Legal Payment Method’ (3 April 2017) Business Insider Singapore accessed 2 August 2018. 37 中国人民银行 中央网信办 工业和信息化部 工商总局 银监会 证监会 保监会关于防范代币发行融资风险的公告 (4 September 2017)  at accessed 2 August 2018 (in Chinese only). An unofficial translation is available from Wolfie Zhao, ‘China’s ICO Ban: A Full Translation of Regulator Remarks’ (5 September 2018) Coindesk accessed 2 August 2018. 38 中国人民银行等五部委发布《关于防范比特币风险的通知》(5 December 2013)  at accessed 2 August 2018 (in Chinese only).



Characterization of Cryptocurrencies in East Asia

III.  The Roman-​Germanic Terrain of East Asian Civil Law 8.06 Before we can begin to contemplate the characterization of cryptocurrencies as

property in Japan, China, or South Korea, it is necessary to briefly introduce their respective legal systems. Property law in Japan, China, and South Korea is respectively called ‘bukkenhou’ (物権法/​Japanese); ‘wùquánfǎ’ (物权法/​Chinese); and ‘mulkwonbop’ (물권법/​Korean).39 In fact, the translation ‘property law’ does not precisely capture the nuance of the original term used in each of these languages. A more precise and accurate translation would be ‘the law of real rights’ or—​to resort to Latin—​the law of in rem rights or rights erga omnes. This branch of the law mainly provides for those rights that are in principle exigible against an unspecified number of persons or—​to use a more vivid colloquialism—​the world at large. The reason the term ‘property law’ may cause confusion when used in a civil law context is that it might denote an area of law that concerns property in the sense of assets or wealth, yet property in this sense can involve debts, ie a personal right. However, used in this sense, ‘property’ is respectively translated as ‘zaisan’ (財産/​Japanese); ‘cáichǎn’ (财产/​Chinese); and ‘jaesan’ (재산/​ Korean).40 While the former sense of ‘property’ focuses on the nature of the right (specifically its exigibility), this wider sense focuses instead on the nature of assets. It accordingly does not inquire into the nature of the right in question, therefore both tangibles (ie land and chattels) and intangibles (ie debts, intellectual property rights) are included. As with the case of ‘property’, ‘ownership’ has a strict legal meaning that is distinct from its colloquial usage. Ownership is respectively translated as ‘shoyuuken’ (所有権/​Japanese); ‘suǒyǒuquán’ (所有权/​Chinese); and ‘soyukwon’ (소유권/​Korean).41 In its strict legal sense, only tangible things are capable of being the object of ownership. This, however, cannot prevent laypersons from describing their rights in other assets as a form of ‘ownership’ in the colloquial sense. For example, when B owes A money, it is not uncommon to encounter statements to the effect that A ‘owns’ a debt owing from B. However, this is not ‘ownership’ in the strict legal sense of the word because the debt is not a tangible thing, and, furthermore, unlike ownership, A’s right is in personam and binds B only. The verb ‘own’, as used colloquially, is thus a neutral and elusive 39 Despite appearances, all three phrases refer to exactly same concept. Indeed, historically, they would even be written in exactly the same way because of the influence of the Chinese script on Japanese and Korean writing. The Japanese kanji characters for ‘bukkenhou’ reflect the traditional Chinese script adopted by the Japanese. The Chinese characters for ‘wùquánfǎ’ are in turn the same words in the simplified Chinese script. The Korean hangul characters are a syllabic simplification of the same characters, which until the early twentieth century, would have been represented in hanja, which was the same script as the traditional Chinese script. 40 All three phrases again, despite differences in phonology and logogram, refer to exactly the same concept and derive from the same historical characters. 41 All three phrases again, despite differences in phonology and logogram, refer to exactly the same concept and derive from the same historical characters.



The Roman-Germanic Terrain of East Asian Civil Law expression that can be used whenever a tangible or an intangible asset belongs to us. Although a debt can, somewhat confusingly, form the subject matter of a real right (ie a security interest over a debt), the debt itself is a personal right (ie rights in personam) rather than a real right. Since the law of real rights in East Asian civil jurisdictions under discussion only deals with rights in rem, it is therefore preferable to employ the translation of ‘the law of real rights (or rights in rem)’ in order to avoid any misunderstanding arising out of translation.42 The first question is thus: what is the source of the law of real rights in these three jurisdictions? The primary legal source for the law of real rights in Japan43 and South Korea44 8.07 is the Civil Code. Whilst China has yet to enact a comprehensive Civil Code, it has a separate piece of legislation called the Law of Real Rights45 that adopts the structure of the part of the Civil Code that deals with the law of real rights. China is expected to enact a Civil Code in the near future,46 and it is highly probable that

42 For the different translations of the term ‘property’ in the various European jurisdictions, see George Gretton, ‘Ownership and its Objects’ (2007) 71 Rabels Zeitschrift für ausländisches und internationales Privatrecht 802. 43 After the Meiji Restoration in 1868, Japan opened its country to the world. It started to modernize the nation by learning from advanced western countries. As part of this modernization scheme, the reform of its legal system also proceeded. Initially, the French Civil Code was adopted as the model for importation since Japan wanted to have a set of written rules that could be immediately translated into Japanese. The first Japanese Civil Code based on the French Civil Code was completed in 1890 and ready to be enacted in 1893. However, the enactment of the German Civil Code resulted in an abrupt shift to the German Civil Code since it was (i) the newest Code in Europe, (ii) regarded as systematically well-​structured, and (iii) written in a clear and simple style. The Japanese Civil Code modelled after the German Civil Code was finally enacted in 1898. For more detail, see Hiroshi Oda, Japanese Law (3rd edn, OUP 2011) 13–​25; Curtis Milhaupt, J Mark Ramseyer, and Mark West, The Japanese Legal System (Foundation Press 2006) 34. 44 The Korean Civil Code came into force in 1960. The Japanese Civil Code was applied in Korea Peninsula after Japan annexed Joseon (the old name of Korea) between 1910 and the end of the Second World War in 1945. In other words, Korea accepted a Western Civil Code through Japan and adopted a Roman-​Germanic system. Even though Korea was liberated in 1945, it could not draft its own Civil Code for more than a decade owing to the Korean civil war and its domestic political turmoil. The Korean Civil Code, which tried to address some of the perceived defects of the Japanese Civil Code, was finally enacted in 1960. For more detail, see Kwon Youngjoon, ‘Korea: Bridging the Gap between Korean Substance and Western Form’ in E Ann Black & Gary F Bell (eds), Law and Legal Institutions of Asia: Traditions, Adaptations and Innovations (CUP 2011) 151, 154–​56. 45 An English translation is available at:  accessed 2 August 2018. Besides statutes, judicial interpretations and selected leading authorities also have binding effect in China and are sources of law. For more information on them, see Jianfu Chen, Chinese Law: Context and Transformation (Brill 2016) 266–​72; Seth Gurgel and Ping Yu, ‘Stare Decisis in China? The Newly Enacted Guiding Case System’ in Marco Wan (ed), Reading the Legal Case: Cross-​Currents between Law and the Humanities (Routlege 2012) 142. 46 For more detail, see Shi Hong (ed), The General Provisions of the Civil Law of the People’s Republic of China (Peking University Press 2017) 3 (石宏 主编, 《中华人民共和国民法总则》 ,北京大学出版社,北京 2017,第3页); Yang Lixin, A Study on the General Provisions of the Civil Law of China vol.1 (Renmin University Press 2017) 114–​15 (杨立新, 《中国民法总则研究 上卷》 ,人民大学出版社,北京 2017,第114-​115页).



Characterization of Cryptocurrencies in East Asia the Law of Real Rights will be incorporated into their new Civil Code. So far as the Japanese and South Korean Civil Codes are concerned, their systematic structure follows that of the German Civil Code (BGB), which adopts the Pandectist system. This system is named after the Pandectae (also called the Digesta or Digest) within the Corpus Iuris Civilis47 since many rules of the German Civil Code are derived from it. Structurally, the German code is influenced by the Christian geometric systems which moved from the general to the particular.48 Thus both Japanese and South Korean Civil Codes49 also adhere to such a structural system and consist of five Books:  General Rules of Civil Law (Book I); Law of Real Rights (Book II); Law of Obligations (Book III); Family Law (Book IV); and Law of Succession (Book V). 8.08 Book I (ie General Rules of Civil Law) of both the Japanese and South Korean

Civil Codes provides for the common elements of all private legal relationships, such as personhood (both natural and legal); manifestation of intent (ie juridical acts such as agreement, will etc.); and prescriptions, to name but a few. Therefore, it applies to all aspects of private law in those jurisdictions. Then the Codes move on to topics that are more specific. Book II deals with the Law of Real Rights (ie Rights in rem). Following the geometric system, Book II of both Civil Codes is also divided into a General Part and a Particular Part. The General Part enshrines the rules relating to the creation of real rights, the modes of transfer, and the reasons for extinction. These rules are common denominators that can be generally applied to the specific and individual real rights-​relationships such as ownership, security interests (ie hypothec, pledge, and lien), and usufruct (ie easement, superficies etc.) that are to be found in the Particular Part.50 The Civil Code forms the infrastructure and cornerstone of all aspects of private law in Japan and South Korea. Although China presently lacks a comprehensive Civil Code, its 47 The Pandectae is one of the four parts of Justinian’s Corpus Iuris Civilis; For English translation, see Alan Watson, The Digest of Justinian Vols.1-​4 (University of Pennsylvania Press 1998); the other three parts of the Justinian’s code are the Institutes, the Code, and the Novels. For the English translation of the Institutes, see Peter Birks and Grant Mcleod, Justinian’s Institutes (Cornell University Press 1987); unlike the German Civil Code, the French Civil Code is influenced by the Institutes. 48 Peter Stein, Roman Law in European History (CUP 1999) 32–​37, 119-​123; For more details on the differences between the French and German civil law, see Rene David and John EC Brierley, Major Legal Systems in the World Today (3rd edn, Stevens & Sons 1985) pt I; H Patrick Glenn, Legal Traditions of the World (OUP 2014) ch 5; Konrad Zweigert and Hein Kötz, An Introduction to Comparative Law (Tony Weir tr, OUP 1998) chs I and II; John H Head, Great Legal Traditions: Civil Law, Common Law, and Chinese Law in Historical and Operational Perspective (Carolina Academic Press 2011) ch 2. 49 An English translation of the Japanese Civil Code is available at accessed 2 August 2018; an English translation of the South Korean Civil Code is available at accessed 16 August 2018. 50 For reasons of space, Books III, IV, and V are not dealt with here; but their fundamental structure (ie the General-​Specific division) is identical to that of Book II.



The Unbearable Strictness of Owning? modern civil law is also heavily influenced by the German tradition.51 Its General Principles of Civil Law, enacted in 1986, was modelled on the Civil Code of the Soviet Union, which was itself substantially influenced by the German Civil Code, and it resembles what appears as Book I of the Japanese and South Korean Civil Codes. It is now supplemented by the General Provisions of Civil Law, enacted in 2017, which is intended to serve as Book I of a future Civil Code.52 Likewise, China’s Law of Real Rights, enacted in 2007, is also akin to Book II of the Japanese and South Korean Civil Codes in terms of its systematic structure, likewise comprising a General Part and a Particular Part. Although the Germanic influence is less explicit, it will be seen that the dominant view of real rights in China remains Germanic. With this brief background of the legal systems of the three jurisdictions, in par- 8.09 ticular, their laws relating to real rights, we can explore the two questions that this chapter attempts to answer: First, can cryptocurrencies be considered a thing recognized in the Civil Code? Second, if not, how can they be accommodated under the current Civil Code regime?

IV.  The Unbearable Strictness of Owning? A. A fundamental distinction: ownership and its objects With the growing consciousness of cryptocurrencies, it is increasingly common- 8.10 place to hear statements to the effect that ‘I own bitcoins’. But are such statements accurate as a matter of law? Do persons in China, Japan, and South Korea who hold cryptocurrencies actually own them in the legal sense of the word ‘ownership’? To begin our study on the accuracy of such commonplace statements, it is necessary to distinguish a real right from its subject matter, the object or thing or res that lies at its heart. For example, when we say that A has ownership of a pen, ownership is the real right that exists in the pen but this right is separable and distinct from the pen itself. The pen is the subject matter of A’s ownership (ie a real right). Such a juxtaposition of subject matter and right can also be found in an obligational relationship. For example, if A contracts with B to borrow money from B, A is contractually entitled to B’s performance, which in this case entails the transfer of money to A. In other words, the subject matter of A’s contractual right is B’s performance. Again, we have a subject matter (ie B’s performance) and a right (ie A’s contractual right). However, there are a number of crucial differences. First, since A’s right only binds on B under the latter contractual relationship, its

51 Tsung-​Fu Chen, ‘Transplant of Civil Code in Japan, Taiwan, and China: With the Focus of Legal Evolution’ (2011) 6 National Taiwan University Law Review 389, 418–​21. 52 In the event of conflict between the General Principles of Civil Law 1986 and the General Provisions of Civil Law 2017, the latter prevails.



Characterization of Cryptocurrencies in East Asia legal nature is that of a personal one, thus a right in personam, as contrasted with the former real right (ownership) that is in principle exigible against the world. 8.11 Second, the subject matter of a real right is always an object or a thing. The same,

however, cannot be said of obligational rights such as contractual rights. Whilst A can say A has ownership of the pen, it is nonsensical to say that he has ownership of B’s performance. Whilst it is semantically possible for A to say he owns a contractual right to B’s performance,53 it makes no sense to speak of A having ownership of B’s performance, as opposed to his right to B’s performance. B’s performance per se, the transfer of money, is not capable of being the subject matter of ownership. It is only possible to speak colloquially of ownership by blurring the right with its subject matter, hence the commonly encountered ‘A owns a contractual right to B’s performance’. This can be contrasted from the case where A says he owns a pen. The term ownership carries with it an exclusive right to use, benefit, and dispose of a thing, in this case, a pen. Therefore, owning a contractual right is in principle demarcated from having ownership of a thing owing to the exclusive nature of the latter required to have a separable, tangible object at its heart.54 The subject matter of the former (or of obligational relationships in general) is the obligor’s performance, whereas that of the latter is always an object or a thing. Are cryptocurrencies such as bitcoins capable of being ‘objects’ in the legal sense of the word in the Chinese, Japanese, or South Korean legal systems? B. The objects of ownership in East Asia

8.12 Before we can consider whether cryptocurrencies can be the object of ownership

as a matter of Chinese, Japanese, or South Korean law, it is necessary to examine how these legal systems respectively define ‘ownership’ as a matter of their civil law. According to Article 206 of the Japanese Civil Code, ‘an ownership holder has the right to freely use, obtain, profit from, and dispose of the thing owned, subject to the restrictions prescribed by laws and regulations.’ In a similar vein, Article 211 of the South Korean Civil Code provides that ‘an ownership holder has the right, within the scope of law, to use, take the profits of and dispose of, the thing owned.’ According to Article 39 of the Chinese Law of Real Rights, ‘an ownership holder of a real property or movable property has the rights to possess, use, seek profits, and dispose of the real property and movable property according to law.’ Although these provisions prescribe the various rights that an owner possesses in relation to the thing owned, they do not set out what subject matter may

53 We see this all the time in relation to money in bank accounts, which are essentially debt obligations. 54 Yang Lixin, Real Rights Law (5th edn, Renmin University Press 2016) 26 (杨立新, 《物权法 第5版》 ,人民大学出版社 ,北京2016,第26页); Uchida Takashi, Civil Law I: The General Rules of Civil Law and the General Part of the Law of Real Rights (4th edn, University of Tokyo Press 2008) 353 (内田貴, 『民法I 総論.物権総論』,東京大学出版会,東京2008,353 頁).



The Unbearable Strictness of Owning? qualify as an object of ownership. What may qualify as an object of ownership is instead defined in the General Rules of Civil Law in each jurisdiction. In this respect, Japanese law appears to adopt the strictest approach. According 8.13 to Article 85 of the Japanese Civil Code, ‘things’ as used in this code shall mean a tangible thing’. Japanese law, under influence from the German Civil Code, confines the scope of things to that of tangible objects.55 Thus, in order to be recognized as a thing under the Japanese civil law, it must be a thing that physically occupies space. Things such as land, water, or goods, for example, would have no difficulty being recognized as things that can serve as objects of ownership. However, this does not mean anything corporeal is capable of being classified as a thing capable of being owned. The orthodox view imposes a further requirement for a tangible object to become a thing: exclusive controllability.56 Thus, tangible objects such as humans, the Sun, other stars, or oceans etc. are not categorized as things as such since they cannot be subject to any individual’s exclusive control. The rationale of the rule that only tangible things may be the objects of ownership is that intangible things are indiscernible by the public in the real world, so that unless otherwise specially provided for, should not become things capable of being the objects of ownership lest they harm the security of commerce.57 Such a view of the objects of ownership has been criticized for being too narrow 8.14 and out of touch with the experience of the average person in daily life. Thus, some modern commentators, while generally accepting that debts or rights cannot be recognized as objects of ownership, argue that controllable intangibles such as electricity58 and natural forces (ie heat or gas) ought to be admitted to the scope of things capable of being the object of ownership.59 This seems to be the position under South Korea law. Apart from tangible things, the Korean Civil Code, under Swiss influence, further incorporates some specific intangibles within the scope of things, viz., electricity or other natural forces can also fall within the scope of things so long as they are confined within a space and under control.60 Thus, Article 98 of the South Korean Civil Code provides that ‘things mentioned in this

55 This idea derives from art 90 of the German Civil Code that restricts things to corporeal objects. 56 Wagatsuma Sakae, The General Rules of Civil Law (Iwanami Shoten Publishing 1965) 201 (我妻栄, 『新訂民法総則』,岩波書店,東京1965,201頁); Uchida (n 54) 353; Matsuoka Hisakazu, Law of Real Rights (Seibundo Publishing 2017) 6, 14 (松岡久和, 『物権法』,成文堂,東京2017,6、14頁). 57 Matsuoka (n 56) 7; For Professor Sjef van Erp, the whole debate on whether rights (ie intangibles) can be owned or not is a trap, created by pandectist legal thinking; for more detail, see Sjef van Erp, ‘European and National Property Law: Osmosis or Growing Antagonism?’ Sixth Walter van Gerven Lecture (2006) 18 accessed 14 August 2018. 58 It is interesting to find that the Japanese Penal Code, art 245 expressly provides that electricity is a thing that can be the subject matter of the crime of theft. 59 Wagatsuma (n 56) 202; Uchida (n 54) 354; Matsuoka (n 56) 14. 60 The idea comes from the Swiss Civil Code, art 713, which prescribes that ‘Chattel ownership relates to movable physical objects and to forces of nature. . . .’



Characterization of Cryptocurrencies in East Asia code shall mean corporeal things, and electricity or other natural forces which can be controlled.’ However, despite this modest expansion, the fundamental object of ownership still consists of tangible things, and commentators in South Korea do not consider that debts or rights can be objects of ownership.61 8.15 On the other hand, the recently enacted General Provisions of the Civil Law of

China62 proves rather more cryptic, with Article 115 providing that ‘things’ include immovables and movables. Rights can be the subject matter of a real right if other legislation permits it.’ The first part of Article 115 confines the objects of ownership under Chinese law to immovable and movable property. ‘Immovable property’ denotes land or buildings, and ‘movable property’ is interpreted as involving physical and tangible objects such as chattels and goods, though some commentators are in favour of including controllable electricity and natural forces (ie heat, gas etc.) as objects of ownership.63 Although the necessity of a tangible object is not explicit in Article 115, it appears implicit when read with Article 114, especially when the official comment of the latter is taken into account.64 This would then, if electricity and other controllable natural forces are regarded as proper objects, be a similar position to that under South Korean law. As to the cryptic second sentence of Article 115, while it appears to suggest that rights may be the subject matter of a real right, they cannot truly be considered objects of ownership. Thus, while debts and other rights can be the object of a security interest (ie, a type of real right), they cannot be the objects of ownership, strictly so-​called. Furthermore, as the Article clearly articulates, such quasi-​real rights over rights exist only where it is permitted by a separate piece of legislation. C. Cryptocurrencies as objects of ownership?

8.16 So far as the ‘asset’ sense of ‘property’—​‘zaisan’ (財産/​Japanese); ‘cáichǎn’ (财产/​

Chinese); and ‘jaesan’ (재산/​Korean)—​is concerned, the concept certainly seems sufficiently wide to encompass bitcoins and other cryptocurrencies. After all, as we have seen, property, in the sense of assets, includes intangibles65 such as debts and intellectual property rights. Bitcoins and other cryptocurrencies certainly

61 Kwak Yunjik, Law of Real Rights (Pakyoungsa publishing 1998) 289 (곽윤직, 물권법, 박영사, 서울 1998, 289면; Song Tucksoo, Law of Real Rights (3rd edn, Pakyoungsa publishing 2017) 269 (송덕수, 물권법 제3판, 박영사, 서울2017, 269면). 62 The General Provisions of the Civil Law of the People’s Republic of China has recently been enacted and has been drafted with the intent of being incorporated into the Civil Code as Book I of the future Code. For more information see Shi (n 46) 1–​4; Yang (n 46) 114–​15. 63 Shi (n 46) 272. 64 The official comment (立法理由, lìfǎ lǐyóu) on art 114 of the General Provisions of the Civil Law of the People’s Republic of China enforced in 2017 explains that ‘Assets can be divided into tangibles and intangibles, and real rights are those the object of which consists of tangible assets.’ Whilst there had been some doubt over the strictness of Chinese law in this respect prior to 2017, the official comment to art 114 clearly adopts the strict Germanic view. 65 See text accompanying n 40.



The Unbearable Strictness of Owning? hold economic value for now.66 That they do possess economic value appears to have been acknowledged by the South Korean courts, and it appears that they are considered to be assets or ‘jaesan’ (재산) as a matter of law and therefore liable to confiscation. The case67 involved one Ahn, who was indicted for operating a pornographic website with some 1.2 million members, in which he took membership fees in bitcoins. According to the Act on the Regulation and Punishment of Concealment of Criminal Profits, Article 8(1)(i),68 criminal profits acquired through illegal crime are liable to be confiscated. When the Southern Gyeonggi Provincial Police Agency ‘seized’ Ahn’s 216 bitcoins, therefore, the question arose as to whether or not the police’s actions were appropriate. Initially, the Suwon District Court69 ruled: ‘It is not appropriate to confiscate bitcoins because they are in the form of electronic files without physical attributes, unlike cash. Virtual currency cannot assume an objective standard value.’70 However, on appeal by the prosecutor, the Suwon District Court reversed its previous decision and concluded71 that ‘Among the 216 bitcoins confiscated by the prosecution, Ahn’s 191 bitcoins’ were traced to email addresses of the pornography site members, so that ‘it is appropriate to confiscate the 191 bitcoins as these were the profits from criminal activities’.72 This decision has since been upheld by the Korean Supreme Court.73 According to the District Court, ‘Korean law stipulates that a seizable hidden asset ranges from cash, deposits, stocks, and other forms of tangible and intangible objects holding value’. Granted ‘bitcoin is intangible and comes in the

This was not always the case, and it may not always remain the case. 67 Kim Yoo-​chul, ‘Local Court Confiscates Bitcoins’ (31 January 2018) The Korea Times accessed 14 August 2018. 68 Unfortunately, no English translation is provided yet, but for Korean text, see accessed 16 August 2018. 69 Suwon District Court Judgement, 7 Sep.  2018, no 2017 GODAN 2884 (수원지법 2018.9.7선고 2017고단2884); although the judgment has not been officially published, the present authors have the judgment on file in the original language. Extracts quoted in the text have been checked against this document for accuracy. 70 Samburaj Das, ‘Korean Court Rules Bitcoin Seizure as Illegal Confiscation’ (11 September 2017) CCN accessed 14 August 2018. 71 Suwon District Court Judgement, 30 Jan. 2017, no 2017 NO 7120 (수원지법 2017.1.30선고 2017노7120). The Korean court system has three main levels: District Courts, High Courts, and the Supreme Court. However, certain district court cases can be decided by a single judge, and the judicial panel of the same district court would deal with appeal cases. This case was initially decided by a single judge (n 69). However, the defendant appealed, and the appeal was heard by the judicial panel of the same district court. 72 Also see Kevin Helms, ‘South Korean Court Rules Bitcoin Has Economic Value’ (31 January 2018) Cryptocurrency Investing accessed 14 August 2018. 73 The Korean Supreme Court Judgment, 30 May 2018 no 2018DO3619 (대판2018.5.30. 선고2018도3619); Kim Hyun-​bin, ‘Top Court Recognizes Cryptocurrency as Asset’ (30 May 2018) The Korea Times accessed 14 August 2018. Unfortunately, the court had not issued its grounds of decision at the time of writing. 66



Characterization of Cryptocurrencies in East Asia form of digitized files, but it is traded on an exchange and can be used to buy goods. Therefore, receiving bitcoins is an act of taking profits.’ Two reasons in particular were considered significant by the District Court on appeal. First, it was possible to identify the bitcoins held by the accused and to transfer the illicit profits to the government’s account using the cryptographic key obtained from the criminal. The fact that the Bitcoin blockchain was updated with fresh blocks every ten minutes did not cause the bitcoins at issue to lose their identity. Second, bitcoins are capable of being exchanged for legal currencies (with an exchange rate applying), and some businesses accept bitcoins. Moreover, various transactions can be made via bitcoins so they clearly hold economic value. A similar position appears to hold in Japan where the bitcoins held by Mt Gox for its customers have been treated as assets by its trustee in its liquidation.74 While there has been litigation over whether or not these assets took the form of property in the sense of real rights, Japanese law appears content to assume that cryptocurrencies are at least ‘zaisan’ (財産), even if they may not be ‘bukken’ (物権). 8.17 The position in China is more complicated. Article 127 of the 2017 General

Provisions of Civil Law provides that ‘data or online virtual assets shall be protected if the law has provisions on the protection of them.’ As no new legislation has been passed following the enactment of the General Provisions of Civil Law, it would appear that cryptocurrencies exist in a sort of legal limbo. In theory, the Chinese law relating to property in the sense of assets should be as broad as that of Japanese or South Korean law. However, paradoxically, the explicit inclusion of a provision relating to virtual assets in its General Provisions of Civil Law appears to prevent their inclusion for consideration as assets pending further legislation. This is perhaps not surprising, since China has proscribed bitcoin exchange transactions and holds a sceptical and negative attitude toward cryptocurrencies. One of the reasons for the past popularity of Bitcoin in China, it has been speculated, has been that it allowed users to evade capital controls. Although some experts have ‘said the evidence suggests this is not a significant phenomenon’,75 one of the reasons for the Chinese government’s clampdown on cryptocurrency exchanges reflects its fears that it facilitates capital outflows.76 Although one of the drafters of the General Provisions of Civil Law had suggested in an interview

74 Adrianne Jeffries, ‘Inside the Bizarre Upside-​Down Bankruptcy of Mt Gox’ (22 March 2018) The Verge accessed 14 August 2018; Leo Lewis, ‘Bitcoin Surge Prompts Legal Bid to Remove Mt Gox from Bankruptcy’ (13 December 2017) Financial Times accessed 14 August 2018. Also see below. 75 Nathaniel Popper, ‘How China Took Center Stage in Bitcoin’s Civil War’ (29 June 2016) The New York Times accessed 14 August 2018. 76 Agence France-​Presse, ‘Chinese Investors Fume over Beijing’s Bitcoin Crackdown’ (1 October 2017) South China Morning Post accessed 14 August 2018.



The Unbearable Strictness of Owning? that he considered bitcoins to be a form of ‘virtual movable asset’,77 it is notable that this interview was conducted before the Chinese government’s clampdown on cryptocurrencies. Most major monographs published recently seem to be in line with the more recent hostile governmental policy, since none of them includes cryptocurrencies within the ambit of this Article. Instead, they consider that virtual assets mainly involve game money, game items, points earned from a particular website etc.78 So far as cryptocurrencies are concerned, it is more likely than not that the only cryptocurrency that will be accommodated within Article 127 of the General Provisions of Civil Law will be an as yet unreleased fiat cryptoyuan.79 Non-​fiat cryptocurrencies including bitcoins would seem to be wholly excluded from legal protection in China at the moment. If so, however, their exclusion would appear to be politically driven rather than the result of a fundamental incompatibility with the civilian conception of ‘asset’, as both Japanese and South Korean law take a different position and a drafter of the General Provisions of Civil Law had previously considered Bitcoin to be a form of movable asset. Whilst South Korean and Japanese law consider cryptocurrencies to be assets, 8.18 there is much less clarity about what sort of assets they are precisely (apart from the fact that they are not money) and how they are protected by the law. After all, whilst assets encompass intangibles such as debts and intellectual property rights, such rights are protected by other provisions in the Law of Obligations or the Intellectual Property Act, rather than under the rubric of ownership since the subject matter of the latter primarily consists of tangible assets such as land or chattels that must be amenable to exclusive control. So far as the narrow meaning of ‘property’ in the sense of ‘bukken’ (物権/​Japanese); ‘wùquán’ (物权/​Chinese); and ‘mulkwon’ (물권/​Korean) is concerned, it would appear that the qualities of cryptocurrencies render them incompatible with such a classification since they are intangible and a tangible object is generally regarded as a necessary object of ownership. For this reason, it is not surprising that a Japanese District Court has expressly rejected the suggestion that bitcoins, the cryptocurrency par excellence, can be the object of ownership. The case was filed at the Tokyo District Court, 77 新京报 (16 March 2017), 民法总则起草人:民法总则最大突破是规定基本规则, 中新网 at (in Chinese only). Notably, the drafter, Yang Lixin, also remarked that he preferred the first draft of the General Provisions of the Civil Law of China, which included virtual assets within the classification of real rights: ‘其 实,我觉得,一审稿的规定更好,虚拟财产放在物权客体中,数据放在知识产权客体中。’ /​ ‘Actually, I consider the first draft’s classification to be better, virtual assets would be classified as objects of real rights, digital assets would be classified as objects of intellectual property rights.’ 78 Yang Lixin, A Study on the General Provisions of the Civil Law of China vol.2 (Renmin University Press 2017) 654–​55 (杨立新, 《中国民法总则研究 下卷》 ,人民大学出版社,北京 2017,第654-​655页). 79 Sputnik, ‘China Will Let Solely Cryptoyuan Into Country –​Blockchain Comp Co-​Founder’ (22 April 2018) Sputnik News accessed 14 August 2018.



Characterization of Cryptocurrencies in East Asia and it arose out of the infamous collapse of Mt Gox owing to a hack. At the time, Mt Gox was the biggest Bitcoin exchange in the world, and the hack it suffered was until recently, the worst hack to have hit the cryptocurrency community.80 The claimant had been a customer of Mt Gox and had held 458.8812618 bitcoins in his wallet (‘account’) when Mt Gox suspended trading and closed its website and exchange services on 25 February 2014. This was swiftly followed by a declaration of bankruptcy on 16 April. The claimant sued the trustee in bankruptcy, arguing, inter alia, (i)  the claimant had ownership of the bitcoins kept in his wallet; (ii) since all valuable property (used in the sense of asset or wealth) deserves protection, Article 85 should include his bitcoins within the ambit of the term ‘thing’; (iii) though the claimant’s bitcoins may be considered to be mixed with other customers’ bitcoins, the claimant still had co-​ownership of all bitcoins held by the defendant with other customers;81 and (iv) therefore he should be entitled to require the administrator to segregate and carve the bitcoins out of the bankruptcy estate.82 8.19 Given the narrow construction of ownership under Japanese law, it was hardly

surprising that the claim was dismissed. According to the Tokyo District Court:83 (2) Ownership is a right ‘to freely use, obtain profit from, and dispose of the thing owned, subject to the restrictions prescribed by laws and regulations (Civil Code, Article 206).’ The thing that can be the subject matter of ownership, according to Article 85 of the Civil Code, is defined as a tangible thing. . . . The Civil Code in principle confines the object of ownership or real rights to tangibles only. (Though the Civil Code, Article 362 does allow rights to be the object of a security right, this forms an exception to the principle that only tangibles can be the subject matter of a real right). i.  Moreover, besides the requirement of being something tangible in order to be the object of ownership, it must be something that can be exclusively controlled since ownership is a right that can exclude any interference with the thing to which

80 Robert McMillan, ‘The Inside Story of Mt Gox, Bitcoin’s $460 Million Disaster’ (3 March 2014) Wired accessed 14 August 2018. 81 When two or more identical things are mixed and cannot be distinguished, the people having ownership of them become co-​owners and should share the things pro rata. See the Japanese Civil Code, arts 243, 244, and 245. 82 This right is prescribed in the Bankruptcy Act of Japan, art 62. So, whoever has ownership of a thing that becomes part of a bankruptcy estate is entitled to require the administrator in bankruptcy to segregate the thing from the bankruptcy estate. For example, if A asks B to keep A’s laptop computer for two weeks and B has become bankrupt in the meantime, A is entitled to require B’s administrator in bankruptcy to exclude A’s laptop computer from the scope of bankruptcy estate since there is no reason for B’s personal creditors to benefit from A’s laptop computer. In other words, A’s ownership, being a real right in its nature, takes priority over B’s other personal creditors. 83 Tokyo District Court Judgment, Heisei 26 (wa) no 33320, Heisei 27.8.5. (東京地方裁判所判決 平成26 (ワ) 年第33320号、判決平成27年8月5日), III. 2.  (2). (Heisei denotes the current era in Japan beginning from 1989; Heisei 22 thus is the year 2010). Although the judgment has not been officially published, the present authors have the judgment on file in the original language. Extracts quoted are translations by one of the authors of a copy obtained from the court.



The Unbearable Strictness of Owning? ownership attaches. (Copyrights or patent rights also enjoy exclusive controllability;84 they are exceptions permitted by some other separate special legislation and so do not alter the fundamental principle recognised under the Civil Code. [Footnote added] ii.   . . . The claimant argues that any form of asset that holds value worth protecting by law should be regarded as a thing regulated in Article 85 of the Civil Code. However, both tangibles and intangibles can be protected85 by law, but whether or not it is worth protecting has nothing to do with it being a thing provided for in Article 85. Therefore, the claimant’s argument fails.86 [Footnotes added] iii.  As described above, whether or not something can be the object of ownership hinges upon its tangibility and exclusive controllability.

After setting out the requirements for a thing to be capable of being the object 8.20 of ownership, the court briefly explored the characteristics of bitcoins87 and concluded that:88 (3) . . . It is obvious that bitcoins are not tangibles that can occupy certain physical space since (1) bitcoins are ‘an alternative currency invented by digital technology’, (2) the contract used by the Mt. Gox exchange itself expresses that ‘they are [an] internet commodity’, (3) its mechanism relies only on an internet network. i.  . . . Those who want to join a bitcoin network can have on their own computer the blockchain that shows the digital record which is open to the public on the internet. Thus, the data relating to such blockchains are held or shared by multiple parties who have joined the blockchain. ii. . . .  when bitcoins are sent from account A  to account B, it is not a process that simply sends the digital data representing the bitcoins being transferred from account A to account B. In fact, those who are not the parties to the transaction also need to join the transaction.89 [Footnote added] iii.  . . . it is therefore very difficult to regard those holders of a cryptographic key to a bitcoin address as having an exclusive control to the bitcoin balance in the address. iv.  As explored above, bitcoins lack the tangibility and exclusive controllability required to be an object of ownership. Therefore, bitcoins cannot be the object of ownership.90 [Footnote added] b.  Finally, the same court further emphasised:91 c. As mentioned above, since bitcoins cannot be the object of ownership, the claimant does not have ownership of the bitcoins at issue. As a corollary of this, the The nature of these rights is quasi-​real; we will come back to this issue below. 85 For example, debts are protected by the law of obligation, and intellectual property rights are protected by a separate special statute. Whether or not these intangibles enjoy exclusive effect would depend on individual cases. 86 ie the claimant’s second argument. 87 In relation to the general characteristics of bitcoins, see II above. 88 s 3. 1. (3) of the judgment. 89 This is so since all transactions under the same blockchain system will be calculated, verified, and recorded by all the computers connected to the blockchain network system. 90 Therefore, the claimant’s first and third arguments were rejected. 91 s 3. 2 of the judgment. 84



Characterization of Cryptocurrencies in East Asia claimant has no share under co-​ownership in relation to the bitcoins held in the bitcoin address administered by the bankrupt. . . . Therefore, as to the bitcoins at issue, the claimant is not entitled to exercise any right of segregation that is predicated on ownership.92 [Footnote added] 8.21 Although no South Korean court has pronounced on this issue, it is expected

that a similar conclusion would be reached because the characteristics demanded by the law of an object of ownership are essentially identical across all three jurisdictions. The position so far as Chinese law is concerned would be a fortiori since cryptocurrencies would not even appear to be assets under Chinese law. Whilst not all assets are the objects of ownership, all objects of ownership are assets. Whilst Japanese and South Korean law appear to better protect holders of cryptocurrencies, such users remain in an unenviable and invidious position in both jurisdictions. To say, as Japanese and South Korean law appears to say, that cryptocurrencies are assets but not capable of being the object of ownership tells us precious little about how the law would go about protecting such assets. Unlike more established intangible assets such as debts or intellectual property rights, which are protected by other provisions in the Law of Obligations or the Intellectual Property Act, there is no clarity as to how (if at all), rights in cryptocurrencies are protected under Japanese or South Korean law. We therefore have to contend with the following inquiry: if cryptocurrencies cannot be the objects of ownership, then what rights follow from their ‘ownership’ in the colloquial sense?

V.  Real Rights without Tangible Objects:  Quasi-​Real Rights? 8.22 While cryptocurrencies are undoubtedly intangible, it does not follow that

that which is intangible is property, even in the wider ‘asset’ sense of the word. Information, for example, is often valuable and intangible, but while it may be subject to obligations of confidence, it is not, in itself, an asset. In Japan and South Korea, cryptocurrencies appear to have been accepted as assets—​‘zaisan’ (財産/​Japanese) and ‘jaesan’ (재산/​Korean), respectively. In China, it certainly appears open to Chinese law to adopt the same view and accept cryptocurrencies as ‘cáichǎn’ (财产/​Chinese), although it has not done so as yet. But what sort of assets would they be? In all three jurisdictions, owing to their civil law heritage, the in rem and in personam dichotomy is deeply rooted in the private law system and in the minds of legal practitioners. But just as cryptocurrencies are difficult to fit within the classification of real rights, properly so-​called, many (but not all) cryptocurrencies are just as incompatible with the category of personal rights.

Therefore, the claimant’s fourth argument was denied. 92



Real Rights without Tangible Objects: Quasi-Real Rights? After all, the ‘owners’ of many cryptocurrencies have no right to anyone’s performance. Instead, if he has any right at all, it would be a right to something that only exists in cyberspace. Furthermore, as far as civilian systems are concerned, a personal right is generated either by parties’ mutual consent or by operation of law. The archetypal examples of the former are contractual rights, and examples of the latter would be rights arising out of negotiorum gestio, unjust enrichment, and tort.93 If a right to bitcoins or other cryptocurrencies were to be classified as a personal right or a right in personam, it is also necessary to determine the basis upon which it is generated. Bitcoins and many other cryptocurrencies rely on a process called ‘mining’ to maintain the integrity of their distributed blockchain ledgers. In essence, this involves the miners’ computers engaging in a guessing game and the odds of winning are dependent on how quickly a miner’s computer can perform calculations as compared to those of other miners. Such users are described as miners because, in order to incentivise participants to engage in this process of validation, the system rewards the first to solve the puzzle with a pre-​set quantity of new bitcoins.94

It would be difficult to fit such a process within any of the known categories that generate personal rights. While it is in theory possible for the law to recognize a new basis for the generation of a right, the absence of an obligor, a person subject to the personal right, will probably remain an insurmountable hurdle for their classification as rights in personam. On the other hand, it is possible to classify some newer cryptocurrencies as personal 8.23 rights. Despite the disastrous DAO (or Decentralized Autonomous Organization) experiment,95 a rash of new cryptocurrencies began to be offered as ICOs. Increasingly, these offerings are being treated as securities.96 Such cryptocurrencies, 93 These areas form the four limbs of the Special Part of the Law of Obligations in Japan and South Korea (see Book III of the Japanese and South Korean Civil Codes). It is expected that this will probably also be the model that the new Chinese Civil Code will follow. 94 Kelvin FK Low and Ernie GS Teo, ‘Bitcoins and Other Cryptocurrencies as Property?’ (2017) 9 Law, Innovation & Technology 235, 238. 95 Klint Finley, ‘A $50 Million Hack Just Showed that the DAO Was All too Human’ (18 June 2016) Wired (accessed 14 August 2018). 96 Jay Clayton and J Christoper Giancarlo, ‘Regulators Are Looking at Cryptocurrency: At the SEC and CFTC, We Take Our Responsibility Seriously’ (24 January 2018) Wall Street Journal accessed 14 August 2018; Jay Clayton, ‘Governance and Transparency at the Commission and in Our Markets’ (Remarks at the PLI 49th Annual Institute on Securities Regulation, New York, 8 November 2017) accessed 14 August 2018; Jay Clayton, ‘Chairman’s Testimony on Virtual Currencies: The Roles of the SEC and CFTC’ (Before the Committee on Banking, Housing, and Urban Affairs, United States Senate, 6 February 2018) accessed 14 August 2018; Gary Gensler, ‘Ethics and Governance in the Blockchain Era’ (23 April 2018) MIT Technology Review accessed 14 August 2018 (a transcript of which is available at



Characterization of Cryptocurrencies in East Asia which are not mined but sold to investors with promises of either returns or future services, will probably qualify as personal rights in much the same way other conventional securities (whether shares or debt) are personal rights. In China, the legal characterization of such cryptocurrencies or coins should, in theory, only be of historical interest following their ICO ban in 2017.97 ICOs have also supposedly been banned in South Korea at the time of writing,98 although recent reports suggest that it is mulling new regulations permitting ICOs.99 Moreover, since the announcement of the ban, ‘the administration has yet to implement the ICO [ban] and has not forced companies to return ICO funds. It also continues to let local investors put money into foreign ICOs and digital currency exchanges operating within the country.’100 This may be contrasted with the Chinese ban, which mandated the refund of investments.101 Japan is again the most tolerant jurisdiction in respect of such in personam cryptocurrencies, with a government-​backed study group recently laying out basic guidelines for further adoption of ICOs.102 The proposal is due to be considered by Japan’s Financial Services Agency, with a view to potentially becoming law in a few years.103 8.24 The solution to the conundrum lies in the recognition that, despite the firmly

embedded belief in the dichotomy between rights in personam and rights in rem, none of the three jurisdictions conforms to the dichotomy slavishly. Apart from ownership, lesser forms of real rights exist. For our purposes, the most relevant real right is that of security. Unlike ownership, which demands a tangible object,

Annaliese Mliano, ‘Everything Ex-​CFTC Chair Gary Gensler Said About Cryptos Being Securities’ (24 April 2018) Coindesk accessed 14 August 2018. 97 Wildau (n 3). But see Wolfie Zhao, ‘China State TV:  Token Sales Still “Rampant” After Central Bank Ban’ (22 May 2018) Coindesk accessed 14 August 2018. 98 Bryan Harris and Edward White, ‘South Korea Joins Global Backlash Against Initial Coin Offerings’ (29 September 2017) Financial Times accessed 14 August 2018. 99 Kim Yoo-​chul, ‘Korea to Allow ICOs with New Regulations’ (8 March 2018) The Korea Times accessed 14 August 2018. See also Daniel Palmer, ‘Korean National Assembly Makes Official Proposal to Lift ICO Ban’ (29 May 2018) Coindesk accessed 14 August 2018. 100 Kim (n 99). 101 Leng Cheng, Liu Xiao and Wu Yujian, ‘China Claws Back at Cryptocurrencies with Ban on Initial Coin Offerings’ (4 September 2017) Caixin accessed 14 August 2018. Also see Han Yi and Liu Xiao, ‘ICO Refund Issue Emerges as New Cryptocurrency Flashpoint’ (22 September 2017) Caixin accessed 14 August 2018. 102 Center for Rule-​making Strategies, ‘Call for Rule-​making on ICO: Proposal by ICO Business Research Group’ (5 April 2018) Tama University accessed 14 August 2018. 103 Yuki Hagiwara and Yuji Nakamura, ‘Japan Unveils Guidelines for Allowing Initial Coin Offerings’ (5 April 2018) Bloomberg accessed 14 August 2018.



Real Rights without Tangible Objects: Quasi-Real Rights? the Civil Codes of all three systems permit a pledge of rights (including personal rights such as debts) as a security interest.104 This exception holds profound significance for the characterization of cryptocurrencies since it shows how, despite their inability to form an object of ownership, the law nevertheless accommodates intangible assets as the subject matter of a form of real right, albeit only as an exception. Another exception that is perhaps more obvious is that of intellectual property rights. Whether it takes the form of expression (ie the object of a copyright); invention (ie the object of a patent right); or mark (the object of a trademark right), intellectual property rights, despite their intangibility, take the form of rights erga omnes, thus sharing a characteristic feature of a real right, ie, exclusive controllability. However, whilst these exceptions are recognized under the law, they are never- 8.25 theless regarded as falling outside the conventional category of real rights.105 While they enjoy the effect of exclusive controllability, these exceptional real rights over intangibles are nevertheless not real rights. Instead, they are only treated as if they were real rights because reality and practice demand it. Thus, they carry with them that most deprecatory of legal epithets: ‘quasi’. Both the pledge of a debt and intellectual property rights are more accurately characterized as quasi-​real rights rather than real rights properly so-​called.106 Owing to their nature of exigibility against the world, they must be expressly supported by some special provisions or legislation in order to be consistent with the numerus clausus principle.107 So far as cryptocurrencies are concerned, this need for special legislation is most clearly evident in Article 127 of the newly enacted Chinese General Provisions of Civil Law.

104 The Japanese Civil Code, art 362; the Korean Civil Code, art 345; the Chinese Law of Real Rights, art 223. 105 Cf the judgment of the Tokyo District Court (n 83). 106 Uchida (n 54) 353–​54; Cui Jianyuan, Law of Real Rights (4th edn, Renmin University Press 2017) 530. 107 The Japanese Civil Code, art 175; the Korean Civil Code, art 186; the Chinese Law of Real Rights, art 5; being influenced by German law, all three jurisdictions strictly apply this principle. However, it is interesting to find that German view of numerus clausus is said to be very strict even among European civilian systems; for more detail, see Bram Akkermans, ‘The Numerus Clausus of Property Rights’ in Michele Graziadei and Lionel Smith (eds), Comparative Property Law: Global Perspectives (Edward Elgar Publishing 2017) 100; it should, however, be stressed that some real rights have been created by customary law in Japan and South Korea. For example, the Japanese courts have regarded the right to use the hot spring of another’s land as a customary real right (The Japan Supreme Court Judgment, 18 Sep. 1940 Minshu 19-​1611 (最判昭和15年9月18日民集19号1611)), and the South Korean courts have continuously accepted that the right to use another’s land for the purpose of preserving one’s ancestor’s monuments or graves as a customary real right (the Korean Supreme Court Judgment, 19 Jan. 2017 no 2013DA17292 (대판 2017.1.19 선고 2013다17292)). That said, no new real rights have been created by customary law for several decades. The reason some customary real rights were accepted long ago was to prevent some of the traditional land use rights not included in the Civil Code from being denied right after a Western style Civil Code was transplanted and enforced in these jurisdictions. It is highly unlikely that novel real rights would be created through customary law in the contemporary era.



Characterization of Cryptocurrencies in East Asia 8.26 Bitcoins and other cryptocurrencies clearly have economic value, and it would

appear that the category of quasi-​real right is the most appropriate category for such assets since no other classification is possible.108 After all, ‘when you have eliminated the impossible, whatever remains, however improbable, must be the truth’ [emphasis in original].109 What then of the objection of the Tokyo District Court that a holder of bitcoins does not enjoy any exclusive control over them because the relevant ledger, being distributed, is stored by all the nodes in the network? It is suggested that this argument is flawed since the focus should be on the claimant’s exclusive right to control the amount of bitcoins in his own account rather than the entire Bitcoin blockchain. Nor can the concept of exclusive control be taken too seriously as a condition of admission into the category of quasi-​real right. After all, the entire point of legislating for intellectual property rights is to provide the exclusive control that would be missing absent legislative intervention.

8.27 Although policymakers and lawmakers in China, Japan, and South Korea have

yet to clearly legislate to this effect, a quasi-​real right characterization is the most plausible means of defining traditional, non-​security, cryptocurrencies. Indeed, in Article 127 of the General Provisions of Civil Law, China has already taken half a step in this direction. If the right to cryptocurrencies is eventually conceptualized as a quasi-​real right, it should possess the archetypal incidents of being treated as a real right. The most important incidents to follow such a characterization would be the remedies available should such rights be interfered with. For reasons of space, this chapter will concentrate on only two remedies, one arising from the law of real rights and the other from the law of obligations: the right of rei vindicatio and the right to damages. A.  Rei vindicatio

8.28 The two major incidents of having a real right are: (i) that the right-​holder is en-

titled to assert rei vindicatio if someone interferes with his real right, and (ii) that the right-​holder enjoys priority should the person holding something to which his real right is attached becomes bankrupt. These effects are related to a fundamental feature of real rights, their exigibility against the world at large. So far as bankruptcy priority is concerned, this is prescribed in the Bankruptcy Act110 in Japan, the Debtor Rehabilitation and Bankruptcy Act111 in South Korea, and the Bankruptcy Act112 in China. As to the former incident, although the Japanese

108 The only other real possibility is that holders of such cryptocurrencies enjoy no protection under the law, but, outside Chinese law, this possibility is not seriously entertained. 109 Arthur Conan Doyle, The Sign of the Four (Spencer Blackett 1890) 93. 110 Art 98. 111 Arts 407, 411. 112 Arts 38, 49.



Real Rights without Tangible Objects: Quasi-Real Rights? Civil Code is silent as to the right to assert a rei vindicatio, it is unequivocally conceived to be inherent to every real right, even those that are only quasi-​real rights.113 The South Korean Civil Code, on the other hand, expressly provides that a person with ownership rights is entitled to ask for return of the thing held by another and exclude any interferences made with that thing.114 The Code also further applies mutatis mutandis this right of rei vindicatio to other real rights (such as usufruct and security interests) as well as quasi-​real rights.115 Of the three jurisdictions, the Chinese Law of Real Rights is the most direct in its legislative style. It explicitly provides that a holder of a real right can demand the return of the thing held by another who has no title to possess it, as well as exclude any interferences with his real right.116 Although holders of bitcoins and other non-​security cryptocurrencies should, in 8.29 theory, enjoy a rei vindicatio claim, the efficacy of such a claim will necessarily be affected by the feature of immutability that is common to most blockchains.117 An illustration will perhaps best explain how a rei vindicatio claim would ordinarily operate, as well as the problems posed by immutability. Suppose A  owns some bitcoins that were illegally transferred to B after B obtained A’s private key through hacking. A rei vindicatio claim would ordinarily entail the denial of B’s title to them even though the bitcoins are now associated with B’s public address instead of A’s. In this respect, it is important to note that the identification of cryptocurrencies is possible. This is implicit in the judgement of the South Korean District Court.118 The confiscation would not have been possible but for the possibility of identification. What the South Korean government confiscated were precisely the very bitcoins earned from the commission of the criminal act by tracking the relevant blockchain transaction records. So far as bitcoins are concerned, it is important to note that they are pseudonymous rather than anonymous. However, in theory, cryptocurrencies with stronger anonymity protocols, such as darkcoin and monero, may be similarly confiscated provided evidence for tracking them is available. Here, it is important to emphasize that a ‘mixture’ of cryptocurrencies ought not to stymie this process. Thus, If B has mixed A’s bitcoins with C’s bitcoins in his public address, it should be possible for A and C to argue they share the bitcoins in B’s wallet pro rata. This conclusion follows from an analogy to a case

113 Wagatsuma Sakae, The Law of Real Rights (Iwanami Shoten Publishing 1983) 22 (我妻栄, 『新訂物権法』,岩波書店,東京1983,22頁); Uchida (n 54) 368. 114 See the Korean Civil Code, arts 213, 214. 115 See the Korean Civil Code, arts 290, 301, 319, 370. 116 Arts 34, 35. 117 In this respect, it should be noted that the phrase lacks clarity among the technology community: see Angela Walch, ‘The Path of the Blockchain Lexicon (and the Law)’ (2017) 36 Review of Banking & Financial Law 713. Also see Adrianne Jeffries, ‘ “Blockchain” is Meaningless’ (7 March 2018) The Verge accessed 14 August 2018. 118 See the text accompanying n 69.



Characterization of Cryptocurrencies in East Asia where a thief steals some oil from X and Y, respectively, and puts it in his container. Even though the oil is mixed and it is impossible to tell which oil belongs to X and which oil belongs to Y, X and Y would nevertheless enjoy co-​ownership of the oil and share the oil pro rata between themselves.119 The only difference between the cases is that the nature of the right is differentiated. In the former case, the ‘co-​ownership’ is not a true co-​ownership but an equivalent concept as applied to quasi-​real rights whereas in the latter case, it would be a true co-​ownership, in the true sense of the word ownership. In both cases, this does not entail the claimant recovering the very same oil or cryptocurrencies that were put into the mixture.120 Such an analysis should, in theory, allow a cryptocurrency holder to enjoy priority in bankruptcy over ordinary unsecured creditors, unlike the position that presently prevails under Japanese law as evident in the Mt Gox case. 8.30 It is important to note, however, one important limitation to the rei vindicatio

claim in respect of cryptocurrencies. Owing to the distributed nature of their blockchain ledgers and the feature of immutability,121 a successful rei vindicatio claim will require the cooperation of the defendant, who must provide his private key so that the relevant bitcoins or other cryptocurrency can be transferred to the successful claimant. Where the defendant has forgotten or lost his private key or is otherwise simply obdurately recalcitrant, the rei vindicatio claim is practically worthless since there is no point to enjoying a legal order that a specified quantity of cryptocurrency in another person’s public address belongs to him if the claimant has no practical means of accessing the same. B. Damages under tort law

8.31 If ‘ownership’ of cryptocurrencies is characterized as a species of quasi-​real right,

then infringement of such rights would also usher in liability in tort. All three jurisdictions under examination have a general provision on tort liability. In Japan, Article 709 of the Civil Code provides that, ‘A person who has intentionally and negligently infringed any right of others, or legally protected interest of others, shall be liable to compensate any damages resulting in consequence’.122 As this Article shows, the subject matter so protected includes ‘rights’, as well as ‘legally protected interests’. Examples of ‘rights’ include personal rights (ie, debts or a contractual right); real rights (ie, usufruct and security rights); quasi-​real rights

See the Japanese Civil Code, arts 244, 245; the Korean Civil Code, art 258. 120 This would be based on the concept of vindication pro parte in Roman law. Among cryptographers, there is no agreement as to the technically correct approach to mixtures: see Ross Anderson and others, ‘Bitcoin Redux’ (2018) Cambridge University Computer Laboratory accessed 14 August 2018. But note that some of the techniques considered in the paper that are based on the common law concept of tracing would be inapplicable in China, Japan, and South Korea, which has no similar concept. 121 For a more detailed explanation of immutability, see Low and Teo (n 94) 254–​57. 122 The Japanese Civil Code, art 709. 119



Real Rights without Tangible Objects: Quasi-Real Rights? (ie, patent rights and copyrights); bodily rights; family rights; privacy rights; etc.123 An example of infringement of a legally protected interest, according to the Supreme Court of Japan,124 would include a situation where a fraudulent legal suit is filed or where a witness perjures himself, resulting in the innocent defendant losing the case and suffering economic loss. The scope of Article 709 is therefore extremely wide and would certainly be sufficient to embrace the ‘ownership’ of cryptocurrencies if they are legislated as quasi-​real rights. South Korean law is very similar. Article 750 of the South Korean Civil Code similarly provides that, ‘A person who causes losses to or inflicts injuries on another person by an unlawful act, intentionally or negligently, shall be bound to make compensation arising therefrom’. Consequently, the analysis would be similar to that under Japanese law.125 Chinese Tort Law contains not only a general tortious liability provision akin 8.32 to Articles 709 and 750 of the Japanese and South Korean Civil Codes, respectively, but it also contains a provision that sets out the objects that fall within its protection. First, Article 6 prescribes that ‘One who is at fault for infringement upon a civil right or interest of another shall be subject to tort liability’. The term ‘fault’ includes both intentional and negligent acts,126 and the statute further provides the list of subject matter protected by Article 6, viz, Article 2. This Article provides that: Those who infringe upon civil rights and interests shall be subject to tort liability according to this Law. ‘Civil rights and interests’ used in this Law shall include the right to life, the right to health, the right to name, the right to reputation, the right to honour, right to self-​image, right of privacy, marital autonomy, guardianship, ownership, usufruct, security interest, copyright, patent right, exclusive right to use a trademark, right to discovery, equities, right of succession, and other personal and property rights and interests. The upshot is that anyone who intentionally or negligently infringes on another’s right to cryptocurrencies will be liable to pay damages under the law of tort if cryptocurrencies come to be recognized as quasi-​real rights.127 123 Uchida Takashi, Special Provisions of Obligations (3rd edn, Tokyo University Press 2011) 362–​81. One thing to note is that the possibility of protection by tort law should not be a criterion of judging whether a right is a right in rem or a right in personam since, as art 709 shows, personal rights (such as a contractual right) are also protected if infringed by others. However, some conditions apply because of its personal nature. For more detail, see Wagatsuma Sakae, The General Part of the Law of Obligations (Iwanami Shoten Publishing 1964) 75–​82 (我妻栄, 『新訂債権総論』,岩波書店,東京1964,75-​82頁). 124 The Japan Supreme Court Judgment, April 13, Saibansho Jihou 1505-​ 12 (最判平成22年4月13日裁判所時報1505号12頁); Saibansho Jihou means the Court Law Report. 125 Cf. Song Tucksoo, The Special Part of the Law of Obligations (4th edn, Pakyoungsa Publishing 2017) 509–​15 (송덕수, 채권법총론 제4판, 박영사, 서울 2017, 509-​515면). 126 For more information about the meaning of fault under Chinese law, see Yang Lixin, Tort Law (Lawpress Publishing 2010) 59–​62 (杨立新, 《侵权责任法》 ,法律出版社,北京2010,59-​62页). 127 Under Japanese and South Korean law, monetary compensation is the principal method of compensating the victim’s loss caused by another’s tortious act (see art 417 of the Japanese Civil



Characterization of Cryptocurrencies in East Asia C. Electing between remedies 8.33 On this account, if rights to cryptocurrencies are recognized as quasi-​real rights, a

claimant ought to be able to select between the aforementioned two remedies, with the choice being largely driven by pragmatic concerns. Should the defendant be insolvent but acquiescent, a rei vindicatio claim is preferable. Should the defendant be solvent but recalcitrant, a damages award would be more practical. All things being equal, given the extreme fluctuations in value of cryptocurrencies, sharp rises or drops in value will also likely drive claimants to prefer one remedy over the other. This can be seen in the Mt Gox saga, when the sharp rise in bitcoin prices led claimants in the bankruptcy proceedings to seek to have the company undergo civil rehabilitation128 instead,129 a course which was recently approved by the Tokyo District Court130 despite the sharp fall in prices from the time of petition to its grant. This mostly had to do with the unprecedented rise in bitcoin prices from the time of the Mt Gox hack to its peak in late 2017, when the petition for civil rehabilitation was taken out. The losses since then, whilst severe, were far outstripped by the gains between 2014 and 2017 as bitcoin prices grew by roughly eighteen-​fold in that period.

VI. Conclusion 8.34 At the time of writing, Bitcoin was nearing its tenth birthday. Although Satoshi

Nakamoto chose a Japanese pseudonym and claimed to be based in Japan,131 doubts have been cast as to his Japanese origins,132 and his identity remains a mystery.133 However, it is perhaps nevertheless fitting for his invention and its

Code and art 394 of the South Korean Civil Code). However, it is up to the court’s discretion to choose between the orders of specific recovery or monetary compensation in China (see art 15(2) of the Chinese Tort Law). It must be noted that, since tort law is part of the law of obligations, the order of specific recovery only bears the nature of personal right, so it would not accord to the claimant a preferred position in the tortfeasor’s bankruptcy. 128 This is a scheme that assists debtors to recover their economic credibility by allowing them to keep a certain amount of their capital money and rebuild their business so as to have a chance to fully discharge the debt they owe to the creditors. 129 Jeffries (n 74). 130 Nobuaki Kobayashi (Civil Rehabilitation Trustee), ‘Announcement of Commencement of Civil Rehabilitation Proceedings’ (22 June 2018) at accessed 15 August 2018. 131 See his archived page with the P2P Foundation: P2P Foundation, ‘Satoshi Nakamoto’s Page’ P2P Foundation accessed 15 August 2018. 132 See, eg, Benjamin Wallace, ‘The Rise and Fall of Bitcoin’ (23 November 2011) Wired accessed 15 August 2018. 133 The identity of Satoshi Nakamoto has been much speculated, but it remains a mystery. See eg Robert McMillan, ‘Why Bitcoin Doesn’t Want a Real Satoshi Nakamoto’ (7 March 2014) Wired accessed 15 August 2018); Izabella Kaminska, ‘Bitcoin:  Identity Crisis’ (7 May 2016) Financial Times accessed 15 August 2018; Andrew O’Hagan, ‘The Satoshi Affair’



Conclusion progeny to flourish in a part of the world with which he explicitly chose to associate himself. As is the case with many innovations, the law has lagged behind technology, and similarly to many other jurisdictions, much of the early flurry of legislative activity has centred on regulation rather than private law characterization. This is explicable given that retail investors have been known to be swept up by the fear of missing out or ‘FOMO’,134 despite not fully understanding the true risks and potentials of their investment.135 In Asia, investors’ affinity with leverage,136 and the proliferation of outright fraudulent schemes137 greatly amplify the risks for such investors. However, the paucity of attention given to the private law characterization of cryptocurrencies remains regrettable. It has left the courts confused and adrift, as the cases from Japan and South Korea demonstrate, which ultimately further hurts the very investors intended to be protected through regulation. While there is a growing consensus that cryptocurrencies are (or may be in the case of China) property in the sense of being assets, it is much less clear as to what sort of assets they are precisely. The traditional dichotomy of in rem rights and in personam rights that make up most of a person’s assets are both unsuitable categories,138 the former because of the absence of a tangible object, the latter because of the absence of an identifiable obligor. Although we consider that they are best regarded as quasi-​real rights, in a manner analogous to intellectual property rights, the commitment of the three East Asian jurisdictions under consideration to the primacy of the dichotomy, as well as the numerus clausus principle, means

(2016) 38 London Review of Books 7 (accessed 15 August 2018). 134 Cf. Stephanie Bank, ‘Your Brain and Bitcoin: The Fear of Missing Out Is Real’ (5 February 2018) The Globe and Mail accessed 15 August 2018; Bobby Azarian, ‘How Fear Is Being Used to Manipulate Cryptocurrency Markets’ (14 December 2017) Psychology Today accessed 15 August 2018. 135 See eg Orange Wang, ‘Welcome to China’s Wild, Wild World of Blockchain Investment’ (30 April 2018) South China Morning Post accessed 15 August 2018; Minami Funakoshi and Joyce Lee, ‘Fretting over Savings, Mrs Watanabe Turns to Bitcoin’ (14 December 2017) Reuters accessed 15 August 2018; Rachel Premack, ‘South Korean Millennials Are Reeling from the Bitcoin Bust’ (3 April 2018) The Verge accessed 15 August 2018. 136 See n 11. 137 See eg Wolfie Zhao, ‘Police Bust Alleged $13 Million Crypto Pyramid Scheme’ (18 April 2018) Coindesk accessed 15 August 2018; Samburaj Das, ‘South Korea Dismantles $24 Million Bitcoin Pyramid Scheme’ (20 April 2018) CCN accessed 15 August 2018. 138 Except in relation to cryptocurrencies or tokens issued pursuant to ICOs (initial coin offerings), for which see the text accompanying nn 95–​103.



Characterization of Cryptocurrencies in East Asia that they cannot be regarded as such without separate and specific legislation. Pending specific legislation, they would appear to be vagrant assets absent settled (if any) rights. At least that appears to be the case in Japan and South Korea. In China, their status appears to be even more perilous in that they do not even appear to be assets at all. If so, then they are ‘virtual assets’ in more ways than one. Not only are they devoid of form in the physical world, they appear also to be currently non-​existent in Chinese law as well.

VII. Postscript 8.35 It is questionable how tenable the position in Chinese law—​at least as a matter

of pure textual reading—​will prove. An arbitral tribunal, the Shenzhen Court of International Arbitration, in a dispute concerning the legality of contracts to transfer cryptocurrencies, has recently suggested that in the absence of any relevant legislation, it was not possible to regard cryptocurrencies as ‘data or online virtual assets’ in accordance with Article 127 of the 2017 General Provisions of Civil Law. Nevertheless, the tribunal appears to consider Article 127 purely permissive, and it suggested that bitcoins may nevertheless be considered ‘cáichǎn’ (财产) despite not falling within Article 127 because ‘[b]‌itcoins bore the attributes of assets, being capable of allocation and control, having economic value, and being capable of providing the claimant economic benefits.’139 Curiously, this analysis is only to be found in the summary of the decision (案例综述) published online but not in the published decision (仲裁庭意见) itself. The tribunal, at least in its discussion on contractual liability, appears to have been swayed by the fact that although some cryptocurrency-​related activities such as the operation of cryptocurrency exchanges and initial coin offerings have been banned, the mere holding of cryptocurrencies remains perfectly legal as a matter of Chinese law.

139 Shenzhen Court of International Arbitration Decision, Bitcoin Arbitration, 25 October 2018, para 4 of the essential points found in the summary of the decision. The decision of the tribunal has been published online in Chinese accessed 11 November 2018. The translation is supplied by the authors.




I. Introduction II. The Cryptocurrency as a Store of Value

D. Fiduciary duties


. The duty to act within mandate A B. The duty of secrecy C. The duty to act with reasonable skill and care

9.04 9.13 9.16

I II. The Cryptocurrency as Payment IV. The Cryptocurrency as a Basis for Lending V. Conclusion

9.20 9.21 9.26 9.27


I. Introduction From its humble origins in an academic paper,1 Bitcoin and its fellow 9.01 cryptocurrencies have been subjected to an intense and unrelenting scrutiny that has sharply divided opinion. On the one hand, cryptocurrencies (or at least the distributed ledger technology underlying them) have been heralded as representing a new techno-​legal dawn2 for contractual dealings in general, trade finance transactions, land registration, maritime trade, central securities depositaries and intermediated securities,3 and complex financial transactions, such as derivatives, bond issues,4 and syndicated loans. On the other hand, media depictions of Christopher Hare, Tutorial Fellow, Somerville College, Oxford and Travers Smith Associate * Professor of Corporate and Commercial Law, University of Oxford, UK. 1 Satoshi Nakamoto, ‘Bitcoin: A Peer-​to-​Peer Electronic Cash System’ (October 2008) (Bitcoin) accessed 27 August 2018. See further Kleiman v Wright, US Dist Lexis 216417 (2018). 2 See Law and Financial Markets Project, Blockchain Financial Assets and Beyond:  Legal and Regulatory Perspectives, London School of Economics, 26 May 2017 . 3 Eva Micheler, ‘Custody Chains and Asset Values:  Why Crypto-​ Securities Are Worth Contemplating’ (2015) 74 CLJ 505, 509, 532–​3. 4 Consider Richard Cohen and others, ‘Automation and Blockchain in Securities Issuances’ (2018) 33 BJIB&FL 144.



Bitcoin and Banking Law: Are there Lessons to Learn? cryptocurrencies have focused upon the cloak that their anonymity provides for serious criminal activity (as exemplified by the infamous Silk Road drug exchange where Bitcoin was the preferred payment method),5 their avoidance of securities regulations,6 the fact that Bitcoin has been the currency of choice for hackers and blackmailers alike,7 and the easy path to riches that results from speculating upon their volatility (as evidenced by the fact that Bitcoin increased in value by almost 2,000% during 2017, but has since lost more than 50% of that value during 2018).8 9.02 Between these extreme depictions of cryptocurrencies, there has been a relatively

consistent (and more muted) stream of objections from central bankers around the world. Some central banks have taken direct action, such as the Indian and Pakistani central banks prohibiting banks and regulated entities entirely from engaging with companies dealing in cryptocurrencies9 and the Chinese central bank calling a halt to initial coin offerings10 and closing domestic cryptocurrency trading platforms. Other central bankers11 have described cryptocurrencies as being at best a ‘will-​o’-​the-​wisp’ or a ‘classic Keynesian beauty contest’12 and at worst a Ponzi or pyramid selling scheme.13 Closer to home, the position has been more equivocal. Despite initially embracing the promise of cryptocurrencies by developing its own cryptocurrency with central bank oversight (RSCoin),14 the Governor of the Bank of England has more recently expressed the view that Bitcoin has ‘pretty much failed thus far on . . . the traditional aspect of money’,15 5 Matthews v The Queen [2014] VSCA 291, [35]; Attorney-​General v Davis [2018] IESC 27, [4]‌–​[5]. See also R v Ciftdal [2018] EWCA Crim 2505. 6 Consider Dearborn v Saskatchewan (Financial and Consumer Affairs Authority) [2017] SKCA 63; Coffey v Ripple Labs Inc, US Dist Lexis 135585 (2018). In the United States, cryptocurrencies are treated as a commodity for regulatory purposes: see Re Coinflip Inc, Commodity and Futures Trading Commission, CFTC Docket no 15-​29 of 2015 (17 September 2015). 7 Consider PML v Person(s) Unknown (responsible for demanding money on 27 February 2018) [2018] EWHC 838 (QB); R v Read [2018] EWCA Crim 2186. See also United States v Brown, 857 F.3d 334 (6th Cir, 2017). 8 Commodity Futures Trading Commission v McDonnell, 287 F. Supp 3d 213 (EDNY, 2018). 9 State Bank of Pakistan, Prohibition of Dealing in Virtual Currencies/​Tokens, BPRD Circular no 3 of 2018 (6 April 2018). See also Finextra, India’s Central Bank Issues Cryptocurrency Ban (6 April 2018). 10 For a judicial description of an ‘initial coin offering’, see Matter Technology Ltd v Mrakas [2018] NSWSC 507, [35]. 11 Yves Mersch, ‘Virtual or Virtueless? The Evolution of Money in the Digital Age’, Official Monetary and Financial Institutions Forum, London, 8 February 2018. 12 Consider John M Keynes, The General Theory of Employment, Interest and Money (Macmillan, 1936). 13 Jake Rudnitsky and Anna Baraulina, Russia’s Central Bank Is also Sceptical of Cryptocurrency (Bloomberg, 14 September 2017) . 14 George Danezis and Sarah Meiklejohn, ‘Centrally Banked Cryptocurrencies’, Network and Distributed System Security Symposium, San Diego, 21–​24 February 2016 . See also Yves Mersch, ‘Digital Base Money:  an Assessment from the ECB's Perspective’, European Central Bank, 16 January 2017. 15 The Telegraph, ‘Bitcoin a “Failed” Currency, says Mark Carney’, 19 February 2018, reporting Mark Carney’s comments made following his speech, ‘Reflections on Leadership in a Disruptive



The Cryptocurrency as a Store of Value since cryptocurrencies lacking centralized control and oversight are yet to operate successfully as either a store of value or as a medium of exchange. Whilst one could readily dismiss views of the Bank of England (and other central bank responses) as being based upon a desire to protect the vested interests in the current financial status quo, the ambivalence in the Bank of England’s position is the inspiration for this chapter, since it raises the issue of the relationship between traditional banking, on the one hand, and cryptocurrencies, on the other. Whilst the starting assumption might be that (at least in terms of their structure, rationale and practical operation) these are irreconcilable opposites, this chapter seeks to investigate whether this also holds true for the legal context or whether these technological parvenus may yet learn lessons from our legal past. In this regard, whilst it is certainly true that cryptocurrencies’ raison d'être is 9.03 the abandonment of the banking system’s institutional framework and oversight mechanisms,16 it does not necessarily follow that traditional banking law principles, which have been developed over the last century in the context of interactions between banks and their customers, can provide no assistance in resolving some of the legal issues surrounding the use of cryptocurrencies. Indeed, even in the disaggregated and decentralized world of cryptocurrencies, there is a functional equivalence with traditional retail banking—​the storing of cryptocurrency private keys in digital wallets effectively performs the same basic function as a traditional bank account in providing a way of storing economic (and arguably monetary) value with another, a mechanism for making payment by transferring that value, and a means to unlock further value through lending and security structures (as would occur with an overdraft or charge-​back arrangement). Accordingly, the following sections consider each of the three functions (storing value, making payments, and lending) carried out by traditional banking entities through their account services, as well as the extent to which cryptocurrencies (and those entities providing ancillary ‘storage’ and exchange services) achieve the same ends.

II.  The Cryptocurrency as a Store of Value In considering the extent to which cryptocurrencies operate as stores of value, it is 9.04 necessary to distinguish between two quite distinct issues: firstly, there is the issue

Age’, Regent’s University, London, 19 February 2018 . 16 For example, unlike other funds deposited in a bank account, a person’s cryptocurrency is probably not protected by the Financial Services Compensation Scheme in the UK (see Financial Services and Markets Act 2000, Part 15 (as amended)) nor is the relationship between a wallet-​ provider and wallet-​holder likely to fall within the remit of the Financial Ombudsman Scheme (see Financial Services and Markets Act 2000, Part 16 (as amended)).



Bitcoin and Banking Law: Are there Lessons to Learn? of whether a cryptocurrency itself stores monetary value by replicating the functions associated with ‘money’, so that it attracts that designation;17 and, secondly, irrespective of whether cryptocurrencies ought to be treated as ‘money’ or not, how the economic value in cryptocurrencies is stored in digital wallets. The first issue has already received some attention judicially and academically.18 Whilst it is clear that the digital form of cryptocurrencies precludes it from falling within the traditional conception of money, in the sense of physical coins and banknotes,19 there are clearly other forms of generally accepted non-​physical money, whether money in a bank account20 or ‘electronic money’ (which is defined as ‘electronically (including magnetically) stored monetary value’ on a device that is issued in return for funds by an ‘electronic money issuer’, such as a bank or credit-​card issuer, and that not only gives rise to claim for the return of those funds from the issuer, but can also be used as a means of payment with persons other than the issuer).21 Accordingly, it is not just the intangibility of cryptocurrencies that makes them hard to classify as ‘money’, but rather, as indicated in Skatteverket v Hedqvist,22 the fact that bank money and electronic money are expressed in the currency of a particular jurisdiction, whereas cryptocurrencies ‘are not expressed in traditional accounting units, such as in Euro, but in virtual accounting units, such as the “bitcoin” ’.23 Whilst courts may be prepared to interpret the concept of ‘money’ in a purposive manner for particular statutes designed to prevent money laundering,24 to prohibit drug trafficking,25 or to regulate tax26 or securities,27 it remains unclear whether cryptocurrencies should be treated at a high conceptual level as involving money,28 intangible property,29 or the provision of a

17 Wisconsin Central Ltd v United States, 138 S Ct 2067 (2018), 2076. 18 For the characterization of cryptocurrencies as ‘money’ for a range of legal purposes, see further Chapters 2 and 3 above. 19 See generally Currency and Bank Notes Act 1954, s 1; Coinage Act 1971, ss 3, 9–​10. 20 Funds deposited in a bank account take the form of a chose in action that can be enforced by the depositor against the bank up to the amount of the deposit (or overdraft limit): see R v Preddy [1996] AC 815, 834. 21 Electronic Money Regulations 2011, SI 2011/​99, reg 2(1). 22 C-​264/​14 Skatteverket v Hedqvist [2016] STC 372. 23 ibid [12]. 24 United States v Ulbricht (Case 1:14-​cr-​00068-​KBF, SDNY, 9 July 2014), 5, 47–​50, aff’d 858 F.3d 71 (2nd Cir, 2018). 25 See generally United States v Ulbricht (Case 1:14-​cr-​00068-​KBF, SDNY, 9 July 2014), aff’d 858 F.3d 71 (2nd Cir, 2018); United States v Faiella (Case 1:14-​cr-​00243-​JSR, SDNY, 8 August 2014),  2–​3. 26 Coinstar Ltd v The Commissioners for Her Majesty’s Revenue and Customs [2016] UKFTT 0610 (TC), [64], aff’d [2017] UKUT 256 (TCC), [73]. Consider also Navee Ltd v The Commissioners for Her Majesty’s Revenue and Customs [2017] UKFTT 0602 (TC). 27 Rensel v Centra Tech Inc, US Dist Lexis 106642 (DC Fla., 2018). 28 Securities and Exchange Commission v Shavers (Case 4:13-​cv-​00416-​RC-​ALM, 6 August 2013), 1–​3; United States v Ulbricht (Case 1:14-​cr-​00068-​KBF, SDNY, 9 July 2014), 5, 47–​50, aff’d 858 F.3d 71 (2nd Cir, 2018); United States v Faiella (Case 1:14-​cr-​00243-​JSR, SDNY, 8 August 2014), 2–​3; cf. C-​264/​14 Skatteverket v Hedqvist [2016] STC 372, [42]–​[56]. 29 Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156, [42]–​[61].



The Cryptocurrency as a Store of Value service.30 Whilst this apparent incoherence may prove intellectually unsatisfying, or may result in a lack predictability from a practical perspective, it may ultimately be better to accept the chameleon-​like quality of cryptocurrencies, so that they can be accommodated more readily into existing legal and regulatory frameworks as and when appropriate. This chapter is, however, less concerned with this first issue relating to the legal 9.05 characterization of cryptocurrencies and is more focused on the second issue regarding how their economic value is stored by their ‘owner’, as well as the legal framework that might be applied to such storage. The need for some form of storage mechanism is evident from the way other forms of economic value operate, whether that be the tokenization associated with coins and banknotes, the establishment and operation of an account for bank money, or the use of pre-​ loaded cards or mobile phones for electronic money. For cryptocurrencies, the equivalent storage facility is the digital wallet with a unique identifier number (or ‘public key’), which is essentially a software program recording the amount of a particular cryptocurrency ‘held’ within the wallet and facilitating its receipt and transfer.31 It is important to stress, however, that digital wallets do not store the cryptocurrency itself, which is the product of the relevant network and is recorded on that network’s blockchain, but rather one or more private keys. This is essentially a secret code or mathematical proof that establishes the wallet-​holder’s ‘ownership’ of a certain amount of the relevant cryptocurrency and allows them to ‘sign’ transactions for its transfer.32 Unlike the relevant cryptocurrency network, in respect of which the information is distributed and shared amongst the network nodes, the content of the digital wallet is secret and controlled solely by its holder. Accordingly, it will be encrypted with a password to prevent unauthorized third-​party access. Although there are different types of digital wallet, they must conform to the protocol for the particular cryptocurrency if they are to be effective. In terms of selecting between the different species of digital wallet available, the 9.06 wallet-​holder’s choice will be driven by the desired balance between convenience, control, and security. In that regard, there are two key types of digital wallet. The first main type is effectively stored upon, and accessible through, a particular piece of equipment:  a ‘desktop wallet’ stores the private keys on a computer’s hard-​ drive, a ‘mobile wallet’ on a mobile phone, and a ‘hardware wallet’ on a specialist external device designed specifically for the storage of private keys.33 Accordingly, 30 C-​264/​14 Skatteverket v Hedqvist [2016] STC 372, [22]–​[31]. See also Wilton Park Ltd v Commissioners for Her Majesty’s Revenue and Customs [2015] UKUT 343 (TCC), [42]–​[50]. 31 United States v Ulbricht, 858 F.3d 71 (2nd Cir, 2018), 85. 32 C-​264/​14 Skatteverket v Hedqvist [2016] STC 372, [11]. 33 There is also a distinction between a ‘hot’ wallet, which stores the private keys on a network-​ connected machine, and a ‘cold’ wallet, which stores the keys offline: see United States v Ulbricht, 858 F.3d 71 (2nd Cir, 2018), 116–​17.



Bitcoin and Banking Law: Are there Lessons to Learn? the principal advantage of such wallets is that the wallet-​holder retains a high level of control over his or her private keys by storing them on a physical device that they own and possess. As between the different methods of storage, a ‘hardware wallet’ provides a high level of security, as its off-​line features make it less susceptible to malware that might compromise the device when compared to desktop and mobile equivalents, although it is obviously less convenient than other available options. These wallets may either be ‘full node’ wallets (hosting a full copy of the relevant blockchain) or ‘light’ wallets that require connection to some external source or node to read the blockchain (as is usually the case with mobile wallets). The downside of such device-​based wallets, however, is that, if the particular device is lost, suffers a hardware failure, is hacked, or becomes infected with a virus, then there is a real risk that the private keys might be lost forever unless appropriate back-​up systems are in place. Less sophisticated variations on this theme (which have similar risks) are the ‘paper wallet’ (which embodies the private keys in physical materials, much like a bank note) and the ‘brain wallet’ (which generates the digital wallet from a passphrase committed to memory). The second principal type of digital wallet (and the most popular amongst casual and amateur users) is the web-​based or ‘hosted’ digital wallet, which allows cryptocurrency to be sent, received, and stored through a person’s web browser. The principal advantage of such digital wallets is convenience, since it is not tied to a particular piece of hardware (and so less susceptible to physical loss) and is often linked to a cryptocurrency exchange that allows the wallet to be used to trade cryptocurrencies and exchange them for traditional (or fiat) currencies and vice versa (as occurs in the case of ‘Coinbase’).34 The downside with such web-​based wallets, however, is that the third party (by providing the digital-​wallet account and managing its security features) effectively controls the wallet-​holder’s private keys so as to enable easier access to the relevant trading platform. There is also a higher likelihood (given the concentration of digital wallets in the hands of the exchange’s operator) that web-​based wallets may become a particularly attractive target for cyberattacks,35 and holders of web-​based digital wallets remain exposed to the cryptocurrency exchange’s insolvency,36 as occurred with the largest such exchange, Mt Gox KK, in February 2014.37 Indeed, given the security features afforded to the cryptocurrency network by the mining process, it is undoubtedly

34 Consider Leidel v Sallah, US App Lexis 10464 (2018). 35 Notable examples include the hacking of the Bitcoin bank, Flexcoin, in April 2014; the Hong Kong-​based Bitfinex exchange in August 2016; the South Korean exchange, Bithumb, in July 2017; the mining marketplace, NiceHash; the South Korean Youbit exchange in December 2017; and the South Korean exchange, Coinrail, in June 2018. 36 The investor risk might be lessened if cryptocurrency exchanges qualified as a designated ‘system’ under EC Directive 98/​26 of the European Parliament and of the Council of 19 May 1998 on Settlement Finality in Payment and Securities Settlement Systems, OJ L 166/​45, art 2(a). 37 Greene v Mizuho Bank Ltd, US Dist Lexis 95536 (DC Ill, 2018). See also Peter Susman, ‘Virtual Money in the Virtual Bank: Legal Remedies for Loss’ (2016) 31 BJIBFL 150.



The Cryptocurrency as a Store of Value the case that it is the points of user interface with a particular cryptocurrency (such as the digital wallets and the trading exchanges) that represents the weak link in the chain of security. Having set out the range and key features of digital wallets, the question posed in 9.07 this section is whether banking law principles, especially those developed around the bank-​customer contract, can provide assistance in resolving some of the legal issues that arise out of the use of digital wallets. The need for such an analysis has been highlighted by United States v Ulbricht,38 in which the United States Court of Appeal for the Second Circuit used banking concepts to explain the nature of a Bitcoin digital wallet, namely that the wallet is associated with a Bitcoin address, ‘which is “analogous to the account number for a bank account, while the ‘wallet’ is analogous to a bank safe where the money in the account is physically stored” ’. While that description may not be entirely accurate, it does squarely raise the question of whether banking law principles might provide an appropriate analytical framework for the issues surrounding cryptocurrency wallets. That said, where the situation involves the first type of digital wallet considered 9.08 above (in that the private keys are stored upon a particular piece of equipment under the sole control of the wallet-​holder), the principles developed around the bank-​customer contract are unlikely to have any role, since by definition those principles would only be relevant in circumstances where a cryptocurrency’s private keys are controlled by a third party who is susceptible to being instructed by their ‘owner’ as to how to deal with those keys. Accordingly, this first type of digital wallet can more appropriately be analogized to a real wallet—​if the device storing the private keys is lost, then so too are its contents. Similarly, if the relevant hardware is deliberately damaged or destroyed by a third party or its value lessened by the hacking of the private keys, then the tangibility associated with this first category of digital wallet may entitle the wallet holder to invoke the tort of conversion by way of protection.39 Indeed, in the latter scenario where a person’s private keys are extracted from their hardware-​based digital wallet (assuming the perpetrators can be discovered) the equitable wrong of breach of confidence may also provide the basis for a potential claim.40 In contrast, where the hardware device storing the cryptocurrency’s private keys is physically damaged by a third party’s negligent act, the tort of negligence would provide the appropriate route to recovery for the storage-​device’s owner.41 Alternatively, if the loss of the

38 United States v Ulbricht, 858 F.3d 71 (2nd Cir, 2018), 85. See also Symphony FS Ltd v Thompson, US Dist Lexis 214641 (2018). 39 Consider OBG Ltd v Allan [2008] AC 1, [97]–​[106], [225]–​[238], [321]. See also Lucy Chambers, ‘Misappropriation of Cryptocurrency: Propelling English Private Law into the Digital Age?’ (2016) 31 BJIB&FL 263. 40 Consider Ashton Investments Ltd v OJSC Russian Aluminium (Rusal) [2006] EWHC 2545 (Comm). 41 See generally Leigh and Sillavan Ltd v Aliakmon Shipping Co Ltd [1986] AC 785.



Bitcoin and Banking Law: Are there Lessons to Learn? private keys is attributable to some defect or missing security feature in the digital-​ wallet software provided by its supplier, there may be a claim by the wallet-​holder (at least when he or she is a consumer)42 for breach of the contract supplying the digital content43 on the basis that it was neither of satisfactory quality44 nor fit for the particular intended purpose.45 In contrast, where the digital wallet is of the second type considered above, there would appear to be some similarity between a digital wallet hosted by a third party, which confers control over the private keys associated with the cryptocurrency, and a current account that involves the transfer of title and control of a customer’s funds to his or her bank. In such circumstances, there may be some scope for judicial borrowing from the principles governing the bank-​customer contract, although obviously it is clear that neither the wallet-​provider nor the wallet-​holder would necessarily satisfy the common law definitions of either a ‘bank’46 or a ‘customer’,47 which would ordinarily be pre-​requisites to the creation of a bank-​customer contract. With that caveat in mind, the various aspects of the traditional bank-​customer relationship will be considered in turn. 9.09 An initial question that arises in that regard concerns the extent to which the

legal nature of the relationship between wallet-​provider and wallet-​holder can be analogized to that between banks and their customers. In relation to the latter, the characterization of the bank-​customer contract as involving either a bailment48 or trust49 of the deposited funds was quickly rejected by the courts, as was the view that the bank account relationship was fiduciary in nature as a result of the bank acting as either the trustee or agent for its customer.50 In contrast, whilst the possibility of the digital wallet creating a bailment relationship between the wallet-​ provider and wallet-​holder can probably be discounted,51 owing to the intangible nature of both the wallet itself and the private keys associated with it, the existence of a trust may be less readily dismissed. Clearly, from a remedial perspective,

42 Consumer Rights Act 2015, s 33(1). Where the wallet-​holder is a non-​consumer, an equivalent claim under the Sale of Goods Act 1979 would traditionally require there to be an element of tangibility associated with the software supplied: see n 61 below. 43 For these purposes ‘digital content’ is defined as ‘data which are produced and supplied in digital form’: see Consumer Rights Act 2015, s 2(9). 44 Consumer Rights Act 2015, s 34(1). 45 ibid s 35(1). Consider Susman (n 37 above). 46 United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431, 447, 457–​58, 465. 47 Commissioners of Taxation v English, Scottish and Australian Bank [1920] AC 683, 687–​88. 48 Akbar Khan v Attar Singh [1936] 2 All ER 545, 548. 49 Foley v Hill (1848) 2 HLC 28, 36–​7; Foskett v McKeown [2001] 1 AC 102, 127–​28; Azam v Iqbal [2007] EWHC 2025 (Admin), [15]–​[17], [27]–​[29]. 50 Foley v Hill (1848) 2 HLC 28, 36; Governor & Company of the Bank of Scotland v A Ltd [2001] 1 WLR 751, [25]; Wright v HSBC plc [2006] EWHC 930 (QB), [42], [47], [61], [63]. 51 That said, the distinction between tangible and intangible property or between choses in action and choses in possession may not be as watertight as traditionally assumed: see Joanna Perkins and Jennifer Enwezor, ‘The Legal Aspect of Virtual Currencies’ (2016) 31 BJIB&FL 569, 570. See also Attorney-​General of Hong Kong v Nai-​Keung [1987] 1 WLR 1339, 1342.



The Cryptocurrency as a Store of Value a trust analysis of the digital-​wallet relationship would be particularly attractive for the wallet-​holder, especially as it would afford the wallet-​holder priority in the event of the wallet-​provider’s insolvency and would open the door to making third parties who had hacked the private keys liable as either a knowing recipient or dishonest assistor. Such a characterization would only be possible, however, if the courts were willing to treat private keys (as well as other types of password or passcode) as a species of property on the basis that they satisfy Lord Wilberforce’s criteria in National Provincial Bank Ltd v Hastings Car Mart Ltd52 as to what constitutes property.53 On that assumption, the holding of private keys in a hosted digital wallet might be analogized to the holding of rights in dematerialized securities by registering them in the books of an intermediary, which structure operates through a series of trusts and sub-​trusts.54 Indeed, such an analogy would consequently provide a useful framework for analysing how wallet-​providers might pool the digital wallets of multiple wallet-​holders, as well as for dealing with any possible right of reuse on the wallet-​holder’s part.55 That said, private keys in a hosted wallet might in fact be too ephemeral and unstable to satisfy the criteria in Hastings Car Mart. Furthermore, private keys may not satisfy the third criterion in that case of being capable in their nature of assumption by third parties: whilst digital wallets may be hacked (so that the private keys are capable of being assumed by a third party in an involuntary manner), and whilst a wallet-​holder is free to disclose such information voluntarily to a third party, this criterion arguably refers to whether private keys (as opposed to the underlying cryptocurrency) would be transferred in the ordinary course of business.56 Although private keys

52 National Provincial Bank Ltd v Hastings Car Mart Ltd [1965] AC 1175, 1247–​48: ‘Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability’. The possibility of applying a trust analysis to the digital-​wallet relationship is not made any easier by conceptualizing the trust as a ‘persistent right’ (see Robert Stevens and Ben McFarlane, ‘The Nature of Equitable Property’ (2010) 4 Journal of Equity 1), since this conception has not been adopted by the courts (see Shell UK v Total UK [2010] 3 All ER 793; Akers v Samba [2017] UKSC 6) and does not do away with the need for the private key to be classified first as a species of ‘property’ before any possible trust arises. 53 Even if the wallet-​holder’s private keys do not qualify as property, the Hastings Car Mart criteria might be used to explain why the cryptocurrency itself might constitute property in the same way as a ‘carbon credit’ (see Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156, [42]–​[61]); a waste management licence (see Re Celtic Extraction Ltd [2001] Ch 475, [29]–​[34]); a milk quota (see Swift v Dairywise Farms Ltd [2000] 1 WLR 1177, 1183–​84); or an export quota (see Attorney-​General of Hong Kong v Nai-​Keung [1987] 1 WLR 1339, 1342). See further ch 6 above. 54 See eg Secure Capital SA v Credit Suisse AG [2015] EWHC 388 (Comm), [58]–​[60], aff’d [2017] EWCA Civ 1486. 55 Although digital wallets would not currently fall within the Financial Conduct Authority’s Client Asset Sourcebook (see Financial Conduct Authority Handbook, CASS 6), the advantage of such regulatory oversight is that a statutory trust would arise in the event of the wallet-​provider’s insolvency: see Re Lehman Brothers International (Europe) [2012] UKSC 6. 56 For example, in Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156, [50], a carbon credit was considered to be property as it was transferable in the ordinary course of business and there existed a liquid market facilitating such transfer.



Bitcoin and Banking Law: Are there Lessons to Learn? are necessary to authenticate a cryptocurrency transfer for the network, they are not themselves transferred as part of that transaction. Indeed, the conclusion that private keys are not property would be consistent both with the long-​held reluctance to reify information (other than intellectual property rights),57 which is already adequately protected through the distinct equitable wrong of breach of confidence, and with the resistance to allowing trust concepts to operate too readily in commercial contexts. 9.10 Accordingly, the better view is that (like a bank account) a digital wallet is not a

proprietary institution, but rather a contractual one that arises (as in the case of an account)58 upon the agreement to create the wallet, with the consideration, on the one side, being the provision of the digital wallet and, on the other side, being the promise to use the wallet in accordance with the website’s terms and to comply with any particular provisions specifically governing the use of the digital wallet. Unfortunately, simply recognizing the contractual nature of the digital wallet (or, for that matter, the bank account) only takes the analysis so far. With respect to a bank account at least, the orthodoxy has long been that its opening creates a simple debtor-​creditor relationship between the bank and its customer,59 their respective positions depending upon whether the account is in credit or overdrawn. It is not immediately apparent, however, that the same legal characterization could be applied to a digital wallet, despite its functional equivalence with a traditional bank account. The key difference lies in the fact that a bank is entitled to use the funds standing to the credit of a customer’s bank account for its own commercial purposes,60 whether that involves repaying other depositors or earning interest by lending those funds to borrowers. In contrast, a wallet-​provider is not generally entitled to use the private keys for its own ends, but effectively holds them to the wallet-​holder’s order. Moreover, whilst there is a superficial similarity between a bank account and digital wallet in that both purport to record the funds available to the account-​or wallet-​holder respectively, there is the fundamental difference in what those records represent: in the case of a bank account, the ledger entries reflect the funds deposited with the bank and accordingly the chose in action representing the obligation to repay the equivalent funds, whereas a digital wallet simply reflects the amount of cryptocurrency linked to the private keys and does not purport to represent any obligation to repay that amount. This is because, as explained above, the digital wallet does not ‘contain’ any cryptocurrency directly, but simply the means of accessing and transferring it. To draw a more concrete

57 Phipps v Boardman [1967] 2 AC 46, 89–​90, 103, 127–​128 (contra 107, 115); Phillips v News Group Newspapers Ltd [2013] 1 AC 1, [20]. 58 Ladbroke & Co v Todd (1914) 30 TLR 433; Woods v Martins Bank Ltd [1959] 1 QB 55, 63. 59 Foley v Hill (1848) 2 HLC 28, 36–​37; Joachimson v Swiss Bank Corporation [1921] 3 KB 110, 127. 60 Foley v Hill (1848) 2 HLC 28, 36; Commissioners of the State Savings Bank of Victoria v Permewan, Wright & Co Ltd (1914) 19 CLR 457, 471.



The Cryptocurrency as a Store of Value analogy: the fact that one person leaves the keys to his safe with another may give rise to obligations involving the custody of the safe’s contents, but this act does not create in legal terms a debt owed by the latter to the former. Accordingly, unlike a bank account, a simple obligation to repay a sum of money (whether expressed in a fiat currency or its cryptocurrency equivalent) does not accurately reflect in legal terms the functions or practical operation of digital wallets. Accordingly, some other contractual characterization is required. In that regard, it is submitted that the digital wallet involves (at least at its in- 9.11 ception) a contract for the provision of digital content to the wallet-​holder61 and subsequently involves a contract for the provision of safe-​keeping services in relation to the wallet-​holder's private keys, which may in turn be analogized to the custodian services traditionally offered by banks.62 That said, even in respect of bank accounts, the courts have recognized that a bank may provide accessory services involving other forms of contractual relationship, such as acting as financial adviser63 or paying agent.64 Similarly, the wallet-​provider may act as an agent (assuming the host also operates a cryptocurrency exchange) if it receives instructions from the wallet-​holder to engage in a currency exchange transaction or (assuming the digital wallet or the host also operates as a node for the cryptocurrency network) if it receives instructions to affect a transfer or payment with the cryptocurrency. Accordingly, the basic contract for safe-​custody services may be overlain with an agency relationship in certain circumstances. Given the similarity (albeit not the identity) between digital wallets and trad- 9.12 itional bank accounts in terms of their essentially contractual nature, the next issue concerns whether there is likely to be any similarity in the contents of the two contracts. Whilst current accounts are increasingly governed by detailed standard-​form terms and conditions that are signed at the time of the account’s opening, this has not always been the case; at one time, the relationship between

61 For the notion of a contract for the provision of ‘digital content’: see Consumer Rights Act 2015, s 33. As this concept is limited to business-​to-​consumer supply contracts, equivalent contracts between different parties might qualify as a sale of goods if there is an element of tangibility in the supply (see St Albans District Council v International Computers Ltd [1996] 4 All ER 481, 493; Gammasonics Institute for Medical Research Pty Ltd v Comrad Medical Systems Pty Ltd [2010] NSWSC 267, [1]‌–​[3], [5]–​[6], [12]–​[15], [24], [47]; Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281, [18]–​[20], [42]) or alternatively a contract for the provision of a service or a sui generis type of contract. 62 For the equivalent services traditionally provided by banks in relation to safe custody of tangibles and documentary intangibles, such as safety-​deposit boxes, see Peter Ellinger, Eva Lomnicka, and Christopher Hare, Ellinger’s Modern Banking Law (5th edn, OUP, 2011) 742–​49. In relation to global custodian services provided by banks in relation to securities, see generally Madeleine Yates and Gerald Montagu, The Law of Global Custody (4th edn, Bloomsbury Publishing, 2013). 63 See eg JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm), aff’d [2010] EWCA Civ 1221. 64 Westminster Bank Ltd v Hilton (1926) 136 LT 315, 317; Coutts & Co v Stock [2000] 1 WLR 906, 909; Hollicourt (Contracts) Ltd v Bank of Ireland [2001] 2 WLR 290, 296, 300.



Bitcoin and Banking Law: Are there Lessons to Learn? a bank and its customers was principally governed by a series of terms implied by law into the bank-​customer contract.65 Obviously, to the extent that the operation of the digital wallet is governed by express terms and conditions, those terms will govern the relationship between the wallet-​provider and holder, but, given that digital-​wallet contracts are still at a relatively embryonic stage of development,66 the precise content of the relationship between wallet-​provider and holder may well be dependent upon a process of contractual implication for the foreseeable future. Applying the approach traditionally adopted for bank accounts in that regard, there are four contractually implied duties that might be applicable to the present context: the duty to act in accordance with one’s mandate, the duty to keep information secret, the duty to act with reasonable skill and care, and the fiduciary duties (or disabilities) relating to unauthorized conflicts of interest and profit-​making. A. The duty to act within mandate 9.13 To the extent that the wallet-​provider is instructed to perform a particular task,

whether exchanging cryptocurrencies and fiat currencies or acting as a node to broadcast a payment or transfer to the wider network, it is likely to act as an agent with an obligation to act within the scope of its mandate.67 Although there may be issues relating to the interpretation of the instructions issued,68 in general claims for breach of mandate are relatively straightforward, since liability is strict and not dependent upon whether reasonable care has been taken or not.69 At least as regards bank accounts, the difficulty has always lain in identifying those circumstances when the bank is not obliged to follow its customer’s otherwise valid instruction,70 and there is no reason why this would be any less challenging in relation to digital wallets. Indeed, the difficulty is likely to be magnified given the legal and conceptual uncertainty surrounding digital wallets. Accordingly, an issue arises as to whether the circumstances identified by the law as terminating a bank’s mandate might be helpful in identifying when the wallet-​provider’s mandate might similarly end.

9.14 In that regard, there will clearly be some situations involving termination of a

bank’s mandate that are likely to prove inapposite to the context of digital wallets: whilst a bank is entitled to ignore its customer’s instructions when their account

Joachimson v Swiss Bank Corporation [1921] 3 KB 110, 126–​29. 66 For more sophisticated examples of standard terms and conditions, see Free Wallet, ‘Homepage’ (Free Wallet) and Bitcoin Wallet, ‘Homepage’ (Bitcoin Wallet) accessed 27 August 2018. 67 London Joint Stock Bank v Macmillan [1918] AC 777, 814. 68 Difficulties may arise when the principal’s instructions are ambiguous: see Ireland v Livingstone (1872) LR 5 HL 395; Westminster Bank v Hilton (1926) 43 TLR 124. 69 Midland Bank Ltd v Seymour [1955] 2 Lloyd’s Rep 147, 168. 70 Ellinger, Lomnicka, and Hare (n 62 above) 224–​26, 454–​88. 65



The Cryptocurrency as a Store of Value is overdrawn,71 the concept of an overdrawn digital-​wallet is as yet unknown and may ultimately prove a conceptual impossibility. With respect to other situations in which a bank’s mandate would be terminated, their potential transposition to the context of digital wallets will turn upon the extent to which a court is prepared to characterize a private key and/​or the underlying cryptocurrency as functionally equivalent to either ‘money’ or ‘property’ for the purposes of particular legislative provisions. Two relevant situations exemplify this issue. Firstly, whilst a bank’s mandate to honour its customer’s instructions is clearly terminated in respect of funds that are subject to a third-​party debt order served upon the bank,72 whether the same would apply to a digital wallet containing a cryptocurrency's private keys would depend upon whether the wallet-​provider owed a ‘debt due or accruing due’73 to the wallet-​holder, which would in turn require the contents of the wallet to be classified as ‘money’.74 Not only is this latter point unresolved, but, as considered above, describing the relationship between a wallet-​provider and -​holder as involving the creation of a ‘debt’ does not accurately encapsulate the nature and functions of a digital wallet. Secondly, whilst a bank (by virtue of being in a regulated sector)75 is under a directly imposed obligation (backed by the threat of criminal liability) to report any known or suspected money-​laundering offences committed by its customers76 and, following such a report, is relieved of its obligations to obey its customer’s instructions until it receives clearance for any transactions from the relevant authorities, a digital-​wallet-​provider’s responsibilities in this regard are less clear. Ultimately, the issue would turn upon whether cryptocurrencies or the associated private keys could be designated as ‘criminal property’ under the Proceeds of Crime Act 2002.77 Whilst the notion of ‘property’ under that enactment is expansively defined,78 it is uncertain whether private keys (or any other type of password or passcode for that matter) would qualify. To the extent that they do qualify, a wallet-​provider could be made criminally liable for acquiring, using or possessing ‘criminal property’79 (assuming of 71 Sierra Leone Telecommunications Co Ltd v Barclays Bank plc [1998] 2 All ER 821, 827. 72 A third-​party debt order is a proprietary remedy which operates to discharge the debt and release the debtor from his obligation to pay in respect of that debt: see Société Eram Shipping Co Ltd v Compagnie Internationale de Navigation [2004] 1 AC 260, [24], [62], [88]; Taurus Petroleum Ltd v State Oil Marketing Co of the Ministry of Oil, Iraq [2017] UKSC 64, [29]. 73 Civil Procedure Rules, r 72.2(1)(a). 74 For the meaning of ‘debt’ for the purposes of Civil Procedure Rules, Part 72, consider Taurus Petroleum Ltd v State Oil Marketing Co of the Ministry of Oil, Iraq [2017] UKSC 64, [87]. See further Civil Procedure Rules, Practice Direction 72, [2]‌. 75 Proceeds of Crime Act 2002, Sch 9, para 1(1)(a). 76 ibid, s 330. 77 ibid, s 340(3). For these purposes, ‘criminal property’ is property that represents ‘a person’s benefit from criminal conduct’, which means that the property has been obtained ‘as a result of or in connection’ with the conduct in question: ibid, s 330(5). 78 ibid, s 340(9). In this regard, the notion of ‘property’ is defined in a non-​comprehensive manner as including money, ‘all forms of property, real or personal, heritable or moveable’ and ‘things in action and other intangible or incorporeal property’. 79 ibid, s 329(1).



Bitcoin and Banking Law: Are there Lessons to Learn? course that the private key is obtained as a result of criminal activity) unless it has made an authorized disclosure about the property to the relevant authorities.80 Alternatively, if the underlying cryptocurrency qualified as ‘criminal property’, a wallet-​provider could be made liable for concealing, disguising, converting, transferring,81 or becoming involved in a transaction to acquire, retain, use, or control82 such property by storing the private keys and/​or allowing them to be used to affect a transaction with the relevant cryptocurrency, unless the wallet-​provider has made the requisite authorized disclosure.83 9.15 Yet other situations, in which a bank’s mandate will terminate, are likely to be

readily transposable, as they are not dependent upon concepts of ‘property’ or ‘money’ (albeit that these situations may give rise to other difficulties). Firstly, when a bank has received notice of the fact that a freezing injunction has been made against its customer, its mandate is terminated, as a failure to abide by the order will amount to a contempt of court.84 Similarly, as the standard-​form freezing injunction is worded so as to prevent dealings with ‘assets’ (rather than ‘property’), and such relief operates in personam (rather than in rem85) against the defendant to the freezing injunction and any third parties with notice,86 there would appear to be no reason why a freezing injunction would not similarly be effective in preventing the wallet-​provider from allowing the private keys to be used to transfer an amount of cryptocurrency. That said, at least where the freezing injunction is territorially circumscribed, there may be difficult questions regarding the situs of the private keys and the underlying cryptocurrency for the purpose of determining whether the terms of the freezing injunction have been breached or not.87 Secondly, just as with a bank account, the wallet-​provider’s mandate to deal with the private keys will be terminated automatically by the wallet-​holder’s death88 or lack of capacity (whether under the Mental Capacity Act 200589 or at common law90). Whether the ability to deal with the private keys (and accordingly ibid, ss 329(2)(a), 338(2)–​(3). 81 ibid, s 327(1). 82 ibid, s 328(1). 83 ibid, s 338(2)–​(3). 84 Civil Procedure Rules, Practice Direction 25A. 85 Customs & Excise Commissioners v Barclays Bank plc [2007] 1 AC 181, [10]; Fourie v Le Roux [2007] 1 All ER 1087, [2]‌. 86 Cretanor Maritime Co Ltd v Irish Marine Management Ltd [1978] 1 WLR 966, 976–​77; Mercedes-​Benz v Leiduck [1996] AC 284, 300. 87 It has been suggested that trying to reify cryptocurrencies for the purposes of allocating it a particular location ‘is not marginally more useful than thinking of Santa Claus as a denizen of the North Pole’: see Microsoft Corporation v United States, 855 F.3d 53 (2017), 62. 88 Campanari v Woodburn (1854) 15 CB 400. There is, however, a distinction between the general impact of death upon an agency relationship and the impact of death upon the specific mandate to honour cheques: see Bills of Exchange Act 1882, s 75(2). 89 In circumstances where the digital-​wallet-​holder lacks capacity to manage his or her property or affairs, a court may appoint one or more deputies to take over that decision-​making process: see Mental Capacity Act 2005, ss 2(1), 16(2), 18(1). 90 Yonge v Toynbee [1910] 1 KB 215, 235; cf Drew v Nunn (1879) 4 QBD 661, 668–​70. 80



The Cryptocurrency as a Store of Value the underlying cryptocurrency) devolves upon the wallet-​holder’s executor, administrator, or deputy may well depend, however, upon the application of property or monetary law concepts.91 Thirdly, just as a bank’s mandate to deal with an account is affected, so the ability of a wallet-​holder to use or give instructions in respect of the private keys and underlying cryptocurrency is likely to be affected by the commencement of an insolvency proceeding: in the case of an individual, the moment of termination probably occurs when notice is received of the petition for their adjudication,92 and, in the case of a company, upon the passing of the relevant resolution (when the winding-​up is voluntary93) and the making of the court order (when it is compulsory94). That said, as in cases of death or mental incapacity, the basis upon which the trustee in bankruptcy or liquidator would seek to assert a claim to the private keys may not be straightforward, although a liquidator or administrator may seek an order requiring any person (such as a wallet-​provider) to hand over ‘any property, books, papers or records’ of the wallet-​holder.95 Finally, a bank’s mandate is likely to terminate under the Proceeds of Crime Act 2002, when the customer is shown to have lead a ‘criminal lifestyle’, and a court makes a confiscation order on the basis that the customer has ‘benefitted’ from his general criminal conduct. Accordingly, as the legislation seeks to avoid as far as possible such restrictive terms as ‘property’ or ‘money’ in favour of a more nebulous concept of ‘benefit’, it would certainly seem arguable that private keys might be the subject of a confiscation order, which would adversely affect the wallet-​holder’s and -​provider’s ability to deal with them. B. The duty of secrecy Putting aside issues of the wallet-​provider’s mandate to deal with the private keys, 9.16 the second core implied contractual duty that arises in the context of the bank-​ customer relationship involves the bank keeping its customer’s information secret.96 A bank’s duty of secrecy is extremely broad, covering all information that 91 Administration of Estates Act 1925, ss 25, 52. 92 Pettit v Novakovic [2007] BPIR 1643, [7]‌. 93 Re London and Mediterranean Bank (1870) LR 5 Ch App 567, 569. 94 National Westminster Bank Ltd v Halesowen Presswork Assemblies Ltd [1972] AC 785. That the mandate does not terminate upon the issuing of the petition is clear from Hollicourt (Contracts) Ltd v Bank of Ireland [2001] 2 WLR 290, [33]. 95 Insolvency Act 1986, s 234(2). For these purposes, ‘records’ include computer records and other non-​documentary records:  ibid, s 436. A  similar power is conferred on a trustee in bankruptcy: ibid, s 365. 96 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, 472–​73, 479–​ 81, 485–​86. This chapter uses the terminology of ‘secrecy’, rather than ‘confidentiality’, to refer to the bank’s core obligation, arising out of the account contract, not to disclose its customer’s information. There are three reasons for this. Firstly, the language of ‘bank secrecy’ reflects the statutory terminology adopted in some jurisdictions: see Banking Act, para 47 (Switzerland); Criminal Code, s 156 (Argentina); Banking and Financial Institutions Act 1989, s 97 (Malaysia). That said, Singapore has recently abandoned the language of ‘secrecy’ in favour of ‘privacy’: see Banking Act (Cap 19, 2008 Rev Ed Sing), s 47 (Singapore). Secondly, referring to ‘bank secrecy’ emphasizes that the bank’s



Bitcoin and Banking Law: Are there Lessons to Learn? comes into the bank’s hands in its role as a banker.97 Accordingly, even information that would not otherwise be considered confidential in the strict sense (such as a customer’s account number, which is disclosed to third parties for the purposes of allowing payment to be made) would nevertheless be covered by the duty of secrecy. With respect to cryptocurrencies, it is clear that the private keys in a hosted98 digital wallet are highly confidential, since their disclosure would effectively allow a third party to utilize or transfer the cryptocurrency to which they relate. Accordingly, the confidentiality of private keys obviously requires some form of legal protection. The issue is whether that protection can be adequately provided by the general equitable wrong of breach of confidence99 or whether the wallet-​holder requires the additional protection afforded by a broader contractual duty of secrecy similar to that owed by banks. It is submitted that the analogy with bank accounts is apt in this context and that the need for a broad obligation of secrecy is almost more compelling in the context of cryptocurrencies than might nowadays be the case for retail bank accounts: this is because the operation of the cryptocurrency network is often based upon a wallet-​holder’s public keys being disclosed, but not that person’s identity or any other details about them. Accordingly, the intended anonymity associated with cryptocurrencies arguably necessitates that any of the wallet-​holder’s identifying features be kept secret, not just the private keys themselves. Only an obligation akin to the bank’s duty of secrecy (rather than the wrong of breach of confidence) can achieve this aim. Indeed, developing notions of privacy100 and recent developments in data protection101 may bolster this view. The development of secrecy and confidentiality within the bank-​customer relationship is, therefore, likely to provide a useful duty of non-​disclosure (at least as traditionally conceived in the UK) extends to information that is not actually confidential at all. Thirdly, and related to the previous point, the language of ‘bank secrecy’ helpfully distinguishes the duty owed by banks specifically from the more general form of equitable liability for breach of confidence, which arises in any situation involving the disclosure of confidential information: see Coco v AN Clark (Engineers) Ltd [1968] FSR 415, 419–​21; Attorney-​ General v Observer Ltd [1990] 1 AC 109, 281. 97 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, 473–​74, 485. See also Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, 1357; Barclays Bank plc v Taylor [1989] 1 WLR 1066, 1070. 98 With respect to equipment-​based wallets, it is clear that issues of confidentiality and secrecy are no less important, so that if there is a disclosure of the private keys this may (although this will not necessarily always be the case) indicate some defect in the equipment provided and accordingly provide the basis for a contractual claim against the supplier of the equipment: see Sale of Goods Act 1979, s 13–​15; Consumer Rights Act 2015, ss 9–​11. 99 See generally Attorney-​General v Observer Ltd [1990] 1 AC 109, 281; Douglas v Hello! Ltd (no 3) [2008] 1 AC 1, [255], [272]–​[278]; Campbell v Mirror Group Newspapers Ltd [2004] 2 AC 457, [14], [21], [51], [96], [134]; Vestergaard Frandsen A/​S v Bestnet Europe Ltd [2013] 1 WLR 1556, [23]–​[28]. 100 Consider, for example, the protection to privacy rights afforded in PJS v News Group Newspapers Ltd [2016] UKSC 26. 101 See generally EU Regulation 2016/​679 of the European Parliament and of the Council of 27 April 2016 on the Protection of Natural Persons with Regard to the Processing of Personal Data and on the Free Movement of such Data and Repealing Directive 95/​46/​EC, OJ L 119/​1.



The Cryptocurrency as a Store of Value guide to the protection of a wallet-​holder’s information. Some support for this view may be derived from the recent Singapore High Court decision in B2C2 Ltd v Quoine Pte Ltd.102 The analogy with bank accounts not only relates to the initial scope of protection 9.17 conferred by the duty of secrecy103 but also potentially includes the circumstances in which that duty no longer applies.104 In that regard, it would hardly be controversial to suggest that the wallet-​provider should (as in the case of a bank account relationship) no longer be required to keep the wallet-​holder’s details secret when the latter has expressly consented to their disclosure105 or when it would be in the public interest for such disclosure to be made, even though this could not be compelled.106 Equally, there should be no objection to such disclosure when it is in the wallet-​provider’s interests to do so,107 provided that this exception is narrowly construed to cover only those situations in which disclosure is absolutely essential (such as when the wallet-​provider is being sued by the wallet-​holder),108 rather than also covering those circumstances when it might be considered merely desirable by the wallet-​provider to disclose personal information (such as when the wallet-​holder’s information is disclosed for marketing purposes to related companies in a group).109 Most significantly, of the various exceptions to the bank’s duty of secrecy, a wallet-​provider should be entitled to disclose private keys or other information when ordered to do so by legislation or a court. Amongst the burgeoning legislation compelling disclosure, a wallet-​holder is most likely to be affected by legislation requiring the disclosure of money-​laundering or drug-​trafficking activity,110 compelling the disclosure of criminal activity to the police or other investigatory authorities111 or enabling a liquidator112 or the revenue authorities113 to seek judicial orders for the disclosure of a wallet-​holder’s pre-​liquidation or taxable activity. Indeed, an important example of the last type of disclosure order is provided by United States v Coinbase Inc,114 in which the United States

102 B2C2 Ltd v Quoine Pte Ltd [2018] SGHC 4. 103 Barclays Bank plc v Taylor [1989] 1 WLR 1066, 1070. 104 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, 473; cf Attorney-​ General v Observer Ltd [1990] 1 AC 109, 281–​82. 105 In the banking context, it is clear that a customer’s implied consent is nowadays insufficient to relieve a bank of its duty of secrecy: see Turner v Royal Bank of Scotland plc [1999] 2 All ER (Comm) 664, 671. 106 Price Waterhouse v BCCI Holdings (Luxembourg) SA [1992] BCLC 583; Pharaon v Bank of Credit and Commerce International SA [1998] 4 All ER 455. 107 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, 473. 108 Ellinger, Lomnicka, and Hare (n 62 above) 190. 109 Consider the overly broad (and arguably illegitimate) approach to this limitation in Sunderland v Barclays Bank Ltd (1938) 5 LDAB 163. 110 See eg Terrorism Act 2000, s 21B; Proceeds of Crime Act 2002, s 337. 111 See eg Police and Criminal Evidence Act 1984, s 9. 112 See eg Insolvency Act 1986, s 236. 113 See eg Taxes Management Act 1970, ss 13, 17, 24; Income Tax Act 2007, s 771. 114 United States v Coinbase Inc, US Dist 196306, (ND Ca, 2017).



Bitcoin and Banking Law: Are there Lessons to Learn? Inland Revenue served a summons on Coinbase, a cryptocurrency exchange and wallet-​provider, seeking information regarding over 10,000 of the latter’s customers over a period of several years. When Coinbase refused to comply with the summons, the court ordered disclosure on the basis that it would serve the legitimate purpose of identifying wallet-​holders who may not have paid federal taxes on their profits from cryptocurrency dealings. Given the wealth that is nowadays tied-​up in cryptocurrencies and the perception (as considered above) that they are primarily used for nefarious ends, such applications for judicial disclosure are unlikely to diminish, thereby increasingly threatening the anonymity associated with cryptocurrencies and ultimately their potential utility. C. The duty to act with reasonable skill and care 9.18 The third potential duty that arises from drawing an analogy between digital

wallets and bank accounts concerns the contractual duty on a bank to exercise reasonable skill and care in operating its customer’s account.115 To the extent that such a contractual duty is also imposed on wallet-​providers, many breaches of that duty will likely also involve a breach of the wallet-​provider’s duty of secrecy, since the most likely result of a wallet-​provider’s negligence is the disclosure of the wallet-​holder’s private keys to a third party. In cases of such an overlap, a well-​advised wallet-​holder ought to rely upon any breach of the duty of secrecy given that this involves strict liability, in contrast to the fault-​based liability of a contractual duty of care. Nevertheless, there may be situations in which there is a standalone breach of the duty of care, such as when the only records of the wallet-​holder’s private keys are lost or destroyed by the wallet-​provider or when an employee or agent of the wallet-​provider uses the private keys for their own ends. Such scenarios do then give rise to the question of whether a contractual duty to exercise reasonable care should be imposed by analogy with the bank-​ customer relationship, when the same result could be achieved directly by the implication of a term under the Supply of Goods and Services Act 1982116 or the Consumer Rights Act 2015.117

9.19 It is submitted, however, that the analogy with bank accounts (and wider banking

principles) remains useful as it highlights three features of the bank’s duty of care that would probably be equally desirable to emphasize in the context of the contractual relationship created by a digital wallet. The first feature is that (like banks), wallet-​providers ought not to be under any wider implied obligation than that of providing and operating the digital wallet with due care and in particular

115 Selangor United Rubber Estates Ltd v Craddock (no 3) [1968] 1 WLR 1555, 1608; Karak Rubber Co Ltd v Burden (no 2) [1972] 1 WLR 602, 622–​31. 116 Supply of Goods and Services Act 1982, s 13. 117 Consumer Rights Act 2015, s 49(1).



The Cryptocurrency as a Store of Value ought not to owe any wider duty to advise118 (especially given the speculative and volatile nature of cryptocurrencies119) on the merits of opening a digital wallet, purchasing any cryptocurrency, or engaging in any particular transaction with that cryptocurrency.120 The second feature is that a bank’s duty to exercise reasonable care extends to ignoring an apparently valid instruction from its customer when the bank has clear knowledge that the proposed transaction is in reality an attempt to defraud that customer or otherwise involves an illegal transaction.121 Given that the risk of such fraud or illegality may well be higher for digital wallets than in relation to an ordinary bank account given the anonymity surrounding the former, it seems appropriate that a wallet-​provider should be under a duty not to facilitate a fraud on the wallet-​holder when it has cogent evidence available to demonstrate that this is what is in fact occurring. Indeed, any other conclusion would allow the wallet-​provider to do nothing when it is best placed to avoid the potential loss to the wallet-​holder. The third feature is that, in the event that the wallet-​provider is required to make a disclosure relating to suspected money laundering, there may come a point in time when the wallet-​provider is required to provide information to the wallet-​holder regarding the disclosure that has been made.122 D. Fiduciary  duties The fourth potential duty that would result from drawing an analogy between 9.20 bank accounts and digital wallets relates to the issue of whether or not fiduciary duties should be owed by banks and wallet-​providers to customers and wallet-​ holders respectively. Certainly, the orthodoxy with respect to banks has long been clearly established: a bank is not a fiduciary of its customer with respect to ordinary banking123 or lending transactions,124 albeit that there may be circumstances involving relationships of vulnerability and ascendency,125 the provision

118 JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm), [3]‌, [94], [101–​[105], [141]–​[171], [236], [263]–​[264], [373]–​[374], [429]–​[434], [445]–​[459], [474]–​[490], [603]–​[608], aff’d [2010] EWCA Civ 1221. 119 Stafford v Conti Commodity Services [1981] 1 All ER 691, 696–​97; Valse Holdings SA v Merrill Lynch International Bank Ltd [2004] EWHC 2471 (Comm), [22], [69], [71]. 120 Williams & Glyn’s Bank Ltd v Barnes [1981] Com LR 205, 207; Schioler v Westminster Bank Ltd [1970] 2 QB 719; National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51, [22]. 121 Barclays Bank plc v Quincecare [1992] 4 All ER 363, 376–​77; Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340, 1378; Verjee v CIBC Bank and Trust Company (Channel Islands) Ltd [2001] Lloyd’s Rep Bank 279. 122 Shah v HSBC Private Bank (UK) Ltd [2010] EWCA Civ 31, [37]–​[39]. 123 Governor & Company of the Bank of Scotland v A Ltd [2001] 1 WLR 751, [25]; Murphy v HSBC Bank plc [2004] EWHC 467 (Ch), [101]; Tamimi v Khodari [2009] EWCA Civ 1042, [42]; Kotonou v National Westminster Bank plc [2010] EWHC 1659 (Ch), [136]. 124 Popek v National Westminster Bank plc [2002] EWCA Civ 42, [33]; Tamimi v Khodari [2009] EWCA Civ 1042, [42]. 125 Lloyds Bank Ltd v Bundy [1975] QB 326.



Bitcoin and Banking Law: Are there Lessons to Learn? of financial advice,126 the custody of securities,127 or discretionary portfolio management128 when such a fiduciary relationship may arise. In light of the fact that the wallet-​provider is effectively providing a type of custody service to the wallet-​ holder, it is certainly arguable that the relationship arising from the digital wallet might be treated as fiduciary in nature, but, given the usually commercial and arm’s-​length nature of the dealings between a wallet-​provider and wallet-​holder and the likelihood of contractual exclusion, a court is only likely to reach such a conclusion cautiously. Accordingly, in general there should not be any greater willingness to impose fiduciary duties in the digital-​wallet context than in the context of ordinary retail banking.

III.  The Cryptocurrency as Payment 9.21 Besides acting as a depositary for funds, the second key function performed by a

bank involves the transfer of those funds, usually by way of payment. Accordingly, the second broad area of enquiry concerns the extent to which the established principles relating to bank payments and payment systems may be useful in analysing the transfer and use of cryptocurrencies as payment. Whilst the discussion still considers the role of the digital wallet and its provider in that process, the analysis is necessarily broader than in the previous section, given that the transfer or payment process does not simply involve the private keys held in the digital wallet; it also concerns how the underlying cryptocurrency itself operates within the network. In that regard, it may once again be wondered how the lessons learned from bank payments can be mapped onto a decentralized network that does not purport to depend upon intermediaries in the same way as traditional banking. The answer lies in the fact that just as traditional bank payments rely upon a notion of authority or agency or mandate to establish their effectiveness, so too does the holder of cryptocurrency rely on the acts of others (whether the host of the digital wallet or the nodes of the cryptocurrency network broadcasting the transaction and then adding and confirming it on the blockchain) to carry out the transfer or payment in question. Accordingly, cryptocurrencies still depend upon a form of authorization given by the wallet-​holder initiating the relevant transaction; albeit that the authority in question takes a more diffuse form than in traditional bank payments, since the instruction is given to both the wallet-​ provider and network more widely, rather than just directly to a single bank. Once this premise is accepted, the wallet-​holder’s mandate becomes susceptible

126 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (no 4) (2007) 241 ALR 705, [325]–​[330]. 127 JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm), [573], aff’d [2010] EWCA Civ 1221. 128 Diamantides v JP Morgan Chase Bank [2005] EWCA Civ 1612, [42].



The Cryptocurrency as Payment to a similar analysis to that applied in the context of a bank customer’s mandate and accordingly gives rise to the following issues:129 namely, whether it is possible for the wallet-​holder to countermand a transaction once initiated; whether a wallet-​holder’s instructions may be terminated through external factors; how one allocates responsibility between the wallet-​provider, the wallet-​holder, and/​or the network nodes for any unauthorized or misdirected transfers; and how one determines when the transfer is effective to discharge any underlying liability in respect of which the transfer of cryptocurrency is made. With respect to issues of countermand, the aim of every cryptocurrency net- 9.22 work is that the transaction be completed as quickly as possible, since the shorter the delay, the less the risk of a successful countermand. Unfortunately, with the number of network nodes declining,130 there can be delays in broadcasting a particular transaction to the network and, thereafter, there can be further delays in the confirmation of the transaction by the network.131 Accordingly, there may be a window between initiation and confirmation when countermand is technically possible. Certainly, the position with cheques was that customers were free to cancel their payment instructions if they informed their bank before the cheques were cleared.132 Increasingly, however, the requirements of commercial certainty and business efficiency have tended to eclipse the desirability of a payor being allowed to change his or her mind about a particular payment. Accordingly, with respect to credit and debit card payments, the contractual network rules established by Visa and MasterCard generally preclude a cardholder from simply revoking a payment instruction,133 although there are charge-​back134 and statutory mechanisms135 for recouping payments when goods or services have been returned by the cardholder, have never been supplied, or have proved to be defective. The same position has been adopted with respect to electronic funds transfers: in Delbrueck & Co v Manufacturers Hanover Trust,136 the Court of Appeal for the Second 129 It is submitted that the analysis does not alter according to whether a cryptocurrency is viewed as being equivalent to money (and so capable of constituting payment in the usual manner) or whether it is viewed as an intangible asset held in an electronic system in a similar manner to intermediated securities, albeit that these demonstrate a degree of centralization absent in cryptocurrency networks. 130 Unlike the mining process, there are few rewards for operating a network node used to broadcast transactions, and the costs associated with the process can be high. 131 Whilst the average confirmation time for one block in the Bitcoin network is ten minutes, Poisson processes result in some blocks taking far longer to confirm, heightening the risk of countermand. 132 Bills of Exchange Act 1882, s 75(1). 133 For statutory confirmation of this position, see Payment Services Regulations 2017, SI 2017/​ 752, reg 67(3). 134 Office of Fair Trading v Lloyds TSB Bank plc [2008] 1 Lloyd’s Rep 30, [36]–​[37]; Lancore Services Ltd v Barclays Bank plc [2009] EWCA Civ 752, [16]; The Governor and Company of The Bank of Scotland v Alfred Truman [2005] EWHC 583 (QB), [2]‌, [5]–​[11], [125]; NSB Ltd v Worldpay Ltd [2012] EWHC 927 (Comm), [3]–​[4]. 135 Consumer Credit Act 1974, s 75(1). 136 Delbrueck & Co v Manufacturers Hanover Trust, 609 F.2d 1047 (2nd Cir, 1979), 1051.



Bitcoin and Banking Law: Are there Lessons to Learn? Circuit considered that a CHIPS transfer was irrevocable because of the nature of the system and the fact that the CHIPS participants expected the system to operate in that way and, in Tayeb v HSBC Bank plc,137 Colman J considered that, as the CHAPS rules effectively precluded countermand, any instruction issued by the payor was effectively irrevocable. This trend in payments has been confirmed with the advent of the ‘Faster Payments System’,138 which completes the transfer of small electronic payments almost instantaneously, and the Payments Services Regulations 2017 (PSR 2017),139 which provides that a payment instruction can no longer be revoked once received by the transferor’s bank, thereby removing the practical option of revoking a payment unless the revocation occurs almost immediately. On this basis, to the extent at least that a cryptocurrency is being used as a means of effecting payment for goods or services, there appears to be no reason why legally the transfer or payment would not be treated as irrevocable once it is broadcast to the network by analogy with Tayeb and the PSR 2017, even if in practical terms there is a window (as described above) in which countermand would otherwise be possible. 9.23 More problematic than the issue of countermand by the cryptocurrency holder

is the risk that some external factor might—​as described previously—​operate to terminate the authority of the digital wallet-​holder and the network to initiate, broadcast, and confirm the transaction in question. Of particular concern in this regard is the impact that the anti-​money laundering and anti-​terrorist financing legislation under the Terrorism Act 2000 and the Proceeds of Crime Act 2002 might have upon that authorization process, particularly when an ‘authorized disclosure’ has been made.140 With respect to other traditional payment mechanisms, the courts have been clear that, when such a disclosure has been made, the bank is ‘obliged not to carry out any transaction in relation to that account’,141 since the transaction is temporarily illegal to perform, with the result that the obligation on the bank to abide by its customer’s instructions is suspended until the illegality is removed (by virtue of the relevant authorities giving the transaction clearance).142 Accordingly, even in those payment systems that are considered irrevocable by the customer (as considered above), it is possible for the payment transaction to be suspended statutorily. Indeed, Colman J made clear in Tayeb that (by analogy with documentary credits) the irrevocable nature of a payment instruction could not trump any fraud or illegality affecting it.143 With respect to cryptocurrencies, Tayeb v HSBC Bank plc [2004] 4 All ER 1024, [57], [60]. 138 See Faster Payments, ‘Homepage’ (Faster Payments) accessed 27 August 2018. 139 Payment Services Regulations 2017, SI 2017/​752, reg 67(3). 140 Proceeds of Crime Act 2002, ss 338–​39. 141 Squirrel Ltd v National Westminster Bank plc [2005] 2 All ER 784, [7]‌, [19]–​[21]. 142 K v National Westminster Bank plc [2006] 2 All ER (Comm) 655, [10]–​[12]. See also Shah v HSBC Private Bank (UK) Ltd [2010] EWCA Civ 31, [20]–​[33]. 143 Tayeb v HSBC Bank plc [2004] 4 All ER 1024, [60]–​[61]. 137



The Cryptocurrency as Payment it would be unproblematic to apply the same reasoning at the pre-​confirmation stage of the transaction, but it is unclear how that same reasoning could be squared with the process of confirming a transaction by adding it to the blockchain, since the underlying premise of the network is that the transaction is not only irrevocable but also irreversible at that stage. It is highly unlikely, however, that the English courts would allow the internal workings of a cryptocurrency network to set at naught international attempts to combat money-​laundering and terrorist financing (indeed, money laundering legislation has been successfully applied to Bitcoin in the United States),144 but such a judicial approach may ultimately be at the expense of the cryptocurrency network’s integrity. Besides the issue of whether it might be possible for an instruction relating to 9.24 a cryptocurrency transaction to be reversed, the law relating to bank payments may also assist with the allocation of legal responsibility for any unauthorized or fraudulent payment instructions. With respect to the issue of liability for unauthorized instructions, a useful analogy might be drawn with those payment systems that previously employed the ‘tested telex’ system and now depend upon SWIFT for their transmission. In Standard Bank London Ltd v The Bank of Tokyo Ltd,145 which involved a bank arguing that a tested telex sent to the beneficiary of a letter of credit was unauthorized, Waller J was prepared to accept that the security features of the tested telex system effectively negated any argument that the letter of credit was unauthorized. A similar argument has since been accepted by the Singaporean courts in relation to a letter of credit issued by SWIFT.146 By this reasoning (and as a corollary of the fact that countermand is likely to be largely impossible) it ought not to be possible for a wallet-​holder to argue that a particular transaction was not properly authorized and accordingly seek to unwind it on that basis. Whilst such a transaction ought not to be invalid, there may still be an issue of whether the wallet-​holder might be entitled to compensation from the wallet-​provider or the network nodes in respect of an unauthorized or fraudulent transaction or whether the wallet-​holder must ultimately bear that loss. Certainly, at common law, a bank bore all the losses associated with the operation of a payment system, even if the relevant unauthorized or fraudulent transaction was initiated by one of the customer’s own employees;147 under the PSR 2017, however, the customer bears responsibility for any losses if these are the result of his or her negligence in keeping any security features safe,148 the result of his or her gross negligence or fraud,149 or the result of using incorrect

144 United States v Ulbricht (Case 1:14-​cr-​00068-​KBF, SDNY, 9 July 2014), 5, 47–​50, aff’d 858 F.3d 71 (2nd Cir, 2018). 145 Standard Bank London Ltd v The Bank of Tokyo Ltd [1995] 2 Lloyds Rep 169. 146 Industrial and Commercial Bank Ltd v Banco Ambrosiano Veneto SpA [2003] 1 SLR 221. 147 Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank [1986] AC 80. 148 Payment Services Regulations 2017, SI 2017/​752, reg 72(3). 149 ibid, reg 77(3).



Bitcoin and Banking Law: Are there Lessons to Learn? transfer details150 (such as an incorrect public key for the intended transferee in the case of cryptocurrency). Neither of these analytical frameworks draws the line in the right place for cryptocurrencies, however, since they operate from the default position that the bank should bear the losses for unauthorized or fraudulent transactions, unless there is some countervailing reason to make the customer liable. With respect to cryptocurrencies, the wallet-​holder should bear all the losses associated with such transactions, unless he or she can establish a freestanding civil claim that is attributable to the wallet-​provider or one or more operators of the network nodes. In other words, there should be no default assumption that someone else, other than the wallet-​holder himself, will bear the losses attributable to unauthorized or fraudulent transactions. 9.25 Finally, there arises the question of when a transfer of cryptocurrency discharges

any debt in respect of which it is transferred. There are two sub-​issues. Firstly, as with other payment systems, it is necessary to enquire as to whether payment by cryptocurrency would constitute absolute or conditional payment. Given that most modern payment systems result in the absolute discharge of the underlying debt, as in the case of credit cards,151 it is submitted that this is the more appropriate analogy for cryptocurrencies, rather than linking them to cheques. Secondly, it is necessary to determine when a transfer of cryptocurrency is effective to discharge any underlying debt. In the context of electronic funds transfers, the issue arose in The Laconia,152 in which a payee’s bank received a telex message requiring it to credit its customer’s account with an amount due under a charterparty. This telex was received at the payee’s bank after the date appointed in the charterparty, but shortly before the bank was given an instruction by its customer to refuse late payment. Although the payee’s bank had started taking the steps necessary to credit the payee’s account, the payee instructed the bank to return the funds. Whilst the House of Lords stressed that the steps taken by the payee bank were purely provisional and procedural (and accordingly subject to reversal), their Lordships also indicated that the payee bank lacked authority to accept the payment for the payee, since the bank’s authority had been withdrawn when the payment was late (although there may be exceptions where the payee bank has ostensible authority or has retained the funds for an unreasonable length of time153). Accordingly, the discharge of the underlying debt by payment depended upon the continuing authority of the payee’s bank to receive that payment. In addition to the payee bank needing such authority, the House of Lords in The Chikuma154 confirmed that

Tidal Energy Ltd v Royal Bank of Scotland plc [2015] 2 All ER 15. 151 Re Charge Card Services Ltd [1989] ch 497. 152 Mardorf Peach & Co Ltd. v Attica Sea Carriers Corporation of Liberia, The Laconia [1977] AC 850. 153 TSB Bank of Scotland plc v Welwyn Hatfield District Council [1993] Bank LR 267. 154 A/​S Awilco of Oslo v Fulvia SpA di Navigazione of Cagliari, The Chikuma [1981] 1 WLR 314. 150



The Cryptocurrency as a Basis for Lending payment would only be complete, as between the payer and payee, once the payee had unconditional use of the funds and could draw on them without restriction in the same way as cash. On this basis, a transfer of cryptocurrency ought only to be effective to discharge an underlying debt if the recipient’s digital wallet-​provider has authority to receive the transfer of cryptocurrency and the wallet-​holder is able to access his or her cryptocurrency unhindered, once its receipt is recorded in their digital wallet.

IV.  The Cryptocurrency as a Basis for Lending The third and final function that is performed by banks, in addition to their roles 9.26 as depository and paymaster, is the lending of funds to customers and third parties. In contrast to the previous sections, the principles relating to bank lending (whether through loans or overdrafts) may not at present provide a particularly useful analogy or helpful analytical framework for cryptocurrency-​based financing: firstly, as considered above, the notion of an overdrawn digital wallet is as yet largely unknown; and, secondly, it seems unlikely that a bank in today’s climate would either designate a loan or overdraft facility in cryptocurrency or accept such a payment in relation to an existing loan or facility, simply because cryptocurrencies are viewed as being too volatile to be a reliable measure of value. If such loans or overdrafts were one day advanced, then there is no reason why the legal principles relating to ordinary bank lending would not be equally applicable to cryptocurrency-​based loans, although some thought would need to be given to the drafting of any ‘market flex’ or ‘material adverse change’ clauses in light of cryptocurrencies’ volatility. That said, there is a developing market in ‘cryptocurrency loans’ that involve the holder of cryptocurrency ‘lending’ their holding (in return for a fee payable in fiat currency) to a third party who may then use that cryptocurrency for their own commercial ends.155 Traditional banking lending principles are unlikely, however, to provide much assistance in resolving the issues arising out of such asset-​lending arrangements, which is more akin to a repurchase agreement or a title-​transfer security arrangement. In that regard, the principles developed in the context of bank security-​taking may provide more assistance in respect of how private keys or the underlying cryptocurrency could operate as collateral for the purpose of secured lending in a fiat currency, although this would once again depend upon the issue of whether cryptocurrencies qualified as ‘money’ or ‘property’, as touched upon above. If this issue were overcome, it may be that a security arrangement taking effect by way of outright transfer of private keys may ultimately prove to be the

155 See eg​lending.



Bitcoin and Banking Law: Are there Lessons to Learn? most effective way of structuring the transaction,156 rather than the taking of a charge.157

V. Conclusion 9.27 Ultimately, therefore, it seems clear from the above survey that cryptocurrencies,

whilst on practical level at odds with traditional banking, do have a good deal to learn from traditional banking law principles. That said, it is clear that the transposition of the principles from one context to the other does on occasion require some adjustment, particularly when it comes to the application of money-​ laundering legislation. Such adjustment is unsurprising given that much of the legislative material pre-​dates the advent of cryptocurrencies. Now that they are firmly on the regulators’ radar, however, it should be possible in future to ensure that legislation is drafted to take account of cryptocurrencies specifically in order to achieve their proper regulation.

156 David Quest, ‘Taking Security Over Bitcoins and Other Virtual Currency’ (2015) 30 BJIB&FL 401, 403. 157 In particular, private keys and the associated cryptocurrency are unlikely to qualify as ‘financial collateral’ within the Financial Collateral Arrangements (no 2)  Regulations, SI 2003/​3226, reg 3(1).




I. Background

A. Direct taxes B. Value-​added taxes

II. International Approaches

. Cryptocurrencies as property A B. Cryptocurrencies as currency C. Other approaches

10.01 10.13 10.16 10.18 10.18 10.62 10.90

III. Consideration of the Tax Treatment of Cryptocurrencies

10.98 A. Equality 10.100 B. Efficiency, convenience, and certainty 10.112

IV. Conclusions


I. Background Questions over the taxation of Internet-​enabled non-​government financial ex- 10.01 change mechanisms have been around for some time now: whilst the focus today (and the focus of this book) is on cryptocurrencies, the questions first arose in connection with virtual currencies which feature in massive multi-​user online environments such as Linden dollars (in Second Life) and ‘gold’ (in World of Warcraft et al). Second Life1 is a virtual world launched in 2003. It has an internal economy and 10.02 currency, the Linden dollar (L$). Users can create virtual objects and other content within Second Life and sell these to other users for L$. However, users generally start by buying L$ with a credit card in a traditional fiat currency. Similarly, in the online game World of Warcraft2 (launched in 2004), users can earn 10.03 ‘gold’, ‘silver’, and ‘bronze’ by completing tasks and similar activities. Officially, this internal currency can only be spent in the game to buy items, either from non-​player characters or at the auction houses, or be converted into vouchers to purchase game access subscriptions from Blizzard, the operators of the game. Anne Fairpo, Barrister, Temple Tax Chambers, London, UK. * 1 http://​ 2 https://​ accessed 22 July 2018.



Taxation of Cryptocurrencies Unofficially, however, there is an external trade in selling Warcraft currency to players who prefer not to spend either the time or the effort in earning the in-​ game virtual currency. 10.04 Both Second Life and Warcraft’s currencies, therefore, are principally internal to

their systems and cannot be used as a general means of exchange. Nevertheless, players can earn these currencies and (legitimately or otherwise, in the context of the virtual world or game rules) turn them into fiat currency—​and it is this second step that meant that tax authorities first puzzled over how to deal with them and then settled into an answer.

10.05 In fact, tax authorities were, and are, somewhat uninterested in virtual curren-

cies accumulated by individuals until that currency could be used to buy a pint of beer (or milk, depending on preference) that an individual can actually drink. There has always been an exception for business activity in connection with such currencies: where a virtual currency can be exchanged for ‘real-​world’ value, the accumulation of such a virtual currency in the course of a business will generally result in taxable income for that business even if the accumulated virtual currency is not actually converted.3

10.06 The questions for tax are at what point would an activity become a business and,

therefore, a taxable activity and when and how should income from that activity be taxed? This is, however, a problem that arises elsewhere: tax rules have always had some difficulty in establishing the point at which an activity ceases to be a (generally non-​taxable) hobby and becomes a (taxable) business. In such context, the problem is not specifically with the use of virtual currency but with the activities that enable an individual to accumulate such virtual currencies.

10.07 This reflects the reality that, in general, governments are not concerned about

the form in which individuals accumulate wealth. Taxes generally have to be paid in the local fiat currency, but tax authorities do not insist on transactions being undertaken in that currency. Gains and similar increases in wealth need to be declared on a tax return (translated to local currency) when the result is a taxable increase in an individual’s wealth, or represents the profits of a business.

10.08 Bitcoin and cryptocurrencies are very different to virtual currencies such as Second

Life L$ and Warcraft currency: as already noted, direct use of the latter is principally confined to use within their virtual world,4 and they are not regarded as a

3 In the United States, the IRS requires tax reporting by Linden Labs (the operators of Second Life) of individuals who have more than 200 sales in L$ in one year, with gross sale proceeds of more than US$20,000. 4 Blizzard, the company which owns Warcraft, allows in-​game gold to be used to buy tokens which can then be used to pay for game time that otherwise has to be paid for in traditional currency. This is arguably then allowing a non-​virtual use of the virtual currency, but it is a very limited use.



Background means of exchange outside that world. Virtual currency which has been accumulated must be converted into a means of exchange such as a fiat currency before it can be used to, for example, pay for rent or groceries. As such, virtual currencies are generally regarded as property (albeit virtual property) for tax purposes and not as a currency. In contrast, cryptocurrencies are intended to be, and can be, accepted as a means of exchange, being a payment mechanism in pubs,5 universities,6 and other physical businesses such as house movers.7 In such context, a cryptocurrency has characteristics that arguably make it possible to consider it for tax purposes as a currency rather than as property. Tax law in relation to currencies has been developed in the context of fiat cur- 10.09 rencies because, until the development of cryptocurrencies, decentralized and Stateless currencies were non-​existent. Virtual currencies such as those described above and local currencies (the Bristol Pound, for example) were defined in value by reference to a fiat currency. A foreign currency has therefore previously been something created by a country and accepted as legal tender. As a result, cryptocurrencies have started to give rise to tax problems beyond those 10.10 triggered by virtual currencies in the past. These problems arise in part from the nature of cryptocurrencies and in part because of the different approaches taken by different governments towards taxing cryptocurrencies, particularly the comparators used to establish the basis for taxation. The rise of virtual currencies and subsequently cryptocurrencies have led to the 10.11 development of arguments that these should be outside the scope of taxation altogether. Such arguments generally arise in the context of crypto-​anarchism,8 a development of anarcho-​capitalism,9 which advocates the use of technology in a libertarian context and so generally opposes ‘confiscatory taxation’. As such, the argument is based less on the nature of virtual currencies and cryptocurrency and more on a philosophical/​political foundation. Another argument put forward is that governments may not have the power to tax cryptocurrencies as they are considered to be anonymous; this argument overlooks the fact that physical fiat currency is and always has been at least as anonymous as cryptocurrencies,10 and such anonymity has not prevented governments from taxing cash transactions. 5 https://​​pembury/​info.html accessed 22 July 2018. 6 The University of Nicosia in Cyprus accepts Bitcoin as a payment method for the tuition fees in respect of its courses, including an MSc in Digital Currency. It has also begun to publish diplomas on the Bitcoin blockchain (https://​ accessed 22 July 2018. 7 https://​ accessed 22 July 2018. 8 Usman Chohan, ‘Cryptoanarchism and Cryptocurrencies’ (27 November 2017) SSRN https://​​abstract=3079241 accessed 22 July 2018. 9 See eg David Friedman’s ‘A Machinery of Freedom’ http://​​The_​ Machinery_​of_​Freedom_​.pdf accessed 22 July 218. 10 Arguably, more so:  the public nature of blockchains means that, if you know a person’s cryptocurrency key, it may be possible to trace their transactions in that cryptocurrency in a way that cannot be done with physical cash, making cryptocurrencies pseudonymous rather than



Taxation of Cryptocurrencies 10.12 An analysis of these arguments is outside the scope of this chapter, which will

examine the tax approaches to cryptocurrencies taken by different governments and the implications of those approaches. A. Direct  taxes

10.13 Currency itself is not generally taxed directly: tax is based on changes in wealth,

which are usually measurable in currency of one format or another and generally, only when there is a transaction which crystallizes that change for tax purposes. A change in wealth may arise as a result of a transaction involving a currency, but latent changes in wealth from the holding of a currency are not (generally) taxed on individuals.

10.14 Businesses may have tax consequences from holding foreign currency (or, at least,

currency other than the functional currency11 in which their accounts are expressed). Accounting standards often require that, at the year-​end, foreign currency holdings be translated into the functional currency of the accounts, and the movement in value of the holding is reported as a profit or loss for the period.12 Where the tax rules follow the accounting standards, this movement will be a debit or credit in calculating the taxable profit of the business for the period.

10.15 In contrast, accounting standards do not require that property be revalued from

its book value unless there has been some indication that the book value has been impaired during the tax year.13 If the assets are depreciated, then there may be a deduction for depreciation in the profit and loss account of the business, and there may be a debit in calculating the taxable profit of the business. By contrast with foreign currency holdings, a property asset is, therefore, less likely to result in a taxable credit being recognized until it is disposed of. B. Value-​added  taxes

10.16 As with direct taxes, transactions relating to currency are not generally subject to

value-​added taxes (also known as VAT or GST, for goods and services tax). Most jurisdictions with a VAT system will exempt transactions in currency from VAT.

10.17 In contrast, a supply of property in the course of a business will be usually be sub-

ject to VAT in such jurisdictions. In general, only real estate assets are likely to be exempt from VAT.

anonymous. There is effectively an evidence trail with some cryptocurrencies that might make it easier for governments to enforce tax rules in comparison to physical tax transactions. 11 ‘Functional currency’ is defined as the currency of the primary economic environment in which the entity operates. 12 See eg International Accounting Standard IAS 21 The Effects of Changes in Foreign Exchange  Rate. 13 IAS 36 Impairment of Assets.



International Approaches

II.  International Approaches A. Cryptocurrencies as property 1. United  States In the United States, the Internal Revenue Service (IRS) issued guidance14 in 10.18 2014, which takes the approach, for federal tax purposes, that cryptocurrencies are property and not forms of currency, although the guidance does accept that cryptocurrencies are used as a payment mechanism for some transactions. The guidance was developed (at least in part) in response to the US Taxpayer 10.19 Advocate’s 2013 Annual Report to Congress.15 The report recommended that the IRS issue guidance in order to (inter alia) ‘eliminate the ambiguity that may encourage some digital currency users to avoid taxation and information reporting’. In particular, the report recommended that the IRS issue guidance to explain the following: A) When will receiving or using digital currency trigger gains and losses? B) When will these gains and losses be taxed as ordinary income or capital  gains? C) What information reporting, withholding, backup withholding, and record­ keeping requirements apply to digital currency transactions? D) When should digital currency holdings be reported on an FBAR or Form 8938, Statement of Specified Foreign Financial Assets?16 The IRS guidance is in the form of a ‘question and answer’ notice, considering 10.20 various aspects of cryptocurrency. The term used in the guidance is ‘convertible virtual currency’. ‘Virtual currency’ is described as ‘digital representation of value that functions as a medium of exchange, a unit of account, and/​or a store of value. In some environments, it operates like “real” currency . . . but it does not have legal tender status in any jurisdiction’.17 A virtual currency is ‘convertible’ where it ‘has an equivalent value in real currency, or . . . acts as a substitute for real currency’.18 In practice, this definition will cover cryptocurrencies (which have no central issuing entity but nevertheless function, or are intended to function, at least as a medium of exchange) and most virtual world currencies (such as Linden

https://​​pub/​irs-​drop/​n-​14-​21.pdf accessed 22 July 2018. 15 National Taxpayer Advocate, 2013 Annual Report to Congress p 249 https://​taxpayeradvocate. ​ 2 013- ​ A nnual-​ Report/​ d ownloads/​ D IGITAL-​ C URRENCY-​ T he-​ I RS-​ Should-​ Issue-​ Guidance-​to-​Assist-​Users-​of-​Digital-​Currency.pdf accessed 22 July 2018. 16 A  similar request for guidance was made at about the same time by the US Government Accountability Office in its report on Virtual Economies and Currencies (GAO-​13-​516) https://​​assets/​660/​654620.pdf accessed 22 July 2018. 17 IRS Notice 2014-​21, s 2. 18 ibid. 14



Taxation of Cryptocurrencies dollars, which are issued by a single entity and function as a medium of exchange in specific contexts). 10.21 Although the guidance requests ‘comments from the public regarding other types

or aspects of virtual currency transactions that should be addressed in future guidance’,19 the guidance has not been updated, and it continues to be the point of reference for the US tax treatment of cryptocurrencies.20

10.22 The guidance states that cryptocurrencies are treated for federal tax purposes

as property.21 It specifically confirms that cryptocurrencies are ‘not treated as currency that could generate foreign currency gain or loss for US federal tax purposes’.22

10.23 As such, transactions relating to virtual currency are not taxed as foreign exchange

gains and losses, but, instead, are taxed on the basis of the fair market value of the virtual currency on the date of the transaction.

10.24 No reasoning is given for the IRS having taken this approach to the nature of vir-

tual currency, although the comment in the definition of ‘virtual currency’ that it ‘does not have legal tender status in any jurisdiction’ may be an indicator of the reasoning. Information provided to the American Bar Association’s Section of Taxation indicated that the IRS considered that cryptocurrencies do not come within with the US laws and regulations defining foreign currency.23 They also considered that cryptocurrency is held more for investment than for use as a currency.24

10.25 This follows the approach taken by the US Treasury in 201325 that cryptocurrency:

is a medium of exchange that . . . does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction . . . [it] either has an equivalent value in real currency, or acts as a substitute for real currency. 10.26 However, the United States has not taken an entirely consistent approach to its

consideration of the nature of cryptocurrencies:  not long before the IRS guidance was issued, the Financial Crimes Enforcement Network, a bureau within

19 ibid, s 3 20 See eg the IRS press release IR-​2018-​71 https://​​newsroom/​irs-​reminds-​taxpayers-​ to-​report-​virtual-​currency-​transactions accessed 22 July 2018. 21 IRS Notice 2014-​21 FAQ answer A-​1. 22 IRS Notice 2014-​21 FAQ answer A-​2. 23 David D Stewart, ‘ABA Section of Taxation Meeting:  IRS Preps Bitcoin Investigators as Treatment Questions Remain’ (29 September 2014) 144 Tax Notes 1538. 24 William R. Davis, ‘Bitcoin Guidance not Designed to Answer All Questions’ (30 March 2015) 146 Tax Notes 1603. 25 Statement to the US Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy (November 2013)  https://​​sites/​default/​files/​ 2016-​08/​20131119.pdf accessed 22 July 2018.



International Approaches the US Treasury responsible for dealing with money laundering and similar financial crime, issued guidance26 that stated, ‘an administrator or exchanger [of cryptocurrency] is [a money service business] under FinCEN’s regulations, specifically, a money transmitter’. Despite this guidance, a subsequent court case27 held that the sale of Bitcoin was not within the scope of money laundering offences because it considered that Bitcoin was property and not within the definition of ‘payment instrument’. In late 2017, the Securities and Exchange Commission noted28 that certain 10.27 types of cryptocurrency, particularly those used in Initial Coin Offerings to raise business capital, have ‘key hallmarks of a security and a securities offering [and] involve the offer and sale of securities’. The US Supreme Court recently considered (briefly, in a dissenting opinion)29 10.28 what the nature of ‘money’ is for tax purposes and suggested that it may come to include cryptocurrency: what we view as money has changed over time. Cowrie shells once were such a medium but no longer are . . . ; our currency originally included gold coins and bullion, but, after 1934, gold could not be used as a medium of exchange . . . ; perhaps one day employees will be paid in Bitcoin or some other type of cryptocurrency . . . Nothing in the statute suggests the meaning of this provision should be trapped in a monetary time warp, forever limited to those forms of money commonly used in the 1930’s.

It should be noted that the IRS guidance anticipates the possibility of employees being paid in cryptocurrency without choosing to equate it with money.30 The IRS interpretation of cryptocurrency as ‘property’ is not, accordingly, wholly 10.29 consistent with other interpretations by US government entities. In particular, it seems increasingly likely that cryptocurrencies may be regulated as securities or money, yet continue to be taxed as property. This could easily create confusion and inconsistencies in treatment between tax and other areas of law. The definition of cryptocurrency as property also means that, under tax law, the 10.30 treatment of cryptocurrency transactions will differ from transactions in foreign currencies. Although the basic rules are similar, with a tax charge arising on the difference between the base cost of acquisition and the disposal value, there are

26 FIN-​2013-​G001 https://​​resources/​statutes-​regulations/​guidance/​application​fincens-​regulations-​persons-​administering accessed 22 July 2018. 27 Florida v Espinoza F14-​2923, 2016. 28 Statement on Cryptocurrencies and Initial Coin Offerings, US Securities and Exchange Commission https://​​news/​public-​statement/​statement-​clayton-​2017-​12-​11 accessed 22 July 2018. 29 Wisconsin Central Ltd et al v United States, 17–​530, dissenting opinion of Breyer J, in which Ginsburg, Sotomayor, and Kagan JJ joined. 30 IRS Notice 2014-​21 FAQ answer A011.



Taxation of Cryptocurrencies specific tax rules for foreign currencies which provide an advantage over the tax rules relating to property in general. 10.31 Firstly, there is a personal-​use exemption for foreign currency gains under $20031

so that use of a foreign currency to make day-​to-​day payments is unlikely to give rise to a reportable gain. Secondly, taxpayers can choose32 how to calculate gains (or losses) in foreign currency bank accounts, provided that the method chosen is reasonable and applied consistently.

10.32 Beyond the question of definition and categorization, and possible inconsisten-

cies with the tax treatment of currencies, the IRS guidance lacks precision. Merely stating that cryptocurrency holdings are property does not resolve all questions as to the tax treatment of the holding, and the ‘frequently asked questions’ section of the guidance fails to address a number of issues that could arise.

10.33 For example, although the value of cryptocurrencies can generally be determined

by the use of publicly available pricing information, it appears that a vendor of cryptocurrency is expected to calculate gains or losses on cryptocurrency sales on the basis of the actual cryptocurrency sold and not, for example, to treat the holding as a fungible asset. Where a vendor sells part of a fungible asset and cannot (or does not) identify specifically which assets are sold, US tax rules treat the seller has having sold on a ‘last in, first out’ basis, starting with the amounts most recently purchased.33

10.34 Overall, the economic gain or loss across the lifetime holding of such assets is

the same whether the sold assets are separately identified or dealt with on a last-​ in-​first-​out basis. However, without specific rules, a vendor who has acquired a cryptocurrency holding in multiple transactions could theoretically manipulate the gain or loss on a particular sale by choosing which acquisition to sell. In practice, it should be noted that cryptocurrency software does generally result in the sale of identifiable tranches: each acquisition of cryptocurrency is separately recorded and remains separately identified on the blockchain.34 A sale transaction is not made from an undifferentiated total balance but, instead, from specific unspent acquisitions. Arguably, therefore, a cryptocurrency is not a fungible asset in the same way as traditional currencies. In addition, any gain on sale should be readily ascertainable given that the software will have tracked the relevant holding tranches.

10.35 As another example, in the absence of specific confirmation from the IRS, it is

unclear whether the ‘wash sales’ rules, which prevent a deduction of a loss on Internal Revenue Code § 988(e). 32 US Treasury reg § 1.988–​2(a)(2)(iii)(B). 33 Treasury reg §1.1012-​1(c)(1)(i). 34 See eg https://​​bitcoin-​transaction-​really-​works/​ accessed 22 July 2018; and Chapter 6 in this volume. 31



International Approaches transactions where there is a close reacquisition of the same type of asset, apply to transactions in cryptocurrencies. The IRS has confirmed35 that they consider that the wash sales rules apply only to stocks and securities, which might suggest that the rules do not apply to cryptocurrencies. However, the SEC considers that some cryptocurrencies have the ‘key hallmarks’ of a security (see above), it remains unclear how the IRS will address the matter—​and so it remains unclear what the appropriate reporting rules are. The IRS guidance also is becoming out of date: it does not, for example, address 10.36 the tax implications of ‘hard forks’, which are changes to cryptocurrency software that result in two separate versions of a cryptocurrency blockchain which have a shared history.36 A hard fork can arise where, for example, there are disagreements as to how or whether to implement changes in the cryptocurrency blockchain ruleset. As cryptocurrencies are not centrally controlled, changes require consensus. A hard fork can be temporary if all users upgrade to the new ruleset or permanent where some users continue to maintain the former ruleset. The most notable example is the Bitcoin cash hard fork, which split off from the main Bitcoin blockchain in August 2017 and effectively established a separate Bitcoin cash cryptocurrency. At the time of the hard fork, anyone owning bitcoin also owned the same number of Bitcoin cash units.37 Following a hard fork, a holder of the cryptocurrency has their original holding 10.37 and a forked holding. What remains unclear is how the hard fork is treated for tax purposes; in particular, given the IRS definition of cryptocurrency as property, should a hard fork holding be treated as derived from the original holding, and therefore a taxable amount? Regardless, how should the base cost of the original and forked holdings be determined? The American Bar Association’s Section of Taxation wrote to the IRS in March 2018,38 setting out the problem and proposing that, as an interim measure, hard fork holdings should be regarded as derived from the original holding and therefore as taxable but with a deemed value and base cost of zero, with holding period starting from the date of the hard fork. The result would be a nil tax charge on the fork. Any future gains on the original holding and the hard fork holding would be assessed separately, and the latent gain in the original holding at the time of the hard fork would be maintained and taxed on eventual disposal.

35 IRS Publication 550 (2017), Investment Income and Expenses. 36 David Farmer, ‘What Is a Bitcoin Fork?’ (27 July 2017) Coinbase https://​​ what-​is-​a-​bitcoin-​fork-​cba07fe73ef1 accessed 22 July 2018. 37 See eg Selena Larson ‘Bitcoin Split in Two, Here’s What That Means’ (1 August 2017) CNN Tech https://​​2017/​08/​01/​technology/​business/​bitcoin-​cash-​new-​currency/​index. html accessed 22 July 2018. 38 https://​​content/​dam/​aba/​administrative/​taxation/​policy/​031918comments2.authcheckdam.pdf accessed 22 July 2018.



Taxation of Cryptocurrencies 2. Australia: income tax and capital gains tax 10.38 Although the Australian Tax Office (ATO) has created a definition of ‘digital currency’ for GST purposes (see below) which provides a GST treatment that parallels the GST treatment of currencies, that definition and interpretation has specifically not been extended to other areas of Australian tax law. 10.39 Accordingly, the ATO ruling,39 issued in 2014, that cryptocurrency is not to be

regarded as a foreign currency continues to apply for income tax purposes.

10.40 In contrast to the IRS guidance, which provides little or no background for the

decision to treat cryptocurrency as property, the ATO has produced a detailed analysis40 as to why they consider that cryptocurrency is not foreign currency for Australian ta law purposes.

10.41 This analysis is based on Australian law, which takes the view that ‘currency’ must

be government backed.41 Although the ATO acknowledges that the term should be interpreted broadly, they nevertheless consider that ‘currency’ means a ‘currency legally recognized and adopted under the laws of a country as the monetary unit and means of discharging monetary obligations for all transactions and payments in that country’.42

10.42 Although the Australian definition is, specifically, that cryptocurrency is ‘not

currency’, the implications of the Determination is that cryptocurrency is therefore to be regarded as property for income tax purposes. Specifically, transactions involving cryptocurrency are to be treated as barter transactions for income tax purposes,43 so that taxpayers using cryptocurrencies for transactions are required to include the arm’s length value of the cryptocurrency in calculating taxable income.

10.43 The same approach is taken for capital gains tax purposes,44 specifically confirming

that the ATO considers that a cryptocurrency holding is property. The reasoning given for this is primarily that: bitcoin are treated as valuable, transferable items of property by a community of Bitcoin users and merchants. There is an active market for trade in bitcoin and substantial amounts of money can change hands between transferors and transferees

39 Taxation Determination TD 2014/​25. Although the Determination relates specifically to Bitcoin, there is nothing in the text that means that the principles would not also apply to other cryptocurrencies. 40 Taxation Determination TD 2014/​25, Appendix 1. 41 See eg Leask v Commonwealth [1996] HCA 29; (1996) 187 CLR 579, where Brennan CJ held (at CLR 595) that ‘Currency consists of notes or coins of denominations expressed as units of account of a country and is issued under the laws of that country for use as a medium of exchange of wealth.’ 42 TD 2014/​25, para 32. 43 TD 2014/​25, para 34. 44 Taxation Determination TD 2014/​26.



International Approaches of bitcoin . . . English and Australian cases evidence a judicial willingness to regard property that is valuable in commerce as property for the purposes of law.45

Accordingly, for Australian tax purposes, the disposal of cryptocurrency at a 10.44 gain will result in a capital gains tax charge unless it has already been subject to income tax.46 The Australian approach47 is that a sale of a cryptocurrency at a gain will generally 10.45 be taxed as income where the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain, and the transaction was entered into in carrying out a commercial transaction, even if it was an isolated transaction. If the cryptocurrency holding is considered to be a personal-​use asset and was ac- 10.46 quired for less than AUS$10,000 (subject to anti-​fragmentation rules), then there is no capital gains tax charge on disposal at a gain (and no deductible loss if sold at a loss, a point which may be highly relevant given the fluctuation in value of cryptocurrencies at various times). The cryptocurrency holding will generally be a personal-​use item if it was kept or used for personal-​use purchases;48 if kept or held for investment purposes, it is less likely to be considered a personal-​use asset, so that all gains and losses would be within the scope of tax. The effect of this is that, for most individuals and entities acquiring and holding 10.47 cryptocurrency to use as currency, the impact of the rules is not significantly different to that which would arise when using non-​Australian fiat currency as the personal-​use asset exemption should remove the potential tax charge that would otherwise arise on the disposal of the cryptocurrency in exchange for goods or services. Where the rules will diverge is where the cryptocurrency is held as an invest- 10.48 ment; Australia has specific rules for calculating gains and losses on foreign currency accounts and usually applies a first-​in-​first-​out rule to valuing the base cost (although other specific methods may be available). These rules are used because of the fungibility of currency. The base cost of a cryptocurrency disposal, in contrast, will be valued at the amount paid for the actual holdings disposed of. As noted above, the holdings disposed of will be identifiable on the cryptocurrency blockchain and so, arguably, are not fungible in the same way as fiat currency. 3. Other countries In contrast to the United States and Australia, many other countries have yet to 10.49 provide detailed information about their tax treatment of cryptocurrencies. Some 45 TD 2014/​26, para 10. 46 TD 2014/​26, paras 15–​16. 47 TD 2014/​26, para 22. 48 TD 2014/​26, paras 18–​21.



Taxation of Cryptocurrencies have not addressed the point at all, whilst others have issued information on specific types of transaction rather than a more comprehensive analysis. 10.50 Next, a few of these which have tended towards treating cryptocurrencies as assets

are considered.

10.51 a) Singapore  Singapore has not published specific guidance49 but has responded

to a request from business as to its approach to taxation of cryptocurrency.50 The response indicates that Singapore regards cryptocurrency as an asset, with transactions being subject to income tax for businesses which buy and sell cryptocurrency. Singapore has no capital gains tax (other than for real estate), which removes some of the issues that arise in other jurisdictions.

10.52 However, one result of Singapore’s approach is that transactions involving

cryptocurrency are regarded as a taxable supply of services for GST. This will lead to a double charge to GST on a single transaction, on the supply of the cryptocurrency (where used by a business to make a purchase) and on the supply of the goods or services received in exchange. In comparison, using fiat currency to pay for a supply would only give rise to a single GST charge.

10.53 Although Singapore gives concessionary treatment to crypto-​to-​crypto exchanges,

an exchange of cryptocurrency for fiat currencies, goods, or services is also within the scope of GST and so could result in a triple GST charge for a transaction, where the cryptocurrency received as consideration for the supply of goods or services is then converted by the recipient business into a fiat currency.

10.54 b) France  The French approach was, originally,51 that cryptocurrency transac-

tions were subject to income tax as either business profits or non-​commercial profits where the cryptocurrency was acquired for resale purposes. The highest applicable tax rate was, therefore, 45%, together with a social contribution of 17.2%.

10.55 In 2018, the position was reviewed and the French State Council announced52

that cryptocurrency53 holdings should be regarded as ‘intangible personal property’ and that such profits should be regarded as capital gains arising from ‘movable property’. The change means that the tax rate applicable is reduced to a flat rate of 19%. The same announcement noted, however, that certain transactions 49 It has some information regarding business treatment on its website at https://​​ irashome/​Businesses/​Companies/​Working-​out-​Corporate-​Income-​Taxes/​Specific-​topics/​Income-​ Tax-​Treatment-​of-​Virtual-​Currencies/​ accessed 22 July 2018. 50 Responses to Coin Republic, January 2014 https://​​singapore-​tax-​ authorities-​iras-​recognize-​bitcoin-​and-​gives-​guidance/​ accessed 22 July 2018. 51 Commentaires administratifs publiés le 11 juillet 2014 au bulletin officiel des finances publiques, BOI-​BIC-​CHAMP-​60-​50. 52 http://​www.conseil-​​Actualites/​Communiques/​Modalites-​d-​imposition-​des-​bitcoins accessed 22 July 2018. 53 The ruling is specifically in relation to bitcoin, although there is nothing in the ruling that means that it could not apply to other cryptocurrencies.



International Approaches in cryptocurrency would remain subject to income tax, particularly proceeds from cryptocurrency mining and other commercial activities. The 2014 and 2018 announcements relate principally to transactions in 10.56 cryptocurrency acquired for resale, and neither the 2014 nor the 2018 announcement make it clear how personal use of cryptocurrencies will be taxed, although the decision that cryptocurrency holdings are property would imply that the tax treatment would follow the rules relating to other property assets in general, rather than specific tax rules relating to currencies. c) Israel  Israel has also confirmed54 that it regarded cryptocurrencies as property 10.57 and not as a currency. This follows the Bank of Israel’s view55 that cryptocurrencies cannot be regarded as foreign currencies, such that use of cryptocurrency in a transaction is subject to capital gains tax for private transactions and taxable as profits where the transaction is part of a business activity. For Israeli VAT purposes, business transactions involving cryptocurrencies (in- 10.58 cluding mining) will be subject to VAT; however, investment transactions are regarded as being excluded from VAT. d)  The UK  The UK has yet to produce a definitive view on the tax treatment 10.59 of cryptocurrencies. A statement in 2014 noted, ‘cryptocurrencies have a unique identity and cannot therefore be directly compared to any other form of investment activity or payment mechanism’.56 The statement sets out a number of provisions for taxing specific business activity 10.60 in relation to cryptocurrencies which treat them as a form of foreign currency but note that, where a cryptocurrency transaction does not fall within a specific set of rules, such transactions are within capital gains tax rules. The cryptocurrency holding would therefore be treated as an asset when held by a business. No definitive ruling is given in that statement (or elsewhere) for non-​business 10.61 transactions, so that it remains unclear what the tax treatment of (for example) the use of cryptocurrency as consideration for a purchase might be. Following general rules, it is likely that it would be regarded as the disposal of an asset and so potentially subject to capital gains tax (the UK has an annual exemption57 from capital gains tax; aggregate gains up to the threshold are not subject to tax). However, the UK statement suggests that buying and selling cryptocurrencies might be regarded as sufficiently highly speculative as to amount to non-​taxable 54 https://​​About/​SpokesmanAnnouncements/​Pages/​Ann_​190218_​1.aspx accessed 22 July 2018. 55 http://​​en/​NewsAndPublications/​PressReleases/​Pages/​8-​1-​18-​DeputyGove. aspx accessed 22 July 2018. 56 Revenue and Customs Brief 9 (2014), 3 March 2014. 57 £11,700 for the 2018/​19 tax year: https://​​guidance/​capital-​gains-​tax-​rates-​and-​ allowances accessed 22 July 2018.



Taxation of Cryptocurrencies gambling. In the author’s view, it is unlikely that such an argument would in fact now be accepted by HM Revenue & Customs even though they have themselves proposed it in their statement. Given the substantial increase in value of mainstream cryptocurrencies since the statement was produced in 2014, it is more likely that a tax authority would now regard the buying of mainstream cryptocurrencies as an investment, subject to capital gains tax on any gain on sale, or (where undertaken on a regular basis) as a trading activity with profits being subject to income tax. This is because, at the time of writing, although the cryptocurrency markets are volatile, an investment in the mainstream cryptocurrencies is unlikely to have the all-​or-​nothing character of a gambling transaction. B. Cryptocurrencies as currency 10.62 Although the general tendency of tax authorities has been to treat cryptocurrencies

as property for tax purposes, this does not mean that cryptocurrencies will never be regarded as foreign currencies. Indeed, some jurisdictions (notably Australia) have specifically concluded that, for particular tax purposes at least, a cryptocurrency holding should be regarded as a foreign currency holding.

1. Australia: goods and services tax—​supplies of cryptocurrencies 10.63 Australia originally took the approach that cryptocurrencies were assets, and, accordingly, GST are applied on the sale of cryptocurrencies in the course of business. 10.64 That initial view set out in an ATO ruling,58 published in December 2014, was

that digital currency should be treated as an intangible asset for GST purposes and not as ‘money’. This interpretation was based on Australian law as set out for income tax purposes above. This meant transfers of cryptocurrencies were taxable supplies, subject to GST where undertaken by a business. A supply of a cryptocurrency in exchange for goods or services was treated as a barter transaction, so that GST would be accounted for by a business using a cryptocurrency as consideration for a purchase.

10.65 The result of this ruling from a GST perspective was double taxation for con-

sumers:  first, on the purchase of the digital currency and then second, on the use of that cryptocurrency in exchange for goods or services subject to GST. Businesses were less likely to be subject to double taxation overall, as a non-​exempt GST-​registered business should have been able to claim an input tax credit for the GST liability. The effect of the ruling would nevertheless still create at least a cash-​flow disadvantage in the use of cryptocurrency.

Goods and Services Tax Ruling GSTR 2014/​3. 58



International Approaches From 1 July 2017, that approach has been modified59 by amending the relevant 10.66 GST law to make purchases of ‘digital currency’ exempt from GST, echoing the approach taken by the European Court of Justice in Hedqvist in 2005 and making the GST treatment of supplies of digital currency equivalent to the GST treatment of supplies of foreign currencies. The new law redefines currency for GST purposes only—​there has been no change in the definition for income tax purposes. ‘Digital currency’ is defined as:60 digital units of value that: (a) are designed to be fungible; and (b) can be provided as consideration for a supply; and (c) are generally available to members of the public without any substantial restrictions on their use as consideration; and (d) are not denominated in any country’s currency; and (e) do not have a value that depends on, or is derived from, the value of anything else; and (f ) do not give an entitlement to receive, or to direct the supply of, a particular thing or things, unless the entitlement is incidental to: (i) holding the digital units of value; or (ii) using the digital units of value as consideration; but does not include: (g) money;  or (h) a thing that, if supplied, would be a financial supply for a reason other than being a supply of one or more digital units of value to which paragraphs (a) to (f ) apply.

The reasoning given for the change in treatment was given as being the need 10.67 to remove the double tax charge and ‘an obstacle for the Financial Technology (Fintech) sector to grow in Australia’.61 The mismatch in treatment in certain areas of income and capital gains, obviously, are not considered an equivalent obstacle. In practice this is probably a reasonable assessment, but, nevertheless, the differing treatment for differing taxes inevitably leads to complexity in tax compliance. 2. European  VAT Within Europe, the tax treatment of cryptocurrency for VAT purposes was estab- 10.68 lished in 2015 when the European Court of Justice (ECJ) issued their decision in the case of Hedqvist.62 The European Union has jurisdiction over VAT rules throughout the Union so that decisions of the ECJ as to the application of VAT in particular circumstances will have force in all European Union countries.

59 Treasury Laws Amendment (2017 Measures no 6) Act 2017, Schedule 1 amending A New Tax System (Goods and Services Tax) Act 1999. 60 A New Tax System (Goods and Services Tax) Act 1999, s 195-​1. 61 Australian Government 2017–​18 Budget Paper no 2, Revenue Measures 22. 62 Skatteverket v David Hedqvist C-​264/​14. Although the case concerns Bitcoin specifically, the principles are applicable to many forms of cryptocurrency.



Taxation of Cryptocurrencies 10.69 The case arose because a Swedish individual wanted to set up of a cryptocurrency

exchange. He asked for clarification as to the VAT treatment of the exchange transactions; given the lack of certainty and as Sweden is a member of the European Union, the Swedish courts referred the question to the ECJ.

10.70 Firstly, the ECJ confirmed (unsurprisingly) that the exchange of cryptocurrency

for a fiat currency is a supply of services and so within the scope of VAT.63

10.71 Considering the specific transactions of the proposed cryptocurrency exchange,

the ECJ concluded:

Article 135(1)(e) [of Directive 2006/​ 112, which exempts ‘transactions, including negotiation, concerning currency, bank notes and coins used as legal tender’] . . . must be interpreted as meaning that the supply of [exchange services relating to cryptocurrency] are transactions exempt from VAT, within the meaning of that provision on the basis that it ‘follows from the context and the aims of Article 135(1)(e) that to interpret that provision as including only transactions involving traditional currencies would deprive it of part of its effect’. 10.72 The ECJ noted that cryptocurrency was not be regarded as legal tender in any

country but that this was not a barrier to cryptocurrency falling within this provision. The ECJ distinguished between ‘currency’ and ‘bank notes and coins used as legal tender’. The view was that cryptocurrency could be regarded as ‘currency’ because it is accepted by parties to relevant transactions as an alternative to legal tender. The linguistic differences between different language versions of EU VAT law meant that the ECJ considered that it should interpret the provisions of the statute in the context used and in the context of the aims of the VAT Directive. Given that it is a key aspect of the European Union that equivalent transactions should be treated in the same way, the result is perhaps not surprising.64

10.73 The ECJ also considered that cryptocurrency in this context has no purpose other

than as a means of payment, so that the applicability of this case to specialist cryptocurrencies such as tokens issued in Initial Coin Offerings may depend significantly on the nature of the tokens. It is also possible that the ECJ might have come to a different opinion if hearing the case in 2018, given the increasing tendency to hold certain cryptocurrencies as an investment rather than as an accumulation of a means of payment.65

63 Under EU rules, a ‘supply of services’ is broadly defined, being ‘any transaction which does not constitute a supply of goods’ (art 24, Directive 2006/​112/​EC). 64 It should be noted that this aspect is an aspiration and not a rule; for example, books supplied in electronic format are usually subject to a different rate of VAT to physical books. This anomaly has been well known for years without substantive resolution. 65 See eg the decision by the payment processor Stripe to discontinue support for Bitcoin payments because they considered that ‘Bitcoin has evolved to become better-​suited to being an asset than being a means of exchange’. https://​​blog/​ending-​bitcoin-​support accessed 22 July 2018.



International Approaches 3. UK  VAT The UK follows the EU approach to cryptocurrencies for VAT purposes. 10.74 Interestingly, the March 2014 statement66 from HMRC set out a provisional approach for VAT purposes that closely followed the approach subsequently taken by the ECJ in Hedqvist. This approach is, it should be noted, rather different to that taken by (for example) Singapore and Israel, both of which have taken the view that such transactions are capable of falling within their VAT (or equivalent) rules. HMRC’s view was that:


when Bitcoin is exchanged for [fiat] currencies . . . no VAT will be due on the value of the Bitcoins themselves’ and ‘charges (in whatever form) made over and above the value of the [cryptocurrency] for arranging or carrying out any transactions in [cryptocurrency] will be exempt from VAT under Article 135(1)(d).

There is a slight difference between the HMRC interpretation in 2014 and the 10.76 ECJ decision in 2015, in that HMRC took the view that VAT exemption arose under Article 135(1)(d) rather than 135(1)(e). Article 135(1)(d) relates to ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection’, presumably on the basis that HMRC were equating a cryptocurrency holding with a bank account rather than a currency as such. HMRC also considered VAT in relation to non-​exchange activities, concluding 10.77 that ‘income received from . . . mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received’. This suggests that HMRC did not wholly understand the nature of mining activities, which involve verification of transactions on the cryptocurrency blockchain.67 Miners are not only paid transaction fees but may also acquire a portion of newly created cryptocurrency tokens (or coins). There is no standalone ‘mining’ activity which does not also verify transactions, and so it is questionable whether there is in fact an insufficient link between the services provided and the consideration received. However, HMRC also concluded:


income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments’.

66 Revenue and Customs Brief 9 (2014). 67 See eg https://​​bitcoin-​mining accessed 22 July 2018.



Taxation of Cryptocurrencies Accordingly, even if they have misidentified the nature of mining activities in their initial view, they have nevertheless addressed the question of the treatment of mining activities overall. 10.79 Mining activities were not considered by the ECJ in Hedqvist, but, in practice, the

HMRC approach follows the general reasoning in Hedqvist (albeit with reference to a different provision of the Directive) which suggests that the same might apply in a wider EU context.

10.80 However, both the UK and the ECJ clearly proceeded on the assumption that

the function of a cryptocurrency is to act solely as a payment mechanism. This assumption may have been appropriate with regard to Bitcoin in 2014 or 2015, but, with the rise of private cryptocurrencies issued to raise capital in Initial Coin Offerings,68 it is questionable whether that assumption will continue be sustained in all cases. The ‘coins’ issued in such offerings can carry a wide variety of rights, from voting rights or rights to participate in guiding development to a right to services to be developed by the issuing company. Some are intended as a payment mechanism, but this is usually within a specific platform or network rather than as a global payment mechanism.

10.81 Prior to issuing its statement on the tax treatment of cryptocurrencies in 2014,

HMRC had taken the view that cryptocurrencies were a taxable voucher,69 such that VAT had to be charged when cryptocurrency units were sold by a business within the scope of VAT. That view may revive in connection with private cryptocurrencies, particularly where the terms of the issued coins are such that they represent a right to be exchanged for something else. A voucher, for VAT purposes, is any evidence of entitlement to a reward (which can be tangible or intangible). The sale of such a coupon is a standard-​rated supply for VAT purposes unless it meets specific criteria which will not generally apply to private cryptocurrencies.

4. UK corporation tax 10.82 In contrast to many other countries (and indeed, in contrast to their position for individuals) HMRC have taken the view70 that ‘the general rules on foreign exchange and loan relationships apply’ to cryptocurrencies for corporation tax purposes specifically and that they have not yet ‘identified any need to consider bespoke rules’.

68 And, as noted above, the increasing holding of cryptocurrencies as an investment rather than with the intention of using it as a payment mechanism. 69 HMRC did not make any public statement to this effect, but see eg https://​www.accountingweb.​tax/​business-​tax/​hmrc-​exploring-​bitcoin-​vat-​treatment, January 2014 accessed 22 July 2018. 70 In Revenue and Customs Brief 9 (2014).



International Approaches The UK corporate foreign exchange rules very closely follow the accounts treat- 10.83 ment, and the effect is that for companies, exchange movements are determined between the company’s functional currency (usually the currency in which the accounts are prepared) and the relevant cryptocurrency, and the profits and losses of a company entering into transactions involving cryptocurrencies would be reflected in accounts and taxable under normal corporation tax rules. The debits and credits brought into account for tax purposes in respect of corporate 10.84 foreign exchange largely depend on the accounting classification and measurement. The UK accounting standard FRS102 (following international accounting standards, particularly IAS 21) requires that, at the end of each accounting period, amounts representing the carrying value of a foreign currency are revalued, with any movement in value giving rise to the relevant foreign exchange gain or loss for that period. That foreign exchange gain or loss will be recognized for tax purposes in the same way in computing the loan relationships gain or loss for the period.71 Accordingly, if a company has recognized a cryptocurrency holding as a currency holding, there may be a tax charge for a corporate holder of such cryptocurrency at the yearend, as well as in relation to transactions in that cryptocurrency. 5. UK business tax For unincorporated businesses, HMRC took the view that the tax treatment 10.85 would depend on how the business used the cryptocurrency and would be subject to either income tax as business profits or capital gains tax as proceeds from assets. It is not clear how HMRC would expect an unincorporated business to calculate capital gains on cryptocurrencies. Given that HMRC’s approach for corporation tax, it would seem possible that they anticipate businesses using the rules applicable to currencies which, generally, establish the base cost of the currency disposed of by reference to the relevant proportion of the value of the ‘pool’ of currency held rather than by reference to the value of specific acquisitions of currency. However, in the absence of a clear statement by HMRC, it remains an open question as to how exactly gains and losses on cryptocurrencies by unincorporated businesses should be calculated. 6. Switzerland In 2016 Switzerland specifically took the position that cryptocurrencies are a cur- 10.86 rency for VAT purposes and not as property,72 following a request for clarification from Swiss organizations. Accordingly, Switzerland follows the EU position that currency exchange transactions relating to cryptocurrencies are exempt from VAT s 306A CTA 2009. 72 According to Bitcoin Association Switzerland (April 2016)  https://​​blog/​ good-​news-​no-​vat-​bitcoin-​switzerland accessed 22 July 2018. 71



Taxation of Cryptocurrencies in Switzerland. The request was solely in relation to VAT, but Switzerland appears to extend the same approach to other taxes. 10.87 Switzerland does not have a general capital gains tax on privately held assets, so

that the potential issues that arise in other countries on the use of cryptocurrency as a payment mechanism do not arise in Switzerland. However, cryptocurrencies are specifically included within the scope of the annual Swiss wealth tax, as the Swiss Federal Tax Administration (SFTA) publishes an exchange rate list for this purpose.73 Currency holdings generally are within the scope of wealth tax, as are other financial assets, real estate, and certain other types of durable property.

10.88 Finally, if cryptocurrencies are bought and sold as part of a business activity in

Switzerland, the profits from that activity are subject to income tax in the same way as the profits from other business activities (including profits from trading fiat currencies).

10.89 Accordingly, Switzerland appears more closely to align cryptocurrencies with fiat

currencies for tax purposes than many other countries. C. Other approaches

10.90 In some cases, countries have not specifically defined cryptocurrencies as either

property or currency but have given a tax analysis on a different basis although even these are beginning to bring their interpretation into the scope of one of these.

10.91 For example, Denmark has, to date, taken the view that cryptocurrencies are not

currency and so are not taxable under capital gains tax rules, as the country has also concluded that it is not any other form of taxable asset. However, in early 2018, the Danish tax authority concluded74 that ‘with the inflation of Bitcoin in 2017 . . . the expectation had increased that profits were to be made from the acquisition [and] Bitcoins have no physical usage benefits, unlike a painting or other asset that can vindicate a purpose besides a profit’.

10.92 Accordingly, the proceeds of sale of Bitcoin (and, presumably, other crypto­

currencies) will be subject to tax. The decision does not give a specific assessment of the nature of cryptocurrency but instead focuses on the nature of the transactions in which cryptocurrencies are acquired and disposed of.

10.93 The decision appears to leave open the possibility that a taxpayer may be able to

show that their intention in acquiring a cryptocurrency holding was not to make a profit and so remain outside the scope of tax, but it is clear that the tax authority

73 The 2017 list https://​​extern/​de.html#/​ratelist/​2017 accessed 19 October 2018. 74 Tax Council Decision SKM 2018.104-​SR.



Consideration of the Tax Treatment of Cryptocurrencies will assume a profit motive exists for acquisitions and that it may take substantial evidence to displace that motive. Denmark also concluded that the base cost of cryptocurrency disposals should 10.94 be calculated on a first-​in-​first-​out basis75 when valuing a gain for tax purposes. Germany classifies cryptocurrency transactions by individuals as private sale 10.95 transactions, rather than classifying cryptocurrencies as either currency or property in general. The effect is that any gain on disposal is exempt from tax if the cryptocurrency has been held for a year or, where it has been held for less than a year, where the gain is no more than €600.76 Business transactions are taxed differently; cryptocurrency holdings of businesses 10.96 are regarded as part of the assets of the business and gains on disposal are subject to tax as profits of the business, following the general tax rules in Germany. For VAT purposes, Germany has now accepted the Hedqvist decision of the ECJ,77 10.97 so that exchange transactions in relation to cryptocurrencies are treated as exempt from VAT. The tax authority also takes the view that block rewards are not consideration for a service for VAT purposes and so are outside the scope of VAT, although transaction fees for miners are agreed to be exempt from VAT. This is the same position as taken by the UK (see above).

III.  Consideration of the Tax Treatment of Cryptocurrencies The four main principles on which tax systems should be based were set out by 10.98 Adam Smith in 1776,78 but they remain influential in the tax policy setting by most governments over 200 years later. These principles are equality, efficiency, certainty, and convenience (in an administrative sense). It is clear from the discussion of the approaches of governments to the taxation 10.99 of cryptocurrencies that these principles are not being particularly adhered to in the context of cryptocurrency. There is no obvious reason to depart from these

75 This appears to be based on the belief that it is not possible to identify each Bitcoin in a wallet; however, as previously noted, Bitcoin acquisitions are separately identified within a single holding so this interpretation may not survive. 76 s 23(1) EStG (German Fiscal Code). 77 Until recently, Germany had continued to take the view that as it considered that cryptocurrencies were not legal tender, such transactions were subject to VAT. Bundesministerium der Finanzen, VAT treatment of Bitcoin and other so-​called virtual currencies (February 2018) https://​​ C ontent/​ D E/​ Downloads/ ​ B MF_ ​ S chreiben/ ​ Steuerarten/​ Umsatzsteuer/​Umsatzsteuer-​Anwendungserlass/​2018-​02-​27-​umsatzsteuerliche-​behandlung-​von-​ bitcoin-​und-​anderen-​sog-​virtuellen-​waehrungen.html accessed 22 July 2018. 78 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book V, ch II (1776)



Taxation of Cryptocurrencies principles when considering cryptocurrencies, and so the following will consider the extent to which government approaches to cryptocurrencies may be considered appropriate. A. Equality 10.100 The principle of equality may also be referred to as ‘fairness’, and in the context

set out by Adam Smith, it has been taken to refer to the ability to pay, or vertical equity. It also refers, however, to equality of treatment of similar activities,79 or neutrality. Neutrality in tax systems reduces the risk of tax driving decisions, or discrimination between individuals making substantively similar choices.

10.101 In the context of cryptocurrencies, there is a clear apparent non-​neutrality in

a number of countries in the treatment of cryptocurrencies when used as a payment mechanism. As already noted above, most countries regard the use of cryptocurrency as a means of payment as a disposal of some or all of the cryptocurrency holding for tax purposes. In jurisdictions with a capital gains tax, this can result in a taxable gain when the cryptocurrency is used as consideration (assuming, of course, that the holding stands at a gain compared to its base cost).

10.102 When compared to the use of a traditional currency, this appears to be clearly

non-​neutral, or unequal. The use of the local fiat currency as consideration does not give rise to a tax charge on the disposal of that fiat currency. The use of foreign currencies as consideration for a purchase is often theoretically subject to capital gains tax but is more usually subject to exemptions, which mean that no tax charge in fact arises.

10.103 The difference arises where cryptocurrencies are not regarded as currencies but,

instead, as property in general. The transaction is therefore seen as one of barter, where property and/​or services are exchanged, and each is therefore disposed of for tax purposes, rather than an exchange of local currency for an asset or service.80

10.104 Although this is an apparent unequal treatment, with an apparently similar trans-

action being treated in different ways for tax purposes, the tax treatment of barter transactions has been established over a long period of time, partly as a mechanism to minimize the risk of other inequalities. If an asset given as consideration in a barter transaction were not subject to tax on any accumulated gain then, in a jurisdiction with capital gains tax, a barter transaction would allow for an easy unintentional deferral of gains.

10.105 When considering the neutrality or otherwise of the tax treatment of barter trans-

actions, it is also important to note that local traditional currency is effectively a

79 See eg ‘Tax by Design’ (September 2011) The Mirrlees Review 34 https://​​uploads/​mirrleesreview/​design/​ch2.pdf accessed 22 July 2018. 80 See Green, Chapter 2 of this volume.



Consideration of the Tax Treatment of Cryptocurrencies means of measuring value, and it does not, relative to itself, change in value over time (for example, £1 remains £1 from year to year; it cannot be exchanged for a greater amount of £ in a later year). It is, therefore, questionable whether a barter transaction should be regarded as economically equivalent to a transaction where property or services are exchanged for local currency. It is, arguably, too early to determine whether tax rules should be required to 10.106 change to accommodate cryptocurrencies and recognize private cryptocurrencies as currency. During 2017 and 2018, popular cryptocurrencies have increasingly been used as investment mechanisms and have been acquired with the intention of later realizing a profit on sale, rather than for use as a payment mechanism. This, together with volatility in pricing, has led to a reduction in vendors willing to accept cryptocurrencies as a payment mechanism (other than, perhaps, in the case of Initial Coin Offerings, which often require that the payment for the issued ‘coins’ is in the form of a cryptocurrency). If cryptocurrency is not in fact used regularly as a payment mechanism, it is ar- 10.107 guably difficult to challenge tax authorities which categorize cryptocurrency as property, even if the resulting tax treatment creates inequality for those who do use it as a payment mechanism. Given the general tax treatment of barter transactions then, to the extent that 10.108 cryptocurrencies are seen as property, the treatment of the transaction as one of barter is logical and consistent. The problem arises if cryptocurrency, instead, is considered equivalent to currency. Using a foreign currency for a transaction, in many countries, is considered a form of barter transaction as the foreign currency is considered a taxable asset. However, many countries also have specific rules which eliminate a possible tax charge where foreign currency is used for day-​to-​day purchases. Where the rules are specific for foreign currencies rather than to property in general, there can be an inequality when comparing the use of cryptocurrencies to the use of foreign currencies in a jurisdiction. In context, it is therefore arguable that Australian approach may be the approach 10.109 most compatible with the principle of equality: the Australian personal-​use asset exemptions are likely to eliminate most taxation on use of cryptocurrency as a means of payment and effectively result in a tax treatment for cryptocurrencies that is broadly the same as that for foreign currencies for individuals. It should be noted that, where cryptocurrencies are acquired and sold as a trading 10.110 activity or as part of a wider business activity, there is generally less risk of a mismatch or inequality in tax treatment within a tax system. Where the activity results in business profits, these are generally taxed in the same way whether the activity relates to cryptocurrencies or traditional currencies. Similarly, where cryptocurrencies are acquired and sold as an investment activity, there is also generally less risk of a mismatch in tax treatment within a tax system, as gains on 277


Taxation of Cryptocurrencies investments are also generally taxed in the same way regardless of the type of asset.81 10.111 A few countries have a potential mismatch in how a gain on sale is calculated,

although it is usually a timing mismatch rather than a permanent difference. Nevertheless, this may result in inequality where the holder can manipulate the amount of a gain, and, in principle, countries should consider amending rules to ensure similarity of treatment in this context. B. Efficiency, convenience, and certainty

10.112 In comparison to the issues that can arise with regards to equality, the present tax

treatment of cryptocurrencies in most countries tends not to result in particular issues for convenience and efficiency set down by Adam Smith: at least, no more so than is the case for other aspects of the relevant tax system. The ‘convenience’, or timing, of tax charges relating to cryptocurrencies do not differ significantly (or, in many cases, at all) from that which applies more widely to both currencies and assets. The ‘efficiency’ of a tax charge on a cryptocurrency similarly does not differ significantly from the general efficiency of tax charges on assets and currencies in most tax systems. In practice, problems with efficiency tend to arise from issues of inequality. Reducing inequality in a tax system tends to increase the efficiency of the system.82

10.113 In many jurisdictions, however, certainty remains a problem:  very few tax au-

thorities have specifically spelt out how they consider that cryptocurrencies will be dealt with for tax purposes. As a result, it is necessary to navigate general rules that were not constructed with cryptocurrencies in mind. Now, for direct taxes (principally income tax, corporation tax, and capital gains taxes), the general rules may produce an unequal result, as noted above, and there may be uncertainty as to how to calculate a gain but in most cases there should be little doubt about whether a gain will be within the scope of a direct tax at all. It may come as a surprise to some holders of cryptocurrency that there is a tax charge,83 but that is often a result of lack of awareness rather than lack of certainty in the rules.

10.114 At the time of writing, it should be noted that the UK remains an exception to

this: the statement produced by the UK tax authority in 201484 suggests that the tax treatment may vary from person to person depending on the circumstances of

81 Some countries will have particular rules for certain types of investment asset, but these are specific exceptions to the general rules, intended to encourage investment particular sectors (such as small businesses, for example). These may give rise to inequality by divergence from the general rules but will not generally be unequal in relation to cryptocurrencies alone. 82 See eg ‘Tax by Design’ (n 79) 41. 83 See eg Ben McLannahan, ‘Bitcoin Investors Find Tax Demands Are Not Virtual’ Financial Times (4 February 2018). 84 Revenue and Customs Brief 9 (2014).



Consideration of the Tax Treatment of Cryptocurrencies a transaction and that gains may not even be taxable if they are so speculative as to amount to gambling. During the early part of 2018, the UK announced that it was setting up a taskforce85 to look at crypto assets generally, and it is expected that this may lead to guidance that is more specific on taxation of cryptocurrencies. There is, for some forms of cryptocurrency, a lack of certainty as to the indirect 10.115 tax treatment for VAT (or GST) purposes. Most jurisdictions with a VAT or GST system, although not all, have moved to the view that exchange transactions should be exempt from VAT, effectively giving equal treatment to other financial instruments and currencies. However, the VAT/​GST treatment of private cryptocurrencies such as those used 10.116 in Initial Coin Offerings is far from certain and, even within the reasonably harmonized VAT regime of the European Union, there is no particular consensus between countries as to how to treat the issue of a private cryptocurrency for VAT purposes. Finally, another area of uncertainty is that of situs:  the location of crypto­ 10.117 currency holdings for tax purposes. This is primarily of interest for inheritance tax purposes, where countries may apply inheritance tax to assets located in their country for legal purposes. It may also have some application for income or capital gains tax in countries which tax local source income only (such as, for example, Hong Kong or the UK remittance basis of taxation for non-​domiciliaries). Situs is usually considered to be the jurisdiction whose laws govern the asset, but 10.118 to date, cryptocurrencies are not considered to be governed by any specific jurisdiction, and so no specific situs has been established.86 In the absence of a specific decision, the concern is that more than one country could argue that the situs is in their location and so establish competing tax claims. If there is no connection between an asset and a country, then situs is unlikely to be claimed. However, as cryptocurrency blockchains are held in almost every country, it is likely to be difficult to argue that there is no connection to the country. In some jurisdictions it is possible that local tax laws take the view that 10.119 cryptocurrencies are not local situs assets, For example, as a cryptocurrency holding is an intangible asset for UK capital gains tax purposes, non-​residents will be taxed on a cryptocurrency gain only if the gain arises in the UK. Gains will be treated as arising in the UK if the asset is subject to UK law.87 As cryptocurrencies are not usually governed by UK law, gains on cryptocurrencies by non-​UK residents should not be treated as UK gains even if there are copies of the relevant 85 HM Treasury press release, Fintech Sector Strategy launched at International Fintech Conference, 22 March 2018. 86 For the rules of situs in the conflict of laws, see further Dickinson, Chapter 5 of this volume. 87 s 275A Taxation of Capital Gains Act 1992.



Taxation of Cryptocurrencies blockchain in the UK. For individuals who are UK resident and domiciled, the point is moot, as they will be subject to tax on their worldwide income and gains, regardless of the situs of such income or gains. 10.120 India, in contrast, seems to be taking the view that the situs of an intangible asset

can be linked to the situs of its owner;88 if this is extended to cryptocurrency holdings, this could result in competition with the UK, for example, where a UK domiciled individual is resident in India on their death. Both countries may claim taxing rights to cryptocurrency holdings of the individual.

IV. Conclusions 10.121 As noted above, it may be too early to conclude definitively how cryptocurrencies

should be taxed. For example, inequality in tax treatments can really only be properly assessed once it is clear whether cryptocurrencies will continue to be primarily an investment vehicle (as appears to be the case in mid-​2018) rather than used as a payment mechanism functionally equivalent to currency.

10.122 Nevertheless, as indicated by the Australian example, it appears possible to devise

tax rules which minimize inequalities where a cryptocurrency holding is used as a functional currency. It is also clearly possible to provide more certainty as to tax treatment merely by providing specific guidance or decisions, as has been done in many cases for the VAT/​GST treatment of exchange transactions.

10.123 Accordingly, regardless of the difficulties in categorizing cryptocurrencies at pre-

sent, governments should consider reviewing their tax rules in order to ensure that the tax treatment of cryptocurrencies is not obviously unequal and is certain. This would minimize the risk of distorting taxpayer behaviour or simply non-​compliance due to lack of information and lack of certainty.

CUB Pty Ltd v UOI (71 315). 88




I. Introduction: What Is Digital Community Currency? II. Legal Tender and Money III. Exchange, Community, and Money: Chicken and Egg? IV. How Far Ought Acceptance Be Free? Lessons from History V. Does Digitization Change the Meaning of a ‘Monetary’ Community?

11.01 11.08 11.17



VI. Privately Issued Money: Does Law Converge with Economic Sociology? VII. Is the Banknote Unique? The Reach of Its Legal History VIII. Do Cryptocurrencies Constitute ‘Money’? IX. Does Community Money Bring Net Benefits? A Brief Overview X. Conclusion and Final Observations

11.41 11.46 11.54 11.61 11.66

I.  Introduction: What Is Digital Community Currency? Community currencies are means of payment issued other than by the State, for 11.01 voluntary use side by side with State-​issued (that is, national) currency, either in a particular geographical area or by a group of users. This chapter deals with them as their media have been transforming from paper to digital. Discussing legal aspects of digital community currencies as monetary objects, this chapter combines an analysis general to the law of community currencies, as applied to community currencies regardless of the media in which they are embodied, with an analysis of the general law governing digital currencies as applied to community currencies. Questions relating

Benjamin Geva, Professor of Law, Osgoode Hall Law School of York University, Toronto, * Canada; Dorit Geva, Associate Professor, Central European University, Budapest, Hungary. The authors acknowledge with gratitude research assistance provided by Luke Kelly and Alexander Davis, respectively, of the Central European University and Osgoode Hall Law School.



Non-State Community Virtual Currencies to the meaning of ‘money’ and ‘community’ are at the crossroad of law, economics, and sociology: hence the collaboration between a lawyer and a sociologist. 11.02 Community currencies may be issued by an individual, non-​profit association,

business, or public, regional, or local authority. Where the community is geographically defined, the currency is said to be local or regional. Otherwise, the community currency is spoken of as being parallel or complementary.1 By reference to their availability for use side by side with national currencies, community currencies may be referred to as alternative currencies.2 Literature is not precise on terminology, and all such terms are often used interchangeably. Since local currencies may be the largest category of community currencies, these two terms are frequently used indiscriminately, a point to be kept in mind throughout this chapter.

11.03 The group using the currency, whether or not it is geographically based, may be

referred to as a ‘monetary community’. Its governance may be democratic or hierarchical. It may be formed either for-​profit, for the mutual benefit of its members, or for the enhancement of a cause to which the participants adhere.

11.04 A community currency may take diverse forms. It may evolve from barter into

the use of a unit of account reflecting the value of a given product or amount of labour,3 which may be evaluated in the national currency. Such a system may operate as an exchange of mutual or reciprocal credit system. Among such systems, Local Exchange Trading Systems are denominated in the national currency while Time Banks systems are denominated in service hours. Alternatively, a community currency could be a scrip, namely a circulating document reflecting its issuer’s IOU obligation to pay the bearer, denominated, either at its own unit of account, such as service hours,4 or in the unit of account of the national currency.5 As an

1 For this classification see: Stephen DeMeulenaere, ‘An Overview of Parallel, and Community Currency Systems’ (1998) Appropriate Economics accessed 16 July 2018. For even more extensive information on complementary currencies see Wikipedia, ‘Complementary Currency’ Wikipedia accessed 16 July 2018. 2 Caroline Kenny, ‘Alternative Currencies, POSTnote no.  475’ (August 2014) Houses of Parliament accessed 16 July 2018. 3 According to Jérôme Blanc, ‘Local Currencies in European History: An Analytical Framework’ (1 October 2006) accessed 16 July 2018, the first local currency was envisioned and executed by Robert Owen, in the form of ‘labour notes’ exchanged first in Indiana (US) in 1824 and then in a ‘National Labour Exchange’ in England in 1832–​34. 4 Lewis D Solomon, ‘Local Currency:  A Legal Policy Analysis’ (1995) 5 Kan JL & Pol’y 59,  74–​76. 5 It is distinguished from trading stamps which were mostly outlawed in the United States and Canada at the turn of the twentieth century and that were given as a discount to a purchaser against the promise to redeem them given by someone other than the seller (who typically overcharged). Bradley Crawford, ‘New Methods of Payment and New Forms of Money’ (2004–​05) 20 BFLR 393, 398–​402.



Introduction alternative mode of financing scrips, as well as credits, may be issued at discounted value by retail business to consumers for future purchases at their full face value. Or else, scrips and credits may be issued as promotional tools.6 Retailers and suppliers may also purchase community currency directly from the issuer.7 Scrips may circulate in the community until they are redeemed, at which point, they may be reissued. To achieve success, scrip circulation must occur ‘in a circle’, ‘forming a closed loop, that involves only participants in the system, both with respect to exchanges of the . . . currency for goods and services, and exchanges of goods and services for the . . . currency’.8 At present scrips may be substituted by digital currencies. Throughout this chapter 11.05 ‘digital currency’ is taken to consist of privately issued digital coins, of which each is ‘an entity that amounts to a string of bits’ which must have a numerical value and a unique identity.9 For its part, a ‘cryptocurrency’ is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the execution of payment transactions10 on a decentralized network. Typically it does not have an issuer but it may have founders or a promoter of its technology. Participants in a digital currency scheme may use a centralized network or 11.06 permissioned decentralized one.11 A permissionless decentralized cryptocurrency network12 such as Bitcoin may not be seen as facilitating a community currency, as by definition, it is open to all. On the other hand, the voluntary basis

6 See Gregory A Krohn and Alan M Snyder, ‘An Economic Analysis of Contemporary Local Currencies in the United States’ (2008) 12 International Journal of Community Currency Research 53, 55–​56 accessed 16 July 2018; and in detail Solomon (n 4) 74–​81. 7 Mona Naqvi and James Southgate, ‘Banknotes, Local Currencies and Central Bank Objectives’ (2013) 4 Bank of England Quarterly Bulletin 322, fig 2  accessed 16 July 2018. 8 For this expression see Marusa V Freire, ‘Social Economy and Central Banks:  Legal and Regulatory Issues on Social Currencies (Social Money) as a Public Policy Instrument Consistent with Monetary Policy’ (2009) 13 International Journal of Community Currency Research 76, 84 accessed 16 July 2018. 9 Gideon Samid, Tethered Money:  Managing Digital Currency Transactions (Academic Press 2015)  105–​6. 10 This definition slightly modifies the one from The Wolf of Cyrpto ‘Basic Cryptocurrency Start Guide’ (18 September 2017) Medium accessed 16 July 2018; particularly, we replace ‘transfer of funds’ by the ‘execution of payment transactions’ to point at payment by the transmission of ‘coins’ rather than ‘generic value’ in the forms of funds. 11 For centralized, decentralized, and hybrid models see eg Dong He and others, ‘Virtual Currencies and Beyond: Initial Considerations’ (January 2016) International Monetary Fund 8–​9 accessed 15 July 2018. 12 For permissioned and permissionless decentralized schemes see eg Mark Walport, ‘Distributed Ledger Technology:  Beyond Block Chain’ (2016) Government Office for Science 17 accessed 15 July 2018.



Non-State Community Virtual Currencies of participation in an open permissionless network makes its currency akin to that of a community, the latter of which being defined by the participation in the network. One objective of the chapter is to see to what extent the analysis of restricted-​access community currencies applies to a permissionless decentralized cryptocurrency network. 11.07 Section II discusses the difference between legal tender and money, and thus

highlights the centrality of ‘acceptance in the community’ in the definition of ‘money’. Section III addresses the relationship between ‘acceptance’ and community’. Section IV outlines the origins of community money highlighting the point of ‘acceptance’. Section V proceeds to address the possible impact of digitalization, particularly in the form of permissionless digital access, on ‘monetary community’. The chapter goes on to discuss the legal history of the banknote (Section VI), its application to the community paper-​based money (Section VII), and subsequently to the cryptocurrency (Section VIII). This discussion is designed to demonstrate the convergence between the sociological and legal approach and thus confirms the broad meaning of ‘money’ covering community currency in general and in relation to cryptocurrencies in particular. Benefits of community currencies are briefly discussed in Section IX. The conclusion in Section X is that the law is flexible so as to accord monetary status to anything accepted as money and that concerns with financial stability and the protection of the public justify some form of regulation of business activity in relation to digital community currencies. In the final analysis, digitalization led to the acceptance of a broad meaning for ‘community’, so that ‘community money’ did not need to be set aside as a separate category of ‘private money’.

II.  Legal Tender and Money 11.08 Money differs from any other item of property in that it ‘can not [sic] be re-

covered after it has passed in currency’.13 Stated otherwise, one who takes money in good faith and for value takes it free from all adverse claims to it. As well, money is required for the application of some statutes like the Sale of Goods Act14 and the Bills of Exchange Act.15 Accordingly, a transaction in which payment for goods is made other than in money is a barter and is not governed by the Sale of Goods Act. Consequently, for example, a buyer in a barter will not benefit from the statutory implied conditions relating to the goods.16 By the same token, an

13 Miller v Race (1758), 1 Burr 452, 457; 97 ER 398, 401. 14 Sale of Goods Act 1979 (SGA 1979). 15 Bills of Exchange Act 1882 (BEA 1882) 16 SGA 1979, ss 12–​15.



Legal Tender and Money instrument payable other than in money is not a negotiable instrument and is not governed by the Bills of Exchange Act. Consequently, for example, neither holding in due course nor giving value presumption will benefit its ‘holder’, who may not be even entitled to sue on its own name.17And there may be tax implications as to whether an item of property is ‘money’. The question which arises then is whether community money is money. To 11.09 begin with, quite universally it is not ‘legal tender’. This is usually taken to refer to the banknotes or coins which constitute the national currency issued under the legislation of the State.18 In the absence of an agreement to the contrary, a debtor may make such a tender, and the creditor must accept it, in discharge of a monetary debt.19 As for the relationship between the two terms, it was held that ‘money which is current’—​namely, money in actual circulation20—​need not necessarily be ‘money which is legal tender’.21 Stated otherwise, ‘legal tender’ must be ‘money’, yet the reverse is not true.22 Along these lines, Section 8(1) of the Canadian Currency Act23 clearly recognizes that there may be ‘payment of money’ other than in Canadian coins and banknotes, except that such payment is not ‘a legal tender’. Unless adopted by a State as its own,24 foreign currency is not legal tender. 11.10 Moreover, for a long time, the law has been ambivalent as to the treatment of foreign currency as money. For example, until 1975, it was settled in England that an action, as well as a judgment, for the enforcement of a foreign currency obligation had to be expressed in the sterling equivalent at the day of the breach. This was as if the case involved the breach of a promise to give a specified quantity of commodities and not specific sum of money.25 Stated otherwise, the action

BEA 1882, ss 29, 30, and 38. 18 See eg in the UK: s 1 of the Currency and Bank Notes Act 1954; Coinage Act 1971, s 2, as amended by the Currency Act 1983; in Canada, s 8(1) of the Currency Act, RSC 1985, c C-​52; and in the United States, see s 102 of the US Coinage Act Pub. L. no 89-​81, §31, 79 Stat 254. 19 ‘Legal tender’ must be made in ‘money that is legally valid for the payment of debts and that [in the absence to an agreement to the contrary] must be accepted for that purpose when offered’. See Merriam-​Webster, ‘legal tender’ Merriam-​Webster accessed 16 July 2018. Definition is, however, incomplete as it fails to include the bracketed language. See also ‘Legal Tender Guidelines of the Royal Mint’ accessed 16 July 2018. 20 For ‘current money’ as ‘money that circulates throughout a country’, see eg Bryan A Garner, Black’s Law Dictionary (9th edn, West 2009) 1096. 21 See eg State v Finnegan, Peter 103 NW 155, 127 Iowa 286 (Iowa, 1905). 22 Vick v Howard (1923) 136 Va 101, 109. See Charles Proctor, Mann on The Legal Aspect of Money, para 2.25 (7th edn, 2012). 23 RSC, 1985, c C-​52. 24 For example, the US dollar is legal tender in Ecuador. See eg Central Bank of Ecuador, ‘Historical Review of the Central Bank of Ecuador’ Central Bank of Ecuador accessed 16 July 2018; as well as Wikipedia, ‘Currency in Ecuador’ Wikipedia accessed 16 July 2018. 25 Re United Railways of the Havanas and Regla Warehouse Ltd [1961] AC 1007. 17



Non-State Community Virtual Currencies was not perceived to be for the enforcement of a monetary debt but rather for damages for a breach of contract, in which it was the responsibility of the creditor to mitigate the loss by purchasing the commodities on the day of breach. This position was, however, rejected in Miliangos v George Frank (Textiles) Ltd,26 where having treated the foreign currency as ‘money’, the House of Lords held that in a case involving a foreign currency debt, the claim may be submitted and judgment may be given in the foreign currency, or else, in the sterling equivalent of the day of actual payment.27 11.11 Recently, it became common to define ‘money’ in private law legislation as in-

cluding foreign currency, without conferring on the latter the legal tender quality. For example, under Section 1(1) of the Personal Property Security Act (Ontario),28 ‘money’ is defined to mean ‘a medium of exchange authorized or adopted by the Parliament of Canada as part of the currency of Canada or by a foreign government as part of its currency’. Effectively this language expands the definition to include any sovereign national currency, and not only that of Canada. Also in the United States, UCC Section 1-​201 (24) defined ‘money’ to mean ‘a medium of exchange currently authorized or adopted by a domestic or foreign government . . . ’. More broadly, and yet to the same end, under Section 13 of the Canadian Currency Act, (1) Every contract, sale, payment, bill, note, instrument and security for money and every transaction, dealing, matter and thing relating to money or involving the payment of or the liability to pay money shall be made, executed, entered into, done or carried out in the currency of Canada,29 unless it is made, executed, entered into, done or carried out in (a) the currency of a country other than Canada; or (b)  a unit of account that is defined in terms of the currencies of two or more countries.

11.12 Is foreign currency the only type of non-​legal tender money? While ‘[t]‌he right

of issuing notes for payment of money, as part of the circulating medium’ is said to belong to ‘the supreme power in every State’,30 there is a solid line of case law from which it may be concluded that ‘money’ is not limited to State-​issued currency. Thus, in Miller v Race (1758), referring to banknotes issued by the Bank of England prior to them becoming eligible for a legal tender, Lord Mansfield observed that they were ‘treated as money, as cash, in the ordinary course and

26 [1976] AC 443. 27 See in general Vaughan Black, Foreign Currency Claims in the Conflict of Laws (Hart 2010). 28 RSO 1990, c P.10. 29 While ‘currency of Canada’ is not defined, in the Currency Act, under s 3(2), ‘[t]‌he denominations of money in the currency of Canada are dollars and cents, the cent being one hundredth of a dollar’, the latter being under s 3(1) the monetary unit of Canada. 30 Emperor of Austria v Day and Kossuth (1861), 3 De GF & J 217, 234; 45 ER 861, 868, per Lord Campbell.



Legal Tender and Money transactions of business, by the general consent of mankind’. He went on to conclude that this ‘[gave] them the credit and currency of money, to all intents and purposes’ so as to be ‘money’,31 the latter being ‘whatever common consent has fixed upon as a sign denoting a certain value’.32 Subsequently, albeit dealing with a coin, Darling J expressed his view in Moss v 11.13 Hancock (1899)33 that ‘money’ is: that which passes freely from hand to hand throughout the community in final discharge of debts . . . being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it . . .

Along the same lines, Duff CJ said in Reference Re Alberta Statutes (1938),34 . . . money as commonly understood is not necessarily legal tender. Any medium which by practice fulfils the function of money and which everybody will accept in payment of a debt is money in the ordinary sense of the words. . . .

By saying that any medium that ‘by practice fulfils the function of money’ is money 11.14 (provided ‘everybody will accept [it] in payment of a debt in money’), Duff CJ shifted the focus of the discussion from what money is to what money does, or else, to the function fulfilled by money, namely, the payment of a debt. Anything that fulfils this task in a given societal point is thus ‘money’, regardless of what it is made of and/​or who is its issuer. Case law in the United States has been to a similar end. Thus, the US Constitution35 11.15 confers on Congress the power ‘to coin Money [and] regulate the Value thereof’. Under other provisions of the Constitution, states are precluded from coining money and emitting ‘bills of credit’.36 As well, there is a long history of federal legislation restricting private coinage. However, both the legitimation of the use of any ‘current money’, even a prohibited one, and the issue and use of non-​legal tender non-​coined money are generally recognized.37 To that end, as a generic term, ‘money’ was said to be ‘any circulating medium 11.16 in general use as the representative of value’,38 or ‘anything that circulates as the

31 Miller v Race (n 13) 401. 32 (1758), 2 Keny 189, 199; 96 ER 1151, 1154. 33 [1899] 2 QB 111, 116. 34 [1938] SCR 100, 116. 35 Art 1, s 8 cl 5. For constitutional aspects of money issuance in the United States, see eg Thomas Wilson, The Power ‘to Coin’ Money: The Exercise of Monetary Powers by the Congress (ME Sharp 1992); Ali Khan, ‘The Evolution of Money: A Story of Constitutional Nullification’ (1998-​99) 67 U Cin L Rev 393. 36 US Constitution art I, s 10, cl 1. 37 However, there may be restrictions by a few states. For the legal position in the United States, see the discussion by Solomon (n 4) 81–​86. 38 Johnson v State, 52 So 652, 167 Ala 82 (Ala, 1 January 1910).



Non-State Community Virtual Currencies ordinary medium of exchange in buying and selling property’.39 Accordingly, ‘money’ is: everything which by consent is made to represent property, and passes as such currently from hand to hand, whether it be the iron of the Spartans, the cowrie of the African, the gold and silver of the world, or the paper of modern Europe and America.40 ‘Consent’ must however be by reference to ‘acceptance’ in a ‘community’; a bilateral agreement regarding an item will not elevate it into ‘money.’ For its part, acceptance in the community must lead to ‘consent’ to receive the item without checking the credentials of the payer, as long as it is made in good faith and without suspicion in the payer’s title.41

III.  Exchange, Community, and Money: Chicken and Egg? 11.17 According the case law discussed above, whether something is ‘money’ depends

on its acceptance in the community as a medium of exchange for the discharge of debts. There is no obligation to accept as money something which is not ‘legal tender’. However, arguably, acceptance in a community of something as money may give rise in each case to a rebuttable presumption of consent or advance agreement by a member of that community to accept that thing as money at least when tendered in payment by a member of that community.42 Are then ‘acceptance’ and ‘community’ two distinct factors courts should consider in assessing whether something is ‘money’?

11.18 From the perspective of economic sociology, the answer is negative. For any

practice to be accepted, it must already be organized within the boundaries of a community; therefore, as a norm, ‘acceptance’ implies an already-​existing community. Émile Durkheim argued that morals and norms which bind a community are continuously reproduced through everyday practices and that there is no proverbial chicken preceding the egg or egg preceding the chicken, when it comes to norms and society.43 Norms create society, while society creates norms.

39 State v Finnegan (n 21). 40 ibid; cf Rhodes v Lindly, 3 Ohio 51 (1827), where payment ‘in good merchantable whisky’ was held not to be payment in money presumably in the absence of proof as to its acceptability as such. 41 cf London Joint Stock Bank v Simmon [1892] AC 201 (HL). 42 For a statutory recognition of this principle, albeit probably only in connection with the use of foreign currency, see eg UNMIK/​REG/​1999/​4 of 2 September 1999 reg no 1999/​4 on the Currency Permitted to be Used in Kosovo, s 1:  accessed 12 July 2018, providing that ‘[p]‌arties to a contract or any other voluntary transaction may denominate such transaction in any currency agreed upon by the parties. Unless proven otherwise, such an agreement shall be deemed to exist with regard to any foreign currency that is widely accepted in the territory of Kosovo.’ 43 Émile Durkheim, The Elementary Forms of Religious Life (Karen Fields tr, Free Press 1995).



Exchange, Community, and Money: Chicken and Egg? Marcell Mauss extended some of Durkheim’s insights to his analysis of economic ex- 11.19 change. Mauss argued that exchange relations are by definition social relations, which operate through formal and informal rules, with collective symbolic and moral dimensions, and that exchange creates social relations.44 Mauss’s own analysis compared the gift economy in multiple ‘primitive’ societies and how giving and receiving gifts ought not to be seen as acts of generous benevolence but rather as cultivating relations of obligation and networks of reciprocity.45 Exchange relations, in line with the chicken and egg, are postulated to create social bonds and are organized by the social bonds. Communities are the product of exchange, and networks of exchange constantly reproduce communities. Money, in this tradition, has some unique features, but is not unique in the 11.20 framework of exchange analysed by economic sociology and economic anthropology. Emphasizing the unique aspect of capitalist money, sociologist George Simmel claimed that capitalist money is distinct because it is an abstract unit of value, which emphasizes ‘quantity’ over ‘quality’.46 Inspired by some of Karl Marx’s analysis of the capitalist commodity form, Simmel argued that capitalist money transformed qualitatively specific objects and the qualitatively specific social relations and individuals who produced them into goods and services to be exchanged in the abstract and impersonal capitalist market.47 Simmel thus argued that the capitalist money economy tended to flatten and homogenize social relations. However, others since Simmel, especially the sociologist Viviana Zelizer, have 11.21 shown that despite the features of capitalist money identified by Simmel, like Mauss’s gift exchange, money still creates relations of reciprocity, and is morally

Bill Maurer, ‘The Anthropology of Money’ (2006) 35 Annual Review of Anthropology 15–​36. 45 Marcel Mauss and W D Halls, The Gift: The Form and Reason for Exchange in Archaic Societies (W. W. Norton 1990). 46 Georg Simmel and David Frisby, The Philosophy of Money (Routledge 2004). 47 Karl Marx’s monumental three-​volume Capital begins with his analysis of the peculiarity of the capitalist commodity form. In the first pages of Volume I, he identified what he viewed as the essential features of the commodity form. Here he made his famous distinction between ‘use-​value’ and ‘exchange-​value’. Use-​value is determined by features that are qualitatively specific to a commodity. These include specific labour skills, specific people in a specific place, and specific materials, all of which create a very specific object with a particular use. This use-​value is a necessary feature of the capitalist commodity form, and not in itself unique to capitalist commodities. But what is peculiar to the capitalist commodity form, according to Marx, is the extreme manner by which use-​values are transformed into exchange-​values. Exchange-​value is how value is identified in a commodity, which in capitalism, entails erasing, even denying, the socially specific labour relations, labour skills, and labour time that goes into the production of a commodity—​which he claimed was the source of surplus value, or profit—​and then in determining its exchange-​value. Hence, the twofold nature of the commodity form, according to Marx, lies in this combination of its specificity as a use-​value, and then its transformation into a generic exchange-​value through the historic creation of ‘abstract labour’ made possible by capitalist relations of production. See Karl Marx, Capital: A Critique of Political Economy; Volume I (Lawrence & Wishart 1983). See also Moishe Postone, Time, Labor, and Social Domination: A Reinterpretation of Marx’s Critical Theory (Cambridge University Press 1995). 44



Non-State Community Virtual Currencies bounded.48 Like all systems of exchange, money can only be exchanged for other units of money, or exchanged for other goods and services, if there is social acceptance regarding its legitimacy. This legitimacy has multiple dimensions. It needs to be accepted as a store of value, and, of equal importance, the exchange is made possible only if those engaging in the exchange agree that the goods and services are operating within the boundaries of what is socially permitted. 11.22 Whether there is a sovereign State conferring this legitimacy is not central to this

sociological view of money. The currency issued by the sovereign State is but one variant of money, albeit a historically prominent one which became central to the modern ‘political economy’ described by economic historian Karl Polanyi.49 Furthermore, on its own, currency issued by the State may fail to become ‘money’. More generally, if an individual, group, or a unit of government tries to introduce a new money or scrip into circulation, but no one accepts that it represents value, and no one is willing, therefore, to engage in the ‘magic’, which converts one specific use-​value (eg goods) into an abstract exchange-​value, this is not de facto money. This is the ‘magic’ of money, sometimes called ‘commensurability’ by some sociologists, in reference to the social codes that enable making commensurable, or equivalent, one thing to another.50 An everyday transaction—​made so banal by the capitalist money economy, in which one exchanges, for example, a single American dollar bill for a package of chewing gum at a local corner store—​ contains a complex world of trust, social solidarity, communal ties, legitimacy, and moral boundaries. This is as true for a community currency as it is for State-​ issued currencies.

11.23 This sociological view converges with the legal view that money cannot op-

erate where there is not sufficient consent around its legitimacy and its representation of value. In Moss v Hancock (1899),51 there is specific reference to circulation which is ‘accepted’ within ‘the community’. In Reference Re Alberta Statutes (1938),52 there is recognition of the de facto ‘practice’ of accepting money as payment of debt, and where ‘everybody’, although not explicitly identified as such in the judgement, ought to be understood as ‘everybody in the community’.

cf Viviana Zelizer, The Social Meaning of Money (Basic Books 1994); Viviana Zelizer, The Purchase of Intimacy (Princeton University Press 2007). 49 Karl Polanyi, The Great Transformation (Beacon Press 1957). This work is a social and intellectual history of the development of the capitalist market economy and the development of the modern State’s management of the crises of capitalism. 50 Bruce G Carruthers and Wendy Nelson Espeland, ‘Money, Meaning, and Morality’ (1998) 41(10) American Behavioral Scientist 1384–​408. 51 Moss v Hancock (n 33). 52 Reference Re Alberta (n 34). 48



Exchange, Community, and Money: Chicken and Egg? As well, in the sociological perspective taken here, controversies are also telling 11.24 markers of whether or not a community exists.53 Debates over boundaries of appropriate rules and norms suggest that a group of individuals are relationally oriented around a shared project in which individuals who might have distinct interests also have a stake in defining the boundaries of appropriate behaviour and membership in a community. For example, refusal to accept State-​issued paper money with one of its corners torn off does not, in itself, undermine the legitimacy of the money in general. On the contrary, it reproduces the boundaries of acceptable money. Or, as another example, the moral claim that a child cannot be sold as a commodity,54 that is, that a human being is not commensurable to units of exchange-​value represented by money, also does not undermine the legitimacy of money. Here there is a possible divergence between the legal and sociological views. The legal view of money emphasizes practical consensus within a community. The economic sociologist agrees that practical consensus is likewise essential to money but also sees contestation over appropriate use of money as defining a community of users and the practical viability and acceptance of money. With this view of money exchange as constituting a community and vice versa, 11.25 Community Currencies (CCs) unquestionably constitute communities. Whether they entail an exchange of goods, services, or paper money, they are privately issued systems of money, accruing credit and discharging debt between actors who adhere to the formal and informal rules of the currency framework. While CCs are often designed to serve a small, pre-​existing group, they can also be used as schemes to foster civic engagement and collective solidarities.55 They are therefore explicitly relational, not only reflecting pre-​existing community relations but sometimes organized to strengthen a community. To the extent that they take on a money form, token form, or any unit which represents a unit of credit or exchange, they must retain the feature of being a means of accounting for exchange-​ value. They cannot, and often do not, survive if they do not meet some minimal level of economic viability as a means of measuring and exchanging value.56 And if there are debates among its users, this is often a good sign of an active and engaged community.

See Luc Boltanski and Laurent Thévenot, On Justification:  Economies of Worth (Princeton University Press 2006). 54 cf Viviana Zelizer, Pricing the Priceless Child:  The Changing Social Value of Children (Basic Books 1985). 55 Jérôme Blanc, ‘Penser la pluralité des monnaies à partir de Polanyi : un essai de typologie’ in Isabelle Hillencamp and Jean-​Louis Laville (eds), Socioéconomie et démocratie:  L’actualité de Karl Polanyi (ERES 2013) 241–​69. 56 Michael S Evans, ‘Zelizer’s Theory of Money and the Case of Local Currencies’ (2009) 41 Environment and Planning 1026–​41. 53



Non-State Community Virtual Currencies

IV.  How Far Ought Acceptance Be Free? Lessons from History 11.26 History proves the crucial importance of ‘acceptance’ of a circulating medium for

the characterization and success of an item of property as ‘money’. History also teaches us that economic conditions and selfish motives may support societal acceptance of something as money.

11.27 Thus, during the nineteenth century in the United States, both tokens issued

by transportation companies and fractional paper currencies issued by municipal bodies were designed to meet shortages in legal tender.57 Scrips issued in the United States by mining companies between 1820 and 1940, serving as advance payments of wages,58 are said to be the forerunners of community currency.59 However such scrips were designed to facilitate payment for goods and services provided by the issuer;60 if they did not circulate in the community they fell short of being ‘money’.

11.28 Subsequently experimentation took place in small towns on both sides of the

Atlantic amidst the pre–​WWII Great Depression.61 An uncontested milestone came to be known as the ‘Miracle of Wörgl’ or the ‘Wörgl Experiment’. It took place in the small Tyrolese town of Wörgl in Austria in the early 1930s.62 To fight unemployment and enhance economic activity, Mayor Michael Unterguggenberger put a small amount on deposit with a local savings bank. Against the security of the deposit stamp scrip was issued in the amount of the deposit. There was no final redemption, but the town treasury and local banks would redeem each bill against a 2% fee.

11.29 Stamp scrip is a medium of exchange for which the holder pays a small monthly

‘user fee’, effectively ‘negative interest’ charge. In Wörgl a ‘Relief Contribution Stamp’ needed to be applied each month at 1% of face value. This user fee gave the bearer the incentive not to hoard the bills, as each month they depreciated. It thus encouraged spending and enhanced economic activity in a deflationary

57 Richard H Timberlake, ‘The Significance of Unaccounted Currencies’ (1981) 41(4) Journal of Economic History 853. 58 Richard H Timberlake, ‘Private Production of Scrip-​Money in the Isolated Community’ (1987), 19(4) Journal of Money, Credit and Banking 437. 59 Krohn (n 6) 53, 55. 60 Timberlake (n 57) 440. 61 Krohn (n 6) 55, and further below in this section. 62 Earlier experimentation in a similar scheme took place in 1932 in the little town of Schanenkirchen in Germany. See Blanc (n 3). However, this experimentation ‘did not leave much trace behind’. See ‘The Story of Wörgl’ accessed 16 July 2018 (in the footsteps of Shwarz, Fritz, The Experiment in Wörgl (Verlags-​Genossenschaft Freies Volk 1951).



How Far Ought Acceptance Be Free? Lessons from History environment. Moreover, the disadvantages of redemption at 2% were at any given moment greater than the probable disadvantages of deferring payments at the cost of 1% so that the redemption privilege could not hurt circulation. Municipal taxes paid with the scripts were, to a large extent, promptly used by the town if only to avoid depreciation.63 In short, transactions velocity had gained tremendous momentum. The economy quickly turned around, and the mayor successfully accomplished a long list of municipal projects. The 1% anti-​hoarding fee proved extremely effective to generate work, as ‘[i]‌n fact, every one of the schillings in stamp scrip created between 12 and 14 times more employment than the normal schillings circulating in parallel’.64 A more ambitious Great Depression project, albeit less successful, and yet to 11.30 the same end, was launched in the Province of Alberta in Canada by Premier William Alberhart as part of implementing a social credit vision.65 Under Section 2 of The Prosperity Certificates Act of 1936,66 the Provincial Treasurer of Alberta was ‘authorized to issue and reissue credit certificates to any persons who may be willing to accept them’ in connection with public works undertaken by the Provincial Government, existing Government services, agreements with municipalities relating to unemployment relief projects, and designated public expenditures. Such certificates were stated under Section 3 to ‘be known as Alberta Prosperity Certificates’.67 They were to be redeemable after two years at their face value, provided that upon redemption, they bear 104 stamps, each reflecting a 1% weekly ‘user fee’68 designed to discourage hoarding and encourage spending. Provisions were also made for early redemption, payment of certain taxes,69 and subsequently, upon the discontinuance of issuance.70 The project failed on the key