c. Stability
Stability can be considered in terms of permanence, scarcity, and integrity or non-rivalry. Stability connotes the idea of permanence or standing. This does not have to be absolute, as perishable goods may still be owned and constitute property even if they only have a short useable or physical lifespan. This is one of the arguments against information and confidential information constituting property, as its value is diminished or destroyed on transfer or communication. Assets created and held on digital ledgers are capable of being stable and permanent in relative terms. Scarcity supports value, which can be managed through volume limits imposed on the issuance of official and private currencies. Bitcoin, for example, is limited to twenty-one million coins, which are slowly released on a controlled rolling basis until approximately 2040.
Private property is generally rivalrous with consumption by one party reducing its consumability by another. Non-rivalrous assets can be subject to common consumption without any reduction in value. Money is rivalrous with only one person being able to use it in exchange at any particular point in time. Information, on the other hand, is generally non-rivalrous, although certain socially important information may be considered to be rivalrous. The difficulty that arises with regard to digital currencies is ensuring that digital coins cannot be re-spent or double spent. This is achieved in Bitcoin through the use of single transaction forks with cryptographic access control and transaction and block hashing, which creates a consequential immutable record of entitlement. Transfer values can then only be accessed and reused through the transfer of the private cryptographic access key to the new value address. While the public key is non-rivalrous and reusable, the private key and underlying coin are digitally rivalrous.
The blockchain or other distributed ledger create new digital assets and digital value points or entries. Private coins generally have no intrinsic value, although this may be tied to other assets such as stablecoins, which are linked to official currencies, cryptocurrencies, commodities, or other baskets of assets. Value is denominated in terms of the minimum monetary unit used. This would only otherwise have market value in terms of community and social and market recognition or demand. The effect is to create a form of digital value, code value, or data value on the particular blockchain or distributed ledger. The code then originates a new asset with the value attached to that asset.
d. Singularity
Singularity is concerned with exclusivity and the ability to sole use or possession. This connotes exclusive occupation or use. This may be considered to overlap with the idea of control, although exclusivity is concerned with the denial of others’ rights of use, rather than the specific rights of use of the owner directly. The owner of property can exclude others from exercising any non-transferred rights in relation to the property or asset. The holder of any digital asset can deny others the right of use through the holding of the private cryptographic key.
Property is generally referred to in terms of exclusivity, with the owner or possessor being able to deny third-party use or operation. An asset is excludable where third-party consumption is prevented or managed. This specifically protects the rivalrous nature of the property. Exclusivity is generally secured with digital coins through the application of cryptographic access controls and control over the private key. Excludability is protected in practice through the exercise of private and public legal protections and remedies. This prevents interference with assets, including money, and the recovery of goods, their monetary value, or other compensation for loss or unjust reward.
e. Supremacy or Control
Supremacy or sovereignty corresponds with the idea of control and the ability to exercise the core title rights attached to property. An item does not constitute property unless some or all of the title rights referred to can be exercised in relation to the thing. Whether all rights can be exercised may not be necessary, perhaps reflecting the development or evolution of the supporting law or legal system over time, such as with the recognition of the right to create a charge over a digital coin or bequest a digital asset. Conversely, where the title rights can be exercised in relation to a new digital asset, it is arguable that this will constitute property, assuming that it is otherwise generally capable of satisfying the other principal property conditions or indicia referred to and no disqualification arises. Any digital data point or entry on a distributed ledger can arguably constitute property in law if it satisfies the constitutive existence and title rights conditions referred to.
i. Holding, Exercise, and Possession
Property related rights clearly include the right to hold, use, or exercise an item or asset. Many of the additional rights referred to would fall within the right to exercise, use, and enjoy. This may also include the right to have physical possession, depending upon the specific entitlement conferred. Digital assets may also be considered in terms of constructive digital possession and constructive digital location.
ii. Encumbrance
Owning property will generally include the right to encumber the asset, particularly through the conferment of a security interest. The type of interest created will then be dependent upon the nature of the asset concerned and the relevant local law. For example, a security interest may be created by way of charge without the need for physical possession, although the transfer of possession or title may be required in other cases.
Security interests may be created by agreement or operation of law. Consensual security interests can be created through mortgages, pledges, equitable charges, or contractual liens. Because pledges and liens require possession, security over cryptoassets may generally be provided through mortgages or equitable charges. Parties may also confer rights that create a form of quasi, or functional, security without the full proprietary interest being conferred. Digital assets will generally not be subject to bailments because they require possession.
iii. Bequest
Property may be bequest through a testamentary disposition, will, or, if both of these fail, intestate succession. Property is generally assigned a wide definition for these purposes and will include all assets belonging to the deceased person. In fact, digital assets have specifically been included within the Uniform Law Commission rules of the United States and Canada.
Property may also be placed in trust. But the issue of whether digital coins and other assets can be held in trust depends on their initial classification as property. The Singapore International Commercial Court held that cryptocurrencies could constitute property for the purposes of a trust. The New Zealand High Court also confirmed that cryptocurrencies are forms of property capable of being held in trust.
iv. Transfer
Cryptoassets may generally be transferred by gift or sale without restriction. This corresponds with divestiture. Digital currencies will be transferable rather than negotiable insofar as they do not constitute money or are otherwise recognised as constituting a negotiable instrument. Transferors cannot transfer better title under the Latin maxim nemo dat quod non habet. Title is defeasible rather than indefeasible. Even though a digital coin ledger records an inalienable transfer of title through code, the ledger can still be defective in law and subject to challenge. This may create both an evidential presumption of entitlement subject to argument and a defence in the event of a dispute. Transactions using a private cryptographic key fraudulently would arguably be void or voidable on the basis of fraud.
v. Cancellation and Destruction
Control of an asset also includes the right to cancel the asset or destroy the asset altogether. Destruction constitutes the ultimate form of control and authority.
E. Digital Asset Classification and Constructive Digital Possession
Considerable difficulties remain in understanding the nature and development of new property under the law. Consequently, classifying digital currencies and assets under the law has been a complicated matter. It is arguable that a separate category of personal movable intangible property should be recognised under all legal systems. The existence of a third category of moveable intangible property under English Law is given statutory support by the definition of patents under the Patent Act 1977 and other definitions of property in the Theft Act 1968, Fraud Act 2006, Insolvency Act 1986, and elsewhere. The anomalous treatment of rights of action and under contract, securities, intellectual property, leases, documentary intangibles, and negotiable instruments together sit uncomfortably within the residuary category of choses in action under English law. This could be made subject to statutory correction in the absence of further judicial delay and adjustment, which is, in turn, dependent on the vagaries of instruction and opportunities for argument.
Reform could be achieved either by creating a third category of personal intangible moveable property under English law or extending the existing field of chose in action to include intangible assets and pure claims. It may be preferable to extend the existing category of chose in action to include all intangible property with clear sub-divisions, which would incorporate all existing anomalous types of property and new digital assets.
Digital rights, including digital currencies, will continue to constitute choses in action under English law as long as they are movable property that cannot be physically held. The historical evolution of choses in action allows this category to act as a form of residuary category and subsume any new forms of intangible property. This can also allow real rights to be conferred. Digital rights would constitute intangible movable property under U.S. law and other civil laws. More difficult classification issues may arise under other national laws pending further law reform.
To avoid future uncertainty and confusion, it is arguable that the category of choses in action under English law should be reformulated to separate assets and rights. A clear category of intangible property could be identified to include documentary intangibles, financial instruments, intellectual property rights, possible lease interests, as well as new digital and dematerialised items, with a residual category of choses in action for pure claims and other rights of action.
This could be given effect as well by recognising a separate category of intangible property under English law with further sub-divisions within this category. This could be referred to, for the purposes of this text, as involving choses in possession (for tangible property), choses in action (for pure claims), and additional “choses in entitlement” (for intangible property). Intangible property could, for example, be referred to as choses intactilis, choses inviolabile or choses insensibilis. This may include separate areas of choses digitalis (for new digital assets), choses intellectualis proprietas (for intellectual property), choses conduco (for leases), choses securitates or agmen (for securities), and possibly choses contractum (under contract), with other choses in action consisting of choses in pecunia or impendium (for payment obligations), choses in effectus (for performance), and choses in partum (for delivery of property). The use of Latin formulations is not necessary and used only for clarification and discussion purposes, which would be replaced with clear functional descriptors in any new law reform programme adopted. All of this can be considered further.
In the event that this is not possible, the alternative would be to treat digital assets as choses in possession through the use of a new doctrine of constructive digital possession based on any form of control rather than physical holding. The Financial Markets Law Committee (FMLC) in the United Kingdom has recommended that digital currencies be treated as choses in possession rather than choses in action and be assigned negotiability in addition to simple transferability. The Law Commission has been reconsidering this and recommended that possession in relation to electronic trade documents should be extended and based on the three tests of independence, exclusivity, and divestment. The term “chose in possession” has traditionally only been used where physical holding is available. One possible means of reconciling the anomalous treatment of patents and other forms of intangible rights, and specifically digital intangible assets, would be to develop a new doctrine of constructive digital possession. Constructive possession is already used in other areas such as drugs trafficking, which establishes that offences have been committed where parties exercise a sufficient degree of control over narcotics or other goods, even when they are not in actual physical possession.
The new doctrine of constructive digital possession could be applied where parties are considered to control digital assets held on a distributed ledger or blockchain and determine the access to or transfer of the assets on the ledger. This would specifically apply where, for example, they hold the private cryptographic key to digital currencies held on a blockchain, which gives them exclusive control over the digital entitlement held on the ledger and the sole right to transfer the asset. “Possession” could then be re-defined in terms of control rather than physical holding. A “chose in possession” would refer to any item within the physical or legal control of a party without the need for any physical relationship or attachment.
This could be supported through the development of a parallel doctrine of constructive digital location. This would look to determine the legal location and governing law to apply with regard to any specific crypto asset. Difficulties arise in that digital assets can be considered non-existent and, at any particular point in time, both nowhere and everywhere at the same time. A series of options can be developed under a waterfall model, with the default solution being the location of the person holding the private cryptographic key.
III. Digital Financial Assets
Several further issues can be considered to arise with regard to the nature of digital currencies and money, tender, digital ledgers, title transfer, digital autonomy, and smart contracts.
A. Digital Currencies and Money
Uncertainty remains as to whether digital currencies constitute money under domestic legal systems. The assumption is often made that, as currencies, digital currencies must comprise money, although this is not necessarily correct under an economic or legal analysis. Conflicting writings and opinions have been expressed both in terms of economics and in terms of law.
In economic terms, the meaning of money depends upon its function. Money is specified to consist of any item that can be used as a medium of exchange, store of value, and unit of account. This classification dates from Aristotle, although Aristotle also stressed the importance of valuation in his Nicomachean Ethics. Some economic texts accept the importance of valuation, although the majority stress exchange.
In legal terms, the meaning of money depends upon the intention of the parties in any specific situation. This may include private parties, public bodies, or Parliament in construing statutory provisions. There is no single definition of money in UK statutes, with a number of conflicting opinions having been issued by the courts over time. The widest and most generous interpretations tend to be adopted in charterparty (shipping) and testamentary dispositions where the parties are understood to have adopted the widest possible definition and intent.
Where intention is not separately relevant or clear, the default position in law should arguably be to equate money with legal tender where the legislature has adopted a legal tender statute. The effect of a legal tender designation is to determine that only the defined assets specified can discharge a payment obligation and debt in law. To interpret money as anything other than legal tender in any particular case would then be to compel a party to accept payment in a form that does not discharge the debt obligation concerned. Money, tender, and payment can, therefore, be considered together in default situations.
A number of separate theories of money have been constructed over time, principally in economic writing. These can be summarised in terms of the specie or commodity theory, the state or chartal theory, the more recent institutional theory, as well as an earlier society theory. These can be most easily reconciled through the adoption of a denomination and state permission theory. Money would then constitute anything denominated in the form of an official reference asset (ORA) and issued by or under the authority of the state. This would include coins and banknotes, as well as commercial bank accounts and central bank reserves accounts. This would also include new forms of electronic or digital money denominated in an official currency and either issued by or under the authority of the state. This would, for example, specifically cover pre-loaded electronic devices at present, as well as sovereign or central bank digital coin in the future.
It must be recognised that many private digital currencies can carry out each of the core economic functions of money, including acting as a means of exchange, store of value, and unit of account, although issues remain regarding their reliability and stability. This does not of itself mean that such currencies are money, with any other commodity possibly being used for these purposes. Most private token based digital currencies would not constitute money under the reconciliation definition referred to. They are not denominated in the form of an official currency or reference asset and would not be used by, under the authority of, or with the permission of the state. Even where private currencies are exchangeable into official currencies, this would still not mean that they would automatically be reclassified as official money. Such currencies can be classified as investments rather than monetary assets.
B. Digital Tender
Private digital currencies will generally not constitute money as noted. They will generally also not constitute legal tender in the absence of a statutory amendment to extend the list of official assets to include such currencies. The effect of this is that payees can always refuse to accept digital currencies in tender for payment purposes in the absence of contrary agreement. Debts can only be discharged through the provision and acceptance of legal tender.
Separate issues arise where a central bank may issue digital coin in place of domestic coinage or banknotes. Where the new digital coin is produced as a substitute for existing legal tender, it could be argued that the coin would constitute tender. A strict interpretation of legal tender laws may, nevertheless, exclude this and require a paper instrument in the absence of appropriate statutory correction. Legal tender status was originally introduced in the United Kingdom to promote confidence in Bank of England notes during a period of market volatility. Extending tender status to official new digital coins may be considered appropriate to promote confidence and use, with relevant laws having to be extended as necessary.
C. Digital Ledgers
An important key development in this area has been the growth in the use of electronic systems to record and exercise underlying legal rights. This applies both with regard to the expression, or re-expression, of existing separately or previously generated rights as digital rights and the original creation of new rights in the form of digital entitlements. It must be expected that, with the continued growth and expansion of the Internet, electronic commerce, and government systems, many legal rights may be transferred to or generated and stored in the form of digital information and digital data systems. This creates substantial new challenges in terms of legal definition and recognition, as well as the protection of all relevant rights and entitlements.
Different types of more general asset registers or ledgers can be distinguished. This may include land registers, corporate securities registers, and dematerialised government bond or corporate securities or bond registers. Many registers only act as a record of underlying entitlements and transactions, with assets being passed from party to party, for example, through separate contracts of sale, such as missives or dispositions. Other registers may constitute or be determinative as to the original title to the underlying assets, with the register entry being proof of ownership subject to separate contrary evidence.
These two types of registers could then be distinguished in terms of being either title or substantive and record or evidential ledgers. While this division does not have any established or common use or meaning in legal terms at this time, this becomes of considerable significance in the digital asset area, with title to new digital assets often only being determined by electronic ledger entries alone.
Registers can also be distinguished in terms of either being centralised, multiple or separate, shared, and decentralized or distributed. Other possible divisions can also be identified depending upon, for example, whether they are permissionless and open or permissioned and closed. Central registers are usually closed or permissioned and managed by a central official entity, such as with a land register. Multiple separate registers would include bank accounts with different accounts in common format being held by different banks and other financial institutions. A shared ledger is a collective term for any register with multiple accesses. A decentralised ledger operates on the basis of multiple copies being made available through separate nodes, with a distributed ledger having no central hierarchy and with all nodes being connected directly.
Digital assets held on distributed ledgers arguably do not constitute documents or instruments. They do not represent other assets apart from in relation to coloured or tokenised coins. They do not embody a payment obligation. They have also not been recognised as documentary intangibles or negotiable instruments by mercantile usage to date.
Entries held on digital ledgers cannot generally be considered to constitute financial instruments, documentary intangibles, or documents of title. An instrument can be considered to constitute a record of title to ownership or payment with a financial instrument embodying a payment obligation. Negotiable instruments are financial instruments that confer perfect titles, subject to the transferee not receiving them with any notice of any prior defect in title. Negotiability can only be conferred by statute or established mercantile use. Transaction volume is arguably more important than time. While the law is flexible, the negotiability of cryptoassets has not generally been recognised to date.
It is arguable that the digital ledger cannot be considered to constitute a definitive record of legal entitlements without express statutory recognition. The effect of this is that a court may not be bound by the terms of a ledger in considering legal entitlement. Parties may agree that the entries in a ledger specify their entitlements inter se, although this may not bind third parties. Separate proprietary interests may arise off the ledger, such as those created through trust, security, or succession, or through off-chain dealings. Parties acquiring assets off-chain will need to evidence their entitlement through other means and may acquire preferential rights, particularly where they receive the asset before an on-chain transaction. All of this will have to be clarified in law over time.
D. Digital Rights, Title Transfer, and Title Finality
Where digital assets are held on a ledger, a number of distinct types of title rights can be distinguished, as discussed above. These would specifically include the right to hold, encumber (by way of security), bequest, transfer (by gift or sale), and cancel or extinguish. These are referred to as core title rights for the purposes of this paper.
The transfer of digital assets held on such ledgers would also be by way of simple register or ledger amendment. Assets would be transferred simply by revising that record of holding on the ledger. In practice, this would require use of the encrypted public key, which would be verified through the private cryptographic key. Bitcoin has specifically been referred to as a list of digital signatures.
The related issue that arises is ensuring finality of transactions without the possibility of subsequent interference. The issue has become of particular importance at the national, European, and international levels in connection with ensuring finality in clearing and settlement systems and especially with the adoption of the European Settlement Finality Directive (SFD) in 1998. The SFD is implemented under statutory instrument in the United Kingdom. The objective is to disapply the normal operation of insolvency laws to protect the finality and irrevocability of transfer orders entered into through the system. The provisions apply to systems complying with the criteria set out in the regulations and appropriately designated by the national authority.
Difficulties may arise with regard to DLT and blockchain in that their transfers are intended to be indefeasible and irreversible, particularly through a combination of cryptographic access control, transaction hashing, and the closing and locking of blocks. Where unauthorized or inappropriate transfers have been carried out, the transfers may have to be managed through subsequent “correction” or “compensation” value transfers to avoid the need to amend the original transaction and all of the intermediate transactions carried out. This would protect the integrity of the system while allowing necessary corrections to be made, where appropriate.
E. Digital Autonomy and Smart Contracts
A related issue that arises is whether digital assets can be transferred on an automated basis using code or algorithms alone. This is, in turn, concerned with the wider legal effectiveness and enforceability of code-based “smart contracts.” The term “smart contract” has not been authoritatively defined, and it is questionable whether such arrangements are smart and constitute contracts. A smart contract is defined for the purposes of this text as referring to any form of contractual performance determined or controlled by computer code alone. Contract law is generally concerned with the legal enforcement of promises. Contracts can be created in any form, may be unilateral, bilateral, or multilateral, and are only dependent on the establishment of an agreement between parties, the intention to be legally bound, and the transfer of benefit or consideration. Contracts may be created and recorded using either natural language or computer code. Code may be used in different ways, such as to record party agreement or to determine results on the basis of conditions set by party agreement. A piece of pre-written code may also be offered by one party to another, which is accepted by the other. A court would look to determine the proper intention of the parties, giving regard to the clear and apparent meaning of the documentation or language used. The purported meaning will be applied unless the language is unclear or unambiguous. Courts will generally seek to determine the obligations that the parties intended to assume, giving regard to the contract as a whole and any admissible evidence.
Parties do not need to know the identity of the other contracting party, which applies in relation to unilateral contracts, agency relationships, and auction purchases. A court may consider external factors extraneous to the code in circumstances where this does not reflect party intention or where there has been misrepresentation, fraud, or duress applied. The anonymous or pseudonymous nature of DLT dealings would not prevent transfer of legal title or conclusion of a valid agreement to contract. The use of a private key may constitute an electronic signature, which satisfies any statutory signature condition. A statutory or contractual “in writing” condition should also include code where any form of representation of meaning is capable of visual output, including on a screen or printout. The determinative condition would appear to be that there was an intention to convey meaning. This would apply even where a computer programmer was required to read or explain the code.
IV. Digital Currencies Under U.S., EU, & Other Laws
Many inconsistencies have arisen in practice, as judicial and regulatory tribunals have applied different sets of laws depending on the approach adopted for the nature of the digital asset concerned. Agencies have had to consider an increasingly wide area of law and regulation and apply existing definitions that were not designed for use in the digital area. A series of decisions have increasingly recognized that cryptocurrencies are property, including for the purposes of injunction, attachment, and trust. But significant uncertainty remains with regard to the nature of the property interests, whether other digital assets would also constitute property, as well as the regulatory and tax treatment of such items. Many contradictory positions have arisen because of specific difficulties in determining whether cryptoassets fall within various financial regulatory statutes and their parameters. All of this will have to be reviewed to ensure that relevant laws and regulations apply in a complete, consistent, and effective manner, especially in response to continuing innovation in financial markets, trade, and commercial practice.
A. Currency
Many conflicting decisions have been issued in various countries, including the United States, as to whether Bitcoin and other digital currencies constitute money. U.S. Magistrate Judge Amos Mazzant of the Eastern District of Texas held in 2013 that the SEC could proceed against Trendon Shavers on the basis that “[b]itcoin is a currency or form of money.” Shavers was accused of operating an illegal Ponzi scheme through the Bitcoin Savings & Trust (BTCST), having collected $4.5 million with 700,000 Bitcoins and promising investors a seven percent weekly return.
In the United Kingdom, Her Majesty’s Revenue and Customs (HMRC) treats Bitcoin and other cryptocurrencies as private payment devices. HMRC notes that “[c]ryptocurrencies have a unique identity and cannot therefore be directly compared to any other form of investment activity or payment mechanism.” No value-added tax (VAT) is charged for the exchange of other currencies or for mining, although VAT may apply where other goods or services are supplied. Profits and losses are subject to corporation tax or capital gains tax and income tax for non-incorporated businesses.
B. Investment
Many initial coin offering (ICO) related schemes have been treated as constituting investment contracts and are, therefore, considered securities under U.S. law through the application of the Howey test. Attempts have also been made to clarify the law concerning digital currency and other assets in relation to derivatives markets in the United Kingdom and the United States.
The term “security” is defined extensively in the United States under the Securities Act of 1933 and Securities Exchange Act of 1934. The definition specifically includes “investment contracts,” in addition to general corporate stock, bonds, and debentures, as well as financial derivatives. This will include subscription rights and any other interests or instruments commonly known as securities. The meaning of investment contract was examined by the U.S. Supreme Court in SEC v. W.J. Howey Co. in 1946. In Howey, the meaning of investment contract was summarized in terms of any common investment and expectation of profit, which may include digital currencies or cyptoasset-related schemes. Consequently, U.S. authorities have adopted an aggressive approach to ICOs and digital token offerings in addition to issuing warning notices. The SEC issued two warnings: one with regard to Ponzi schemes and virtual currencies in July 2013 and another with regard to Bitcoin and other virtual currency related investments in May 2014. The SEC has taken many specific actions related to digital assets and ICOs since its enforcement proceedings against Shavers and BTCST for operating a Bitcoin-denominated Ponzi scheme in 2013.
Following its investigation into the Decentralized Autonomous Organization (DAO), the SEC released a statement in July 2017 confirming that U.S. securities laws may apply to the offer, sale, and trading of interests in virtual organizations. Although the SEC has warned that they may be used to entice investors with the promise of higher returns in a new investment space, ICOs may provide fair and lawful investment opportunities as well. Other warnings were issued in 2017. Former SEC Chairman Jay Clayton produced a statement on Cryptocurrencies and ICOs in December 2017 and testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs in February 2018.
C. Commodity
The U.S. Internal Revenue Service (IRS) confirmed in March 2014 that it would treat virtual currencies as property rather than currency for tax purposes. Such currency was not granted legal tender status in any jurisdiction. This confirmation followed a Government Accountability Office (GAO) report on virtual economies and currencies that had sought additional IRS guidance.
A Dutch court held in June 2014 that Bitcoin was a commodity, like gold, and not “common money,” “legal tender,” or “electronic money.” The buyer of 2,750 Bitcoins had sued the seller for return of the prepaid contract price after only 990 Bitcoins had been delivered. The buyer received the value of the undelivered coins (around €14,000) but was not awarded the additional €130,000 in damages following an increase in the value of the coins.
Similarly, the Australian Tax Office (ATO) confirmed in August 2014 that it would tax Bitcoin related activities as non-cash barter transactions and not as money.
D. Regulation
Regulatory authorities have also been considering whether money laundering controls should apply to crypto assets. Judge Katherine Forrest of the U.S. District Court for the Southern District of New York ruled in August 2014 that Bitcoin fell under federal money laundering statutes. The case involved an action against Ross Ulbright (Dread Pirate Roberts), creator of the infamous Silk Road website, for operating an unlicensed money transmitting business. Judge Forrest ruled that it would be “nonsensical” for Bitcoin not to have been covered by the relevant legislation. Ulbricht was sentenced to life imprisonment.
E. Lack of Regulation
While courts have increasingly recognized the proprietary and regulatory nature of digital coins, some inconsistencies have arisen. Tokyo District Court Judge Masumi Karachi ruled in August 2015 that Bitcoin was not subject to ownership following the collapse of the Mt. Gox Bitcoin exchange that filed for bankruptcy in February 2014 after 850,000 Bitcoins disappeared from customer wallets. A former customer claimed the return of 458 Bitcoins worth around ¥31 million ($128,144), with the judge considering that the Bitcoins could not be recovered under existing law due to their intangible nature and reliance on third parties.
V. Digital Property Comment
Several issues remain regarding the nature of digital legal rights, assets, claims, classification, regulation, and taxation. Specific difficulties can be identified regarding digital property definition, exercise rights, creation, remedy, and location. Further, problems arise with title ledgers, title transfer, and transaction finality. As with many other areas of law, property law specifically creates underlying rights and duties that cannot be disapplied by party agreement or code alone. The residuary effects of law in the digital space consequently create massive uncertainty.
A new digital rights theory can be constructed under this paper to refer to legal rights held or created in a digital form, with rights being defined in terms of any interest or entitlement recognized and subject to protection at law. Legal rights can be held, created, or transferred in the form of computer code held on digital record systems. An accompanying digital property theory has been proposed that defines any new digital asset in terms of the five constitutive conditions of specificity (definition and identification), separability (independence), stability (permanence), singularity (excludability), and supremacy (control). A series of associated control or title rights, including holding, use or exercise, encumbrance, bequest (by will or trust), transfer (by gift or sale), and cancellation or destruction, are then attached.
Arguably, any new digital asset could be created in the future, including by computer code, provided that it satisfies these conditions and is not otherwise disqualified. This could arguably cover digital currencies or tokens, digital securities, smart contracts, and other types of new digital assets, including digital securities like decentralized autonomous organizations (DAOs). The value of these digital items would clearly be dependent on market use and interest, although these could satisfy the minimum necessary conditions for legal recognition.
This new approach to property has been summarised as constituting an attachment theory. This digital property theory can also be considered to incorporate a series of sub-theories, including a digital title theory or digital ledger theory, with ledgers being title rather than record or evidential registers, and an associated digital creation idea, with rights being either transfer and conversion or creation and origin rights. A further digital asset theory, digital claim theory, and digital value theory can also be developed.
The following specific comments and conclusions may be drawn on this crucial, although still evolving, area of law.
A. Technology and Digital Rights
Astonishing technological advances have occurred in recent years that have developed innovative forms of products, services, and delivery channels. Certain core legal constructs, nevertheless, remain in place. Legal systems are based on legal rights which are defined, for the purposes of this paper, as any interest or entitlement recognized and subject to protection by law. Legal rights may be created by legislative enactment or judicial pronouncement, and possibly by custom over time, subject to separate legal acceptance and recognition. Digital rights are legal rights held or created in digital form.
Separate difficulties arise regarding the legal definition and nature of information and data and digital information and digital data. Many new forms of digital assets may only exist in the form of code entries or data strings. It is maintained that information and data do not constitute property in law directly. Where a piece of data code, nevertheless, creates a new identifiable digital item or satisfies certain conditions and an appropriate set of title rights are attached, this data point can be transformed into a new type of property in law. While a point of information cannot be considered to constitute property in and of itself, if it is referable to and identifies a new asset to which corresponding rights of use and control are attached, a new item of digital moveable intangible personal property can be created.
B. Choses in Possession, Action, and Agreement
A new area of moveable intangible personal property must be created under English law. While this could be left to judicial clarification in response to continuing technological advances, this may be more effectively achieved through statutory revision in the form of a Law of Property (Miscellaneous Provisions) Act, Digital Property Act, or revised Digital Economy Act. The objective of a new area of moveable intangible personal property law would be to clarify the nature of new digital monetary and other non-monetary assets. This would include those created on a blockchain, created on other DLT, or converted or transferred to the ledger. These are referred to as conversion or transfer rights and creation or origin rights for the purposes of this paper. Additionally, this could be an opportunity to clarify regulatory coverage and perimeters by confirming the extent to which each new asset is or would be covered by financial laws. Specifically, this would be achieved in the United Kingdom through amendment to the Regulated Activities Order (RAO) 2001. An appropriate remedy system must also be provided.
The traditional distinction between choses in possession and choses in action has generally only confused this debate. Judicial decisions and legal textbooks refer to such established authority as Lord Justice Fry’s statement in Colonial Bank v. Whinney from 1885, although this has arguably only resulted in misunderstanding and delayed necessary reform and development. Lord Justice Fry’s analysis was arguably obiter and fact and time specific. It may also have been based on a misreading or overstatement of relevant sources, including Blackstone’s Commentaries on the Laws of England (1765-69) and other available authorities. Blackstone did not have to consider the nature of intangible property more generally and did not restrict property only to land and physical chattels. The chose in possession and chose in action dichotomy may arguably be further concerned with the classification of actions and remedies rather than with the substantive division of property and things as originally provided for by Gaius and Justinian.
Historical development of causes of action over time has affected increasingly important areas of English law, including the residuary area of choses in action, particularly in the absence of any other appropriate law reform. This would now include digital currency and other assets as the residual identifier. Arguably, this creates unnecessary juridical and pedagogical confusion, which could be corrected as part of a larger reform to create new digital communities, societies, or economies. This is not meant to create a new third area of property but to extend and clarify the existing category of chose in action, which would apply to all intangible moveable personal property. Further, it should include separate necessary sub-divisions, including pure claims and other forms of assets. All assets must, nevertheless, enjoy the same protections under the law, with any other anomalies removed, especially in terms of available remedies.
C. New Digital Property Classification or Restatement
The associated definitional conditions applied to determine whether a thing constitutes property under the law can also be clarified. The original judicial tests of definition, identification, assumption, and permanence can be revised to merge definition and identification, replace assumption with independence, and add control, with control being understood in terms of the five key title rights of holding, encumbering, bequeathing (by will or trust), transferring (by gift or sale), and cancelling (or destroying). The five core conditions for property determination can then be restated in terms of specificity, separability, stability, singularity, and supremacy. Supremacy or control can, in turn, be understood in terms of detaining, devising, donating, dealing, and destroying or classifying, charging, ceding, conveying, or cancelling.
Many new forms of public and private digital coins and other tokenised assets would fall within this new definitional framework. Computer code would then create digital rights in the form of entitlement to new “digital assets,” which are digital data points or entries. Many of these may then embed private digital value or data value denominated in the form of new digital currencies or other social units of account. This can form a key part of the new ValueNet currently under construction. In terms of property analysis, new digital assets would be specific, separable, stable, isolated, and managed or sovereign and identifiable, divisible, permanent, exclusive, and controllable. This would allow identification by owners and discoverability by third parties. They would be divisible and both specific and fungible depending upon use.
The value of the assets is based on their usability and supported by their controlled scarcity with cryptographic security, including access control and transaction and block hashing, making them rivalrous and only finitely consumable without double spending. Third-party use would be limited through their excludability and ownership and protected through the availability of a full remedy system that permits continuous recoverability. They are generally also controllable through a still-emerging set of title rights including holding, encumbering, bequeathing, transferring, and cancelling (or destroying).
While all these conditions and rights may not be specifically recognized in relation to new digital coins and assets at this time, this may be commercially and socially necessary over time and can be extended accordingly. Appropriate law reform could ensure that new digital assets are properly recognized as property, subject to these conditions, and that all necessary consequential rights of use, remedies, and protections are available. Appropriate changes can also be made to ensure that a full set of title rights can be exercised in relation to all new forms of digital assets over time.
The following more specific points may be made on the core property conditions and revised indicia.
D. Specificity, Identifiabilty, and Discoverability
It is necessary to be able to define and identify things to constitute property items in law. This can be understood as an aspect of specificity, which also allows party identification and third-party discoverability. New digital coins and other assets must be capable of definition and identification, which should be relatively easy to secure in most cases. Issues may arise regarding anonymity, although this should not prevent a property attribution. Property can be held by any natural or legal person, including agents or nominees, although arguably not by a machine, but this may require legislative clarification and any concessions confirmed.
E. Separability, Divisibility, and Fungibility
Separability may be understood in terms of divisibility and fungibility, as well as negotiability. It must be possible to separate digital coins and assets from other items. This will generally be achieved at the level of the minimum monetary unit concerned with larger items being divisible into root units. These may still be fungible in practice, with one monetary unit being exchangeable for another if they have the same nominal value. Conflicting technological techniques (such as splitting, peeling, and mixing) may hide the source and defects in the title of specific assets to make them fungible, while other tools (such as poison, haircut, and first in first out devices) identify transaction chains. While banknotes and cheques are negotiable, digital currencies will not be treated as such pending substantial changes in market and commercial practice. Negotiability may only otherwise be conferred by statute. Legal tender status and the ability of digital currencies to discharge debts may also only be secured through legislative revision and extension.
F. Stability, Scarcity, and Integrity
Stability can be understood in terms of permanence, scarcity, and integrity. Property must have a degree of relative permanence to make it a holdable asset. It must be separable but also lasting in some manner and not constitute a fiction, sham, or abuse of any form. It should have a corresponding degree of certainty. This does not have to be permanent, provided that the asset has a useable lifespan of some form. Scarcity arises in the form of production limits, which support both separability and stability. The usability or integrity of the asset is also confirmed if it is rivalrous but capable of controlled reuse without limiting its value. The effect of all of this is to create a new data asset and data value.
G. Singularity, Exclusivity, and Protectability
Exclusivity can be considered in terms of singularity and protectability. The party entitled to the asset must be able to exclude third-party consumption and exhaustion and to protect the asset. Exclusivity preserves the rights of the owner or possessor. This ensures the rivalrous nature of the asset. The owner must also be able to prevent interference or removal or be compensated for loss or other unjust enrichment through appropriate legal remedies. This would include recoverability of the asset in the event of loss, as necessary.
H. Supremacy, Sovereignty, and Control
Control can be referred to in terms of supremacy or sovereignty. The owner or holder must be able to exercise all the assigned title rights attached to property, other than those separately granted to another party. These specifically include the right to hold, encumber, bequest (by will or trust), transfer (by gift or sale), and cancel or destroy. Ownership can be understood in terms of the aggregation or amalgamation of these rights. Possession can be restricted to refer to the direct physical holding of the asset or possibly extended to include direct or indirect constructive control, although this may again require a degree of physical attachment under English law pending further law reform.
I. Digital Ledgers
Digital ledgers are distinct from more traditional forms of register or record in that legal title can only be held and transferred on the ledger itself. This is distinct from other forms of title transfer, including sale contracts and missives or dispositions of title to land where title is generally transferred under contract and subsequently recorded on the register for evidential purposes. The registered title may then replace the contractual title where this is separately provided for, such as in relation to land registers. Digital title will generally only be capable of being held and transferred on the new blockchain or DLT concerned.
Difficulties may remain where it is unclear whether digital ledger title rights replace underlying contractual entitlements for all purposes and when finality and indefeasibility takes place. This may, for example, be relevant where issues arise regarding transaction mistakes, misrepresentations, or fraud. Also, this may raise arguments of substitution and replacement regarding the use of the original asset. It would be desirable to expressly deal with this under the terms of any new title ledger established, although this may not occur in practice, especially where the ledger is intended to replace other register systems through the use of code alone. Forms of correction transfer or other restitution-based remedies may become relevant in practice. Difficult issues may remain to be resolved in this area.
J. Digital Money and Legal Tender
A number of conflicting positions have arisen regarding the nature of digital currencies in law. The varied treatment of digital currency in terms of money reflects the diffuse uses of the terms digital and money, both of which can be considered to constitute contestable ideas and, more specifically, essentially contestable concepts. In legal terms, money can principally be considered in terms of party intent in the particular circumstances, which includes individual private party and Parliamentary or legislative intention.
Digital currency is generally not considered to constitute money at this time. Commentators generally refer to the limitations that arise in using digital currencies for the purposes of exchange, store of value, and unit of account. This reflects a re-application of an economic or functional theory of money. In legal terms, the meaning of money can be considered to be dependent on party or legislative intent, with the default position being to equate money with legal tender. Money can be defined as an asset denominated in the form of an official monetary value issued by or under the authority of the state. This would include coins issued by a royal mint or finance ministry, banknotes produced by a central bank (as an agent for the state), as well as regulated commercial bank account balances and other forms of recognised electronic value.
For the purposes of this paper, a denomination theory has been adopted with private digital currencies not constituting money or national currency to the extent that they are not designated in the form of an official reference asset or issued by or under the authority of the state. Sovereign digital coins issued by a government or central bank (Central Bank Digital Currency (CBDC)) on behalf of a national government or state would arguably constitute money with or without a corresponding extension of legal tender status. This would also apply to commercial bank or other private operator digital coins, provided that these were issued with the direction and consent of the state. Stablecoins would not constitute money unless again issued by or under the authority of the state.
K. Digital Remedies
Specific difficulties arise with digital assets in relation to remedies and recovery. This is a complex area of English law that has evolved over time, with many distinct issues arising in contract, tort, and property law, depending on the particular facts and circumstances. Initially, a core distinction has to be drawn between the classification of the remedies available to protect rights and the underlying rights themselves or causes of action and liability. A further division can then be drawn between property or proprietary remedies and personal or non-proprietary rights of action, with some of these being performance, rather than payment, related. Remedies may be referred to as being common law or equity based, possessory or non-possessory, and coercive or non-coercive, as well as monetary or non-monetary in nature. Separate remedial actions may be exercised on an extra-judicial (or self-help) basis without court sanction, while others require judicial authority or direction. A further range of final enforcement or executionary remedies are also available.
English law does not have a general remedy equivalent to Roman vindicatio that protects ownership rather than possession. No pure proprietary action is available. Separate real and personal common law and equitable proprietary remedies can still be pursued. In rem actions are available through following and tracing. Common law personal proprietary remedies may be exercisable, although these provide limited protection in relation to intangible property, which would include digital coins and cryptoassets. Personal common law claims include trespass and conversion with negligence, possible reversionary injury, and formerly detinue (wrongful detention), which was abolished under the Torts (Interference with Goods) Act 1977. Equitable proprietary actions principally consist of constructive trusts or equitable torts in the form of knowing receipt and dishonest assistance.
Possessory torts may be used to protect corporeal property that is capable of physical possession with an action based on interference with physical possession. Trespass involves interference with the physical possession of goods without consent. Conversion involves interference with the physical goods themselves, which prevents their possession or use by another. Possessory remedies, such as trespass or conversion, are not available in relation to intangible digital currencies or assets, with reversionary injury being similarly restricted in scope. Money may not be recovered through conversion. Conversion may be available where something physical was involved, such as a computer or server, which may include the physical record of an encryption key. An action may be available for knowing receipt or dishonest assistance. A constructive or resulting trust may be created with a possible lien in equity. Constructive trusts provide an equitable remedy where it would be unconscionable for the party to retain the property and a resulting trust where the intention of the parties has not been carried out. Stolen property may be held subject to a constructive trust, while a resulting trust may arise from fraud.
An action may lie in restitution for money had and received, which includes incorporeal money. This may also include money paid for the plaintiff’s use, quantum meruit, and quantum valebat. Common law claims for restitution against banks may fail where the funds are mixed or the bank is a bona fide purchaser for value. A claimant may apply to the court for a declaration of superior title, which would create a proprietary remedy. An equitable proprietary claim or personal action may be available for knowing receipt or inconsistent dealing.
Tracing remedies may be available where the holder of a digital currency suffered a loss in which the interest was considered to be proprietary and property was involved. It is, nevertheless, unclear whether digital currencies would be followed rather than traced. Specific difficulties arise in relation to digital currencies where coins are intentionally mixed for criminal, commercial, or technological purposes. Coins may be processed through multiple keys to hide their source. Mixer services (or coin laundries) may be used, which collect payments using a specific public key but distribute outgoing payments from a separate key, breaking any transactional connection chain. Data transaction chains can be broken through splitting, peeling, and mixing, or transfers can be conducted off-chain, which makes it impossible to identify the origin of the funds. Programmers can use other tools to attempt to respond to these identification problems, including through a punitive “poison” or proportionate (haircut) and allocative “first in first out” approaches.
The law of remedies with regard to intangible property is arguably already confused and inadequate. Even more difficulties will then arise in the digital area. Some form of codification and restatement of relevant remedies may be necessary, which could be considered as part of a larger digital law reform programme, including relevant private international law measures, which are considered next.
L. Digital Location and International Private Law
Digital assets come with their own residual issue for private international law purposes. The purpose of international private law is to determine the most appropriate law applicable to the dispute, paying regard to all relevant circumstances but without adopting any formalistic approach. Specific issues arise in determining the most appropriate jurisdiction, the choice of law to govern the dispute, and the enforcement and execution of judgements following court action or arbitral award. Jurisdiction is concerned with determining the most appropriate court to consider the dispute. Choice of law identifies the most appropriate law or laws to apply to resolve the dispute. Enforcement involves domestic or cross-border execution of court or arbitral rulings.
Jurisdiction was originally dealt with under common law rules, which were subsequently supplanted by the Brussels Convention, as implemented in the United Kingdom under the Civil Jurisdiction and Judgements Act 1982 and then by the 2012 Recast Brussels II Regulation, which had direct effect in the United Kingdom and did not require separate national implementing measures. Since it came into effect on March 1, 2002, Brussels II has applied with regard to civil and commercial matters, including status and legal capacity, matrimonial relations, wills and succession, bankruptcy, social security, and arbitration and excluding revenue, customs, or advantage of matters. This covered transfers of rights of causes of action, debts and rights under contract, securities, intellectual property rights, and leases.
Choice of law, or lex causae, is considered in terms of the relevant issues, most appropriate connecting factor, and legal application. Lex causae deals with such matters as the nature of the asset, legal capacity of the parties, transferability, conditions for transfer, and priority. English international private law contains separate sets of provisions governing contractual and non-contractual obligations (tort, restitution, and equitable remedies), family law, property, and succession.
Difficulties arise in determining the governing law in relation to intangible property. The location of intangible property, for conflict purposes, is generally considered in terms of where the asset is recoverable or may be enforced, such as in the country or residence of a debtor. Determining the governing law for assignments of choses in action within the EU is dealt with under Articles 14(1) and (2) of the 2008 Rome I Regulation, in respect of transfers carried out after December 17, 2009. Article 14(1) is concerned with the relations between the transferor and transferee and applies the law of contract of assignment, while Article 14(2) is concerned with the nature of the asset at issue and applies the law of the asset. Under the terms of the Rome I Regulations, a number of choses are, nevertheless, excluded, and separate rules apply.
The choice of law selection for registered shares will generally be determined by the lex situs and location of the register and law of incorporation, while bonds and debt securities are subject to contract rules. Dematerialised securities can be dealt with on a Place of the Relevant Intermediary Approach (PRIMA) basis, which applies the law of the intermediary or the place intended or agreed by the parties, which can be referred to as PRIMA plus (or “PRIMA+”). English courts have generally refused to consider issues with regard to foreign land, leases, and intellectual property rights, although actions concerning infringement rather than the validity of intellectual property rights may be considered. Negotiable instruments are dealt with under Section 72 of the Bills of Exchange Act 1882. Trusts are considered under a separate convention and implementing legislation.
Separate difficulties arise with regard to applying more traditional international private law rules to new forms of digital assets due to the absence of any physical location, identification, or material connection. It may be impossible to determine the location of a digital asset at any particular point in time or the place of the source or receipt of a transfer. These difficulties might be dealt with by reapplying the PRIMA plus and PRIMA principles by using a wider range of options or the “waterfall” approach. This might, for example, include reapplying existing party consent (PRIMA+) or the location of the intermediary (PRIMA), where this is clear. In other cases, regulatory authorities may be given power to allocate or determine the governing law for particular types of products or asset classes (which could be referred to as “PRIMA minus” (or “PRIMA-”)). Other sequential options could include the place of the “operating authority” of the ledger, where this is known (which could be referred to as “PROMA”), or the “administrator” (which would be referred to as “PRAMA”). The default position may then be to equate the location of the asset with the owner or possessor, which would, in practice, be the holder of the private encryption key necessary to locate or transfer the item (creating “PREMA” for encryption). Additional measures could be adopted for use with multi-signature systems, and traditional rules could be applied with regard to agent-principal and employee-employer relations with any necessary adjustment.
Attributing location of digital assets to the domicile of the controlling party reflects the idea of constructive digital possession and creates a parallel doctrine of constructive digital location. This would apply an encryption key, or PREMA test, as the default option model, based on private cryptographic key location. A corresponding set of waterfall options can be designed in respect of jurisdiction selection. The application of such a series of measures in respect of governing law and jurisdiction could assist in cases where no selection has been made by the coders, programmers, or other parties involved either deliberately or accidentally. There should also always be some possibility of judicial oversight and final judicial determination.
All of this, including the waterfall, default PREMA position, and the parallel doctrines of constructive digital location and possession, could be set out in a digitally targeted legislative reform programme. This could also include a clarified set of definitions, particularly of digital information and digital data, as well as a reformulated set of digital property conditions and associated rights, as outlined in this paper.
VI. Digital Property Close
Fundamental difficulties remain in determining the nature of new digital currencies and assets based on cryptography and blockchain or distributed ledger technology. Property law is a form of default law, which defines and determines relevant rights and remedies. The nature of modern property and commercial assets has changed substantially, while legal categories and classifications have remained, to a large extent, based on their feudal and mercantile origins. Gaius and Justinian classified private law in terms of persons, things, and actions, with things consisting of all forms of corporeal and incorporeal property. This classification has to be updated to include all new forms of code creating digital assets.
Specific difficulties remain with regard to English law and its binary classification of personal property into choses in possession and choses in action. This is arguably juridically and pedagogically inadequate, to the extent that it is essentially dependent upon an outdated classification of property, actions, and remedies. A new, wider category of personal moveable intangible property should be recognised under English law and other laws that can include such valuable new commercial assets as digital coins and dematerialised securities, as well as intellectual property rights and leases separate from pure claims in action. The effect of this is not to create a third category of property law, but rather to recognise the extensions that have occurred over time, with a clearer set of sub-divisions being applied as necessary.
The impact of modern technology has been to stretch the limits of legal recognition of property in terms of its underlying digital information and digital data base. While information and data do not constitute property as such, they can be used to create new forms of code generating ideational constructs to which a full set of title rights can be attached. Code cannot replace law outright, despite technological pretensions to the contrary, although code can create fully recognisable and enforceable legal rights and property in law. The new world will not be created by code rather than law. The future is both law and code.
