Originally published at The Conversation
The price of Bitcoin has dropped by 75% in the past year, so anyone who invested heavily at the peak will have lost a lot of money. And now there’s more bad news for crypto-currency investors to worry about: they may not legally own the digital assets they have purchased.
My colleagues and I have recently completed research showing that courts in England and Wales are unlikely to identify digital tokens as property, since the law does not recognise possession of intangible items. This means that crypto-currency holdings may not qualify as property at all. As a result, although digital tokens are technically secured through blockchain technology, the level of legal protection is unclear. And the same likely applies in other common law jurisdictions such as the United States, Hong Kong, Singapore, and most of India.
Defining Property
Property law deals with the rights you have over the things you own. Common law systems distinguish between land, called “real property”, and all other property, called “personal property”.
Personal property includes rights over two categories of things. First, there are “things in possession”. These are tangible items which you can physically possess and transfer to another. The £20 note in your pocket is a thing in possession.
Second, there are “things in action”, a mixed category of rights that can only be claimed or enforced by legal action. This includes debts, rights under contract, and intellectual property. The £20 you have deposited at a bank is a thing in action, because the bank owes you a debt of £20. That debt is intangible, but, if necessary, could be enforced through legal action.
So what about digital tokens such as crypto-currencies? Tokens don’t physically exist. They are entries on a virtual ledger. And case law in England and Wales has established that a thing which exists only in electronic form cannot be the subject of possession. So digital tokens aren’t things in possession.
But they don’t really resemble things in action either. A Bitcoin doesn’t give you a right to anything or against anyone. What you have is a cryptographic private key (a sort of secret number password) that gives you exclusive control over that Bitcoin. This allows you to submit transactions to the ledger and send your Bitcoin to anyone you like.
Other types of tokens do give you a right against the token issuer. For instance, utility tokens give you a right to a product or service from a company. Such tokens effectively represent a debt or right under contract and will probably be considered things in action. However, not all tokens give purchasers a right against the issuer. The terms of one recent token sale by start-up firm Block.one – which raised US$4 billion – specified that the tokens have no rights, uses, or attributes.
Legal Uncertainty
This lack of legal protection may suit crypto-currencies’ “cypherpunk” origins. Individuals trading secure tokens online in private don’t need protection from “weary giants of flesh and steel” (industrial governments). But when mainstream consumers buy digital tokens, disputes are bound to arise.
For example, if digital tokens are property, they will form part of your estate when you die and your heirs will inherit them. But whoever has the private key technically controls the tokens, creating a potential conflict. The issue has arisen before a court in Florida. The estate of the deceased Dave Kleiman is suing Craig Wright, who allegedly seized up to 1m bitcoin, worth billions of dollars. The estate is suing for return of the tokens under what is known as the tort of conversion, which in England and Wales applies only to things in possession.
Some commentators have questioned whether Wright – a colourful character who once claimed to have invented Bitcoin – ever had the tokens to begin with. But the case shows how the outcome of disputes can depend on the property status of digital tokens. Similar issues could arise in cases of theft, bankruptcy, and divorce.
Few investors will have given much thought to the legal status of their crypto-currency. But in the long term a lack of legal protection could further diminish the tokens’ value, particularly if it stops financial concepts such as trusts or securities being applied. Admittedly, the value of digital tokens so far has anyway been volatile and unpredictable. But the resulting legal disputes may force property lawyers to confront a new, virtual world of digital assets.
In future, the law could extend property rights to digital tokens, for instance by recognising a new category of virtual-thing-in-possession – but this would probably require new legislation. For now, the property status of digital tokens remains an “area of doubt”, as one of the UK’s Supreme Court justices recently put it. So caveat emptor: bitcoin buyer, beware.
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Can one own something that has zero intrinsic value.
My first car was a puke green (optimistically termed ‘avocado’) problem prone 1974 Pinto, but my parents owned it, not me.
At some level, perhaps the Bitcoin freaks would view this state of legal affairs as a good thing. They’ve always said that they want their currency to resist “censorship”, by which is meant, any judicial or other governmental decision as to ownership of coin, or transactions that transfer it. So, well, it follows that they would not want a money system that was amenable to judicial fiat, right?
Now, why a grandma or granddad would want to use such a system, -that- is beyond me. Completely beyond me.
I think a case in China recently came down in favour of cryptocurrencies being considered property, which broadly fits with the blockchain regulations proposed last month. In the US, there seem to be wildly divergent claims over whether or not they should be considered securities, and therefore should be subject to similar regulations. Perhaps the recent sell-off is a sign that some whales expect at least some of these chickens are coming home to roost.
That’s the whole point of crypto
Its not property so it cannot be taxed
But people can still exchange it for goods and services
…still exchange it for goods and services.
Then it can, probably has, and certainly will be taxed, I remember when counter-trade companies cum exchanges (who had their own token schemes) were a hot item 30 years ago, they were horrible inefficient, like mining bit-coins, but had appeal as a tax avoidance scheme. It didn’t take the law makers and courts long to turn that tax avoidance into tax evasion. Once that happened the attraction disappeared and these companies all quickly folded.
Actually crypto currency is handled by the tax code as property and is of course taxed.
Just like property. It is taxed when you earn it, and it you exchange it for other currency, will be taxed again if a gain occurs.
At least in the US
Is it taxed before it is realized as USD?
Yes.
The IRS has ruled that when you mine bitcoins you have performed a service and have been compensated for it.
So, when I mine(solve math problems) a bitcoin worth $5,000 I have been compensated and I have taxable business income the same as if someone told me to ‘solve some math problems for me and I will pay you $5,000 in USD’.
If I convert it into dollars, that is another ‘transaction’ and I will have gain or loss on the sale.
If I sell if for $4k, I have a $1k loss. If I sell it for $6k, I have a $1k gain.
Link to IRS Notice 2014-21, which details the tax treatment of any virtual currency.
Seems flawed. Wouldn’t this theory also make theft of digital records, photos, and audio similarly a non-crime because they would be considered intangible non-property? This would seem to be more true for digital artifacts stored on external cloud servers that were generated without some creative intent like log files, sensor system photos and audio (e.g. those from home security systems).
I can see and entertain the point being made, but it seems too slippery a slope to survive the ramifications on a host of other digital “possessions” that the modern Information Age relies upon.
Records, photos, audio files, etc. are all tangible or represent something tangible. Crypto currency could be considered tangible if it represented a contract between parties. SEC has just ruled to that effect. But the unregulated anarchic dream currency invented by the libertatian super programmers is the ultimate caveat emptor.
iTunes etc really exist as contracts. You have a legal right not a thing in possession. Corey Doctorow of EFF beats this drum a lot.
As for ordinary files, you have no rights whatsoever to the files themselves except possibly for intellectual property rights if you created them yourself and possibly a licensed to use granted by the owner of the IP if you did not create it.
Meanwhile you have no rights to use FB or this site other than what they choose to grant you and it sounds like some blockchain projects work the same way.
Little known to many investors, cryptocurrency reviews are for sale [Reuters]
… paid for in hard cash. Just like with the toxic mortgage-based derivatives 12 years ago.
Let a thousand Standard and Poor’s bloom.
Ponzi tulip money. Get out early, but not too early. Even Newton bought in to tulip mania and lost money getting out too late, that’s the strength of mass hysteria.
Newton did not buy into the Tulip Mania — he bought into the South Sea bubble.
Ah thx for the correction you are of course quite correct.
Interesting!
In the US, the UCC handles bitcoin and other crypto assets pretty well. The general view of the legal community here is that tokens are “general intangibles,” a catch-all category of property in the UCC.
There may be technical issues relating to liens on tokens that are not released when the token is transferred or sold, but there is no question that the tokens are personal property. And a sensible creditor shouldn’t rely on a lien filing but should have actual possession, or some sort of control account structure tantamount to possession, in order to be properly secured.
I’ve seen law professors debate how the UCC would regard Bitcoin, and I have seen nothing even remotely along these lines. Please provide links. The two alternatives I saw were treating it as a security, which has a different definition in the UCC than under securities law, but had several problems, or “money” if an actual recognized legal jurisdiction designated it to be money which has not happened.
Please provide links supporting your claim.
Yves, links:
https://cardozo.yu.edu/faculty-intellectual-life/bitcoin-under-uniform-commercial-code
(links to PDF)
Argues that Bitcoin’s status as a general intangible (and not as “money”) will interfere with liquidity and financial transactions, but certainly not going so far to say it is not “property” at all or that courts will fail to honor and enforce ownership claims.
https://www.coindesk.com/perkins-coie-bitcoin-can-learn-real-estate-law
Basically the same premise as the first piece but focuses on the fact that liens on general intangibles follow the asset so theoretically any bitcoin is subject to claims of holders of liens granted by the coin’s prior owner(s). Again, nothing here suggests courts will fail to recognize basic property law claims relating to bitcoin.
Lots of technical legal issues to resolve, to be sure. Hard to see that bitcoin does not constitute a bundle of contractual and quasi-contractual rights, express and implied, that will be viewed as property by most jurisdictions. The issue is what’s in that bundle, and how do those rights operated in practical detail. It’s taken millennia for “money” to come to where it is. Even if you assume the law will progress at bitcoin-speed (not a good assumption) skepticism is warranted.
I am still baffled by crypto-currencies. To me they are gold and silver but without 10,000 years of history in much of the world, can’t be used in making jewelry, don’t have an industrial purpose like electrical connections, and are unlikely to be of value if buried in a bag in the backyard and dug up 100 years from now.
Fiat currencies have the full faith and backing of the government which is good as long as the government is solvent and in existence. Still baffled by what the full faith and backing behind crypto-currencies is.
Their primary purpose appears to be to make the Argentine peso and Venezuelan Bolivar look stable by comparison.
BTW – I know a clinical psychologist who started getting a lot of patients coming in a couple of years ago about crypto-currenices. These are mainly wives of men who are “investing” heavily in crypto-currenices and the wives are panicking and in great stress that their retirements are vanishing before their eyes. I had to send her articles about crypto-currencies so that she would have a clue what these people were talking about as she had never heard about things like Bitcoin. My guess is that the recent plunge is going to become a financial opiate crisis with a lot of people quietly going bankrupt, similar to the real estate bubble popping, but at a smaller scale.
Didn’t Warren Buffett warn against investing in things you don’t understand?
These retirement losses will be very unfortunate for the totally innocent spouse who is at zero fault for the other spouse throwing away the whole retirement on crypto currency. I am at a loss to suggest what a spouse chained-at-the-neck to such an utter fool is supposed to do.
What is the “full faith and backing of the government”? You can’t redeem USD at the Fed for anything but USD.
USD benefits from the fact that you can satisfy tax liabilities with it and force creditors to accept it as payment. All the rest is network effect (more or less). Otherwise it is just rag paper and ledger entries.
If it is not property, it also cannot be stolen, and there can be no accusation of theft.
Yon libertarians have no recourse for “theft”. Put that in you concept of absence of rule of law, and smoke it.
We’ve tried absence of rule of law. It was called the dark ages, and the English exchanged it for “The King’s peace,” aka Rule of Law.
The libertarians I have encountered don’t want NO “rule of law.” They want some force of “government,” somehow not beholden to and outside of the realm of the “individuals,” to write just the exactly perfect amount of perfect (by their lights) rules, and then be present to enforce those rules vigorously, when one of their competing (not fellow, NEVER “fellow”) Galtian libertarians, you know, “breaches the contract.”
Hypocrisy and sparkle ponies squared, cubed, to the infinity power…
Libertarians want government to title their property, enforce their contracts and incorporate their business and then go away and never lift a finger to help anyone else.
If you can’t own intangible things, how do they prosecute people for child porn that is stored solely on a computer? It’s intangible, you can print it our, but you can do that with a bitcoin, too.
A child has the right to bodily integrity. The intangible file is proof enough that a right was abused. ‘Possession’ in this case has nothing to do with property rights.
It’s a social judgment, related to the experience of degradation and pain, that like other proscriptions on abuse has been agreed to be bad enough to be “outlawed.” And it’s not intangible if one can print it out, to inform one’s self-pleasing behaviors. And one can’t, as far as I know, “print out” bitcoin.
THe North American Man-Boy Love Association, NAMBLA, just loves them some arguments like the one made, that child porn is “intangible” and its creation and possession is not prosecutable. Wiki and other locations have info on that organization.
So I don’t own the money in my bank account?
You have only such rights as you can enforce.
If the government or a litigant wants to put a lien on it, or in the government’s case to just seize it or forfeit it because they think you might be a “criminal,” or too impotent to complain, it’s gone. If you are a depositor and the REAL owners of everything decide that bank deposits need to be siphoned to pay interest and principal to bond holders who got their “positions” via various forms of corruption, it’s gone. If as recently happened, some corpo types decide to implement a new IT system without backing up the ledgers and files and without checking to see what happens when the “new, improved, cheaper” software tries to access the old kludgy stuff and bad code things happen, you better have a paper trail of your own to try to prove what you “own,” or it’s gone. As with ‘your’ house that you hold a mortgage on, if some set of assoles decides to foreclose on you and your neighbors, as noted in a comment today, “the law” has been re-written to let them present ‘any note,’ in Star Chamber proceedings that several commenters here have been hammered and robbed by, the ‘value” of your house is also gone.
So no, you don’t “own” the “money,” the ledger entries, in your bank account. And if you read the fine print on those adhesion “contracts” that apply to “your” account, you may reasonably wonder if you “own” your bank account either.
+1 Excellent comment. I’ll add one does not even “own” the dollar bill in one’s wallet, it’s a certificate that provides the user with some priviliges, but in all cases, ownership of the note itself remains with the government. See 18 U.S.C. § 333: