Chasing Bitcoin

What Bitcoins are not. Image by Zack Copley.

What Bitcoins are not. Image by Zach Copley.

I attended an interesting SCL event last night on cryptocurrencies, with three speakers: Hakim Mamoni of Seedco.in, Michael Taylor of 4 Pump Court, and Rich Folsom of Kemp Little (who hosted the event).

Hakim Mamoni opened proceedings with a talk that amounted to a passionate advocacy of Bitcoin as a means of protecting our money from impending state seizure under the EU’s Bank Recovery and Resolution Directive. Colour me sceptical, I’m afraid. (If I want to protect my money that badly, I’ll put it under my mattress rather than into a notoriously volatile speculative asset class like Bitcoin.)

It’s Michael Taylor’s contribution that I want to discuss in a little more detail, however. Mr Taylor was looking at what legal remedies are available should your Bitcoins be lost or stolen, and how the English courts’ approach is likely to contrast with that taken in other jurisdictions. This is particularly relevant where I want to take action against an innocent recipient or intermediary who is (or has at some point been) in possession of “my” lost or stolen Bitcoins – so that I can’t take action on the basis of their wrongdoing, but would need an alternative type of claim (such as applies to “conversion” of physical goods, which is a “strict liability” tort for which no evidence of wrongdoing is required).

While no cases specifically relating to Bitcoin have arisen yet, other intangible assets have come before the courts. In the sex.com domain name case (work-safe link!), the US courts held that the tort of conversion could apply to a domain name (as for physical goods). The Dutch courts held that two youths who forced another gamer to hand over virtual goods in the Runescape game could be guilty of theft. However, the English courts have consistently stated that intangible assets are not goods, and can therefore not be subject to either the tort of conversion or the criminal offence of theft.

So is that the end of the road, under English law, if your Bitcoins are lost or stolen (and you can identify who now has them)? Maybe not: Mr Taylor pointed to the case of Armstrong v Winnington, a 2011 case involving the misappropriation of carbon credits. Carbon credits are an intangible asset, and the court therefore reiterated that they could not be stolen or converted. However, the court held that a claim of proprietary restitution could apply. As the judge stated (para 94):

if and where legal title remains with the claimant, a proprietary restitutionary claim at common law is available in respect of receipt by the defendant of a chose in action or other intangible property.

Mr Taylor suggested that the same could be true where Bitcoins have been lost or stolen, provided you can identify who is now holding them (which, as he pointed out to laughter from the audience, “is the solicitor’s job”). So unless the defendant has bought the Bitcoins in good faith, you can sue for their recovery.

BUT… 

…a hidden assumption – and, to my mind, a profoundly mistaken one – lurks around almost every discussion of Bitcoin. To see what this is, we need to ask the question: what is a Bitcoin?

The very word “Bitcoin” conjures up an association with physical currency. Other common terminology such as “Bitcoin wallet” (which “holds” your “Bitcoins”), and of “mining” Bitcoins, adds to this.

However, I think this is misleading. Bitcoin isn’t like physical currency at all. For a long time, this confused me, because I couldn’t see what “a” Bitcoin could be. If it was a number or code of some type, I couldn’t see how you could establish the uniqueness of “a” Bitcoin, let alone how you could then subdivide that Bitcoin into 100 billion satoshis. What was to prevent me from copying “my” Bitcoins, giving you the copies, and hanging on to the “originals” myself, for example?

A better analogy for Bitcoin, though, is with banking and electronic transfers. Say I have £120 in my bank account and you have £250 in yours (you high-roller, you). You transfer £50 to my account, which means I now have £170 and you have £200.

However, no physical transfer of money has taken place. The balances on our accounts are just a reconciliation of all the transactions that have taken place in relation to those accounts, between our respective banks and others. So how do I “know” that I have £170? Ultimately, it’s because I trust that the processing of transactions and reconciliations within the banking settlement system is reliable (otherwise I’d insist on cash).

Now consider Bitcoin. Say I have 10 BTC in my various wallets and you have 20 BTC. You transfer 2.5 BTC to me. That transaction enters the Bitcoin blockchain, which is validated by the mathematical processing of Bitcoin miners. How do I “know” that I now have 12.5 BTC and you have 17.5 BTC? Because I trust the blockchain validation process, which is analogous to the banking settlement system. But again, no physical (or even notionally identifiable) “Bitcoins” are involved, or even exist: my “Bitcoins” are just a label for the number that emerges from the balancing of all Bitcoin transactions, just as my bank balance is the number that emerges from the balancing of all banking transactions.

Bitcoin is therefore significantly different from carbon credits under the European emissions scheme. As the court observed in Armstrong v Winnington (para 17), while EUAs have no physical existence or title documents, “each EUA has its own individual number and is easily identifiable”. It was therefore possible to trace the specific EUAs from Armstrong’s registry account to that of Winnington, as the basis for a common law proprietary restitution claim.

However, proprietary restitution “tracing” claims are not available under common law where the property involved has been mixed with other funds – as would be the case if you have put “my” Bitcoins into a wallet which also contains other Bitcoins. I might be able to bring a tracing claim in equity, but traditionally this required a “fiduciary relationship” between me and you. The courts have become less strict about this in recent years, but clearly this is going to complicate matters.

In short: there may be circumstances in which proprietary restitution will ride to my rescue, but these are likely to be limited. At the very least, we will need to keep in mind the nature of Bitcoin: not an identifiable, traceable asset like a physical coin or a registered carbon credit, but more like the balance of my current account.

Advertisements