Competing Claims to Cryptoassets

At the height of the ‘crypto winter’, with several crypto-intermediaries filing for insolvency and subjected to schemes of arrangement, who owns what and who has a claim on what becomes all important. Meanwhile, blockchains, as one type of Distributed Ledger Technologies (DLT), are frequently presented as a digital solution to these perennial problems of competing claims to the same asset. We debunk this myth in our new article, as we first show that neither technology nor law solves the competing claims issue and then suggest policy solutions based on a comparative legal analysis.

Competing claims arise (1) in transfers, such as a sale, gift, or succession, and (2) in enforcement of individual or collective creditor claims, as in the case of insolvency. In both cases, either the asset is transferred from its true ‘owner’ to multiple persons that have mutually exclusive claims to the same asset (‘double spending’ problem), or the asset is transferred from an apparent ‘owner’ to a third party who now has a competing claim to that of the true owner (‘apparent owner’ problem).

Yet, the technical solution of DLT is limited, as is explained in the Bitcoin white paper, to the double spending problem and extends to on-chain transfers only, bypassing both creditors, victims of apparent owner problems such as hacks (theft) or ransomware attacks, and any other person with a claim arising outside of the blockchain.

Neither does the law offer clear solutions, despite emerging case law, legislative action in the US and selected European countries. Because some cryptoassets are neither things in action nor things in possession, there is a debate over whether they can be owned in the first place. Then, because the technology in fact does not facilitate the transfer of one token from A to B, but rather the extinction of A’s token and the creation of a new one for B, there is a question of whether legal principles for competing claims to the same asset apply at all. Finally, if they do apply, the question is to what extent a bona fide purchaser of cryptoassets is protected and the exact implications thereof. The answer may well vary across the thousands of cryptoassets in existence. For total confusion, then add the fact that most transactions are cross-border, cryptoassets have no physical location in any country, the defendant is typically unknown, and it is even uncertain whether choice-of-law rules for property, contracts, or torts should be applied to resolve the matter.

Our solution to this challenge requires three steps by legislatures, regulators, and courts:

(1) assign property rights to cryptoassets,

(2) establish that bona fide purchaser protection derives from control over the private key, and

(3) implement initiatives to lower costs of private enforcement of the law, such as licensing rules for custodians, KYC and tracing rules, injunctive remedies addressed towards crypto-custodians as well as enabling the use of KYC-related data gathered by licensed custodians for purposes of private law claims on lost assets.

At the hight of the ‘crypto winter’, this requires immediate action from lawmakers, as further detailed in our article.

Douglas Arner is the Kerry Holdings Professor of Law of the University of Hong Kong.

Ross Buckley is a Scientia Professor at UNSW Sydney.

Jannik Woxholth is a Senior Scientist under the ADA Chair in Financial Law (Inclusive Finance) at the University of Luxembourg.

Dirk Zetzsche is a Professor of Law at the University of Luxembourg.