Cryptocurrency and the Property Question

I.         The ‘Property Question’

While property plays a ubiquitous role in contemporary life, it is not always easy to identify when it exists.  Disputes over novel things or assets may therefore require a court to answer the ‘property question’: will the law will recognize and enforce entitlements to them? Cryptocurrency represents an increasingly significant context which invokes the property question for courts around the world.

Cryptocurrency, which can be transferred directly from one party to another within a network without a financial intermediary, derives its name from the fact that it is controlled and secured through cryptography (the science of protecting digital data through encryption). Blockchain forms the secured encryption platform making possible the digital ‘ledger book’ that supports these transactions. The original, and most well-known cryptocurrency is Bitcoin, which, like all others, has no intrinsic commodity value, and relies upon peer-to-peer consensus. While its value is ascribed to it by its users, as of October 2019, some 2,957 cryptocurrencies were being traded globally, with a total market capitalisation of USD $221 billion.

Because value is ascribed by users, the property question assumes heightened significance for those who seek to protect their cryptocurrency against threats from others or the state.  Courts in a number of civil (e.g. South Korea and China) and common law (e.g. Singapore and England) jurisdictions have provided partial answers, which have been accompanied by a burgeoning scholarly literature, which includes, for example, work by Kelvin Low and Ernie Teo, Chiara Zilioli, and Roee Sarel, and a collection edited by David Fox and Sarah Green. 

II.        Ruscoe and Moore v Cryptopia

In Ruscoe and Moore, the main issue was whether cryptocurrency was held on trust for accountholders by Cryptopia, a cryptocurrency exchange. To consider whether cryptocurrency was capable of being held on trust, it was necessary to decide whether it was capable of being ‘property’ under the Companies Act 1993 (NZ).  Justice Gendall answered both questions affirmatively, based upon four considerations: (i) the National Provincial Bank v Ainsworth (‘Ainsworth’) indicia of property; (ii) whether cryptocurrency can (or must) constitute either a chose in action or a chose in possession; (iii) whether cryptocurrency is a form of information and, if so, whether that can be property; and, (iv)  the public policy considerations associated with a finding that property in cryptocurrency might exist.

In Ainsworth, Lord Wilberforce, in an oft-cited ‘litmus test’ for property, outlined four indicia: ‘it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.’ Reasoning by analogy from cases recognising other types of intangible property, Gendall J concluded that cryptocurrency met the four indicia. The first, identifiable subject matter, was easily satisfied; indeed, Gendall J suggested that cryptocurrency may even be more identifiable than some other forms of recognised property, such as copyright.  Similarly, Gendall J found that the second indicia—identifiability by third parties—was easily satisfied by the fact that one’s public address appears as the last entry in the blockchain for that cryptocurrency.  The third indicia, whether the asset is capable of assumption by third parties, was satisfied on the basis that there is clearly a market in cryptocurrency in which the rights of holders are respected and subject to remedies for interference. Finally, Gendall J found that the degree of permanence or stability requirement added little to the other three indicia; while cryptocurrency may be subject to hacking or the wrongful use of private keys, those risks do not detract from the inherent permanence or stability of the asset.

Justice Gendall dismissed the argument that in order to be recognised as property, novel interests must be either a chose in action or a chose in possession.  Many other forms of intangible property—licences, quotas, and shares—are not choses in action, in the sense that they are recognised other than through and by reason of enforcement of rights in respect of them. Similarly, Gendall J found that Fry LJ’s dictum in Colonial Bank v Whinney (1885) 30 Ch D 261, 285 that the law ‘knows no tertium quid’, did not prevent cryptocurrency being treated as property.  Rather, Gendall J reasoned, Fry LJ’s dictum might in fact allow cryptocurrency to be classified as a chose in action.

While the English Court of Appeal held in Your Response Ltd v Datateam Business Media Ltd that information could not be property, Gendall J found that cryptocurrency is more than mere information.  First, because it is a tradeable form of data, and designed to be so, with a private key to transfer the value.  Secondly, as with a contract, it is not the words or promise that makes a contract ‘property’, but the unique relationship and system for transfer that equity recognises and supports.  Thirdly, the prohibition against information being property on the basis that it is something ‘open to all who have eyes to read and ears to hear’ does not apply to cryptocurrency—it cannot be infinitely duplicated, and cannot be transferred without a private key.  Fourthly, it is a more secure method of transfer than assignment of a chose in action, which equity allows to be assigned multiple times (notice being a further requirement for deciding which assignment binds the debtor).  Cryptocurrency, on the other hand, cannot be ‘spent’ or assigned more than once.

Justice Gendall dealt finally with the public policy objection.  While it is possible that cryptocurrency can be used for criminal activity—which would render it incapable of constituting property—the same could be said of the existing banking system.  Indeed, in an environment where cryptocurrency is being widely adopted, including by the traditional banking sector, the failure to recognise it as property could inhibit legitimate commercial developments.

III.      An Answer, or More Questions?

The property question often involves the application of one of two approaches (or a hybrid).  The first is what Bruce Ziff calls the ‘attributes approach’, in which a court looks for some external indicator that property exists.  Rather than comprehending that it is the court’s answer to the question, in the case before it, that will decide whether there is property in respect of the thing or asset, the court instead attempts to find similarities between the novel claim and previously decided cases.  This, it is assumed, reveals the existence of property. 

In adopting such an analogical approach, a judge can fall into a significant misunderstanding about property: that previously decided cases settle the property question for all time.  Property however is not a static concept, but rather, one that can, and often does, change with new circumstances. 

The second approach to the property question, which Ziff calls the ‘functional’ approach, provides some protection against falling into that misunderstanding.  Here, a judge must remember that if, as one of us has argued, property is about a relationship —the legal rights of use, excludability, and alienability —then what matters is whether the relevant relationship exists, at that point in time, in respect of the thing or asset in question.  As Ziff observes, this involves taking account of ‘how property, as a tool of social life, should be used.’

This is why Gendall J’s judgment is so important: it deftly avoids pinning everything on attributes, recognising that there is something deeper, and more profound, about finding property in a novel thing or relationship. As a result, it provides, generally, a novel way of approaching the determination of property, and specifically, a novel approach to the property question when applied to cryptocurrency.  Justice Gendall clearly understands that the law must recognise that cryptocurrency has become an important tool in socio-economic life, one that requires the certainty and stability provided by property.  Justice Gendall provides a roadmap for use in navigating the functional approach, one that can be used not only in relation to cryptocurrency, but also in dealing with other novel intangible interests.

In short, asked in relation to cryptocurrency, the property question reveals important theoretical considerations about the nature of property itself, its invocation as a response to novel things or assets, and the interplay of property with other doctrinal categories of law.  It provides some of the certainty and stability which are the hallmark of property.  Looked at another way, though, while asking the property question might provide some fundamental answers and clarify pressing commercial and financial concerns, it also poses a range of further questions with which the courts have only just begun to grapple.  The answer we have so far does not mean that the property question is definitively settled, rendering the nature of property in cryptocurrency static.  Instead, every answer simply produces another question.

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How to cite this blog post (Harvard style) 

Babie, P, Brown, D, Giancaspro, M & Catterwell, R. (2020). Cryptocurrency and the Property Question. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2020/05/cryptocurrency-and-property-question (Accessed [date]).