What do you legally “own” with Bitcoin? A short introduction to krypto-property

Knut Karnapp posed this very interesting question over on Twitter. His answer:

To me you own a part of the Bitcoin UTXO set uniquely assigned to you, and only you — by virtue of the corresponding private key. With this comes great responsibility. If you lose your private key, you lose your bitcoins. If your private key gets stolen civil law may dictate that the key itself and the UTXOs accessed by it are still “yours”. As far as the Bitcoin network is concerned though the private key grants power of disposition to whomever is in possession of said key.

That’s a solid answer from a de facto point of view, where continuing knowledge of the private key basically == what most people commonly refer to as control, or ownership. From a workaday transactional standpoint I basically agree with it wholeheartedly. De jure, on the other hand…

It Depends

“Ownership” is more than mere control; it is a legal concept and law is a local phenomenon. Accordingly, when you ask yourself whether and how something is owned, it’s generally a safe assumption to begin, in the first instance, by looking at the governing law of the asset and asking what that governing law says.

With certain things, like securities, the governing law of the issuing jurisdiction/entity and the governing law of the instrument (if different) are likely to be dispositive. International bearer securities, e.g.,  utilize well-worn issuance frameworks like the New Global Note structure, which divides up legal and beneficial title in the underlying security by contract in a manner that is highly certain and leaves little room for ambiguity. With real property (an apartment, a house, some land) you usually look to the law of the situs as the starting point for that inquiry. Generally speaking it’s the same story for chattels, save where ownership of those chattels is represented by a certificate of title or the like.

The problem with Bitcoin, of course, is twofold.

First, Bitcoin does not avail itself of existing categories of property, like chattels or instruments; indeed, it defies them in many respects. As a consequence, any contractual or systemic understanding of the thing – to the extent one exists at all – is going to be implied, and seeing as courts haven’t really grappled with foundational questions about what Bitcoin is, we don’t know what that implication will look like. The best we can do for now is guess what the boundaries of that implication, once set down in writing, will be.  We will call this the Classification Problem.

Second, a bitcoin does not really have a physical location, and is a fundamentally global good – it exists on every computer which runs a full node, and is arguably issued everywhere and nowhere at the same time.  But the Classification Problem will be determined by reference to local, not global, rules. We will call this the Forum Problem.

Bitcoin-as-math-problem

The “Forum Problem” is a simple one; Bitcoin has no identifiable origins, no clear home, so each different country/jurisdiction in which litigation over Bitcoin is brought (in the case of the U.S., the states and the various federal jurisdictions) will feel entitled to apply its own rules to the asset. For the majority of commercial arrangements, harmonization can probably be achieved by choice-of-law clauses among the counterparties to the transaction.

The “Classification Problem” is where things get more interesting. Here we ask what rules each jurisdiction would apply if some litigation arose which involved fundamental questions about the nature of ownership as it pertains to Bitcoin the asset. Usually, those fundamental questions are not in dispute in the kind of workaday litigation that comes before the courts. Courts take judicial notice of who owns what bitcoins based on the facts of the case; Alice sold some bitcoins to Bob, there are no competing claims to the bitcoins and the question is whether one of the parties reneged on the high-level commercial terms of the deal.

What hasn’t happened yet, and what invariably will happen as more and more cases  hit the courts, is that someone will ask the question, “what property classification do we apply to Bitcoin – WTF is it that Bob actually owns?” This is because, at its core, a bitcoin is really, in its purest essence, only a solution to a randomly-generated math problem. Because the problem is very hard, the combination of a UTXO plus the ability for a recipient to spend it, armed with the knowledge of the relevant private key, is treated by most of us today as property. That “property” creates a write permission on a massively distributed cryptographic ledger which nobody controls, although control of that write permission can be transferred to other users of that database by spending the associated coins to those other users.

Because the secret embodied by a private key one does not know is very difficult to obtain – and impossible to obtain on a commercial timescale with existing technology – people call Bitcoin a “digital bearer asset.” Bitcoin is most assuredly not a bearer asset or chattel, though. Nor is it a documentary intangible, as it is not a contract and is silent, apart perhaps from the provisions of the MIT Licence, as to what a court should do when presented with one (more on that below). Unlike physical goods which can only exist in one place at one time, it is conceivable that with a powerful enough computer, the solution could be found entirely honestly by a third party simply doing some math and stumbling upon the answer at random, or by asking the right questions and exploiting some as-yet-undiscovered weakness in the implementation.

Screen Shot 2018-11-25 at 10.41.12 AM
For example. Courtesy of Hacker News

Bitcoin might, therefore, be better described as a digital I-know-something-you-don’t-yet-know asset. “Yet,” because the information is not secret (in the same way as a trade secret, e.g.) or impossible to ascertain; it’s out there waiting to be ascertained by someone clever enough, or a computer powerful enough, to figure it out. The term “cryptoasset” that is cavalierly thrown around by your  garden-variety ICO bro inadvertently turns out to be an accurate description for this new class of ownership. Lawyers wishing to confer dignity on the phrase might call it “crypto-property” instead.

If we really wanted to make it our own and de-emphasize the “there’s a lot of cryptography in this thing” aspect of Bitcoin, which is not legally relevant, in favor of an laser-focused emphasis on exclusive knowledge of the secret key as being dispositive for control and highly relevant for ownership, I might suggest the radical step of changing the spelling of the prefix to “krypto,”  per the original Greek κρυπτῷ, so we’re left with krypto-property.”

Contrasting approaches between England and the U.S.

Who owns the solution to that really hard to solve, but solvable nonetheless, math problem? I ask this question, which seems like an obvious or even pedantic one, only because I am fairly certain that the world’s two largest common-law jurisdictions – England and Wales, and the United States – would reach different conclusions.

Now, of course Bitcoin is treated as various things by various agencies of the state – most significantly, as “property,” by both the IRS (American taxman) and HMRC (English taxman). But that doesn’t answer the question of what kind of property the stuff actually is.

In England, for example, longstanding precedent has held that “the right to confidential information is not intangible property;” see Oxford v. Moss, (1979) 68 Cr App Rep 183 (a student cheating on a test by reading the answer sheet in advance could not be convicted of theft, as the answer to the test – as pure information – was not intangible property and therefore incapable of being stolen). This principle nukes the notion that a private key is worth more than the paper that you [really should not] have written it on.

At the same time, English law may have an equity, which looks a lot like a property interest in confidential information that has been misappropriated, that gives a party wronged  (i.e., for our purposes, the person from whom knowledge of a private key was wrongfully obtained) a right to restitution. Anyone looking for the detailed treatment should read the section “Information as Property” at page 1 in Palmer & McKendrick’s Interests in Goods (1998).

I wrote a fairly lengthy analysis on the English law in this area back in the day, which, annoyingly, I have since lost. TL;DR, if an attacker fraudulently obtains a private key, English law provides a a remedy, but if an attacker should stumble upon a key by accident or by brute force, it probably doesn’t. This is unsatisfactory but it’s what we’ve got.

Contrast this with the U.S. position, where the courts have found that property rights can subsist in pure information such as unpublished or recently-published news (INS v. Associated Press, 248 U.S. 215 (1918)) or straightforwardly analogize doctrines such as relativity of title as a hack/workaround (e.g. Popov v. Hayashi, WL 31833731 Ca. Sup. Ct. 2002). Incidentally, a relativity-of-title-theory approach would also solve, for most practical purposes, what the inimitable Izabella Kaminska described as “Bitcoin’s Lien Problem” in 2015; it strikes me that that theory of ownership should be fairly good fit with UTXO-based systems where one can trace title to a given coin perfectly, give notice of theft or fraud efficiently, and prove current “possession” with a high degree of precision. Crucially, it might prevent an attacker – even an accidental one – from getting superior title to the Bitcoin he obtains, as long as the courts or the legislatures decide that’s how they want to crack that nut.

Equally, and another idea I have noodled on, is that Bitcoin’s code is really the first “smart contract” in that the code embodies a binding contractual understanding among the users. However, the fact that the code can be forked by consensus of the users to say anything at any time suggests to me that a court would likely conclude that there was not a clear intention to create a contract by running the code and so might refuse to enforce a particular mode of operation on the users of the network (see e.g. Jones v. Padavatton, [1968] EWCA Civ 4). Incidentally this absence of a contractual understanding/effective ousting of the jurisdiction of the court is why Bitcoin cannot and should not be described as a chose in action.

Wrapping up, the reason that the matter of Bitcoin’s ultimate classification as property hasn’t come up yet is because, in common practice, ownership  disputes are resolved at a higher conceptual level than inquiring about the “nature of a bitcoin itself” – when I deposit coins at an exchange, e.g., it ought to be pretty clear from the exchange’s TOS that if I have a balance on the exchange, I can ask the exchange to spend an amount equal to that balance back to me on request and, if they fail to do so, I can ask a court to force the exchange to render specific performance or pay damages. A dispute of that kind, of which there have been many, doesn’t ask at what point title transferred and what the fundamental nature of that title is, because it doesn’t have to. It looks instead at the contractual obligations between the counterparties and whether those obligations were satisfactorily performed.

One could write chapter and verse comparing these two jurisdictions and their treatment of Bitcoin as an asset. That said, it’s a Friday night and I have places to be, so for now it will have to suffice to say only that the question has no answer and at some point, probably sooner rather than later, there is going to be a case that explores these fundamental issues (I am frankly shocked that Oxford v. Moss hasn’t been raised yet in any of the UK-based Bitcoin fraud prosecutions).

I look forward to reading those decisions.

Postscript

Too good not to share.

14 thoughts on “What do you legally “own” with Bitcoin? A short introduction to krypto-property”

  1. Your analysis sticks mainly to positive law, and since positive law is incoherent and unjust, you will be limited in what you can conclude. Of course bitcoin *can* be owned if a legal system’s positive law says it can, but it’s messy and a kludge. You are right to sense that owning bitcoin means owning information, … but since information can be owned (IP rights) then… maybe it can be.

    In my view information is impossible to actually own and all laws that purport to protect rights in information are incoherent and unjust. That is why patent and copyright should be abolished (I’m a patent attorney) and it’s also why bitcoin can’t be owned–or, shouldn’t. To own copyright to a creative work really means you own others’ bodies or materials; to own a patent on an invention gives you a right to others factories or equipment. Patent and copyright really end up being unconsented to negative servitudes–a taking of property from those subject to the patent or copyright, in favor of the IP rightholder. IP rights give the holder the right to control others’ property. (see my post http://c4sif.org/2011/06/intellectual-property-rights-as-negative-servitudes/ )

    Likewise, owning bitcoin means you have the right to control the hardware of thousands of others running nodes. But you don’t have this right–they own their own computers. Nothing in the Bitcoin scheme requires users to agree to terms of use that force them to rearrange the ledger copy stored on their node to match some previous allocation. If A “steals” B’s bitcoin by somehow guessing B’s key then the transfer is irreversible. There is no theft. For th law to give B a right to get her bitcoin back a court order would have to be issued against all thousands of full notes ordering them to reverse the transaction. That is unjust. They have done nothing wrong, violated no contract–no one has the right to mess with them.
    I’ve seen this before —

    check out http://www.stephankinsella.com/paf-podcast/kol233-mises-uk-bitcoin-ownership/

    which has the folloiwng links:

    Related material:

    KOL191 | The Economy with Albert Lu: Can You Own Bitcoin? (1/3)

    What do you legally “own” with Bitcoin? Posted on November 23, 2018 by prestonbyrne — see my comments
    for more on whether bitcoin is ownable property, see this Facebook thread
    KOL085 | The History, Meaning, and Future of Legal Tender
    KOL086 | RARE Radio interview with Kurt Wallace: The War on Bitcoin
    KOL 043 | Triple-V: Voluntary Virtues Vodcast, with Michael Shanklin: Bitcoin, Legal Reform, Morality of Voting, Rothbard on Copyright
    Tax Plan May Hurt Bitcoin, WSJ
    Swiss Tax Authorities Confirm that Bitcoin is VAT-free in Switzerland
    Tokyo court says bitcoins are not ownable
    FinCEN Rules Commodity-Backed Token Services are Money Transmitters
    Bitcoin Is Officially a Commodity, According to U.S. Regulator;
    Miami Judge Rules Bitcoin Is Not Money; Dismisses Money Laundering, Transmitting Charges
    How to handle bitcoin gains on your taxes
    SEC: US Securities Laws ‘May Apply’ to Token Sales
    Federal Judge Rules Bitcoin Is Real Money
    See other links at KOL191 | The Economy with Albert Lu: Can You Own Bitcoin? (1/3)
    My facebook post discussing ownership of Bitcoin
    Tom Bell: Copyright Erodes Property?
    KOL233 | Mises UK Podcast: Bitcoin Ownership and the Global Withering of the State
    for more on whether bitcoin is ownable property, see this Facebook thread
    KOL085 | The History, Meaning, and Future of Legal Tender
    KOL086 | RARE Radio interview with Kurt Wallace: The War on Bitcoin
    KOL 043 | Triple-V: Voluntary Virtues Vodcast, with Michael Shanklin: Bitcoin, Legal Reform, Morality of Voting, Rothbard on Copyright
    KOL249 | WCN’s Max Hillebrand: Intellectual Property and Who Owns Bitcoin

    Liked by 2 people

    1. So… let me see here: If I “guess” the shape of the key to your house or apartment, and then “guess” at the combo to your safe, and find there is $10,000 in the safe, and I take it and give it to 3000 of your closest neighbors, then by your reasoning, I have literally stolen nothing, and you can’t order any of them to return the money, because they have done nothing wrong, violated no contract, and no one has any right to mess with them. Perfect. but silly and erroneous reasoning….

      Like

      1. It’s only silly if you don’t think information should be treated differently from physical assets. Pure information as found in nature, such as the answer to a math problem, has traditionally been held to not constitute a thing in which a property interest can subsist; otherwise, 2+2 =4 should be something which might be copyrighted, as the solution can be reached by anyone.

        Contrast this with, e.g., a house or a chattel, such as the contents of a safe, which can only be exclusively possessed by one person at a time. The question is, where do we draw the line between 2+2 = 4 and a private key?

        Like

  2. As far as I can reason about it, Bitcoin is not private property.
    Pasting below: https://raw.githubusercontent.com/swfsql/btc-opinions/eng/src.md

    # Bitcoin is not private property
    _v. 0.1c_

    ## Not a physical scarce mean

    ### Finite Game

    A _Finite Game_ is a competition that must end, such as: two players must alternately speak a valid word, incrementing the player’s score. An invalid word increases the opponent’s score and ends the game. A word is valid if it’s unique, starts with a certain letter, exists in a certain dictionary and if is said within a certain time period.

    Note that _thinking_ first in a word does not relate it to the ownership of any player. Not even _writing it down_ on a sheet of paper changes that. If the player A drops a sheet of paper with some valid words written on and then player B takes a glance at it, Player B is free to use them. Player A cant claim he has a right to the use of force because words are not scarce physical means despite the set of all the valid words being finite.

    An element of a finite set of symbolic strings _can’t be_ a private property. I refer to symbol as an abstract form that _ought to be_ _interpreted_ in order to have any meaning.

    Comment
    (Note that the interpretation is a prerequisite for ALL (human) argument AND (human) action:.. Maybe explore that)

    Comment
    (some feedback points out the definition difference between a finite set and a scarse physical mean.. Maybe explore that)

    ### Mental Bitcoin

    A _Mental Bitcoin_ is defined as the following: a population can maintain a Bitcoin system using only their own bodies and minds. Participants only _remember_ the past and the incremental blockchain data; calculations, checks and execution protocols are _done inside the mind_; data transmission is transmitted by the _spech_ (or scream). This is theoretically possible if the population had a great memory, a lot of cognitive intelligence and powerful throats.

    Comment
    (some feedback points out that mind thinking and calculations exist in the physical world, otherwise we are talking about religion.. Maybe explore that)

    We can change the Mental Bitcoin in order to make it more practical for their users: Let them use papers to _annotate the blockchain_, use calculators to _facilitate the arithmethics oprations_ and do phone calls to _increase the communication’s reach_. With the introduction of computers, let the blockchain be saved on the hard drives, the calculations, checks and the implementation of the protocols be left for the processing units and to carry out the communication via the Internet. We get the standard Bitcoin, despite being initially referring to the Mental one. Thus, both Bitcoins are equivalent in essence, although the tools used to keep it running are more (or less) appropriate or practical.

    ## Not contractual

    ### Informal Network

    In the Mental Bitcoin the network is formed informally by individuals who decided to, but without giving any guarantee of, “participate” on it. Since the blockchain, private keys and transaction messages are strings of symbols, they aren’t free of absolute and arbitrary changes by each participant. Each one is absolutely free to forget and ignore everything, such as transaction messages (and other messages under the protocol) that happens around. Also, the individual’s _interference_ to the network is _null_ if the other participants decide to ignore or deny the information communicated from him/her.

    So each individual should decide to ignore (or not) the _non propositional_ information transmitted. If one decides to not ignore, then they must decide to arbitrarily change or not their memory of the blockchain, according to their arbitrary interpretation of it and of the message. Remember that if this individual is not intended to be ignored in the future by other participants in the Bitcoin network, then they probably will _decide_ to interpret the blockchain and information communicated in a _certain_ way.

    Comment
    (This type of relationship between the individual and the network is equivalent to a mental game where participation is informal, entry and exit is free and one who does not obey certain rules can be ignored by other participants.)

    Like

    1. In other words,

      Bitcoin in essence is not digital. If we could remember as good as hard-drivers, calculate as fast and consistently as CPUs, and perhaps communicate as efficiently as bits travel over the internet, Bitcoin would run in our minds only. And it would run for real.

      Therefore, the only actually physical attachment it must have is ourselves, our minds, and (any) communication channels.

      Bitcoin being mental before digital (I see digitization as just making it more practical), we surround the “owning question”: do we own other peoples bodys or minds? Nope, we don’t.

      So Bitcoin is not, even remotely, private property.

      Like

  3. Dudley: “So… let me see here: If I “guess” the shape of the key to your house or apartment, and then “guess” at the combo to your safe, and find there is $10,000 in the safe, and I take it and give it to 3000 of your closest neighbors, then by your reasoning, I have literally stolen nothing”

    Wrong — to go into my safe or my house is trespass. Even if I leave my door unlocked and the $10k on the table in the kitchen, and you come in and take it, you’ve committed theft, because (a) you used my property without my permission, the trespass, and (b) the money is also physical and owned by me, so you stole it.

    This is why people erroneously support IP rights–because they fallaciously make analogies between information and scarce, physical resourcds. Thus, they call copying information “stealing” even though it’s not, etc.

    Like

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