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.


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.

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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 a 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.


The FCA/Cryptoassets Task Force Report: mostly boring

So the FCA’s Cryptoassets Task Force Report is out today. Compared to the last time the FCA chimed in on crypto, there are few surprises/not a lot to write home about.

For this reason, rather than writing a blog post, I have decided to go all “Web 2.0” on everyone by writing a Twitter thread instead.

Highlights include:



Bitcoin is as efficient as a lame hippopotamus with a hangover

I will preface this post by saying to Pierre Rochard, Nic Carter, and @Bitstein that they should withhold judgment on it until reading through to the very end.

I was perusing Twitter on my way home from Washington, D.C. this evening when I noticed that someone was wrong on the Internet. 

Jake is a litigator with the very well-respected disputes firm Kobre & Kim, which (in my several interactions with Kobre & Kim lawyers over the years) also knows the cryptocurrency business extremely well. So let me preface this blog post by saying that I throw absolutely no shade at Jake, whose professional opinion I greatly respect, and that on this question reasonable people can disagree.

Jake’s view is informed by a pervasive meme in the cryptocurrency world – chiefly  that Bitcoin, despite being expensive in the extreme to operate and secure, with such expense taking the form of expenditure on electricity to “mine” Bitcoins through proof-of-work, is in the final analysis more efficient than “fiat-based” systems.

In the view of some, fiat money requires a massive military and bureaucratic apparatus to secure and administer:

A recent Medium post by Dan Held attempted to quantify “[proof of work]’s costs relative to existing governance systems” by way of a “rough comparison to the existing financial, military, and political systems.”

Or, as put by Jake,

I think this reasoning is fallacious.

This is not really an ideological point but rather a point concerning the analytical methods we should use when asking questions about the efficiency, security and censorship tradeoffs of distributed cryptosystems and what the appropriate meatspace or centralized comparators are for the purposes of that analysis.

Bitcoin’s best comparator, in my view, is existing bank infrastructure. And not all existing bank infrastructure, but rather existing bank infrastructure which mediates either (a) equivalent notional value to Bitcoin or (b) equivalent transactional throughput to Bitcoin.

In terms of notional value, a good jumping-off point would be the Federal Reserve System. In 2016, the Fed possessed a balance sheet of $5 trillion and managed it on a budget of $4 billion. Most of those expenses were not directly related to its balance sheet but rather were labor costs associated with the Fed’s bank supervision function. The costs of electricity, as far as I can tell, were negligible.

Bitcoin, by contrast is worth $100 billion, depending on the time of day, yet costs $3.5/4 billion of electricity alone to mine/secure in a given year.

Comparing these two systems, as they currently stand, is like comparing apples and oranges. Bitcoin is, on many measures, a loser in efficiency and performance terms. Bitcoin cannot, as yet, be the world’s money; it processes no more than 7 transactions per second. It maybe does as much transactional throughput as one might attribute to a single Bank of America branch in a large city.

Dan’s response to this point was to point to a chart in his blog post:

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On this basis, we are told, Bitcoin is more efficient than gold mining/recycling, paper currency, banking as a whole and governments as a whole because Bitcoin costs less than these other systems.

I find such an argument disingenuous, if for no other reason than the fact that Bitcoin does not perform the functions of gold, paper currency, the banking system, or governments. While it sort of operates on a similar theme (setting down rules that govern human conduct combined with a store of value), suggesting that it is comparable as a consequence of occupying a similar conceptual space would be like if I, after deciding that I wanted to compete with Elon Musk in the orbital lift business, began experimenting with moving a watermelon with a Radio Flyer wagon in my garage and, after carefully towing the wagon back and forth across the concrete floor a few times, plugged some figures into Excel and exclaimed, “UREKA! This uses less energy than a SpaceX Falcon 9!”

That statement would, of course, be a true statement. It would not, however, be an especially helpful one if the end-goal of a nascent transportation entrepreneur was to try to devise a more efficient low-orbit heavy lift system. The new data point would be of no use because where we compare a wagon to a rocket, although these are each means of transportation, they are nonetheless very much NOT ALIKE. When the not-alikeness of two things is of a substantial enough degree, comparison does not provide clarity but rather it obfuscates. Where we try to avoid comparing apples and oranges, we must also be careful to avoid comparing apples and Tyrannosaurs.

No offense to Dan, but the chart in his blog post is just plain silly. The chart compares apples with Tyrannosaurs.

Gold, for example, is not used uniformly as a medium of exchange; indeed, not once in my life have I used gold to buy or sell anything, and the only gold I own is a crucifix that I occasionally wear around my neck. Being metal (and an excellent conductor), it is used for a range of processes in manufacturing ranging from jewellery (British spelling) to electronics.

Governments, similarly, are not primarily concerned with providing me with an online P2P payment platform. To the contrary, every government I have ever had the pleasure of dealing with has dealt with enforcing complex bodies of law and policy, including harmonization of transportation and communication standards, social welfare, public and consumer safety, spaceflight, and providing physical security from the nation’s enemies – no small task, and in any case one which does not consume electricity as much as it consumes labor.

When it comes to banks, Bitcoin does not replace those functions, either. Banks provide savings services on commercially very beneficial terms. Sure, I don’t get a lot of interest on a bank account, but my deposit is guaranteed up to a certain amount by the state, I am not liable for fraud, and there are other services – including insurance and loans – which banks offer which Bitcoin does not provide.

The closest comparison is “paper currency and minting.” Here, the Bitcoiners may have a point, but to the extent that they do it requires substantial qualification. Bitcoin in terms of its function may be best compared to the Fed – in a wacky, automatic combination of the Fed’s seignorage function and Fedwire – or the UK’s Faster Payments.

The Federal Reserve System’s opex was, in very broad strokes, dealt with above. As I mentioned, it is likely that Fedwire is a fraction of the operating costs of the Federal Reserve System as a whole. Even if we’re giving BTC the benefit of the doubt, the Federal Reserve System is still, dollar per dollar, about 1,000x as efficient as BTC, costing roughly $1 of expenditure for every $1,000 of notional ($4 billion in operating costs vs $4.5 trillion in assets), rather than $1 of mining for every $25 of notional ($4 billion / $100 billion market cap).

The UK’s Faster Payments system, operated by Vocalink, illustrates the other end of that equation; except, rather than assets, Vocalink more or less blows away any other payment services provider on the planet in terms of performance. It would not be much of an exaggeration to say that nearly every payment in the UK runs through Vocalink. Its revenue per year is £195 million. Even assuming £0 profit, that system runs an entire country’s retail banking transactions – and it does so today at 1/20th the annual cost of mining the Bitcoin network, which (maxing out at 7 TPS) might be able to compete with a single branch of a high street bank in London’s West End.

What to do when presented with Bitcoin, then? Well, I think we can give Bitcoin some credit for being sui generis (that’s lawyer-speak for “unique, with emphasis”). This recognition includes acknowledging Bitcoin’s potential as an alternative to centrally issued, or “fiat,” monies such as those used by the United States.

What we shouldn’t do is get sloppy when we think about Bitcoin. That includes not comparing the cost of operating Bitcoin to bloated strawmen such as, e.g., the total cost of world government, which, while more expensive than Bitcoin, also provide far more by way of services than Bitcoin does (of which the issuance of money is merely one). On a similar vein, we shouldn’t overstate Bitcoin’s abilities. We should ensure that when we compare it we compare it to systems with similar throughput, such as a prepaid web app like PayPal, rather than projecting hopes and dreams into the analysis.

Above all, it also means that we really shouldn’t make the amateurish mistake of making claims for Bitcoin that are unfalsifiable. This includes thinking along the lines that because “fiat money has no worth beyond the military power required to ‘back’ it” this means that the cost of fiat money is equal to the cost of the military apparatus. One could just as easily argue that it is the military apparatus which makes the fiat worth buying, and the continuing value of the currency is a dividend of power, rather than a reflection of the expenditures incurred to obtain power. This is not something which, as yet, we can empirically test.

Finally, it’s just generally a good idea to keep expectations low, that way people will never be disappointed in what they receive.

With that in mind, I say gladly: today, Bitcoin is as efficient as a lame hippopotamus with a hangover. And that’s totally cool. Projects like Lightning promise to increase its performance. Brilliant people the world over are working on scalability proposals to help make Bitcoin more useful to everyday people. I know many of the people working on those proposals and respect them and their work. I look forward to seeing what they build.

With time and effort, Bitcoin might one day become as efficient as a creature far sleeker than aforementioned hung-over hippo, such as, e.g., a Class 4 Battle Marmot equipped with 2,000 megajoule ion thrusters. But today is not that day and continued reliance on proof of work, which consumes more energy as Bitcoin’s price rises, will not help to bring that day about.

Bitcoin with POW is already vastly more expensive than existing systems which, being proper points for comparison with Bitcoin, perform substantially the same function as Bitcoin. If efficiency is the objective, Bitcoin’s basic operating assumptions – including whether to use POW to determine consensus on each block – will need to be revised. If efficiency is not the objective but, say, censorship resistance is, then let us continue as we have before. But let’s not delude ourselves about the costs.


A good point:

The Cryptopocalypse

Recorded last week, out this morning.

“Cryptopocalypse.” Quite timely title for it, too:

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Listen to the whole thing.