France: Blockchain And Intermediated Securities

Last Updated: 12 April 2018
Article by Hubert de Vauplane

Most Popular Article in France, April 2018

Blockchain technology leads us to question the notions of possession and ownership. To what extent can information stored in a blockchain be considered a property right? Due to the global and distributed nature of the blockchain, how can conflict of laws issues be addressed? These issues can be illustrated in the context of intermediated securities law.

1. Introduction

Since its appearance a few years ago, the blockchain has been the subject of many legal studies.1 Indeed, its technology raises particular legal questions. From the issues raised by smart contracts, to the protection of personal data, the blockchain has disrupted the traditional legal order by raising classic questions, but from a new angle. New because the characteristics of the blockchain force us to rethink the conventional legal order.

2. A brief overview of the blockchain

The blockchain is an open source protocol, with two characteristics. First, it is decentralised (it is intended to enable communication between machines without using a central machine). Second, it is consistent. This means that instead of having to consolidate information at a single point, which would be the central authority, all the information is available at each node of the network.2 There is no more need for a central 'general ledger' to validate all the information. For example, in the case of bitcoin, all transactions are recorded after having been confirmed in each node of the network. It is therefore no longer necessary to have a central authority to ensure that there has been no fraud or double spending (i.e. use of the same bitcoin for two separate transactions). It is sufficient to check the consistency with all transactions or with the previous node of the network. There are parallels between the Internet (TCP-IP) and the blockchain since they are both protocols allowing the creation of a decentralised infrastructure. Nevertheless, while the Internet transfers data packets from point A to point B, the blockchain allows 'trust' to be established between separate parties. In other words, with the blockchain, the 'trusted third party' becomes the system itself.

The blockchain technology emerged to solve a computer science problem, i.e. how to establish trust between two strangers who are members of the same network. This problem, known as the 'Byzantine generals' problem, consists of ensuring that a set of computer components work together to handle failures or malicious acts. The system must be able to maintain its reliability in the event that a minority of the components send erroneous or malicious information to circumvent the verification of double spending (fraud). To solve this problem, the protocol uses a cryptographic system based on a decentralised system of proof. Here, the proof of work requires a high computational capacity, provided by 'miners'. Miners are agents whose function is to supply the network with computing power, and to allow the updating of the decentralised database (list of transactions in the case of bitcoin). To update the database, miners must be able to confirm the new 'blocks' by decrypting the data (classic cryptography work). The more miners there are, the more difficult it is to assign the proof of work. Thus, the protocol can become virtually inviolable since the competition is strong at each node of the network, i.e. no group of miners becomes the majority.

To not be falsifiable, a blockchain3 requires that no operator holds, at any time, more than half the computational power of the chain.

A blockchain is said to be public when everyone can read it and use it to perform transactions. It is also public when everyone can participate in the consensus-creating process. The most successful example of the public chain is Bitcoin. The governance of public chains, resulting from the open source movement and cypherpunk, is simple: 'Code is Law'.4 In this system, it is up to the nodes of the network to validate the choices debated and initiated by the developers by deciding to integrate or not the proposed changes. Its operation is based on 'cryptoeconomics', the combination of economic incentives and verification mechanisms using cryptography.

On the other hand, a blockchain is said to be private (or semi-private) when the consensus process can only be performed by a limited and predefined number of participants. Here, write access is issued by an organisation whereas read permissions may be public or restricted. The 'marketplace blockchains' between bankers or insurers are examples of private chains. In this case, the consensus process is controlled by a preselected set of nodes. Access to this blockchain may be public or limited to participants according to a process of co-optation.

The blockchain technology raises a series of classic legal questions whose analysis can be affected by its main characteristic, its operation in the form of a distributed network.

In the present article, I will only examine some aspects of securities law.

3. Ownership in the blockchain

If we take the case of the right of ownership, the question posed by the blockchain is to consider whether it is only a piece of evidence of a legal act or fact, or if it constitutes the legal act or fact itself. However, in many legal systems, the concept of ownership is closely linked to that of possession.5 According to Ihering,6 'Possession is the objective realization of ownership'. It is the external realization of ownership. The owner is also the possessor of the asset, i.e. the good, or the right. Ownership is most often described by law as materialising a direct legal relationship between a good (a right) and a subject of law, while possession reflects a factual relationship between these same entities. In civil law systems, ownership is acquired in particular by possession, and possession proves ownership. In both cases, the regimes differ depending on whether it is moveable or immoveable property. Possession and ownership differ in their mode of acquisition. The transfer of possession is comparatively easier and less technical but the transfer of ownership in most cases involves a technical process of convincing. Possession is the exercise of de facto control over a good, regardless of whether or not this de facto control corresponds to a right. I possess such good because I hold it, because it is in my custody, I can physically touch it.

We can see the limits of this classic approach when it comes to the blockchain. First, it raises the question of whether the elements recorded in the blockchain constitute real rights or personal rights. Second, the approach is limited to the extent that its operating principle is based on a shared system of records. Regarding the question of the characterisation of the nature of the rights in the blockchain, at first glance, it seems difficult to see a real right (right in rem), i.e. a right jus in re insofar as the elements recorded in the blockchain are not physical goods but sequences of letters and numbers in the form of codes. However, these codes are both registered in a public key between the various stakeholders and in a private key, which is physical and held by only one person. As for the question of the functioning of the blockchain, the specificity is due to the fact that there is not a single register, but a multitude of registers shared between the actors. Therefore, the right, or the proof of the right, does not lie in a register but in all registers at the same time.

Here again, it is necessary to distinguish according to the role that one assigns to the 'distributed ledger', i.e. the multitude of registers. Although it is merely one piece of evidence of ownership, it differs from traditional registers by the fact that it is distributed, i.e. there are a multitude of registers all having the same 'probative value'. If these registers do not formalise ownership of a good or a right, but constitute ownership in themselves – in other words if the property right can only be exercised through the recording of the information in the blockchain – then a question arises of the relationship between this ownership and the possession. The good (or right), which is the subject of this ownership, is 'divided' over several registers. In fact, this first analysis should go a little further to see that in the blockchain, what is 'shared' is the public key; only this can be shared between several registers. However, the possession of a good (or a right) registered in the blockchain requires the combination of the public key and of a private key.7 However, the private key remains in the possession of its holder, and is not distributed (or shared) between several blocks. This private key is a random number of 256 bits (32 bytes). There are 2 to the power of 256 possibilities of different private keys, i.e. 1.16 X 10 to the power of 77.


1 The literature is wide and below is just a selection of it: T.I. Kiviat, 'Beyond bitcoin: issues in regulating blockchain transactions', Duke Law Journal (65) 2015, p. 570; P. Oudin, 'Decoding Blockchain Legal Is- sues – A Financial Law Perspective', November 2017, available at; M. Sherlook, 'Digital Securities', Review of Banking & Financial Law (35) 2015-2016, p. 586; A.W. & P. de Filippi, 'Decentralized blockchain and the rise of Lex cryptographia', 10 March 2015, available at; H. de Vaupane, 'La blockchain defiera-t-elle la règle?', Revue de droit bancaire et financier Nov.-Dec. 2016, p. 110.

2 Each block in the chain contains the hash of the previous chain with the exception of the fi rst block, also known as the genesis block (a hash is a mathematical operation that makes it possible to calculate a 'control' value from an original piece of data (fi le, string of characters, etc.), and the slightest change in this original piece of data will give a different hash). This ensures that the blocks follow each other in a chronological order. Indeed, it is impossible to generate the hash of block n without knowing the hash of block n-1. It is impossible to modify a previous block because this would affect all the following blocks. The mining activity consists in searching for a block n+1 in relation to the last block of the longest existing chain.

3 Using a proof of work consensus method.

4 L. Lessig, 'Code is Law', Harvard Magazine, January 2000, available at

5 J.W. Salmond, Jurisprudence, 10th edn., London: Sweet & Maxwell 1947, p. 287; F. Pollock and R.S. Wright, Possession in the Common Law, Oxford: Clarendon Press 1888.

6 J.M. Lightwood, A Treatise on Possession of Land, London: Stevens and sons 1894.

7 A. Mizrahi, 'A blockchain-based property ownership recording system', available at

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