Many people trade in and invest using cryptocurrencies (like BitCoin), and one of the most fundamental questions underpinning those transactions is what cryptocurrencies actually are from a legal perspective.
The answer to this question has significant ramifications for all those owning or dealing with cryptocurrencies, and for a number of reasons ranging from security and fraud prevention to wealth management and tax (and much more).
This question of what they are from a legal perspective was considered this year by the High Court in the case of Liam David Robertson v Persons Unknown.
Firstly, we should note that cryptocurrencies are not strictly speaking a ‘currency’, nor are they intellectual property rights and they don't even fit into the definition of ‘personal property’. In fact, bizarrely, cryptocurrencies don't really seem to neatly fit into any category of asset or property whatsoever. That makes them tricky and, to a large extent, dangerous as an investment; without knowing how they might be treated, you have much less certainty about your rights if things go wrong.
And things can go spectacularly wrong, as Mr Liam Robertson, the CEO of the Alphabit Fund (which trades and invests in cryptocurrencies), found out.
Mr Robertson was the victim of a ‘spear phishing’ attack, where an unknown fraudster hacked an email account and encouraged Mr Robertson to transfer 100 BitCoin (worth £1.2m) to what he thought was a company in which he was investing. The ‘digital wallet’ (essentially a platform where access to a cryptocurrency is stored and hosted by a server managed by a third party) to which he transferred the BitCoin was, however, a digital wallet belonging to the fraudster.
Once Mr Robertson found out, he soon realised the trouble he was in: there’s no way to reverse or undo a cryptocurrency transaction. Even worse, the seemingly attractive anonymity that cryptocurrencies and blockchain offer (and which many investors find desirable) now worked against him, because he had no easy way of finding out who had taken the funds or whether the BitCoin that remained in that digital wallet had been transferred elsewhere or even cashed out in its entirety (and thereby become almost untraceable).
All Mr Robertson could establish was that the fraudster’s digital wallet was held by the UK arm of one of the world’s largest cryptocurrency exchanges (Coinbase). With this limited information, Mr Robertson sought to obtain an asset preservation order at court, with the hope that the court could assist in locating the fraudster’s identity and freeze the stolen BitCoin.
In considering that application, the Court had to consider what cryptocurrencies actually are. Cryptocurrencies are not like money in a bank account, where there is a debtor and creditor, as they do not create an enforceable right against anyone. To that end, they are more like a bank note or a coin, but an intangible version existing only in code and data. Code and data however have, generally speaking, not been regarded at law as being ‘property’ per se.
The Court held that there was a matter to be tried as regards Mr Robertson’s rights to the BitCoin as his property, and therefore granted the asset preservation order. In making this decision the Court suggested that cryptocurrencies are perhaps best thought of as an intangible collectors’ item, rather than currency, data, information or intellectual property, and therefore that they are best considered “personal property”.
What does this mean and why does it matter?
The decision is likely to be good news for those interested in investing or trading in, or dealing with, cryptocurrencies, as the rights one has over personal property are usually sturdier and more favourable to the owner, should things go wrong.
It also has other potentially far reaching consequences. To name a few, it will affect how Bit Coin is taxed, how it’s treated under contracts, how ownership is transferred, how they can be used as security, how it’s dealt with on liquidation or bankruptcy and so on. Another interesting aspect of this case was that the Judge ordered Coinbase (the exchange mentioned above) to identify the fraudulent owner of the digital wallet that received Mr Robertson’s misappropriated BitCoin. Bottom line: in the future cryptocurrencies might not be quite so anonymous as previously thought.
Watch this space
It is critical to note that this is not the final word. The decision was not given after a trial, but at the return date of an interim application. This means that the decision may be less persuasive as a legal ‘precedent’. Nevertheless, it is a step in a direction towards deciding what cryptocurrencies may be under English law, and is a sign of how the Courts are likely to treat cryptocurrencies going forward.
There are still lots of questions to be resolved around cryptocurrencies and it is likely that there will be a lot of development over the coming years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.