Cryptocurrency crime is on the rise. Earlier this year hackers “stole” $40m in bitcoin from one of the largest cryptocurrency exchanges in the world, Binance.
And it was reported by cybersecurity firm CipherTrace that in 2018 cryptocurrency crime and investor scams rose by more than 400 percent with about $1.7billion in losses.
But you can only “steal” bitcoin and other cryptoassets if they are defined as property. If they are merely data stored in a distributed ledger, as some have argued, then they cannot be property.
So if the courts were to decide bitcoin and other cryptoassets were not property this would have huge ramifications. They couldn’t be owned either – so what would happen on the death (or bankruptcy) of the “owner”? Nor could they be used as collateral or any form of security or held on trust.
A related area is “smart contracts” – contracts automatically performed by a computer and written in computer code. Such contracts often work alongside cryptoassets and are implemented using similar technology. Smart contracts can be used to transfer money, shares, and property, for example.
If smart contracts couldn’t be enforced in the courts that would also be catastrophic – the growth of online commerce would be impeded and trust in this burgeoning area would be fatally damaged. Some have argued such contracts are just computer programs and not contracts, for example.
These two questions – can cryptoassets be defined as property and are smart contracts true contracts enforceable by the courts – are questions the English courts haven’t yet definitively answered. And they may not for some time, not until cases work through the system that address these two fundamental questions in detail.
Some countries have enacted laws in these areas to clarify the position and give legal certainty. But nothing is currently proposed in the UK. Are we in danger of being left behind? And should businesses and individuals using cryptoassets and smart contracts be worried?
The answer from distinguished lawyers, including a leading judge, the Chancellor of the High Court Sir Geoffrey Vos, who have recently been looking into this area is a resounding no.
On 18 November 2019 the UK Jurisdiction Taskforce, Chaired by Sir Geoffrey Vos, announced to a crowded hall of lawyers, computer scientists and business people in the City of London that cryptoassets should be treated in principle by the courts as property and that in principle a smart contract can be identified, interpreted and enforced by the courts using ordinary and well-established legal principles.
The 38-page report (56 pages including notes and appendices) presented at the meeting is unusually short and succinct for a detailed piece of legal analysis. It is intended to inform and give comfort to businesspeople and policy makers and not just be read by lawyers.
It also provides encouragement to businesses and individuals using cryptoassets and smart contracts to use the law of England and Wales, and the English and Welsh courts. As the report notes, English law is well able to deal with technological developments and has an impressive track record of doing so.
Having said that, whether English law applies to the matter at hand may not always be an easy question to answer. Those involved may choose for it to apply (so they have legal certainty) or the courts may hold it does because there is a close connection to England & Wales.
The Legal Statement inevitably leaves many questions unanswered which were outside its remit – this it leaves to other organisations including the Financial Conduct Authority (FCA), the Information Commissioner’s Office (ICO), and HM Revenue and Customs (HMRC) for example.
Such questions include:
- Are cryptoassets “money” and how should they be regulated?
- What is the tax treatment of cryptoassets?
- If a smart contract processes personal data who is liable and can data protection law be complied with if the data is held in a ledger that cannot be altered/erased?
We can expect continuing guidance from the FCA, ICO and HMRC on these areas which businesses operating in this space will need to be familiar with. It is also possible the Legal Statement may encourage new legislation, but this remains unclear.
But there is no doubt the Legal Statement is to be welcomed. It ought to encourage business and investor confidence in this fast-moving and fast-growing field. And it dispels some of the myths that have sprung up that the law has no application or any place here; that the code is the law. That simply isn’t true.
English law based on the common law made by judges (rather than just legislation) has adapted to electronic signatures and ecommerce transactions in the last thirty years and there is no reason to suppose its flexibility won’t continue to apply in the world of cryptoassets and smart contracts.
Such ground-breaking and innovative technologies and products don’t operate in a legal vacuum. Those involved in transactions involving cryptoassets and smart contracts still need to be mindful of the law. But the Legal Statement also means they can take comfort that English law (at least) is unlikely to leave them high and dry if things go wrong – although as lawyers always say (as indeed the Legal Statement also states) it does all depend on the facts.