Thursday, 23 February 2017

"Who Owns Blockchains? An English Legal Analysis"

The above phrase is the title of the note at http://sclbc.zehuti.co.uk/site.aspx?i=ed47875. I guess what the authors meant was who owns "bitcoins" while they also rightly point out relevance to other blockchain-based assets. It is nice to see this and other writings appearing in the course of last year which deal with the issues I have been discussing in this blog since 2015. 
The note acknowledges that questions of choice of law could arise (See my previous post), it only examines English law. It does not diminish the value of the note in view of the preeminence of English law in the practice of international commercial transactions. Any global standard which might emerge in the future might indeed mirror the framework of English law.
What should attract the attention of civil law lawyers is the meaning of "ownership." The note explains that English law recognises that there can be multiple individuals each entitled to assert 'ownership' rights to the same property. The note further casts doubt on the availability of a proprietary restitutionary claim, a cause of action which seems to come closest to rei vindicatio in the civil law legal systems.
Like my previous post, the note draws an inspiration from the legal treatment of emissions credits. It observes similarity with Bitcoin but is careful to point out an important difference: a Bitcoin is mere information and does not come with a bundle of rights conferred by statute.
The note finds that an unjust enrichment claim is the most promising approach in English law to the recovery of a misappropriated bitcoin. Among the "property-like" remedies, however, the note observes that a claim for knowing receipt founded by a constructive trust is the most promising avenue. As my previous post has pointed out (at page 4 of the slide), this remedy constitutes an alternative avenue for recovery in some legal systems; it can indeed be the most potent one as in English law.

Tuesday, 17 January 2017

Security interests in cryptocurrency-related assets

Any asset having market value will generate demand for use as a collateral. 
It would be possible to create security interests in a receivable which is denominated in a cryptocurrency in the same way as a receivable denominated in a fiat currency. 
The UNCITRAL Model Law on Secured Transactions (2016) sets forth a special set of rules for bank deposits (Article 25 on effectiveness against third parties and Article 47 on priority). Are they also applicable to a receivable denominated in a cryptocurrency? If the words “authorized deposit taking institution” as contained in Article 2(c) of the Model Law which defines the term “bank account” are interpreted as a generic expression covering any institution authorized to receive deposits, a company which is authorized to provide an online wallet service for the Bitcoin would be an “authorized deposit taking institution.” This interpretation, if adopted, would attract the application of the rules of the Model Law for bank deposits.
Then, would it be possible to create security interests in the units of cryptocurrency? This question concerns cryptocurrency units themselves rather than a receivable denominated in a cryptocurrency. Under the Model Law, any type of movable asset may be encumbered by a security asset (Article 8(a)) and the words “movable asset” is defined broadly as a tangible or intangible asset, other than immovable property (Article 2(u)). So the Model Law seems applicable to cryptocurrency units. 
There are, however, questions of interpretation as to how its rules are to be applied. Thus, a security right in cryptocurrency units would be effective against third parties under Article 18(2) where the secured creditor holds them at his address if it is possible to interpret the possession of a private key as being equivalent to the possession of a tangible asset.
Under the Model Law, the word “money” is defined as currency authorized as legal tender by a State (Article 2(t)). A cryptocurrency would be capable of meeting this definition if any State authorized it as its legal tender. However, money is supposed to be a tangible asset under the Model Law (See Article 2(ll)). Consequently, the special rules for preserving negotiability of money contained in the Model Law (Article 48 on priority) are not applicable to cryptocurrencies. Should it be thought that cryptocurrencies ought to benefit from the same rules, amendments would be needed.
Finally, the Model Law recognizes that the enacting State may specify certain types of asset as being subject to specialized secured transactions under other law (Article 1 (3)(e)) but it recommends such exceptional regimes to be limited (footnote 3).

Monday, 28 November 2016

Ownership dispute in the aftermath of the bankruptcy of Mt.Gox

Attached here is the powerpoint file I used in my presentation at the Cyberspace 2016 conference on 26 Nov. 2016.
I examined the Tokyo District Court's decision in a suit filed after the opening of Mt.Gox's bankruptcy proceedings. The suit was filed outside the bankruptcy proceedings to obtain a full recovery of the bitcoins of which the claimant had a contractual right to return from the bankrupt exchange. To do that, he sought rei vindicatio of the bitcoins over which he asserted ownership rather than making a contractual claim to join other creditors in the bankruptcy proceedings.
I considered three questions noted at p. 4 of the slides. On the first question, the Court relied on the Japanese law concept of "shoyuken" to deny that bitcoins could be an object of ownership. But if we leave aside the technicality of the Japanese law concept and understand the concept of ownership more broadly to mean a right to monopolize the exploitation of objects, it may be possible to say that bitcoins are fit to be an object of ownership. This would open the possibility of rei vindicatio, if other prerequisites are satisfied. The other two questions I considered relate to those other prerequisites. In most of the cases, a customer of a bitcoin exchange would have difficulties meeting those other prerequisites but the possibility of a successful claim is not foreclosed in all cases.

Tuesday, 20 September 2016

Blockchain Technology and Electronic Bills of Lading

My article "Blockchain Technology and Electronic Bills of Lading" has come out from the Journal of International Maritime Law ((2016) 22 JIML 202-211). The full text is here.

Thursday, 3 March 2016

Blockchain Technology and Electronic Transferable Records

Here is the powerpoint file for my presentation at the seminar "Electronisation of Transferable Documents or Instruments Used in International Trade" (10-11 March 2016) in Singapore (organised by UNCITRAL, Attorney-General’s Chambers of Singapore and the Association of Banks in Singapore (ABS)).

Monday, 21 December 2015

Blockchain-based electronic transferable record's functional equivalence to endorsement of paper-based transferable documents

A chain of transactions of an electronic record on a blockchain looks like a chain of endorsements on a paper-based transferable document except that the transactions are anonymous. Despite the anonymity, the blockchain technology ensures a far greater security than bearer documents. I think, therefore, that the law should be crafted in such a way as to allow documents made to order (such as order bills of lading) as well as bearer documents (such as bearer bills of lading) to be replaced by blockchain-based electronic records.
From that point of view, this post will examine the draft text of the UNCITRAL Model Law on Electronic Transferable Records. I have noted in my earlier post that the work on the Model Law should be pursued with the blockchain technology in mind so as to facilitate its applications to replace paper-based transferable documents. As of the time of writing, the most recent official documents containing a draft text are A/CN.9/WG.IV/WP.135 and A/CN.9/WG.IV/WP.135/Add.1, both dated August 2015. The draft provisions quoted below are taken from them.

Draft article 19. Endorsement
Where the law requires or permits the endorsement in any form of a paper-based transferable document or instrument, that requirement is met with respect to an electronic transferable record if information [relating to the endorsement] [constituting endorsement] [indicating the intention to endorse] is [logically associated or otherwise linked to] [included in] that electronic
transferable record and that information is compliant with the requirements set forth in articles 8 and 9.

While an electronic record on a registry may include information constituting endorsement, in the case of an electronic record on a blockchain, it is the blockchain (or, to be more precise, a chain of transactions contained therein) rather than the record itself which indicates intentions of endorsement. Accordingly, the expressions "indicating the intention to endorse" and "logically associated with" seem better cater for the blockchain technology. The words “logically associated” was indeed retained "to provide for all possible instances and methods for the incorporation of an endorsement in an electronic transferable record." (A/CN.9/828, para. 80).
A more difficult question relates to compliance with the requirement set forth in Article 9.

Draft article 9. Signature
Where the law requires a signature of a person, that requirement is met [with respect to] [in relation to] [by] an electronic transferable record if:
(a) A method is used to identify that person and to indicate that person’s intention in respect of the information contained in the electronic record; and
(b) The method used is either ...

This provision will not pose problem with respect to a blockchain-based electronic record to the extent it applies to signatures to be included in the record itself, e.g. a "for the master" signature on a bill of lading. 
It is also intended, as indicated by Draft Article 19, to cover signatures for endorsements. It would be natural to impose a signature requirement to ensure functional equivalence to endorsement, especially if we envisage a registry-based electronic transferable record.  But the requirement of identification, if it is read as requiring identification by name, would be incompatible with electronic records on an open, permissionless blockchain since the parties are anonymous. Logistically, it seems possible to build a system whereby the performance of the obligation represented by the electronic record (e.g. the delivery of goods) is effected without the name of the holder of the private key having to be revealed to the obligor (e.g. carrier) by, for example, allowing the record to activate a key in the physical world (e.g. the key to the container). In my earlier post, I have suggested that a blockchain-based bill of lading may, for that reason, be seen as functionally equivalent to a bearer bill of lading. But the present post is considering how to make rules enabling the replacement of order bills of lading (and other documents made to order) with a blockchain-based electronic records. 
The word "identify" also appears in the following provision.

Draft article 17. [Possession] [Control]
1. Where the law requires the possession of a paper-based transferable document or instrument, that requirement is met with respect to an electronic transferable record if:
(a) A method is used to establish exclusive control of that electronic transferable record by a person and to reliably [identify] [establish] that person as the person in control; and
(b) The method used is either ...

The Secretariat notes, "identification should not be understood as implying an obligation to name the person in control" (para. 22) (See my earlier post for a comment). It would aid clarity to say so expressly in the provision. The same could be done in draft Article 19 and it would make it friendlier to blockchain-based electronic records. But it might not be satisfactory for register-based electronic records. That is why I call this a "more difficult question."

Monday, 14 December 2015

Law applicable to a restitutionary claim arising from a mistaken remittance

The bitcoin addresses are randomly generated long alphanumeric strings and prone to be mistyped. If bitcoin is transferred to a wrong address by mistake, what law is applicable to a restitutionary claim by the transferor against the transferee?
This post will consider this question under the Rome II Regulation (Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations) as it is an influential instrument in private international law. Its Article 10 contains choice-of-law rules for unjust enrichment in the following terms:

1. If a non-contractual obligation arising out of unjust enrichment, including payment of amounts wrongly received, concerns a relationship existing between the parties, such as one arising out of a contract or a tort/delict, that is closely connected with that unjust enrichment, it shall be governed by the law that governs that relationship.
2. Where the law applicable cannot be determined on the basis of paragraph 1 and the parties have their habitual residence in the same country when the event giving rise to unjust enrichment occurs, the law of that country shall apply.
3. Where the law applicable cannot be determined on the basis of paragraphs 1 or 2, it shall be the law of the country in which the unjust enrichment took place.
4. Where it is clear from all the circumstances of the case that the non-contractual obligation arising out of unjust enrichment is manifestly more closely connected with a country other than that indicated in paragraphs 1, 2 and 3, the law of that other country shall apply.

In most cases of mistaken remittance, para. 3 will be applicable. Its connecting factor is the occurrence of the unjust enrichment, as distinguished from the occurrence of the event giving rise to the enrichment.
The application of this provision to mistaken remittance of a bank deposit is not particularly difficult. If, for example, A mistakenly transfers money from his Italian bank account to B's bank account in Spain, Spanish law is applicable to A's restitutionary claim against B. It has been suggested that in localising the situs of enrichment, the discrete asset, rather than the centre of wealth of the enriched person, should be focused on (Huber / Huber / Bach, Rome II Regulation (2011), Art. 10, para. 28). Thus, even if B lives in Portugal and maintains all assets there, it is immaterial.
The application of para. 3 is not as simple in the case of remittance of cryptocurrency such as bitcoin, since there is no such thing as a bank account. Remittance of cryptocurrency takes place between addresses on a blockchain. The addresses are not associated with any physical location, unlike bank accounts. Neither is it possible to localise the blockchain since it is a distributed ledger. Faute de mieux, the unjust enrichment should be deemed to have taken place at the habitual residence of the enriched person. The concept of "habitual residence" is elaborated on at Article 23 in the following terms:

1. For the purposes of this Regulation, the habitual residence of companies and other bodies, corporate or unincorporated, shall be the place of central administration.
Where the event giving rise to the damage occurs, or the damage arises, in the course of operation of a branch, agency or any other establishment, the place where the branch, agency or any other establishment is located shall be treated as the place of habitual residence.
2. For the purposes of this Regulation, the habitual residence of a natural person acting in the course of his or her business activity shall be his or her principal place of business.

Paragraph 2 would not be applicable in the context presently discussed because the person enriched by receiving a mistakenly remitted cryptocurrency would not be deemed to be "acting in the course of his or her business activity." Nor would the second sentence of paragraph 1 be applicable since it seems only concerned with the habitual residence of a tortfeasor.