Problems With Bitcoins as Money?

As you know, the Canadian Senate Committee on Banking, Trade and Commerce published earlier this year a report on Bitcoin and other digital currencies. Bradley Crawford, author of the leading banking law treatise in Canada, has recently written a commentary on that report and on digital currencies generally. That comment – quite critical of the Senate’s report – will be added to his treatise later this month.

He raises one issue that seems to me particularly important to those who promote the use of digital currencies in commercial exchanges: the transfer of control of units of Bitcoin (or equivalent) does not at law discharge the legal obligation for which it is transferred. The transferee is not in the position of a holder in due course of a negotiable instrument. Thus the transferor might still be held liable on the obligation for which the transfer was made – not, probably, by the transferee directly, but by an interested third party like another creditor or a trustee in bankruptcy. (This is my formulation, not his – see below for his words.)

This may be inevitable unless (or until) bitcoin and its equivalents are recognizes as money or currency – something that Mr Crawford thinks is inappropriate for a number of reasons set out in his treatise.

Do you have clients that do transactions using Bitcoin? Does this strike you as a problem? If not, why not?

P.S. here’s an extract from Bradley Crawford’s text (with his permission) ( §4:50.30(2)(d)(iii) of the treatise, forthcoming)

The most significant [difficulty) is the fact that transfers of control over units may not be effective to transfer title to the value represented by the unit. This appears not to have occurred to the [Senate] Committee. At any event, it is not mentioned at any point in the Report. For example, in the definition of “cryptocurrency”, it is asserted that:

Transactions are recorded on a public ledger, which is shared across a peer-to-peer network, and the validity of transactions is verified through cryptographic techniques.

It is important to note that the only information recorded about a transaction transferring a bitcoin is related to the history of that particular unit. It carries, or accesses the public record of, information identifying the transactions in which it has been transferred. It neither carries nor accesses any information whatsoever about any other element of those transactions. Accordingly, the verification of their “validity” to which the definition refers is similarly limited to the pedigree of the unit(s) transferred.

More significantly, the Report fails to note an important adverse consequence of its acceptance of digital currencies as a new currency. As no decentralized, convertible digital currency now in use is legally qualified to be recognized as money, transfers do not expunge the rights of prior claimants to ownership. The transferee, even though receiving the unit in a transaction at arm’s length, in good faith and for value, has only a claim to ownership, not legal title. And that claim might not be prior in right to the claim of some prior owner wrongfully deprived of it.

If the information about the history of the unit that is contained in the public record is adequate to enable a prior claimant to trace it, and to establish their prior right, a court would be obliged to order its return to its prior owner. Now, it is unlikely that any litigation would be initiated with respect to a single unit, but a claim to trace and recover the approximately 900,000 bitcoins stolen from the Mt. Gox exchange in Tokyo is not only plausible, but conceptually feasible under Canadian law, if they can be identified.

Forms of value that trail viable legal claims behind them like comets are unfit for use as currency in any economy.

Comments

  1. Addison Cameron-Huff

    One problem with Bradley Crawford’s comments is that bitcoins don’t come in “units”. One bitcoin is divisible into 1×10^8 subunits (https://en.bitcoin.it/wiki/Myths#21_million_coins_isn.27t_enough.3B_doesn.27t_scale). As bitcoins are spent, the “outputs” of the transactions split the “input” bitcoins into ever smaller amounts and move them to ever more accounts. The result of this is that a transaction last year involving 5 bitcoins could result in “those” 5 bitcoins now being held by 10000 people. Even worse, bitcoins often move through large pools (such as when a transaction occurs using an “exchange” where people buy and sell them). When “your” 3 bitcoins go into a pool of 10,000 and then those 10,003 are moved to tens of thousands of new holders of the bitcoins how do you trace it?

    If that wasn’t bad enough, bitcoins move between “addresses” that may or may not be controlled by the same person, and that person generally can’t be ascertained. The Mt. Gox incident that Mr. Crawford refers to involved around 2,000,000 Bitcoin addresses to start with (http://www.coindesk.com/most-mt-gox-bitcoins-were-gone-by-may-2013-report-claims/) and if you traced those addresses to today’s holders you would find an incredible number of addresses today that can be traced to those Bitcoin addresses. Many very smart, very motivated people have tried very hard to trace the Mt. Gox bitcoins without success.

    Although the theoretical issues raised by Mr. Crawford are interesting, the reality of tracing Bitcoins is such that for all but the rarest of situations (I’ve never heard of one), Bitcoin users shouldn’t be concerned with title issues. The caveat at the beginning of the last paragraph is the key part: “If the information about the history of the unit that is contained in the public record is adequate to enable a prior claimant to trace it…”