Ten Things About Bitcoin That Lawyers Should Know (On Bitcoin’s Tenth Anniversary)

On October 31, 2008, someone posted a PDF to an encryption newsgroup. The post came from an account named Satoshi Nakamoto.

The PDF contained a text called “Bitcoin: A Peer-to-Peer Electronic Cash System” and described what we know today as Bitcoin—the biggest cryptocurrency in the word by market capitalization (about USD$110 billion as of today).

Here are ten things that lawyers should know about Bitcoin.

1. There are no physical Bitcoin coins or banknotes.

Bitcoin is modelled after physical coins and banknotes but it is purely digital. But! Most people still use a physical medium for accessing their bitcoin although some, in theory, are able to keep billions in bitcoin entirely within their brains.

Let’s unpack this.

Bitcoin represents money as digital messages referring to different amounts—just like banknotes. You don’t keep your bitcoin in an account. You own bitcoin by owning one or more messages stored by the Bitcoin blockchain. Every message is digitally signed. The signature consists of a public part and a secret part. You own a message (that is the bitcoin amount it represents), if you know the secret part matching the public part of the signature. In that case, you have the power to change the signature to that of a new owner so the public part changes to that matching the new owner’s signature’s secret part (in cryptography, those are called public and private keys). To accept a payment you publish your public key.

Just like in law, owning bitcoin means having the exclusive power to transfer it to a new owner which is equivalent to having exclusive use of bitcoin. Isn’t the only way to use money to spend it? Except in Bitcoin “exclusive” goes way above conventional law and crosses the boundary into the law of nature. Mathematics (cryptography) and physics (mining/networking) make your ownership of bitcoin exclusive, not laws of people.

Now why would most people still use a physical medium for accessing their bitcoin if it’s purely digital? You need a private key to control your bitcoin holdings. It is a long string of characters, probably longer than any password you used. You have two options: memorize it (and break all your bitcoin into many small amounts with a different private key for each so you can dispose of private keys once you touch any computer or network with it) or keep it on a medium such as flash or hard drive under control of software known as a wallet. There are dedicated computers just to store private keys known as hardware wallets. A non-digital medium is also possible: write your private keys on paper, etch them on metal, and so on. But once your private key is out of your head it is vulnerable to loss or seizure. Losing a private key is equivalent to burning cash and stirring the ashes.

2. No entity controls Bitcoin.

The signed messages with everyone’s different bitcoin amounts are stored in thousands of duplicates of the Bitcoin blockchain. The duplicates are spread out across computers of completely random people all over the world.

The person or people who started this network released the software running the network and the first copy of the blockchain (it was tiny) about ten years ago—into the Internet. Since then, the blockchain grew and propagated to its present, arguably unstoppable status.

The data on blockchain, which represents the money, is under no entity’s control. Only people with matching private keys can sign corresponding bitcoin amounts to others.

The version of the software that runs the network is under the control of a small group of computer programmers. These people cannot change the data (dispose of other people’s money). Their role is maintenance and development of the software that enables nodes on the Bitcoin network to talk to each other. Their work product is extremely public. It is scrutinized on a regular basis. If their software endangers the money in any way or if anything happens to them, new programmers will volunteer to maintain the Bitcoin software. It will be a crisis but probably not the end of the Bitcoin world as the data will still be out there in many, many copies.

Liability of programmers for loss of money on the Bitcoin network despite the standard “AS IS” software licences is an interesting legal puzzle.

3. Bitcoin does not have a domicile or a jurisdiction.

Who released and who controls Bitcoin? An anonymous entity released it. It could be a person, a group of people, or even AI or aliens. No one knows. I don’t think it was a corporation. They just don’t do that.

Bitcoin lives nowhere and everywhere. You literally cannot be sure where the next clone is physically located. It could be on your daughter’s upgraded computer box you thought she was using for gaming. It could be on your office server run by your nonchalant IT person. It is definitely on every continent (maybe even Antarctica).

The best look the law gets at Bitcoin is at the time someone decides to exchange it into fiat (money issued by government’s authority) such as USD. But other than that, Bitcoin is nowhere and everywhere—truly the money of the Internet.

4. Bitcoin can make it difficult to seize bitcoin through the courts.

Let’s say you claim someone owes you Bitcoin and you ask the legal system to enforce your claim. The options for your remedy are damages or an injunction. At least in the jurisdiction where I practice law (Ontario, Canada—and I am not giving you any advice here so you’re on your own), orders for payment of money must be expressed in Canadian dollars. Even where the obligation is in a foreign currency such as USD, the judgment must require payment in Canadian dollars “sufficient to purchase the amount of the obligation in the foreign currency at a bank in Ontario listed in Schedule I to the Bank Act (Canada) at the close of business on the first day on which the bank quotes a Canadian dollar rate for purchase of the foreign currency before the day payment of the obligation is received by the creditor.” I haven’t heard of any bank in Canada selling bitcoin.

You can try to convince the court to order payment in Canadian dollars without reference to bitcoin in the judgment at the rate you suggest and prove. You will then have a standard judgment enforceable through standard methods such as a writ of seizure and sale, a writ of possession, or a writ of sequestration, all of which basically boil down to two things: (1) can a sheriff (or whatever you call the government official with the power to enforce court orders) find the medium where the judgment debtor keeps the private keys to bitcoin in question, or if all else fails (2) can the judgment creditor prove contempt of court and obtain incarceration or some other punishment cutting the debtor’s figurative air supply to a similar extent. In modern, advanced legal systems the prospect of depriving of liberty often raises the standard of proof to that of beyond reasonable doubt. With private keys being strings of characters, think of disproving their loss or theft beyond reasonable doubt. Civil enforcement is a pain as is. The same thinking applies to injunctions for delivery of bitcoin. Good luck.

5. Bitcoin can make it difficult for governments to seize it as well.

Governments are different from judgment creditors. Governments have been known to get extraordinary results extraordinarily quickly. They have huge police forces to track down physical media holding keys and seize the hardware (or paper wallets) without bothering with legal acrobatics. These cases are well-known unlike civil court order enforcement against bitcoin.

It is also well-known that finding a device the size of matchbox can be much, much harder than calling a bank or changing locks in someone’s house. The very properties of Bitcoin suggest that where government was successful in seizing it, the holders of private keys did not take advantage of the full spectrum of Bitcoin properties or they exposed other personal vulnerabilities that sophisticated law enforcement could exploit.

Undoubtedly major governments have excellent cryptocurrency experts in their employ and are quite familiar with enforcement issues presented by decentralized cryptocurrencies. But if bags of cash are still a thing despite much effort, hardware wallets will definitely be a thing for a long time to come.

6. Bitcoin can work with the law very well.

If Bitcoin can be used to oppose the law (or governments), it can very well be used to support the law.

Bitcoin makes it easy to:

  1. Create escrows with a party sanctioned or trusted by the legal system (lawyers or the court). Such escrows can be excellent security for performance of contracts or other obligations.
  2. Record indubitable evidence of a timeline admissible in court.
  3. Issue compliant securities due to the unforgeable and public nature of the Bitcoin blockchain.
  4. Support restitution in cases of mistake or non est factum, in a transaction designed properly and with the parties’ prior consent.
  5. Reward anonymous tipsters.
  6. Seize unlimited amounts of bitcoin if you have physical possession of private keys or discover at least a partial bitcoin history of someone if you have their public key.

The bottom line is parties to a bitcoin transaction can opt in the conventional legal system and make their transaction fully subject to it. Or they can lose control of their transaction and privacy if they lose their private keys or permit connecting their public keys to their physical identity.

7. Bitcoin can authenticate evidence.

I referred briefly to that above when I talked about recording unquestionable evidence of a timeline and making it admissible in court.

The Bitcoin blockchain the many clones of which make it practically impossible to tamper with the transaction history/your money can also accept arbitrary small text with every transaction (which is basically a message signing an amount to someone else). The Bitcoin network timestamps every transaction. For all intents and purposes, the timestamps are reliable and no one can forge or change this timestamped text.

If you are a contractor and if you store a hash of a photo of you standing in your client’s finished living room on the Bitcoin blockchain on October 31, 2018, it will be impossible for your delinquent client to argue on November 1 that you never set foot inside their house and that they should not pay your bill.

(A hash is a string of characters that software can generate for any electronic file—it’s like a fingerprint of a file. All hashes for our purposes here have the same small size that does not depend on the size of the file we are hashing. In court, you produce the blockchain transaction with your hash and the photo; generate the hash of the photo; and compare the timestamped hash from the blockchain with the hash you just generated. This proves the photo existed as of the date and time of the blockchain hash.)

The only remaining piece of the puzzle is making it easy to admit blockchain timestamps in court by recognizing them similarly to business records in an evidence statute.

8. Bitcoin can make it easy to issue securities.

The number one thing about blockchains such as the Bitcoin blockchain is that they offer practically unforgeable records of ownership of arbitrary assets. The assets can be purely digital or physical.

A whole industry grew around conventional securities due to the need to protect their integrity. Bitcoin does it automatically.

Other blockchains do too and some of them even spurred a boom of fundraising on the Internet known as ICOs. (I think 2017 will be remembered as the year of the ICO.) If ICOs make you sceptical about issuing securities on blockchain, I understand it but the problem with ICOs was not technical, it was human because people gave money to strangers in return for buzzwords. This occasionally still happens in the traditional stock market except that you also pay management fees. The technical ability of blockchains to support unforgeable securities without intermediaries is unsurpassed and will flourish.

9. Bitcoin in some ways is still vulnerable to governments and laws.

All Bitcoin transactions are public. All of them are connected to public keys. If you can link a public key to a person, you can see their partial transaction history. This is a god-send for tax authorities.

Bitcoin depends on private key management. Since most people cannot rely on their memory for this, they will resort to easily seizable devices. Imagine a criminal holding their entire fortune on one little drive. But again, it’s probably easier to hide a hard drive than bags of cash.

And if a government ever develops a quantum computer capable of breaking the encryption protecting secret keys on the Bitcoin network, it’s game over, at least for this iteration of Bitcoin.

10. Bitcoin was designed to be above the law and to be a law unto itself.

This final point is important to grasp if you want to work on Bitcoin, and it does not matter whether it will be with it or against it.

Lawyers are conditioned to think that law is all and all is law. But even before Bitcoin, physical laws always trumped human laws. Consider international law or efforts to extend domestic laws to foreign parties, for example. The long arm of the law flies like a bullet through the air of its home jurisdiction but the moment it crosses the border, the environment becomes more like a thick jelly that occasionally stiffens to concrete. If you have big guns there is little you can do if someone else has similarly big guns or even small guns that cause enough pain to slow down your righteous hand of justice. This is the reality of the world of different jurisdictions.

Another means of slowing down enforcement of someone else’s will is encryption. It is not surprising that some countries consider encryption software an armament.

Bitcoin and other blockchains are based both on spreading the network across jurisdictional borders and on encryption. It is tough.

Whoever designed Bitcoin was a cypherpunk, a person who believed that governments and laws come and go but individual sovereignty always stays. To them, the ultimate value was defending this sovereignty and creating a new jurisdiction, a jurisdiction of an individual person, through encryption. Combined with exceptional technical acumen and with the research of many scientists who came before, this philosophy created Bitcoin. Regardless of our values, it is here to stay so what are we to do about it? Legal systems of the world, and in particular common law systems, which are very experienced in incorporating individual choice in their canon, will do well by accommodating Bitcoin and adjusting to this new reality. Criminals will be caught. It is the good people that we should not stop.

Comments

  1. This is a very useful and understandable description, Pulat. Thanks.

    I think you overstate the difficulties of enforcing civil judgments, though. A judgment will very rarely if ever be for specific performance of a contract to deliver bitcoin. So a judgment will be in Canadian dollars (in a Canadian court, of course) at an exchange rate established for the relevant date. If no bank rate is available, other evidence will be admissible. Ifnit is not today, it will take only one failure for the Rule to be changed.

    It will also be very rare that a defendant in an Ontario court will have no other seizable assets than bitcoin. A court does not care how the judgment is satisfied ( absent specific performance)

    So holders of and dealers in bitcoin cannot hide in cyberspace. Nobody lives only there.

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