Abstract
This paper argues that cryptocurrency, including cryptocurrencies such as Bitcoin, should be understood as qualified property. We build up support for this claim in three stages: first, we outline the diversity of cryptocurrencies, a diversity which is underappreciated in the current literature. We then outline the importance of theoretical presuppositions which operate in the ‘cryptocurrencies as property’ debate. This is followed by a detailed critique of established positions. We explore the shortcomings of three commonly-held views in the debate: that cryptocurrencies are property, belonging to a third category of personal property beyond the choses in possession/choses in action distinction; that cryptocurrencies are property and belong to the category of choses in action; and, lastly, that cryptocurrencies are not property at all. We then develop a new analysis of property in cryptocurrencies, taking into account both the variety of cryptocurrencies which exist and capturing the doctrine operating currently in property law, including its theoretical underpinnings. Through understanding rights in property as relative, and property itself as a scale, we avoid the shortcomings of other popular accounts whose shortcomings we identify, and show that cryptocurrencies are a form of choses in possession – namely, qualified property.
Introduction
The reader, upon seeing the title of this paper, might be forgiven for exclaiming “Not another paper on crypto! Isn’t there anything else to write about?!” In our defence, we argue, as every good academic does, that the current literature suffers from three shortcomings that our paper aims to address, namely:
It is not comprehensive and does not appreciate that different forms of cryptoassets have different characteristics which affect their proprietary status; It overlooks serious theoretical controversies concerning exactly what the law of property is about; and, It assumes a uniform concept of property which simply doesn't exist in common law.
Our paper addresses these shortcomings by providing a comprehensive overview of cryptocurrency and blockchain technology, outlining competing understandings of property, critically analysing current understandings of cryptocurrencies’ proprietary (or non-proprietary) nature, and setting out a novel proprietary understanding of cryptocurrency – that cryptocurrencies amount to choses in possession and are a form of qualified or special property. It is important to note that although this paper has implications for the broader debate concerning whether digital files and assets, generally, amount to property,
1
as well as whether cryptoassets such as NFTs (non-fungible tokens) are proprietary, its focus is on cryptocurrency with the authors’ views on the more general issue being reserved for future work.
By cryptocurrency, we mean crypto coins, which are mediums of exchange and the only user-functionality which they have is the power to alter a decentralised ledger which tracks transfers between different addresses; that is “all” that the user can do with crypto coins. Notable examples of crypto coins are Bitcoin and Ethereum (ETH). Crypto tokens, on the other hand, outstrip this functionality vastly, and can be ‘used in countless ways’
2
– they
Blockchain technology and the varieties of cryptoassets
Blockchain technology is ultimately nothing but code or data. What makes it a unique information technology from the perspective of property law is the synergistic and complementary use of peer-to-peer networking, cryptography, and consensus mechanisms to create a distributed ledger system across a network of computers. 3 This stores information in a way which is typically decentralised (in the sense that no single party can unilaterally alter the information), transparent, immutable, and secure. Any one of those features may be lacking in any given blockchain, however. They can be permissioned or permissionless, with differing levels of restricted access to a chain on the basis of identity. They can be widely distributed and decentralised (across e.g. all users) or distributed across a smaller network of central servers. To participate in a chain, one typically requires a pair of cryptographic keys: a public key (visible to others) and a private key (kept secret). These keys determine one's identity on the network and correspond to an address through which one can transact on the network – e.g. by receiving and sending coins. 4 Cryptocurrencies come in a wide variety of forms and are therefore very diverse.
The majority of cases and legal literature regarding blockchain and property focus on ‘crypto coins’, as we term them. Since they are predominantly used as a means of storing and exchanging value, they are mostly contrasted with state-issued (or “fiat”) currency. While fiat currency depends upon the legal authority and power of a central institution (such as a reserve bank) to create and control money, blockchains verify and authorise the creation and transfer of ‘coins’ through what are called consensus mechanisms – ‘self-regulatory stack[s] of software protocols written into a blockchain's code’. 5 While this eliminates any central point of failure, vulnerabilities are nevertheless discovered and exploited as the market share and popularity of cryptocurrencies continue to grow. Therefore, despite cryptocurrency users often aiming to be ‘wholly independent of any legal system’, 6 many end up seeking the law's protection. The law, nevertheless, struggles to keep up with these technological developments, opening a gap between implementations of cryptocurrency technology and how they are understood by the law.
One such important gap is the underappreciated diversity of operation between different cryptocurrencies. While Bitcoin and ETH are known as decentralised, secure, and transparent coins, many new alternative coins and tokens (varieties of which are known as ‘alt-coins’, ‘meme-coins’, and ‘shit-coins’) have differing qualities. These different features are coded via smart contracts and can include (the ability to introduce) trading ‘taxes’, 7 restrictions or pauses on trading (often an element in ‘honeypot’ scams), 8 maximum transaction and token holding limits (sometimes only for specific addresses), 9 token ‘self-destruction’, 10 and external modification of the balance of any token holder (one form of a ‘rug pull’). 11
Many of the above abilities are triggered by the smart contract automatically but many are also, depending on the code and smart contract, features which can be controlled by a specific address in the network – that is, a specific participant. This person is very often the creator of the token or the ‘owner’ of the contract. If the contract's owner has special access to the contract and can modify it unilaterally, there is a significant risk of token holders losing their assets and the whole situation imperils the token's status as property because the token is not sufficiently stable, as will be discussed below. Depending on the contract, the owner may have a variety of powers, many of which are outlined above. One particularly well-known kind of scam is a ‘rug pull’, where the contract owner unilaterally transfers all users’ tokens. 12 To relinquish this kind of problematic level of control, legitimate coin developers ‘renounce' their contracts. This means that the above functions are not modifiable and no participant has special powers in the contract anymore. 13 However, ownership retrieval can be coded into the coin’s smart contract, to reverse renouncement. Similarly, ownership can be hidden in the code, so that a developer can still manipulate a token's smart contract, even if ownership appears to have been abandoned. Ultimately, all owner powers (even ‘hidden’ ones) are contained in the smart contract code and can be scrutinised by investors and algorithms.
In addition to the above smart contract features, the crypto coin chains themselves (e.g. Bitcoin and ETH) can have different features which could be relevant to a property law analysis. Most cryptocurrency blockchain protocols are stable and their histories are encoded into their very being; for this reason, if a developer or community wanted to alter any part of the rules, they must create a copy of the chain and its history, called forking, to encode different rules into it. 14 Precisely because the rules cannot be changed by a central authority, a ‘fork’ is required to create a new copy of the coin with the modified rules in place. This is, strictly speaking, a new coin and the old coin's existence continues – where developers and the broader community decide on the fork, they will follow the new ‘version’ of the coin rather than the old remnant (which can continue being used separately). Indeed, a process like this is what led to the co-existence of ETH and Ethereum Classic (ETC).
As the above indicates, cryptocurrency is not just a single thing to which a single, monolithic category of property law can be applied. The result is that the devil is very much in the detail. Indeed, the diversity of cryptocurrencies dovetails with the fact that property in the common law is ‘relative’ 15 with innumerable gradations 16 so that the proprietary ‘strength’ of cryptocurrencies, as with property generally, varies from coin to coin. 17
What do we mean by ‘property’?
Traditionally, property has been conceived of as the law concerning things; thus Gaius in the the objects of our inquiry in this second book will be the
On such an approach, the ‘thingness’ – or, in the case of incorporeal things, the ‘thinglikeness’
21
– of
The ‘property as things’ approach can be contrasted with a ‘property as rights’ approach, reflected perhaps most clearly in Hohfeldian theories of property law. Hohfeld holds that any property ownership, possession, or other claim can be described using a set of four
The result is that those who adopt such an approach, on the one hand, and those who adopt a law of things approach, on the other, are like ships passing in the night – both the questions they ask and the answers they formulate are different. As we shall see below, this explains the fundamentally different approaches taken to cryptocurrencies by scholars and their inability to substantively engage with each other's arguments. It is for this reason that, although the point is generally overlooked, it is crucial for policymakers and courts to be aware of their own theoretical predicates as well as those operating in the literature before citing a particular authority to support their conclusions about cryptocurrency's proprietary nature. In rebutting such views, it is also necessary to both explain why the underlying philosophical predicate is problematic and, on occasion, to meet it on its own turf by explaining why, even on that view, it is incorrect.
In consequence, it is important for this paper to clearly state its philosophical predicates: it adopts a ‘law of things’ approach to property. It does this because, as shown above, this is the traditional approach of the common law. In addition, the debate concerning cryptocurrency's proprietary nature is ultimately about whether cryptocurrencies are suitable subject matter for property, and a Hohfeldian approach which necessarily eschews any analysis of ‘thingness’ or the nature of the thing cannot tell us whether cryptocurrencies are or are not suitable subject matter for property and why or why not. 30 Examples of this can be seen in Robert Stevens' and Kelvin Low's approaches to cryptocurrency, discussed below, with the former ultimately requiring policy arguments to buttress a generally Hohfeldian argument as to why cryptocurrency should not be property, and the latter, in effect, arguing that as anything can be property, so can cryptocurrency.
Moreover, beyond merely capturing and justifying doctrine as it currently stands, a thing-focused approach is helpful when analysing cryptocurrency because it acknowledges that ‘property is something which has an existence in the real world. Specifically, property is a practice, a way of dealing with things in which people actually engage’.
31
This understanding of property accords with the reality of both legal and lay practice regarding property, as well as the practice of the crypto community. Just as ‘[n]orms
Brief overview of the current state of personal property law
As currently understood, the orthodox position in English and Commonwealth property law is that ‘[p]roperty in chattels personal may be [only] either in possession; which is where a man hath not only the right to enjoy, but hath the actual enjoyment of the thing; or else it is in action; where a man hath only a bare right, without any occupation or enjoyment’.
34
Thus, Fry LJ in
Despite clear reasoning and precedent, the bipartite division of personal property has come under significant pressure in recent years as a result of growing digitalisation, including the development of cryptocurrencies. We will explore the issue in depth below via an examination of the current proposed property law approaches to cryptocurrency, before then outlining our view that cryptocurrencies are choses in possession, and specifically a sub-set of them known as ‘qualified’ or ‘special’ property, which, as we will explain, best reconciles these existing authorities with the technological realities of cryptocurrencies and the structure of property law more broadly.
Current approaches to cryptocurrency's proprietary (or non-proprietary) nature
In general terms, there are three current approaches to cryptoassets:
Cryptocurrencies constitute a third category of personal property Cryptocurrencies constitute choses in action Cryptocurrencies are not property
Each of these approaches will be outlined and critiqued in turn below with reference to the leading judicial, scholarly, and policy proponents and authorities. Subsequently, we shall set out an overlooked fourth, and what we believe to be the correct, approach – that cryptocurrencies are choses in possession and specifically a form of qualified property.
Cryptocurrencies as a third category of personal property
The earliest application of the ‘third category’ approach to cryptocurrencies comes from the LawTech Delivery Panel’s ‘Legal statement on cryptoassets and smart contracts’ by the UK Jurisdiction Taskforce. The legal statement effectively adopts a functional approach, arguing that if cryptocurrencies meets the four-limbed test for property in
The taskforce argued that both definability and certainty were met by virtue of the ‘public parameter of a cryptoasset’ 43 – namely, ‘encoded information about the asset, such as its ownership, value and transaction history’. 44 The requirement for control and exclusivity is also ‘satisfied by the cryptographic authentication process, which permits the holder of the private key, and only that holder, to deal in the cryptoasset, and therefore to control it to the exclusion of others (subject to the powers of other keyholders where there are multiple private keys)’. 45 Similarly, the Legal Statement holds that ‘cryptoassets appear to be as permanent as other conventional financial assets, which may exist only until they are, for example, cancelled, redeemed, repaid or exercised’. 46 The final requirement, that of stability, was more complicated because total stability does not arise until consensus is achieved and the risk of forking remains, as discussed earlier. 47 Nevertheless, the Panel maintained that ‘even without resolving those issues, cryptoassets are in our view sufficiently permanent or stable to be treated as property’. 48
The statement distinguishes the orthodox authorities discussed above by arguing that whilst Fry LJ's statement ‘may carry the logical implication that an intangible thing is not property if it is not a thing in action[,] [i]t is not clear, however, whether Fry LJ intended that corollary, and it should not in any case be regarded as part of the reasoning leading to his decision’.
49
Similarly, the House of Lords' approval of his statement ‘did not explicitly address the issue of exhaustive classification between things in action and things in possession and said nothing about the definition of property’
50
and, in any event, ‘to the extent that the House of Lords agreed with Fry LJ on the classification issue, that seems to have been on the basis that the class of things in action could be extended to all intangible property’.
51
Similarly,
Although
Secondly, it does not follow from Lord Blackburn's statement that ‘it was hardly disputed that, in modern times, lawyers have accurately or inaccurately used the phrase “choses in action” as including all personal chattels that are not in possession’
56
that all intangible property amounts to choses in action. This is because the statement says nothing about the nature of choses in action as such; it merely states that anything which is personal property but is not a chose in possession must be a chose in action. Thus, if choses in action must be enforceable by a right of action, as held by Fry LJ, Lord Blackburn's statement continues to make sense and, indeed, arguably makes more sense given that Fry LJ's view was upheld rather than repudiated by the House of Lords. As for
Lastly, none of the cases mentioned by the statement as recognising property that would amount to a
Notwithstanding these issues, the reasoning of the Legal Statement was adopted by the English High Court in
Most recently the UK Law Commission has analysed the issues posed by cryptocurrencies in its Report on Digital Assets. It represents by far the most detailed analysis of the property issues posed by cryptocurrencies to date. The report adopts a ‘law of things’ approach to property law; thus, in explaining the differences between choses in action and choses in possession, it states that one distinctive feature of things in possession is that they are things which exist regardless of whether anyone lays claim to them, and regardless of whether any legal system recognises or is available to enforce such claims. In contrast, things in action have no independent form and exist only insofar as they are recognised by a legal system.
64
This, in turn, explains why the Law Commission rejects the idea that cryptocurrencies are choses in action, as ‘the software and data together manifest a “thing” that is necessarily independent of any rights that may be claimed over that thing’ with the result that ‘[c]rypto-tokens would continue to exist even if the law [did not recognise them as property]’ and thus they cannot be choses in action. 65 The Law Commission also rejects the idea that digital assets could amount to choses in possession on the basis that ‘[t]he legal concept of possession is traditionally limited to tangible things’ and thus digital assets cannot be choses in possession. 66
In consequence, the Law Commission adopts a ‘third category’ approach to cryptocurrency and cites many of the same cases to support its view that such a category is in fact recognised by English law.
67
To determine whether a thing falls into this third category the Law Commission sets out three requirements:
the ‘thing’ ‘is composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals’; it exists ‘independently of persons and…of the legal system’; and, it is ‘rivalrous’.
68
The first requirement was abandoned by the Law Commission following the consultation paper on the basis that the issue was not so much the data present in a cryptocurrency but rather what the data allowed its holder to do.
69
We will therefore not discuss it further.
The second requirement is intended to ensure that ‘only those things that are properly identified as distinct things, existing independently from any particular person’ 70 can amount to third-category things. The second limb of the second requirement also prevents choses in action, and statutory property rights, such as IP rights, from amounting to third-category things. 71 It is appropriate to note here that it is fundamentally contradictory for the Law Commission to exclude ‘statutorily created property rights’ 72 from amounting to third-category things whilst at the same time heavily relying on cases concerning such rights to justify its view that the common law recognises such a category.
The third requirement would appear to be the most important given the Law Commission's repeated reference to it throughout the paper. This is also accepted by the Law Commission itself when it states in its supplemental report that ‘we consider that rivalrousness is a particularly important feature of things that are appropriate objects of property rights’.
73
The (earlier) final report provides that ‘[a] thing is rivalrous if the use or consumption of the thing by one person, or a specific group of persons, necessarily prejudices the use or consumption of that thing by one or more other persons’.
74
The Law Commission goes on to argue that cryptocurrencies are rivalrous because [t]he use or consumption of the crypto-token by one person, or a specific group of persons, necessarily prejudices its use or consumption by one or more other persons. The technology ensures this. In other words, the technology ensures that a crypto-token cannot be double-spent.
75
It is however arguable that the rivalrousness of cryptocurrency more generally is artificial and technologically contingent
76
– it is not in the nature of the thing itself. Thus 51% (and even 34%) attacks by hackers are possible and have, when successful, allowed for limited double spending; likewise, forking allows for the duplication of such assets. Note that while it could be argued that forking does not duplicate a cryptocurrency but merely creates a new one, this position underappreciates that a forked currency is an exact mirror of the original chain – e.g. all transfers and wallet holdings are recorded in both. Anyone who held coins on the original chain now holds exactly twice as many, with identical holdings recorded on the new chain; this is an essential feature of forking – ‘two identical blockchains exist until changes to one of the chains are made’.
77
Moreover – as has been outlined above – not all cryptocurrencies are rivalrous, let alone rivalrous to the same extent; thus some ‘shitcoins’ may not be rivalrous at all because, for example, the developer may have unlimited power to duplicate or otherwise interfere with them, other altcoins may be only partially rivalrous, and others still may initially be rivalrous but then be modified by their developers to become non-rivalrous or only rivalrous to a limited extent (as where the developer retains a power to self-destruct the cryptocoins or to unilaterally alter balances of the coin held in others' wallets). These technological realities suggest that cryptocurrencies
It is true that the Law Commission accepts in its supplemental report that not all digital assets are rivalrous, distinguishing between an ordinary Word document (which is not rivalrous) and cryptoassets. However, again, the Law Commission merely asserts that cryptocurrencies are necessarily rivalrous
78
and does not appear to be aware of the reality that certain cryptocurrencies will not, in fact, be rivalrous for the reasons we have outlined above.
79
These weaknesses do not necessarily undermine the Law Commission's draft bill – but that is because the bill is anaemic: it merely proposes that just because
Cryptocurrencies as choses in action
The possibility that cryptocurrencies are choses in action has been pioneered in Singapore as a result of the work of Kelvin Low. His argument is alluringly simple: the category of choses in action is not restricted to those things which can be enforced by court action; rather, ‘the categories of intangible property and chose in action are quite simply co-extensive’. 81 Thus, anything which amounts to intangible property is necessarily a chose in action. Low's arguments are novel and well-made but suffer from two primary shortcomings.
The first is that it is arguably not supported by authority. Fry LJ in
Low also makes a novel contribution regarding what exactly is proprietary vis-à-vis cryptocurrencies, arguing that it is ‘the legal right to have their bitcoins, or more accurately their unspent transaction output or UTXO, locked to their chosen public bitcoin address on the blockchain’. 83 Low justifies this view on the basis that it prevents the law from recognising pure information as property which would ‘serve as a grave impairment of the free flow of information and the freedom of expression’. 84 This view fits quite well with the technological functioning of cryptocurrencies, where it is only the private key holder's right to transfer, or control, the relevant cryptocurrency that matters. However, for this right to be proprietary in a system which views property law as the law of things, it must first relate to a thing; what, on Low's account, is the thing to which it relates?
Low does not answer this question but instead argues that a strict “thing-focused” approach is incoherent as English law recognises bank money as a chose in action – ‘specifically a debt owing by the bank to its customer’ – and ‘yet there doesn’t appear to be any separate thing that is the subject of a debt other than the debt itself’. 85 Low therefore suggests a broader definition of property as referring to ‘the law's recognition of and willingness to enforce a holder's rights to exclude others from a resource, whether tangible or intangible, without necessarily providing any clues as to its exigibility’. 86 However, it is not apparent that things are as clear-cut as Low makes out. If one accepts that “property” has two primary meanings, ‘both as things (be they intangible or intangible) and as rights in relation to things’, 87 and that it can vary in strength depending on its similarity to tangible things or strong proprietary rights in relation to things, 88 then much of the problem outlined by Low goes away. Moreover, Low's broader definition of property is unable, as Hohfeldian approaches generally are for the reasons outlined earlier, to account for the undoubted reality ‘that some things simply cannot be the subject-matter of property’. 89 Lastly, such an understanding of property fundamentally disturbs the existing taxonomy of the common law which is predicated on the idea that the subject matter of a proprietary right necessarily affects the ‘strength’ and nature of that proprietary right. The terms “real”, “personal”, and “qualified” property cannot be explained, or understood, without an acceptance of the view that the subject matter of a purported proprietary right is fundamental in determining the extent and true nature of that right. The point will be discussed further below where the paper's novel view of cryptocurrency as a form of qualified property is outlined.
Despite these issues, the Singapore High Court appears to have adopted Low's reasoning in The argument that crypto assets should not be classified as things in action rests on the origin of this category as rights enforceable by action (in the sense of litigation in court) against persons … There is no individual counterparty to the crypto holder's right. But over time the category of thing in action has expanded [and] this diversity suggests that the category of things in action is broad, flexible, and not closed
This would appear to incorporate Low's reasoning but the Court then goes on to state that ‘the holder of a crypto asset has in principle an incorporeal right of property recognisable by the common law as a thing in action and so enforceable in court’, 92 which appears to adopt the narrower view of a chose in action as being a property right enforceable only by legal action. We suggest that this is because, as we have discussed above, property in the common law is ultimately understood with reference to ‘a materialist archetype of property’; 93 thus even when discussing dephysicalised ‘things’, common lawyers ‘understand property in terms of their experiences of material things’. 94
Cryptocurrencies as non-proprietary
The view that cryptocurrencies are not property at all is a third view in the literature, one which is put forward succinctly and strongly by Robert Stevens. Stevens argues that Bitcoin, and cryptocurrencies more generally, are not property as they can neither be physically possessed nor does a crypto holder have any ‘cause of action to enforce a primary right or one to correct any infringement’, 95 given that ‘no tort applicable to things’ applies to them and ‘the holder of the key has no contractual rights against anyone [nor any] statutory rights of enforcement’. 96 Adopting a Hohfeldian approach to property, he argues that the end result is that the ‘correct holder of a key to a Bitcoin wallet’ does not have any ‘rights (or privileges, powers or immunities)’ in relation to the Bitcoin, 97 and thus they do not hold any property rights.
As an initial point, it is worth noting that the traditional view that digital assets cannot be possessed has come under heavy attack in recent years, with courts in both New Zealand and Canada recognising that they can both be possessed 98 and be the subject of conversion claims. 99 The rejection of this possibility in England and Wales has also come under significant scholarly criticism 100 and it is plausible that it does not accurately capture the state of the law (we address this point in further detail below where we set out why we believe such assets can be possessed). However, even if the traditional view outlined by Stevens is correct, this tells us nothing about why cryptocurrencies should not be recognised as property – for example, by statute – or why they could not be recognised if the legal position regarding digital assets changed. To plug this gap, Stevens sets out several policy arguments arguing that ‘[a]lmost all cryptoassets are unproductive and many are positively harmful. For most of their forms, our legal system should not be seeking to facilitate them but, alongside other jurisdictions, attempting to eliminate their use where possible’. 101
There are two significant problems with this argument. Firstly, it is fundamentally an argument from public policy and the role of public policy in property law is a limited one. Thus, whilst in extreme cases – such as those concerning the human body and body parts 102 or slavery 103 – public policy can play a role in limiting or prohibiting the recognition of property rights, in general such rights ‘are determined by fixed rules and settled principles’ so that ‘decisions of legal policy, have no place in the law of property’. 104 Stevens must therefore show that recognising cryptoassets as property raises strong questions of public policy. However, he does not do so to a sufficient degree; the policy issues he mentions are that cryptocurrencies facilitate criminal activity and that they are ‘enormously environmentally damaging’. 105 Secondly, even assuming that these policy points constitute sufficient grounds to refuse cryptocurrency proprietary status, this would only apply to certain cryptocurrencies. In the case of environmental damage, only those networks that use the computation-intensive ‘proof of work’ consensus mechanism would be problematic, whereas many use newer processes 106 that were designed to be more energy efficient and environmentally friendly. 107 Likewise, the level to which cryptocurrency facilitates criminal activity depends on the specific cryptocurrency (as Stevens acknowledges in his article) and the immutability and transparency of blockchain ledgers are both features of cryptocurrency which would arguably be very unattractive to criminal enterprise. Indeed, the popularity of cryptocurrency in criminal circles will depend on the extent to which cryptocurrency is acknowledged, engaged with, and regulated by law. The solution then, as it was for bonds, shares, and financial securities more broadly, as well as cash, which were all at one stage, and to some extent still are, used for criminal enterprises, is regulation rather than prohibition or non-recognition.
Lastly, Stevens argues that, at best, the holder of a private key to a cryptowallet can be analogised to an individual who ‘know[s] where a pot of gold is buried’ – such a right may be valuable, but ‘if another independently of me discovers the same fact I have no claim against them. I have no right exigible
Cryptocurrencies as choses in possession and qualified property
As noted earlier, we suggest that cryptocurrencies are choses in possession, specifically a sub-set of them known as ‘qualified property’. Our argument will therefore proceed in two stages: first, we will show why cryptocurrencies are best understood as choses in possession; second, we will show why they are a form of qualified property.
Cryptocurrencies are choses in possession
We suggest that the answer to the conundrum of whether cryptocurrencies amount to property, and if so how, is to recognise the reality that digital assets are not ‘simply information’ 112 but rather are ‘“things” in which a person [can have] an “interest”’ 113 given that they ‘can be transferred, stored, and, indeed, possessed’. 114 The simple reality is that, at the time when it was determined that intangibles could not be possessed, the human mind could not conceive of the technological developments that would allow for the existence of blockchain technology and cryptocurrencies which, whilst non-physical, nevertheless ‘do manifest themselves in the physical world, albeit in a way that humans are unable to perceive’ 115 and in a way which allows for rivalrousness (a quality physical things inherently possess). It is true that ‘[t]his physical manifestation at the level of digital bits and bytes is not permanent and changes with every transaction. Nonetheless, we identify what is going on as a particular digital token, somewhat like how we give a name to a particular river even though the water contained within its banks is constantly changing’. 116 The parallels with the concept of qualified property are extremely strong here as such water would be considered qualified property at common law. 117
Our argument has some similarities to that of Jessica Lai who suggests abandoning the difference between tangible and intangible things with regard to the tort of conversion. 118 Lai argues that ‘whether property can be converted or not should not depend on whether it is tangible (or tangible enough), as this is extremely difficult to legally delineate. This is because everything has some degree of tangibility or effect on tangible things ... [moreover] the development of technology might challenge our notions of tangibility more and more’. 119 Instead, Lai proposes a functional analysis so that ‘[i]f the property at issue has the characteristics of a public good (non-excludible and non-rivalrous), it should not be capable of conversion’ and vice-versa. 120 Similarly, we argue that it is irrelevant whether or not a particular cryptocurrency is physical or possesses sufficient physicality – for example, via being on a hard drive; instead, the question is two-fold: 1) is it property? And, if so, 2), can it, functionally or from a common-sense perspective, be possessed? If the answer to both questions is yes, then it should fall into the category of choses in possession notwithstanding its lack of physicality.
How then do we establish whether
As for what amounts to the ‘thing’ in the context of cryptocurrencies, we agree with the Law Commission that the relevant ‘thing’ is the ‘notional quantity unit manifested by the combination of the active operation of software by a network of participants and network instantiated data’.
126
We also agree with the Law Commission that cryptocurrencies, in principle, meet the
However, as discussed in detail earlier, there is significant variety in the crypto world and thus certain – indeed, perhaps even many – cryptocurrencies may possess attributes which completely fail the
The question of whether cryptocurrencies can be possessed is even more complex because it has been said that ‘the word “possession” is one for which English law has never worked out a completely logical and exhaustive definition’.
130
Nevertheless, we can say that, in general terms, ‘a man is said to possess or to be in possession of anything of which he has the apparent control, or from the use of which he has the apparent power of excluding others’.
131
Thus, possession ‘involves…two distinct elements, one of which is mental or subjective, the other physical or objective’.
132
Cryptocurrencies
Thus Lord Scarman stated in the case of
Firstly, as a matter of principle, if possession is effectively about control, it is difficult to see why it should be limited to physical control. If it is possible to exercise the same level of control over a non-physical thing as a physical thing then it seems arbitrary, and even incoherent, to refuse to accept that the former can be possessed while acknowledging that the latter can.
142
Instead, one should adopt a more open-ended definition of possession such as that of Tony Honoré, who ‘famously described possession as “to have exclusive physical control of a thing, or to have such control as the nature of the thing admits.”’
143
Salmond is even more categorical in rejecting the idea that possession necessarily relates to the physical power to exclude, arguing instead that it ‘is the security of enjoyment, and there are other means of attaining this security than personal presence or power’.
144
The end result is that [i]n practice indeed possession is often said to be a social rather than a physical fact, in the sense that a person will be held to possess a thing if he has the sort and extent of control that society … would regard as appropriate to the kind of thing and the circumstances of the case.
145
It was on the basis of such views, specifically those of Honoré, Green, and Randall, that the High Court of New Zealand held that one can ‘apply the concept of possession to digital assets… includ[ing] all forms of information stored digitally on an electronic device, such as emails, digital files, digital footage and computer programmes’. 146
Secondly, the concept of possession has already been extended to cover digital files by English law in certain limited contexts. Thus, it is a criminal offence to possess indecent photographs of a child under s 160(1) of the Criminal Justice Act 1988 or to possess extreme pornographic images under s 63(1) of the Criminal Justice and Immigration Act 2008. In formulating the test for possession under these statutes, the Court of Appeal in
Thirdly, the authorities we have discussed above, aside from
In consequence, we suggest that there is no reason not to accept that cryptocurrencies can in principle be possessed. This is because holders of cryptocurrencies (excluding ‘shitcoins’ for the reasons outlined earlier) meet the requirements for possession as they exercise ‘custody or control’ over them given that ‘having a token deposited in one's wallet address means that [the holder] has positive and negative control’. 154 The wallet holder has the positive ability to transfer their cryptocurrencies and ‘obtain any benefits associated with holding the coin’ 155 as well as the negative ability ‘to exclude people from accessing and transferring the asset because they have a private key’. 156 As this is arguably ‘the maximum degree of control allowed by the asset’ it can be considered the ‘digital equivalent of [the first limb of] “possession”.’ 157 As for the second limb – the mental element – cryptocurrencies do not pose any unique issues in this regard and thus determining whether it is met will, as is the case in the law as a whole, have to be done on a case-by-case basis. We would therefore formulate the test for the possession of digital assets, and possession generally, as follows: an intention to possess, and such control as is necessary to secure enjoyment of the thing. 158 This builds on the work of Honoré and Salmond, who recognise that not all things will be capable of the same level of control and that what really matters is that one possesses sufficient control, vis-à-vis others and society as a whole, 159 to secure enjoyment of it. Having explained why cryptocurrencies should be considered choses in possession, we can now turn to an analysis of why we say that they are a form of ‘qualified property’ and what exactly we mean by this.
Cryptocurrencies are a form of qualified property
As noted earlier, English law divides all personal property into choses in possession and choses in action. Another division is often overlooked, however: that of ‘absolute’ and ‘qualified’ property.
160
Blackstone describes ‘qualified, limited, or special property’ as being ‘such as is not in its nature permanent, but may sometimes subsist and other times not subsist’.
161
Its most well-known application is with regard to wild animals,
162
however, it can also apply to other ‘things’. Thus, Blackstone states that ‘[m]any other things may also be the objects of qualified property. It may subsist in the very elements of fire or light, of air, and of water’.
163
This follows from the fact that [a] man can have no absolute permanent property in these, as he may in the earth and land; since they are of a vague and fugitive nature, and therefore can admit of a precarious and qualified ownership, which lasts so long as they are in actual use and occupation, but no longer.
164
This qualified property right allows an individual to bring an action against a person who ‘disturbs another and deprives him of the lawful enjoyment of these’ but ‘the property in them ceases the instant they are out of possession’.
165
In this sense, qualified property is what can be called a possessory proprietary right; thus, in the same way that a thief or someone who finds a jewel, can, so long as they possess it, enforce their right of property
166
over a stolen (or found) article against everyone but the true owner,
167
so can an individual maintain their qualified property right in or over
A qualified property right can also arise not due to the nature of the thing but rather the nature of the person holding the right; this is the case, as Blackstone explains, in bailment and pledge. 170 It has also been held by the English courts to apply to a bankrupt regarding ‘anything which he acquires after the bankruptcy’ 171 and has been used as a catch-all term to apply to any limited or special form of property. Thus, a sanitary authority's ownership in a public lavatory 172 and an owner of land's ownership in a drain 173 were both held to be limited and thus qualified property.
The concept of qualified property is a concrete example of the crucial, but oft-overlooked, truth that property in the common law is not a homogeneous concept, 174 with the result that attempting to define it ‘by reference to fixed, universal, and exhaustive criteria is delusive’. 175 Instead, we should accept that there are ‘degrees of property’ 176 or, perhaps more accurately, ‘degrees of thingness’. Consequently, as noted by Peter Turner, ‘property varies in strength’, with ‘strength’ being determined ‘according to how similar a given item of property is to a familiar tangible thing’. 177 One could also consider property rights to be stronger, or weaker, depending on their similarity to ‘typically strong proprietary relations which humans have with respect to tangible things: ownership of land and ownership of goods’. 178
Property is therefore a sliding scale with stronger property, such as land – as well as property rights over or in it, such as absolute ownership – at one end and weaker property such as wild animals or water – as well as property rights over or in them, such as qualified ownership or other possessory proprietary rights – at the other. The point has recently been affirmed in eloquent terms by the majority of the High Court of Australia in [p]roperty is not ‘a monolithic notion of standard content and invariable intensity’; it is not ‘a term of art with one specific and precise meaning’. It is ‘a term that can be, and is, applied to many different kinds of relationship with a subject matter’… Accordingly, property is not for all purposes to be equated with ‘full beneficial, or absolute, ownership’. Indeed, a proprietary relationship can have the quality of relativity.
180
The specific relevance of the concept of qualified property for cryptocurrencies is that many of their attributes are similar to those of things held to be qualified property, such as
However, just as fish in a lake are no longer the qualified property of A if A's creditor, B, exercises their security over the land by selling it to C (even if the sale says nothing about the fish) who takes possession of it, cryptocoins would no longer be the qualified property of A if A, or his creditor B, sells his key to C, as it is this key which allows possession of the cryptocoins. 184 It is unclear why the outcome should be any different if A merely loses his key, as in such circumstances A has lost possession – and, since qualified property is merely a possessory proprietary right, this necessitates loss of ownership on A's part. Moreover, because of the ‘sticky’ nature of the consensus mechanism, which we explore in further detail below, it is not possible for the software developers of a particular chain to release a software patch to allow for the return of misappropriated coins, even if the majority of individuals on a particular chain agree with such action. Thus, coins once lost are lost forever, and it is not possible to seek specific restitution or delivery of them, whether by detinue 185 (where that cause of action still exists or is at least referred to) or conversion. 186 The result is that, in general, whether the value of the coins has risen or fallen, their former owner will only be able to sue for their value as of the date of the detinue/conversion 187 or trespass. 188
Beyond these general circumstances, our analysis uniquely highlights and accounts for the importance of the distinction between custodial wallets (which operate like banks, whereby a user gives the custodian – often a crypto exchange – control over the private keys and access to their wallet in exchange for convenience and peace of mind) and non-custodial wallets (where the holder of cryptocoins maintains full control over and responsibility for their cryptowallet and their private key). 189 In the case of a custodial wallet, our analysis means that as ‘the third party [the custodian] has full control over the cryptoassets’; 190 through possession of the private key, they now own the cryptoassets with the coinholder merely having contractual claims against them for repayment of the cryptoassets on demand. Thus, custodial wallets operate like banks because just as, when depositing money into an account, a ‘customer [of a bank] does not acquire any interest in or charge over any asset of the bank or over all of the assets of the bank [but merely] acquires a chose in action, namely the right on request to payment by the bank of the whole or any part of the aggregate amount of principal and interest which has been credited or ought to be credited to the account’ 191 so too does the ‘customer’ of a custodial wallet.
The result is that as on the insolvency of a bank a customer ‘can only prove in the liquidation of the bank as an unsecured creditor for the amount which was, or ought to have been, credited to the account at the date when the bank went into liquidation’; 192 the same should be true on the insolvency of a custodial wallet provider. There is already US authority to this effect; 193 however, in that case the court held that this was because the custodial wallet customers had explicitly signed over ownership. In our view this is unnecessary – merely giving possession and control of the assets to the custodial wallet holder is sufficient to transfer ownership in exchange for a contractual right to receive payment on demand of the cryptocurrency from the custodial wallet provider. It may be that in certain cases, if one can prove that the custodial wallet holder was holding the assets on trust for their customers, those customers of a custodial wallet could still possess proprietary rights over their coins, 194 although as mere segregation of the funds is insufficient this is likely to require explicit provision in the contract between the customer and the custodial wallet provider. 195 Admittedly, the idea of a trust over qualified property raises some unique issues, particularly as there does not appear to be any authority directly on the point; however, as other possessory proprietary rights can be held on trust – for example, a thief has been held to hold his possessory rights on trust for the true owner 196 – there does not seem to be any good reason why qualified property could not also be held on trust. 197
Our theory does not, therefore, preclude the creation of trusts over cryptoassets, whether in the context of custodial wallets or otherwise, but merely provides a helpful default rule. If a customer of a custodial wallet provider has handed possession of the cryptoassets over to the custodial wallet provider, whether
Finally, limiting the recognition of cryptocurrency as property in this way also captures the widely accepted sentiment in the crypto community that whoever holds the private key to
Admittedly, this understanding of cryptocurrencies has been challenged; thus in
Moreover, relying on developer software updates directly undermines the unique facets of blockchain cryptocurrencies which allow for understanding them in a proprietary way. The more a chain is decentralised, the more robust the existence of an asset which cannot be double spent and is in fact rivalrous (since it is beyond any single user's or group's control), the more likely it is to fork in unpredictable ways if a software update is released. Our account is sensitive to these features of the technology, rather than expecting law to have unrealistic reach in being able to dictate outcomes to a hard-coded system. If a particular chain is no longer decentralised but rather concentrated in the hands of one or very few individuals, 206 this may undermine or, in extreme cases, even eliminate their rivalrousness, and that in turn will undermine or even destroy its proprietary nature (at least as regards those who do not hold the now centralised power on the chain). This is an inherent feature of the technology, which the law must therefore reflect. Likewise, it is the technological operation of cryptocurrencies themselves that necessitates their recognition as ‘qualified property’ because it is simply not possible to own them absolutely. 207 Instead, one can only own them to the extent that one exercises possession over them via holding their private key or, in other words, ‘your keys, your coins’ and vice-versa.
Conclusion
This paper provides a unique contribution to the extensive literature concerning cryptocurrencies in three main ways. Firstly, it offers an overview of the different types of cryptoassets which goes into more depth than other academic engagements with the topic, demonstrating how their diverse natures affect the extent to which they can, or cannot, be considered property. Secondly, it has outlined various underlying philosophical approaches taken to property law, including the ‘law as things’ approach which we argue best reflects the practice and history of common law property. Thirdly, it has outlined three alternative approaches to the proprietary status of cryptocurrencies and explained why, arguably, each of them falls short – for example, because they do not “gel” with the technological realities of cryptocurrencies, or because they cannot explain the practice of common law property law or are not compatible with its history and core structure. Fourthly, it has outlined a novel understanding of cryptocurrencies as a specific sub-category of choses in possession – namely, a qualified, or limited, form of property. This approach best reconciles the technological realities of cryptocurrencies with the practice and understanding of property in the common law. Specifically, we have argued that cryptocurrencies can amount to qualified property so long as they meet the
Footnotes
Acknowledgements
The authors would like to acknowledge Struan Scott, Margaret Briggs, Alex Latu, and Stéphane Sérafin, as well as the anonymous peer reviewers, for their helpful comments on draft versions of this article. An earlier version of this paper was presented at the UWA Private and Commercial Law Annual Conference 2023 and the authors would therefore also like to acknowledge the organisers, presenters, and attendees of that conference. The usual disclaimers apply.
Declaration of conflicting interests
The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The authors received no financial support for the research, authorship, and/or publication of this article.
