Analogy with ownership of traditional coins and notes

With respect to most tangible items, ownership is not determined by possession. Thus, if I hold in my possession a bicycle which I have rented, it does not make me the owner of the bicycle.
With respect to traditional coins and notes, Japanese law makes an exception to this principle. According to an established line of case law, the ownership of coins and notes depends on their possession (e.g. Supreme Court decision on 24 January 1964). There is a good reason behind this treatment. Coins and notes are different from other tangible items in the sense that their financial worth is derived not so much from the material (such as metal and paper) they are made of but from the monetary value (e.g. 10,000 yen) they represent. Accordingly, the ownership of coins and notes is in essence the ownership of monetary value. An analogy could therefore be drawn from it when we consider the ownership of cryptocurrency.
What should, then, be understood as the possession of cryptocurrency? Since the holder of the private key for the address in which cryptocurrency units are held has control over them, holding the private key could be equated with the possession of the cryptocurrency units. It would then mean that the holder of the private key owns the units.

This approach would commend itself for simplicity since in a majority of cases, no further question would arise. But some people may not like this solution since it would give wallet providers the ownership of units that they are entrusted with. Furthermore, the outcome is not clear in any of the following events:

1. The holder of a private key has disclosed it to others. The others would have the same  control over the units. No analogy could be drawn with traditional coins and notes which are physically possessed.

2. A private key has been stolen.

3. The holder of a private key has transferred it to others without effecting transfer of the corresponding cryptocurrency units on the blockchain.

4. Another person has generated an address with the same private key. This is likely to happen where a simple phrase is chosen to generate an address by using a brain wallet.

Other complications would arise if a multi-signature account is used or if a trust is set up over cryptocurrency units.

It seems to me that there is no simple test which could furnish answers to all ownership questions.

Choice of law rules for proprietary issues

In my earlier post, I have noted why legal ownership of cryptocurrency matters. The use of cryptocurrency as a collateral is also imaginable. 

The prerequisites for acquiring such proprietary rights and their effect are to be determined by legal rules. In the absence of internationally uniform rules, an applicable national legal system must be determined by choice-of-law rules of the country in which such issues are litigated or considered.

With respect to a tangible item, proprietary issues are subject to the law of the country where it is situated (lex situs or lex loci rei sitae) under the prevailing choice of law rules. With respect to intangible goods, choice-of-law rules are not as well established. In one of my articles, I have argued that the proprietary issues of an emissions quota, a species of intangible goods, should be subject to the law of the country where it is registered. 

Cryptocurrency is intangible. It is also a financially valuable data (information) as is an emissions quota. However, unlike the latter which is registrable on a national registry, cryptocurrency is registered on a blockchain which is borderless. This makes it difficult to localise cryptocurrency in a particular country for choice-of-law purposes.

VAT on transactions exchanging cryptocurrencies for traditional currencies and vice versa (comment on CJEU judgment 2)

The part of the judgment in which the Court held that transactions which consisted of the exchange of traditional currencies for bitcoin units and vice versa constituted the "supply of services" is relatively unremarkable. The "supply of services" and "supply of goods" are two main categories of economic activities taxable under the VAT Directive (Art. 2(1)). The Directive further provides, ‘“[s]upply of services” shall mean any transaction which does not constitute a supply of goods.’ (Art. 24(1)). Seen in this context, the notion of "supply of services" would hardly be expected to receive a narrow interpretation.

It may, however, be of interest to note that the European Court does not necessarily give the same meaning to a similar concept in different contexts. Thus, the Court once noted, "it is not necessary ... to interpret the concept of the 'provision of services' set out in the second indent of Article 5(1)(b) of Regulation No 44/2001 in the light of the definition of the concept of 'services' in the Community directives on VAT" (Falco Privatstiftung and Rabitsch (Case C-533/07) (2009)). On that reasoning, the Court interpreted the concept of the "provision of services" narrowly for the purpose of the rules for determining the jurisdiction of courts of the Member States. In a future post, I intend to discuss whether a claim in matters relating to a contract for the exchange of cryptocurrencies with traditional currencies would fall within the "provision of services" under what is now Article 7(1)(b) of the Brussels I-bis Regulation and if so, how the provision is to be applied.

Why legal ownership matters.

What follows is a description of three of the circumstances where the legal ownership of cryptocurrency matters.

1. The person with whom cryptocurrency is deposited (such as the provider of an exchange or an online wallet) has gone bankrupt. 

The depositor would certainly have a contractual claim for the return of the deposit. But the deposit would be converted into the fiat currency which is legal tender of the country where the bankruptcy proceedings are opened. Furthermore, the depositor would have to join other creditors and could obtain only a proportional recovery.

If the depositor could alternatively claim the ownership of the units of cryptocurrency which have been deposited, he would be able to obtain a full recovery outside the bankruptcy proceedings. The Tokyo District Court case, discussed in my earlier post, arose in this context but was decided on a narrower ground that only tangible items could be an object of "shoyûken" in Japanese law. 

2. Cryptocurrency units have been stolen and then transferred to third parties. 

The original owner could certainly claim damages in tort from the thief but his effort of recovery will often end in vain. Even if a restitutionary claim is available against the third party who obtained the units in bad faith, it would not defeat the seizure of the units by a creditor of the third party nor would it lead to a full recovery in the case of bankruptcy of the third party. If, however, the original owner retains the ownership of the units, he could defeat the seizure of the units and could also obtain a full recovery in the case of the third party's bankruptcy.
3. Cryptocurrency units have been sent to a wrong address or in a wrong quantity due to an error. In the case of bankruptcy of the recipient, a full recovery could not be obtained by a restitutionary claim but could be obtained if the original owner retains the ownership of the wrongly sent units.

田髙寛貴「金銭所有権と価値の追及」

　田髙寛貴「金銭所有権と価値の追及」(法学教室June 2015 No.417、22頁)は、仮想通貨の物権的側面の検討に大変示唆的である。

　この論文は、現金通貨に物権的保護を認める議論を展開した上で、預金債権は、預金保護措置などにより、弁済確実性が高いことから、「現金をもっている」のと同視でき、他の一般の債権と区別されうるとする。ただ、郵便切手や有価証券，さらには商品券やプリペイドカード，電子マネー等々，多様な金銭価値の存在形態のうち，どこまでを物権的帰属保護の対象に含めてよいかは問題であるとし、「ビットコインは、通貨としての価値を担保する機関が存在しておらず、このようなものにまで物権的な帰属保護が妥当するとはいえない」と述べる。

　たしかに、仮想通貨には、通貨としての価値を担保する機関が存在しておらず、その経済的価値は市場の評価に委ねられている。しかし、預金等と異なり、そもそも債権ではなく、債務不履行が考えられないので、弁済確実性も問題とならず、同列には論じられない。仮想通貨に物権的保護を認めるとすると、別の論拠が必要ということになろうか。物権的保護を認めるとしても、どの仮想通貨が保護されるべきかの判断(ビットコインのみを明示したCJEUのVAT判決も参照)が必要となる。

Replacing letters of credit with escrow transactions using multi-sig accounts

In an earlier post, I have argued that the blockchain technology could finally herald a breakthrough in the digitization of bills of lading, which are a backbone of trade in goods.
Another backbone of trade in goods is a letter of credit. It may be replaced by a vastly cheaper alternative of escrow transactions using multi-signature accounts on blockchains. A letter of credit relies on the issuing bank checking conformity of documents with the terms of the credit. As a non-expert in goods, the bank is not concerned with the conformity of goods with the underlying sale contract (under the principle of independence as enshrined in the UCPs). Under the alternative model, an expert in goods will act as the holder of a third signature for the multi-signature account, who will be called upon to inspect the goods in case of any dispute between the seller and the buyer.
For both bills of lading and letters of credit, the blockchain technology may offer alternatives and thus has the potential of providing a spark for the world trade and economy. Are there any entrepreneurs willing to put these ideas into practice?

VAT on transactions exchanging cryptocurrencies for traditional currencies and vice versa (comment on CJEU judgment 1)

Hot on the heels of my analysis of the Advocate General's opinion, the Court of Justice of the European Union gave its ruling yesterday.

It is noteworthy that the dispositive part of the judgment speaks solely of "the ‘bitcoin’ virtual currency" rather than using a more general expression like "a pure means of payment." So the question I raised with the AG's opinion would not arise under the judgment. It is a judgment specifically on bitcoin, though it does not mean that the possibility of a mutatis mutandis application of it to other cryptocurrencies is foreclosed.

So far as bitcoin is concerned, the Court embraced the opinion of AG. But there are some differences in their reasoning. Thus, AG noted that the Court had not previously ruled on the rationale of the exemption for currency and considered that its purpose is to ensure that, in the interests of the smooth flow of payments, the conversion of currencies is as unencumbered as possible. The Court, on the other hand, considered that the exemption is intended to alleviate the difficulties connected with determining the taxable amount and the amount of VAT deductible which arises in the context of financial transactions. The reasoning of AG seemed informed by a broad policy consideration while that of the Court is based on a technical consideration which is specific to the context of VAT. In the final analysis, neither AG and Court saw good reasons to differentiate bitcoin from traditional currencies with respect to the rationale to which each of them attributed the exemption.