The Bitcoin white paper was released in 2008 under the pseudonymous name of Satoshi Nakamoto in an effort to introduce a new ‘electronic cash system’. Its rising popularity in society has raised questions of its classification and treatment concerning the law. This essay will begin by assessing what is a bitcoin and its distinctive characteristics and will evaluate its nature as a property and a currency. Finally, throughout the essay, the importance of these classifications will be highlighted and potential issues that arise with respect to the law. 

What is a bitcoin? 

In its simplistic definition, a bitcoin is a virtual or digital coin that is used as part of the bitcoin system. Bitcoin as a system is an electronic cash system that uses cryptographic proof to permit any two parties to make payment transactions with one another, with the absence of a financial institution or trust third party (Nakamoto, 2008, p1). The system contains a permissionless consensus protocol that allows for the validation of a transaction. Through this, the transaction is recorded on a blockchain, and by that point it becomes immutable. The value of a bitcoin is not pegged to any fiat currency or specific commodity and therefore its value relies on the demand and validation in which individuals in society are willing to accept it as a currency or asset (Wiseman, 2016, p418). 

Hence, a bitcoin is deemed intangible, and therefore it is important to understand its classification as property or currency. Our current system has created clear definitions between properties and currencies, and therefore, the law has also been developed to create distinctive rights for them. 

Bitcoin as a property

Different jurisdictions have varying property laws and regulations, and therefore the question as to whether Bitcoin is property will depend on the jurisdiction. Regarding English law (common law jurisdiction), National Provincial Bank v Ainsworth [1965] provided the validity of property in principle will mean that it is ‘definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.’ The private key is unique to the particular transaction that the individual makes and without it, the bitcoin cannot be spent or transferred, satisfying the requirement of definability. (Shillig, 2021). Identifiability can be made through the block explorer as transactions are recorded on the blockchain, while permanence can be assumed after 6 verifications whereby the transaction cannot be (economically) reversed (Nakamoto, 2008, p2). Hence due to its characteristics, in principle, Bitcoin can be considered as a property. However, indirect holding of property, English law can have issues in recognizing- intangible personal property, as it does not fall under chose in possession (physical existence) and chose in action (enforceable in litigation). Bitcoin is intangible and the network has no legal entity for enforcing rights. 

However, the High Courts in AA v Persons Unknown [2019] held that even if the property does not fit both conditions, if the asset has a monetary value then it will likely be seen as a property for the courts. This has demonstrated the progressive and developing acceptance of cryptocurrencies such as Bitcoin as a means of property. Nonetheless, not all jurisdictions have recognised Bitcoin as a form of property. In the Tokyo District Court and the German courts, Bitcoin has not been recognised as a property, while in Russia, ‘Ninth Arbitrazh’ Court of Appeal accepts it. 

Under English law, a property is considered as a bundle of rights, and hence, the indirect holding of bitcoin, through currency exchanges can change the nature of the Bitcoin as a property and rights that pertain to it. In a direct holding of Bitcoin, an individual stores the private key either in a hot wallet (app connect to the internet) or a cold wallet (USB/Drive). This allows for the direct ownership of the bitcoins because the individual controls the private key which allows them to spend the coins. However, when the coins are stored with an exchange (such as Coinbase or Binance), the individual does not physically hold bitcoins as they are held in the exchange on behalf of the individual. This results in more limited rights that can be claimed under the exchange provider because an individual only has personal rights towards Bitcoin. Hence, if the exchange becomes insolvent, or even hacked, then the bitcoins will be lost and there is no proprietary claim that can be made. Additionally, it also prevents proprietary protection in insolvency proceedings against the individual and they do not physically hold the private key.

An issue that Bitcoin faces as a property, is the rightful transfer or delivery of the bitcoin to another individual. The ability for effective transfer of property is important in ensuring that they are delivered to the rightful individual. The issue arises when an individual transfers a bitcoin to the wrong receiver or when the amount send is also incorrect. The transaction made as the bitcoin is sent cannot be reversed. The ledger that is distributed and decentralised is shared over a network, and the nodes begin to validate the transaction by recording it on the ledger (Nakamoto, 2008). Once, it is recorded on the ledger, the transaction cannot be changed (Nakamoto, 2008). With the absence of a central authority, the system would not be able to automatically retrieve the unlawful amount that was spent. There would need to be total reliance on the recipient to make a new transaction sending back the correct amount, and there is no guarantee that this will be done. Additionally, because the system is decentralised, courts cannot enter the system and request the retrieval of funds, limiting the position of legal remedies possible in this case. 

Furthermore, if Bitcoin were to be considered property, it is important to be part of the estate of an individual. However, pseudonymity may be a problem specifically with reference to insolvency law. It would be difficult to track down because there is no identity attached to the transaction or ownership of bitcoins, therefore freezing or confiscating property will be difficult for creditors. 

Bitcoin as a currency

Bitcoin may also be considered as a currency, as more enterprises such as Tesla, Paypal and PwC have started accepting transactions using Bitcoin, it is important to assess its application as a currency. Although there is no accepted wide definition of what constitutes money, a currency can be summarised as a medium of exchange in the form of banknotes and coins. In English law, under the Coinage Act (1971) section 2, a legal tender is the currency referred to as English banknotes and coins. The domestic model is based on a national view and does not even account for foreign currencies. However, foreign currencies are accepted as a medium of exchange under English law (Sale of Goods Act 1979) and Gleeson (2018, p7) questions the acceptance of bank credit as a valid payment means. Following this idea, it could be observed that Bitcoin could be treated as a foreign currency, and under this idea, it would be an acceptable means of payment. 

Furthermore, the social theory of money indicates that social values and the approval of society affects the acceptance of a currency as a means of exchange more so than the utility of the currency itself (Evans, 2009). Under this theory, the nature of Bitcoin is still uncertain due to its limited adaptability in the current market and its social standing. However, its adoption in different global businesses may indicate the start of society’s acceptance as a means of exchange. The accessibility of digital exchanges from fiat currencies to bitcoin aids in pushing the idea of bitcoin as a means of transaction for goods and services. The distinguishing factor of bitcoin from an accepted currency is that it can only be used as long as the person providing the goods or services want to recognise it as a medium of exchange. Because this area has not been regulated, this provides uncertainty for consumers utilising the currency because of the limited guarantee of its approval. 

Bitcoin contains a characteristic that makes it less favourable to be a property and acts more like a currency. In the design of a bitcoin, the owner of the bitcoin should contain the private key to that bitcoin. This key permits ‘transfer or other dealings in the cryptoassets to be cryptographically authenticated by digital signature’ (UK Jurisdiction Taskforce). However, when this key is lost or cannot be found, it does not allow the individual to spend this bitcoin. The proprietary nature of bitcoin is dependent on the availability of the private key, and if it is not there, then the Nemo dat principle cannot be applied. Just like money cannot be retrieved when lost, Bitcoin is worthless without the use of a private key. Therefore, there is a strong case that it applies as more of a currency than property based on the condition of the existence of the private key. From this idea, individuals would not be able to have a claim in retrieval or compensation for the loss of the private key, limiting the enforceability rights that come with proprietary interests. 

Bitcoin: a property or currency or both? 

The current proprietary and financial system, has created a clear separation between an asset and a currency. Therefore, the concept of having a currency to transact with and also is an asset to hold as an investment is unfamiliar to the current system adopted. As previously mentioned, a property and a currency have different claims and rights surrounding it, and the law does not understand an asset that can fall under both categories. For example, there are regulatory requirements for the specific monetary licensing and trading of currencies, in which depository banks and exchanges fall under, but holding and selling of property would have different requirements. Essentially, they are conducting different functions and are different in nature however, the asset in question is the same. The application of different laws on the same asset, bitcoin, is confusing and uncertain for consumers and businesses that wish to utilise the medium or are given the tokens. Could a new classification, outside the traditional boundaries of the law need to be made to cater to such a versatile asset class? In the meantime, Gleeson (The Legal Concept of Money, 2018, p7) suggests that the common will be looking at the parties’ intention in deciding whether bitcoin is being perceived as a property or a currency. 

Conclusion 

Bitcoin is a system that allows for a currency to be held, transacted with, and stored all in one. Its abstract and novel mechanism within modern society makes it difficult to place within the strict boundaries of the law. However as it becomes more prominent and significant, it is important that the law does not neglect bitcoin’s proprietary nature and include it as part of the currency and property system. This would enable its inclusion in family law matters and insolvency proceedings which will change the legal and financial landscape regardless of whether it is a property or currency. 

Bibliography: 

Legislation 

Coinage Act 1971

Sale of Goods Act 1979

Cases: 

National Provincial Bank v Ainsworth [1965] AC 117 (HL), 1247-8.

AA v Persons Unknown [2019] EWHC 3556

Books 

Gleeson S, The Legal Concept of Money  (OUP, 2018).

Journal

Evans MS, ‘ Zelizer’s Theory of Money and the Case of Local Currencies’ (2009) EPAES  

Nakamoto S, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (2008) https://bitcoin.org/bitcoin.pdf

Schillig M, ‘Cryptocurrencies development and perspectives’ (2021)

UK Jurisdiction Taskforce, ‘Legal statement on cryptoassets and smart contracts,’ The LawTech Delivery Panel (November 2019)

Wiseman A S, ‘Property or Currency? The Tax Dilemma Behind Bitcoin’ (2016) Utah Law Review: Vol. 2016 : No. 2 , Article 5 <http://dc.law.utah.edu/ulr/vol2016/iss2/5>, 417 – 418.