Will cryptocurrency become mainstream?
The day cryptocurrency came of age
The continued growth in cryptocurrencies has seen both legitimate investors and fraudsters attracted to the blockchain technology, but a court ruling that Bitcoin constitutes property under English law is likely to have far-reaching implications for all users.
The effect of the ruling in the case of AA v Persons Unknown is that the cryptocurrency is capable of being the subject of interim proprietary injunctions, which was the objective of this legal action, initiated after fraudsters held a company's data hostage in return for a Bitcoin ransom. It also recognises the legal rights of cryptocurrency investors and governs how such assets can be owned, used and transferred, including situations such as bankruptcy.
Cryptocurrencies have been around for more than a decade and rely on blockchain technology, which is effectively a digital ledger shared and verified across innumerable computers worldwide, protected by complex cryptography to make it secure and resistant to fraud. By opening the door to greater security for cyber transactions and the transfer of money in areas such as property transactions, blockchain technology can bring many benefits. However, the digital currencies that have grown on the back of blockchain are often making headlines for different reasons, whether because of online scams to attract investors or where fraudsters use the currencies as the payment path for ransom demands, expecting their holding to be inaccessible, even if traceable.
This case arose following the computer hacking and encryption of a company's customer systems. The company was insured for cyber-attacks, and the insurers agreed to pay US $950,000 in Bitcoin to get the data back. Once the system was recovered, the Bitcoin was traced, and the insurer applied for a proprietary injunction to recover the ransom payment.
The action rested on whether a cryptocurrency could be defined as property, as this affects whether an asset can be secured or charged, and whether it can be seized or frozen for the purposes of enforcement, as was the aim in this case.
The law distinguishes personal property from fixed, real property such as land or buildings, and recognises two types. Firstly, assets which can be possessed, such as works of art, money and stocks and shares and, secondly, assets which give rise to a right that can be enforced through the Courts, such as a right to receive goods or money under a contract. While there had been several cases which were considered persuasive authority on cryptocurrency being property, the question had not been subject to a direct ruling.
Now, this judgement has tackled the issue and has ratified in English law the Legal Statement on Cryptoassets and Smart Contracts which was published by the UK Jurisdictional Taskforce in November 2019. The judge accepted the Taskforce's conclusion that cryptocurrencies, including Bitcoin, meet the four criteria set out in Lord Wilberforce's definition of property inNational Provincial Bank v Ainsworth that it be "... definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability".
Mark Poulton Solicitor and Head of the Corporate and Commercial Department: "This represents a significant step forward in how cryptocurrencies such as Bitcoin are treated. It's been a game of catch-up for the regulators since this technology landed and the judgement provides some much-needed clarity and will be welcome news to investors - although less so for fraudsters.
What is the future of cryptocurrency?
"For the future, there will be greater certainty for cryptocurrency investors and users on their legal rights in owning, transferring and using cryptocurrency. For those concerned about cyber-attacks, or their insurers, there will be a sigh of relief at the possibility of an injunction when funds have been stolen or ransoms paid."
While the decision is seen as a significant development in the legal framework to underpin such assets, there is currently no legislation on the horizon to regulate cryptocurrencies, in the UK or internationally, although the World Economic Forum recently launched a global consortium for digital currency governance. This brings together governments with financial institutions and technical experts to guide the development of an integrated global digital currency system.
Mark added: "Although this increased legal certainty is likely to lead to increased market confidence in cryptocurrencies, by underpinning the viability of such assets, the issues surrounding such trading mean it's always worth taking professional advice. It's important to consider their suitability for a specific use, as well as keeping in mind the volatility we have seen over recent years."
Mark Poulton is a Solicitor and Head of the Corporate and Commercial Department and can be contacted on 01323 434420 or mp@stephenrimmer.com