modern money

Draft Paper: Modern Money

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Modern Money

Modern Money .................................................................................................... 1!

INTRODUCTION ............................................................................................ 1!WHAT IS BITCOIN? ....................................................................................... 2!

The Consensus Problem .............................................................................. 2!Bitcoin .......................................................................................................... 4!

WHAT IS MONEY? ......................................................................................... 5!Legal Orthodoxy ........................................................................................... 6!Medium of Exchange ................................................................................... 7!Negotiable Credit ....................................................................................... 10!Accounting ................................................................................................. 13!Bitcoin ........................................................................................................ 15!

THE PRIVATE LAW FRAMEWORK ............................................................ 17!Notes and Coins ......................................................................................... 17!Bank Money ............................................................................................... 20!Bitcoin ........................................................................................................ 24!

CONCLUSION ............................................................................................... 29!

INTRODUCTION There are many legal contexts in which the question ‘is this money?’ arises, and no

reason to assume that each will produce precisely the same answer. Yet, in 1992, in

the fifth edition of his treatise The Legal Aspect of Money, F. A. Mann considered that

‘clearly the word has an ordinary general meaning which requires definition not only

for the sake of theoretical classification, but also for practical purposes’,1 and took up

the challenge thereby posed. For Mann the State was pivotal: whatever the economist

might recognise as money, only that which Parliament had awarded the status of

‘legal tender’ was acceptable to the legal theorist.

Whilst his was not the first text to attempt a general definition of money, since

1992 Mann’s book, and the arguments therein, have shaped legal discourse

surrounding the nature of money. As payment habits have developed, the definition

has been revised to include more modern monetary technologies. Yet current

orthodoxy, framed by the seventh edition of The Legal Aspect, remains that

centralised governance is fundamental in two, connected, ways: first, the State must

control the monetary system – in particular, the designation of a unit of account, the

issue (if not the creation) of money, and the implementation, thereby, of a monetary

policy; second, if the definition of money is to be broader than legal tender, we must

1 F. A. Mann, The Legal Aspect of Money (Oxford: Clarendon Press, 5th ed) 4.


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at least have recourse to an homogenous framework of norms and consequences in the

regulation of private dealings.2

New payment technologies that replace systemic centralised control with

cryptographic consensus protocols have thrown these claims into sharp relief. Using

Bitcoin as the lynchpin for a discussion of decentralised digital currencies more

broadly, I consider two questions in what follows: (i) are crypto-currencies money;

and (ii) does it matter? I argue that Bitcoin, which contains both a form of negotiable

credit and a method of accounting, is a private (non-State) money, but that its

definition as such does not permit us to draw any automatic conclusions about its

treatment as a matter of private law. Modern manifestations of credit raise new and

important questions about the political assumptions and safeguards that accompany

financial infrastructures. Rather than transplanting new monetary practices into a

centuries-old framework for tangible cash, I argue here that we must develop a system

that acknowledges overtly the different economic structures underpinning disparate

money media.

WHAT IS BITCOIN?

The Consensus Problem

The imagery conjured by the term ‘bitcoin’ is monetary – indeed, specifically

numismatic. Yet, the problem that the Bitcoin protocol was designed to solve is not in

any sense peculiarly financial, but rather a more basic problem of coordination, which

can be framed broadly as follows: how, without reliance upon some mutually

recognised central authority, can we enable disparate actors within a network to come

to an agreement about the validity of a particular transaction? That transaction might

involve the location of purchasing power within the network at a given moment in

time, but it might also, for example, concern the entitlement to control a particular

asset, an agreement for service, or the casting of a vote.

Elsewhere, I have defined a legal transaction as an act that is intended to and

does in fact bring about a change in two or more parties’ legal positions, precisely

because that is what is intended.3 Our legal system prescribes various conditions for

2 C. Proctor, Mann on the Legal Aspect of Money (Oxford: OUP, 7th ed). 3 Forthcoming xxx. See also J. Hage, ‘What is a Legal Transaction?’ Academiaedu accessed 1st January 2014.


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validity, which support the ability to reach consensus about the occurrence of certain

types of transactions with relative ease. So, A has transferred ownership of his house

successfully to B if certain operative criteria have been fulfilled, which can be

evidenced in a limited number of formal ways.

We might make the proof of those criteria slightly more difficult by the

interposition of a gap in the chain of possession: A delivers the deeds not in person,

but by mail. Here, A must trust that the postal service is able and will execute his

intention without interfering with the substance of the transaction. In each case the

corresponding legal event is recorded in a register of entitlements that the parties will

either accept as accurate, or challenge by reference to another formal system of third-

party verification, the decision of which both must accept. We can now say ‘B owns

the house that previously belonged to A’.

Where information is transmitted digitally, both the consensus problem and

the solution to it are analogous to the example immediately precedent. In computer

science, a transaction is a series of linked instructions that together bring about a

change in the informational makeup of a system, such as a database or other

filesystem. Suppose A wishes to send B a digital message – email, text message, or

financial credit – and that to do so he inputs into his device data that includes the

content of the message, the intended recipient and the timing of delivery; again, what

we need is a mechanism for ensuring the integrity of the instruction, its execution and

the validity of the resulting change in network state. Legacy communications and

financial infrastructures accordingly provide both parties with confidence that A’s

instruction will be acted upon in its original form by the proliferation of mutually-

trusted central authorities, which – like postal services – operate as clearing-houses

for the exchange of information.

In exploring alternative, acentric (‘distributed’) mechanisms for securing

transactional integrity in the 1980’s, Lamport, Shostak and Pease posed a problem

that they termed the ‘Byzantine Generals Problem’,4 by which they sought to

exemplify the obstacles to reaching consensus without reliance upon trusted third

parties. The stated objective was to describe a system that could overcome the

problem of conflicting information streams – in their words, a computer system that

4 L.Lamport, R. Shostak, M. Pease, ‘The Byzantine Generals Problem’ SRI International http://research.microsoft.com/en-us/um/people/lamport/pubs/byz.pdf accessed 3rd January 2016.


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could ‘cope with the failure of one or more of its components’,5 which has come to be

known was ‘Byzantine fault tolerance’.

Their primary hypothetical, from which the name of the problem is derived,

posits divisions of the Byzantine army camped outside a hostile city, intending to

invade and capture it. The authors ask us to assume that in order for the operation to

succeed, the generals need to arrive upon a consensus as to a particular group course

of action – attack, or retreat. Yet, we are also told that: (i) several traitorous generals

are present in the group who are able to vote selectively for suboptimal strategies; and

(ii) all generals are able to communicate only through messengers who may forge or

fail to deliver attempted communications. A reliable algorithm, in this instance, is one

that can guarantee both that the loyal generals obtain the same information regardless

of what the traitors do, and that the traitorous generals will not pervert the execution

of a rational plan.

The operation of such an algorithm, the authors argue, would be both

prohibitively expensive and slow. Until recently, therefore, it was generally accepted

that the coordination of individual activities over the Internet required some mutually-

trusted central authority. Now, however, algorithms that demand processing power

from service users (‘proof of work’), or prior access to a defined share of a network

(‘proof of stake’), have been harnessed, on a small scale, to achieve practical fault

tolerance in determining the validity of transactions that are generated using public

key cryptography. It is this development that lies at the heart of the Bitcoin protocol,

which has come to be synonymous in lay discussion with the development of so-

called ‘crypto-currencies’ more broadly.

Bitcoin

In the context of digital payment transactions, the consensus problem is often

expressed as the risk of ‘double-spending’, or the risk that a party will continue to

have unrestricted recourse, after payment, to a defined unit of purchasing power, and

will transmit a repeat transaction to the database. That problem is typically solved, as

above, with the use of financial intermediaries that upon payment instructions to

ensure equivalence between transactional input and output.

However, in 2008, in a paper published in an online cryptography forum under 5 Ibid 382.


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the name ‘Satoshi Nakamoto’, a writer presented the blueprint for a decentralised

system, called ‘Bitcoin’.6 Two features would, Nakamoto claimed, allow the system

to operate without central authorities: (i) public announcement of all transactions; and

(ii) network consensus as to a complete history of those transactions, so announced.

And because adding a transaction to the public record would require significant

computational power, the system would be practically, if not theoretically, secure.

Bitcoin was introduced on 3rd January 2009 as open-source software, in a form

that adheres closely to Nakamoto’s model. A bitcoin is a chain of digital signatures,

constituting a complete history of transactions. In order to make a payment, the payor,

A, signs, using a code that remains private, a representative value or ‘hash’ of the

transaction in which he gained control of an earlier output. A then broadcasts the

transaction publicly to the network, declaring (i) that he has control of the bitcoins he

wishes to reassign, and (ii) that they are intended to be transmitted to address of the

payee, B. That signature is then added to the set of transactions that makes up the

bitcoin.7

Each transaction so generated is gathered into a block, and ‘miners’ are

incentivised to contribute processing power to the network, receiving bitcoin in return

for the solution to complex computational problems that assign to each block of

transactions its correct value, allowing it to be incorporated into the public database.

Each block references its predecessor, so that they too form a chain – the ‘block

chain’. The system is thus both pseudonymous and transparent: whilst a particular

address cannot be connected to a real world identity by any logical internal to the

protocol, the flow of funds through the system is recorded on a public ledger that is

accessible to all participants.

WHAT IS MONEY?

In order to determine whether Bitcoin can be understood as a monetary system, this

part provides both a context for the orthodox account of money, and seeks to refine it

by reference to more recent developments in monetary theory. I argue that the Bitcoin

protocol, which operates as a localised accounting system of negotiable credit, is a

private (non-State) monetary system. 6 S. Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ wwwbitcoinorg accessed 27th October 2014. 7 S. Meiklejohn and others, ‘A fistful of bitcoins: characterising payments among men with no names’ Proceedings of the 2013 conference on Internet measurement conference .


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Legal Orthodoxy

Our legal texts have, at times, evidenced a pattern of resistance to changes in the

practical manifestations of liquid wealth accumulation and payment. In the fifth

edition of The Legal Aspect of Money, Mann considered that ‘the economist’s view

that everything is money that functions as money is unacceptable to lawyers’, giving

as a first example bank accounts, which, he said, ‘are debts, not money’:8

Seeing that everywhere in the world the vast majority of transactions is completed by the transfer of some kind of ‘bank money’… most modern economists, all commercial men and some lawyers cavil at the alleged narrowness of the legal approach. Yet the positive law of money leaves no alternative, for in principle means of payment other than bank notes and coins may freely be rejected by a creditor to whom they are tendered.9

Mann’s definition was clear, and it was limited: ‘in law, the quality of money is to be

attributed to all chattels which, issued by the authority of law and denominated with

reference to a unit of account, are meant to serve as the universal means of exchange

in the State of issue’.10

Two separate ideas are revealed by this statement, each of which goes both to

the function of money and the State’s relationship with it: first, money is the means

by which commodities are exchanged, and, in particular, it is that which an individual

is required – by State mandate – to accept in settlement; secondly, money is

denominated by reference to whatever is the State-designated unit of account.

The first tenet of orthodox legal monetary theory to disappear was the

insistence upon the role of the state in delineating the scope of money. By the seventh

edition, the new editor of Mann on the Legal Aspect of Money had expanded the

definition to include anything treated as a means of payment ‘within the community

generally’, explicitly incorporating bank accounts.11 This approach reflects the

position of the English High Court over a century earlier, in which Walker’s

definition of money was accepted. Money, in Moss v Hancock, was:

that which passes freely from hand to hand throughout the community

8 Mann, The Legal Aspect of Money, 5. 9 Ibid 6. 10 Ibid 8 (emphasis added). 11 Proctor, Mann on the Legal Aspect of Money [1.70].


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in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities.12 Yet Proctor was careful to preserve Mann’s earlier conclusions about the

private law apparatus for the treatment of money media:

If new means of payment are to constitute ‘money’, then consistency and the lawyer’s respect for precedent demand that those new means must display characteristics which are in most respects similar to the more traditional, physical form of money. It thus becomes necessary to seek to draw parallels between the legal attributes of the two forms of money.13

Since ‘payment by means of a bank transfer shares many of the legal characteristics

of a payment in physical money’, this, argues Proctor, justifies the conclusion that

bank accounts are indeed money, for legal purposes.14 So, money, for Proctor, is

anything generally accepted as a means of payment, if and, indeed perhaps because,

its legal attributes fit a predetermined model.

Whilst Proctor rejects the idea that only tokens created by central or delegated

State authority can be money, the idea that the State must prescribe the unit of

account by reference to which values are measured and expressed is also retained in

the most recent edition of Mann’s text. To this is added the idea that ‘the legal

framework for the currency must include a central bank or monetary authority

responsible for the issue of the currency, and including appropriate institutional

provisions for its management through the conduct of monetary policy and the

oversight of payment systems.’15

New orthodoxy accordingly has three tenets: (i) money is a medium of

exchange or mechanism of payment, which (ii) is expressed according to a scale

calibrated in state designated units of value, and (iii) operates within a framework of

homogenous legal norms and policy principles.

Medium of Exchange

12 Moss v Hancock [1899] 2 QB 111, 116. 13 Proctor, Mann on the Legal Aspect of Money [1.72]. 14 Ibid [1.72]. 15 Ibid [1.68].


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The idea that money operates as a medium of exchange carries a great deal more

contextual baggage than either Proctor or Mann ascribe to it. The orthodox economic

account of money, which has survived a quarter of a millennium, is similarly three-

pronged. Money is: (i) the medium or media by which different commodities are

exchanged; (ii) a scale for expressing measurements of relative value, calibrated by

reference to accepted units; and (iii) a store of transferable purchasing power, which

can be expressed as a constant number of these units. Each of these characteristics is

generally considered to form an integral element of money’s most basic definition,

but the most important is the first.16

The genesis of this account is Adam Smith’s exposition of the evolution of

money in The Wealth of Nations.17 There, Smith hypothesizes a numismatic history of

barter, in which actors within a market begin by exchanging things and services

directly for other things and services.18 Such systems, he argues, quickly become

clogged by the problem of the ‘the double coincidence of wants’:19 if A has x and

wants y, and B has y but will only swap it for z, in order to get y A must find C, who

has z and is willing to swap it for x. So, money is introduced as a common instrument

of commerce, to perform the simple and crucial function of lubricating the

marketplace: now A and B could simply accumulate p, which they could both be

confident would be desired by C, D or any other market actor.

Many things, Smith explains, have been used as media of exchange: salt in

Abyssinia; dried cod in Newfoundland; tobacco in Virginia, and, of course, most

commonly, the metal coin.20 Yet, this account directs us to assume that it is,

invariably, something that is already both ‘immediately valuable’ and circulating

widely in a particular community.21 The practice of exchanging commodities for this

medium converts it into a universal reference point for value, so that money is at once

a unit of account and a store of immediately useful abstract value.

Later, from this system of commodity money, emerges a system of

representative or ‘fiat’ money – money as trust, rather than thing. In this system, the

value of money is derived, not from its constituent material, but from the knowledge

16 D. Fox, Property Rights in Money (OUP, 2008) [1.20]. 17 A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (K. Sutherland ed, OUP, 2008). 18 Ibid. 19 W. S. Jevons, Money and the Mechanism of Exchange (New York: D. Appleton and Co, 1876). 20 Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. 21 G. Simmel, The Philosophy of Money (Routledge, Reprint ed, 2011) 151.


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that the fiat money could be substituted immediately for ‘money proper’.22 And once a

society becomes accustomed to representative money, the fact that it might no longer

be customary, or even possible, to reduce promises to notes, notes to coins, and coins,

in their turn, to gold or silver, has no effect on money’s function as such. Thus we

have our system of metal, paper and trust.

As an intellectual experiment, this story can be contextualised by the debate

that preceded government plans to deal with the poor state of coinage and fluctuations

in the market prices of precious metals and foreign exchanges, at the end of the

Seventeenth Century. John Locke and Sir Isaac Newton were two of the most

influential writers advocating recoinage at a weight consistent with the value of

constituent metal. Both took inflation for granted, but argued that it could be

counterbalanced by Government price controls. In response to a report written by

William Lowndes, Secretary to the Treasury, proposing debasement according to the

market price of silver bullion,23 Locke wrote, ‘Silver is the Instrument of Commerce

by its intrinsick Value’,24 arguing that:

Lowndes’ fanciful justification that there was some metaphysical plane on which a coin would retain its ‘value’ despite losing 20 per cent of its silver was therefore as bare-faced and ridiculous a deceit as claiming ‘to lengthen a foot by dividing it into Fifteen parts, instead of Twelve’ while still ‘calling them Inches.’25

This conclusion was referred to Parliament, and in 1695 Charles Montagu forced

through a law for compulsory recoinage in established standards of minted silver

money.26

This version of the history of money, in which counting is merely a practical

way of verifying a particular metal content,27 is particularly convenient. It provides

not only a solution to the double coincidence of wants, but also a ready-made value

scale: whatever quantity of a particular metal is ordinarily exchanged for commodity

x is the market-determined money value of that thing. As such, it has proven 22 J. M. Keynes, A Treatise on Money (New York: Harcourt, Brace & Co) 5. 23 Report Containing an Essay for the Amendment of the Silver Coins: J. McCulloch, Classical Writings on Economics. Volume II. A Select Collection of Scarce and Valuable Tracts on Money. (London, 1995). 24 Further Considerations Concerning Raising the Value of Money, Wherein Mr. Lowndes's Arguments for it in his late Report concerning An Essay for the Amendment of Silver Coins, are particularly Examined J. Locke, The Works of John Locke, vol 2 (London, 3rd ed, 1727) 67. 25 F. Martin, Money: the Unauthorised Biography (The Bodley Head, London, 2013) 26 That recoinage, begun in 1696, was to last for more than three years and cost almost £3 million. 27 Smith, An Inquiry into the Nature and Causes of the Wealth of Nations.


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extremely adhesive, appearing in several textbooks and monographs in which some

account of money’s functions and features forms part of an exposition of an aspect of

law or economics.28

Yet, it remains an hypothesis, and one that, two and a half centuries later, has

remarkably little supporting anthropological evidence. Our earliest systems of coinage

bear no trace of the idea that metal weight preceded counting as a way of measuring

value.29 Further, whilst we have evidence of systems of barter, and systems of

coinage, we have no evidence – other than in closed societies already familiar with

token payment – of the latter emerging from the former.30

Negotiable Credit

In two comprehensive pieces published in the Banking Law Journal in 1913 and 1914

respectively, Mitchell-Innes argued that the idea that all money forms are either silver

and gold or a substitute for those metals is altogether misconceived. In its place, he

proposed a new ‘credit theory’, according to which a commodity purchase is not the

exchange of one commodity for some intermediate commodity (the ‘medium of

exchange’) but rather the exchange of a commodity for a promise.

Example (i): A has a spare bike. B wants it but has nothing that A would find immediately useful. A gives B the bike. B gives A an IOU, recording a promise to give A something of a value equivalent to the bike.

Here, credit is the promise to settle a debt by employing something – anything

acceptable – of a value equivalent to that for which it was given. Value is thus

derived, not from any physical thing, but rather directly from the promise to pay.

The next step in developing a system of circulating money is for that credit to

be rendered negotiable:

Example (ii): A is indebted to C for some service rendered. A has a spare bike. B needs the bike but has nothing that A would find immediately useful. A gives B the bike in return for an IOU. A now draws on B’s promise to him in settlement of A’s promise to C, all the parties agreeing upon an equivalence in value.

28 e.g Keynes, A Treatise on Money; Fox, Property Rights in Money; A. Marshall, Principles of Economics (Cosimo, Eighth ed, 2009) 29 C. Desan, Making Money: Coin, Currency, and the Coming of Capitalism (OUP, 2014). 30 D. Graeber, Debt: the First 5000 Years (Melville House: London, 2014) 29.


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According to Mitchell-Innes, bank accounts, notes and coins are all variations on this

central idea, adding only the technological advance of providing us with various ways

in which credit can be accumulated, permitting payment without the intermediate step

of acquiring a new assignable right against a third party.

The theoretical steps by which we progress from these hypotheticals to a fully-

fledged monetary system containing both circulating credit and method of accounting

are explored in what follows. It suffices to say here that for Mitchell-Innes, the

peculiar value of the coin lay, not in its constituent metal, but rather in the rules by

which tender in coin is held to bring about the automatic release of the debt for which

it is tendered. In this way, a coin is at once credit, in the sense of a promise to pay,

and immediate satisfaction of the underlying debt.

In part due to the lack of an hypothesis that is as singularly compelling as the

money-from-barter story, the orthodox account still dominates monetary theory. And,

whilst neither account, on its own, provides an immediate explanation for the issue

and circulation of State debt,31 credit theory has the additional hindrance of providing

no ready conceptual mechanism for moving from the circulation of credit to the

designation of a mutually-recognised value scale.

Nevertheless, sociologists have recently provided some of the missing pieces

necessary to give a sound factual footing to Mitchell-Innes’ thesis. Amongst many

other examples employed in a careful analysis of the development of money, Graeber

points to the Sumerian economy, the emergence of which historians date to just after

2000BC. In that economy, although the standard unit of account was silver, the metal

itself barely circulated at all: accrued debts calculated in silver could be met with

barley, goats, furniture, precious stones, or anything of recognised value.32 Thus, says

Graeber, ‘our standard account of monetary history is precisely backwards. We did

not begin with barter, discover money, and then eventually develop credit systems. It

happened precisely the other way around.’33

According to Schlichter, by the use of such examples Graeber proves merely

that a period of indebtedness is often required to complete the story of payment: since

goods and services were still bought with goods or services, measured by an agreed

value scale, credit, here is simply payment one step removed – a system in which

31 Ibid 49. 32 Ibid 39. 33 Ibid 40.


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‘People hand over goods and services without receiving immediate payment but in the

knowledge that at some future point in time the other party will reciprocate.’34

Schlichter is correct to point out that a system that has (i) a way of expressing

the different values of commodities, and (ii) a way of delaying payment, is not (iii) a

monetary system in which some medium or media circulate as a recognised

mechanism of payment. But credit theory is not premised at its heart upon the simple

interposition of a period of credit between the receipt and return of goods and

services. Indeed, since it depends upon the possibility of employing obligations to

settle debts that are different from the ones that gave rise to them, it embodies

precisely the idea that the original counterparty probably will not reciprocate in kind.

This is crucial: the Mesopotamian system clearly demonstrates that it is

possible to have a scale of value, and to calibrate it by reference to accepted units,

without there first being a habit of exchanging the money thing for other commodities

a particular market. But, in addition to the elements present in that system – a scale

for expressing relative value, and some system of accounting – we need a pattern of

negotiability, which can only occur if the recipient of the note can be confident of

employing the IOU in settlement of some unconnected debt of his own. We need,

therefore, an IOU that everyone will accept.

According to Martin, for an IOU to be generally acceptable, the intended

recipient must ‘have reason to believe that the debtor whose obligation they are about

to accept will, if it comes to it, be able to satisfy their claim.’35 In Example (ii), this is

absolutely correct: C will accept B’s note only if he believes that B will perform the

underlying promise. Yet, the importance of the original debtor’s creditworthiness to

the recipient varies in each case according to the nature of the credit employed:

whether the transacting parties are content to accept bank credit in settlement will

depend upon whether they believe that the participating banks will continue to be able

and willing meet their liabilities; cash, by contrast, has ceased entirely to be thought

of in terms of the debt that it represents. The latter circulates, as we will see, by State

mandate and the attendant confidence, born of a pattern of value stability, in its future

purchasing power.

In making the claim that only something already treated by a particular

34 D. Schlichter, Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown (John Wiley & Sons). 35 Martin, Money: the Unauthorised Biography.


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community as valuable could circulate as money, Simmel came close to the

conclusion that he ultimately rejected: ‘Nobody will be stupid enough to exchange a

value against something that is valueless, unless he is sure of being able to convert the

latter into values again.’36 People exchange commodities for money, not because there

is some value in its immediate constitution, but because they know that it can be used

to discharge their own liabilities, whether commodity purchases or taxes: these are the

‘values’ into which money is converted.

So whilst the description ‘medium of exchange’, insofar as it implies the

interposition of some valuable commodity between the stages of incurring the

payment obligation and discharging it, is misleading, money does facilitate exchange:

it both allows us to express the relative value of different commodities and – by

providing a means of accumulating and transferring the potential to discharge an

existing or future liability – permits the transformation of labour into purchasing

power. This can be expressed as: ‘money is a mechanism for exchange’, ‘money is a

store of purchasing power’, or, most simply, ‘money is credit’.

Accounting

That the coin operates as a possession-based mechanism for recording (and settling)

the debts that its nominal value records tends to obscure the fact that a monetary

system depends first and foremost upon the existence of a value scale, and some way

of keeping track of credits and debits valued by reference to it. In Keynes’ words,

‘Money-of-account, namely that in which Debts and Prices and General Purchasing

Power are expressed, is the primary concept of a Theory of Money.’37

Here, a tension is revealed between the claims that: (i) money is a medium of

exchange; and (ii) that the State must designate the unit of account. The former

supposes that there is a habit of exchanging all things on the market for some third

commodity, which naturally becomes the reference point for value. The scale, in this

way, comes from the market, even if later ratified by some State authority. The latter

supposes that, like the Mesopotamian system, the State designates the unit of account,

but assumes nothing about the link between market behaviour and the choice of

calibration.

36 Simmel, The Philosophy of Money 151. 37 Keynes, A Treatise on Money 3.


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We have seen the problems with the first of these claims. In order to consider

the second, let us return to our example:

Example (ii): A is indebted to C for some service rendered. A has a spare bike. B needs the bike but has nothing that A would find immediately useful. A gives B the bike in return for an IOU. A now draws on B’s promise to him in settlement of A’s promise to C, all the parties agreeing upon an equivalence in value.

What we have not yet explained is precisely how C and B – who may have no

previous history of dealings – do indeed agree upon an equivalence in value.

Graeber argues that a community is likely to have some common idea of a

hierarchy of values, arising not from the general circulation of one particular

commodity, but rather either out of a habit of exchanging certain kinds of

commodities for one another, or from other social practices. 38 Such customs would

facilitate informal credit arrangements. What they do not provide is a system of

measurement sufficiently standardised to secure the wide circulation of credit: in our

example, it is still necessary for the party accepting the note to determine whether

performance of the promise is worth at least equal to the debt that it is immediately

employed to settle.

The addition of a mutually accepted unit by which the parties can price the

commodity from the outset makes this exercise much easier: suppose that A and C

decide that the first IOU is worth m, and A and B decide that the second IOU is worth

2m. Now – assuming confidence in the ability to pass the IOU onward at face value –

C can make an immediate assessment about the economic benefit of accepting the

second IOU in discharge of the first debt. Such scales – whether units of weight,

distance, pressure or economic value – tend to be the preserve of central government,

for the practical reason that the market often produces competing scales that fail to

remain sufficiently stable over time.39

In the context of money, there are particular reasons for the closing of the

practical and theoretical gap between the emergence of value scales (the unit of

measurement) and circulating credit (the money thing valued): Graeber and Desan

each describe the process by which unilateral State credit issue and taxation

precipitates a national economy organised around the central objective of army

38 Graeber, Debt: the First 5000 Years 36-37. 39 Graeber 48.


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provision.40 Here, the market is a consequence of coinage, which provides a

foundation for the comparison of commodities to a unit of public debt.

We now have all the elements of money: (i) a scale, by which the values of

different commodities are objectified and expressed; (ii) some way of working out by

reference to it how much purchasing power is in an individual’s hands at a given time,

and; (iii) the money thing, which mobilises that credit.

Bitcoin Unlike sovereign and bank money, the origin of Bitcoin is not in the issuing and

circulation of debt, but rather in the generation and assignation of digital outputs. Yet,

we have already seen that when we talk about ‘credit’ we refer, not to a past event,

but constantly to a potentiality – in particular, the probability that the current holder of

a token will be able to use it to discharge a liability of a value roughly equivalent to

that for which he originally accepted it. Whilst it has become popular to define credit

as the opposite of debt, this can, therefore, be misleading: whilst a debt, viewed from

the other angle, is credit, not everything that is credit – in the sense of accumulated

potential to settle existing or future liabilities – is also a debt.41 Crucially, whatever

the media, the focus is not upon the source of any original credit obligation, but upon

what the payee can, in the future, do with the payment instrument received, from

which its value to him is singularly derived.

Understood thus, the protocol manifestly combines the features of each of the

money mechanisms thus far considered: Bitcoin provides a language for expressing

the relative value of transactional outputs, those outputs allow users to accumulate

and transfer credit, and the block chain operates as an accounting system for

recording transactions. Yet, considered quantitatively, by reference to instances of

use, Bitcoin looks wholly insignificant: the number of bitcoin transactions carried out

each day across the globe has never exceeded 130,000, in comparison with

approximately 295 million conventional payment transactions in Europe alone.42

There are various reasons why the system remains small. At least three go to

40 Desan 42. 41 This will be of renewed importance when analysing, below, the capacity for new forms of payment mechanism to fall within the definition “money”. 42 ‘www.blockchain.info’ accessed 27/10/2014. NB that this information does not distinguish between instances of use as a payment mechanism, and e.g. the simple purchase of bitcoin with the intention to speculate.


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user familiarity and confidence: Bitcoin has, at various points, been linked to illicit

activity,43 statistics for gender bias are manifest, and value volatility makes it a poor

store of purchasing power. Further, Bitcoin’s delivery mechanism, which depends

upon broadcasting each transaction to the entire network, means that the system

cannot elegantly be scaled. Currently, the Bitcoin is self-subsidising, but the

production of bitcoins as a reward for contributing purchasing power is set to top out

at 21 million, 44 at which point transaction fees will be required to carry out that role

and Bitcoin will lose one of its primary advantages.

An additional obstacle to widespread adoption of Bitcoin goes to a more

fundamental feature of centralised monetary systems. The State has an overarching

responsibility for the stability and integrity of the monetary system, and it has various

tools at its disposal to achieve this, including the manipulation of reserve

requirements, the fiat monetary base and nominal interest rates. There is no

conceptual requirement for such interference: money supply naturally meets demand,

as the latter of itself increases the purchasing power of money in circulation. But an

economy’s creditors and debtors – the distribution of which changes dramatically

over time – stand to gain and lose accordingly. An inflexible standard, or the use of a

capricious or volatile standard, has, historically, produced a preference for the use of

private credit systems. Breadth of circulation is secured only by a standard that can be

adjusted, rationally and predictably, to suit more than one sector of the population.

Bitcoin’s monetary policy, by contrast is altogether inflexible: the system is designed

such that the greater the number of bitcoins in circulation, the slower and more

difficult the process of generating them. The rate of money creation is thus

predictable, but cannot, without manipulating the protocol itself, be made to suit

multiple sectors of society.

Bitcoin is thus a monetary system, but is, and is overwhelmingly likely to

remain, a private monetary system. If a State-wide system emerges from public ledger

technology, it will not be borne organically, but rather out of efforts to coopt the

technology to streamline the machinations of central authorities.45

43 It was the currency of Silk Road. 44 F. Reid and M. Harrigan, ‘An Analysis of Anonymity in the Bitcoin System’ in Yaniv Altshuler and Yuval Elovici (eds), Security and Privacy in Social Networks (Springer: New York). 45 See e.g. G. D. S. Meiklejohn, ‘Centrally Banked Cryptocurrencies’ https://eprintiacrorg/2015/502pdf accessed 19/11/2015.


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THE PRIVATE LAW FRAMEWORK

Recall that with the wider definition of money came the conclusion that money in all

its forms must be subjected to the same private regime: ‘Since both kinds of money

asset have the standard functions of money in common with each other’, it would be

‘commercially inconvenient if functionally similar transactions led to legally different

outcomes depending on whether the money paid was corporeal or incorporeal.’46 The

question considered in what follows is thus whether defining something as ‘money’,

whether State or private money, demands the correlative conclusion that it be dealt

with by reference to the same norms and consequences that apply to more traditional,

physical, money media.

There is something intuitively appealing about the idea that money in all its

forms should be dealt with by the same legal apparatuses. After all, we use identical

linguistic devices to describe the transfer of corporeal and incorporeal money media –

we speak of money being ‘transferred’, of ‘paying money into’ an account, and of

‘drawing money out’ – and we make the same assumptions about the immediate value

of bank funds that we do about notes and coins. Yet, whilst private law secures cash

circulation by the introduction of mandatory rules for settlement; bank money

circulates instead by a habit of acceptance in settlement.47 The claim that it would be

commercially inconvenient thus requires independent assessment, and is analysed in

what follows with central reference to the logic that underpins our legal framework.

Walker’s definition included the idea that money must be accepted ‘without

reference to the character or credit of the person who offers it’. In addition to rules for

settlement, English private law also has embedded protections for recipients of cash,

which differ from the rules ordinarily applicable to physical things. These rules are

designed to support the circulation of cash by ensuring that an individual can acquire

confidence in his title without the need to make inquiries, thereby lowering

transaction costs. The question here is whether the private law system is the

appropriate manner of achieving the same goal for bitcoin payments.

Notes and Coins

46 Fox, Property Rights in Money [1.133]. 47 Currency and Bank Notes Act 1954, s1(2).


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The English private law of ownership is one of relative title: any person taking

possession of a physical thing acquires the kind of claim to it that will afford to him a

remedy in the event of third party interference. There is no direct vindication of title:

title is protected indirectly, through the law of wrongs, so that the statement ‘that

thing is mine’ can, for present purposes, be reduced to the statement that ‘you must

not interfere with that thing, unless I have granted you permission so to do’.

The only person who does not automatically owe a duty to stay away from the

thing is a prior owner, from whom possession but not title has been wrested. To this,

the onward transfer of title makes no difference: a thief cannot unilaterally pass on the

better title of the prior owner, without his consent. The starting point of the English

law of title competitions is thus embodied in the statement nemo dat quod non habet,

or ‘you cannot give what you do not have’.

English law originally acknowledged two different types of actions

inconsistent with title – detinue, which alleged an interference with control over a

thing, and conversion, which alleged an interference with the thing itself.48 Detinue

was wrongful detention, not wrongful damage or taking, and the response was merely

to give up the thing. Conversion, by contrast, was wrongful physical interference, and

the response lay in damages.

Following a transposition of the trover count to conversion, actions in detinue

disappeared. Conversion lay against finders, the wrong being the simple failure to

return a thing to which someone else had title,49 and the remedy was either return of

the thing, or its value as damages. It could then be said that ‘trover is merely a

substitute of the old action of detinue… [it] is not now an action ex malificio, though

it is so in form; but it is founded on property.’50 In Baroness Hale’s words in OBG v

Allan, ‘although nominally tortious, conversion had become the remedy to protect the

ownership of goods.’51

The current status of tortious property interferences is embodied in the Torts

(Interference with Goods) Act 1977, which formally abolishes detinue and includes

48 Originally by actual conversion of the things into something recognizably different, later by any damage to it. 49 A note in the Inner Temple records for 1494 records: ‘If someone finds my goods, as long as he behaves as a finder he is not punishable, but if he sells them he becomes a trespasser by reason of his subsequent wrongdoing, and trespass clearly lies against him.’ J. H. Baker, Baker and Milsom: Sources of Legal History (Oxford: OUP, 2010) 583. 50 Hambly v Trott (1776) 1 Cowp 371, 98 ER 1136 374 (Lord Mansfield CJ). 51 OBG v Allan [2008] 1 AC 1.


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trover as part of conversion. Strict liability is preserved: knowledge goes only to

interference, rather than to its inconsistency with some prior title. So, we now have a

hybrid wrong – a strict liability tort for any interference with a thing, whether by

taking or keeping, to which someone else has a better claim.

The combined effect of nemo dat and a strict, general obligation not to

interfere is that a recipient from someone who does not have the best claim to a

particular thing is accountable – irrespective of fault – to the original title-holder. The

Sale of Goods Act 1979 mitigates the effects of this conclusion, providing for a set of

circumstances in which an owner who entrusts his goods to another actor can be

deprived without his consent of best title. Nevertheless, these rules, which strike a

balance between the claim of the original owner and the commercial expedience of

providing cheap confidence to the recipient of a thing, stop short at awarding a

remedy to the recipient from a thief.

The relative strength of the reasons to protect the original owner and the

eventual recipient will be affected not only by the circumstances of transfer, but also

by the nature of the thing. Where money transfers are concerned, arguments for

security of title outweigh those that apply to the protection of prior title: in order to

ensure fluid circulation of cash, by which ‘the interchange of all other properties is

most readily accomplished’,52 the recipient must be able to obtain, without any great

output of time or expense, confidence that he will not be subjected to some prior

claim. Thus, ‘To fit it for its purpose the stamp denotes its value and possession alone

must decide to whom it belongs.’53 Money, therefore, is explicitly excluded from the

definition of ‘goods’ in either statutory regime, dealt with instead by a system of

common law rules, codified for notes by the Bills of Exchange Act 1882. The effect

of these rules is that a recipient of money acting in good faith acquires an indefeasible

title, and cannot be made subject to the prior claim of anyone else.

Since it concerns the cost of obtaining knowledge of the circumstances by

which title is conferred, the logic of disapplying nemo dat does not go so far as to

award a defence to a claim by a prior owner against a recipient acting in bad faith,54

nor to a defendant who is cognisant of an unmet condition attached to the transfer of

title. In these cases, title either persists or revests, and can even form the foundation of

52 Wookey v Pole (1820) 4 B & Ald 1, 106 ER 839, 7. 53 Ibid. 54 Clarke v Shee & Johnson (1774) 1 Cowp 197, 98 ER 1041.


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a claim to some asset that is considered to represent the misappropriated money.

Bank Money

The caveat attendant upon the extension of ‘money’ to include bank accounts was that

they be afforded the same legal characteristics as physical cash: this at least,

according to Proctor, was demanded by ‘consistency and the lawyer’s respect for

precedent’.55 A bank account per se cannot be the subject matter of an action in

conversion.56 It is simply a contractual right, usually described as a ‘debt’, although

one which depends upon a demand for payment. As such, it is not amenable to

principles of possession and ownership. Nevertheless, Proctor’s claim is at least

empirically accurate: judges and academics have indeed approached the problem of

misappropriated bank funds in a manner analogical to its treatment of physical cash.

In Banque Belge pour l’Etranger v Hambrouck the defendant, Hambrouck,

forged cheques in order to transfer funds from his employer’s account with Banque

Belge to his own account with Farrow’s bank.57 He then drew cheques on that

account, handing them to Spanoghe, who in turn credited her account. The Court of

Appeal held that Hambrouck’s title to the cheques was defeasible, and that, since

Spanoghe had provided no consideration, the claimant bank’s title persisted. Scrutton

LJ said:

At common law, a man who had no title himself could give no title to another. Nemo potest dare quod non habet. To this there was an exception in the case of negotiable chattels or securities, the first of which to be recognized were money and bank notes: and if these were received in good faith and for valuable consideration, the transferee got property though the transferor had none. But both good faith and valuable consideration were necessary.58 In Trustee of FC Jones v Jones,59 Mr Jones drew three cheques on his

bankrupt firm’s account in favour of Mrs Jones. She credited her account with them,

transferred the money to commodity brokers and speculated with potato futures,

multiplying the value of the original sum fivefold. Millett LJ held that the trustee in

bankruptcy’s claim was ‘exclusively proprietary’, a claim to assert a continuing title

55 Proctor, Mann on the Legal Aspect of Money [1.72]. 56 OBG Ltd v Allan [2008] 1 AC 1 57 Banque Belge pour l'Etranger v Hambrouck [1921] 1 KB 321. 58 Ibid 329. 59 Jones v Trustee of FC Jones & Sons [1997] Ch 159.


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to funds in respect of which the defendant was ‘in possession’ but to which she had

‘no title’.60

In Lipkin Gorman v Karpnale Cass, one of the partners of a firm of solicitors,

obtained funds from a client account by withdrawing cash by cheque, and by causing

funds to be transferred to building society accounts in his name, from which he

withdrew cash. He used that cash to gamble in the defendant casino.61 The court

ordered the casino to pay the firm a sum equivalent to that which it had received from

Cass, reduced by any sums that it had spent in reliance on receipt. Lord Goff

explained the claim as follows:

The first ground is concerned with the solicitors’ title to the money received by Cass (through Chapman) from the bank… [T]he appellant has to establish a basis on which he is entitled to the money. This (at least, as a general rule) he does by showing that the money is his legal property, as appears from Lord Mansfield’s judgment in Clarke v Shee and Johnson. If he can do so, he may be entitled to succeed in a claim against the third party for money had and received to his use, though not if the third party has received the money in good faith and for a valuable consideration.62 In this way, a bank payment is treated as the transfer of an independent asset

to which, if the funds do not reach the hands of a bona fide purchaser, it is possible to

have and retain title. This reasoning is not just a linguistic tool: in each of these cases

it was used to reach conclusions about the existence of claims. The intuition is clear,

and it is the same as Proctor’s: an individual whose bank account is credited in a

manner manifestly connected to a debit incurred by the claimant ought to be

accountable in precisely the same way as a recipient of physical money would be.

We have even extended this analogy to describe accounts that have been

credited multiple times:

When money has been paid into an account (or, for that matter, into a bucket, if money were so kept) and there are subsequent drawings out, it is usually not possible to show by evidence exactly when those particular units of value were withdrawn. A bank account which receives multiple credits is, metaphorically, an incorporeal mixture… It follows that either the tracing exercise must be regarded as generally foiled by payment into a bank account or it must be supported by

60 Ibid 166-167. 61 Lipkin Gorman v Karpnale [1991] 2 AC 548. 62 Ibid 572.


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artificial presumptions.63

These ‘presumptions’, which were developed with explicit reference to the mixture of

physical coins, operate either to allow a claimant to say that the defendant’s money

was withdrawn first and spent,64 or the claimant’s money was withdrawn first and

invested,65 both encapsulated in the idea that everything is presumed against a

wrongdoer.

We know that a bank transfer does not actually involve the transfer of any

thing or claim,66 and that a so-called ‘mixed fund’ is really a single, indivisible, debt.67

Yet, according to Fox, there is no harm in these analogies: ‘nothing compels the view

that it is inappropriate to use the proprietary terminology of title to describe the

holder’s claim to an incorporeal money asset.’68 Of course, metaphors are not

inherently bad; indeed, they can be helpful ways of comparing two phenomena, to

produce a result that is normatively appealing in both. The question here is whether

there is indeed any utility to be gained from treating bank accounts as if they were

incorporeal mixtures, into and from which identifiable assets can be transmitted.

Recall that the economic foundation for disapplication of nemo dat is the idea

that, in order for coins and notes to circulate freely, there must be no reason for a

recipient to prefer the receipt of certain coins and notes over others: we have,

therefore, rules that secure title. Yet, the holder of the account credited faces no such

concern: once a payment instruction is acted upon, it is irrevocable.69 The recipient

has, in other words, absolute confidence in his ongoing ability to access for his own

ends the funds credited to his account. In short, the parity of treatment argument from

commercial convenience has no place: the goal of economic expedience supports only

the provision of counterparty confidence, which, for bank transfers, is already present.

It is only if we pretend that bank transfers involve the transfer of some

physical thing that it becomes necessary to introduce both the exception to nemo dat

and, therefore, its limitations in the case of bad faith transfer, or transfer otherwise

than for value. Without those metaphors, there is nothing inevitable about a strict

63 P. Birks, ‘The Necessity of a Unitary Law of Tracing’ in Robert Cranston (ed), Making Commercial Law: Essays in Honour of Roy Goode (OUP, 1997) 254. 64 Re Hallett's Estate (1880) 13 Ch D 696. 65 Re Oatway [1903] 2 Ch 356. 66 R v Preddy [1996] AC 815. 67 Foskett v McKeown [2001] 1 AC 102 128 (Lord Millett). 68 Fox [1.77]. 69 Tayeb v HSBC Bank [2004] EWCH 1529, [2004] 4 All ER 1024.


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liability claim to the account of a payee. Instead, the questions in each of Banque

Belge, FC Jones and Lipkin Gorman become: what justifies a claim in respect of

funds credited to the account of some third party who did not transact with the

claimant, but rather with a fiduciary, or a non-fiduciary employee, acting without the

claimant’s authority?

The so-called ‘lowest intermediate balance’ rule provides an even more

compelling example of what happens when we forget the analogical premise of the

comparison.70 We saw above that the ‘rules of tracing’ operate to allow a claimant to

say, metaphorically, that ‘his money’ exists in the defendant’s account. But where the

value of that account is reduced to a sum that is lower than that initially paid into it,

the claimant’s claim is reduced correspondingly, according to the following logic:

If £100 of the plaintiff’s value was paid into the account, and at some subsequent time the balance was £60, then the plaintiff cannot assert, on the principles of tracing, that more than £60 of her value remains in the balance… Regarding the £60, it is impossible to say whether or not it came from the plaintiff; the account is an indistinguishable mixture of value; but this impossibility is resolved in her favour against a wrongdoer. But regarding the other £40, there is no impossibility; we know that it was withdrawn, since the balance was only £60. It cannot be in the account any longer. The law allows evidential difficulties, and thus impossibilities, to be resolved against the wrongdoer; but it does not allow findings contrary to the evidence. But this is to turn follow the metaphor into absurdity: it is not possible to

prove, as a matter of fact, that the money is not in the account any longer, any more

than it was possible to prove that it was there in the first place. Again, an account is a

single, indivisible, debt. Without metaphor, it is not at all clear – nor has anyone

sought to articulate – why the intermediate value of the account should be relevant in

shaping the claim that results.

Respect for precedent demands a perpetuation of the existing framework, but

consistency – in the sense of treating like cases alike – dictates precisely the opposite

conclusion. The economic justifications that shaped the existing private law

framework for cash are met by different solutions, which are only hindered by the

transplantation of both the exception to nemo dat, and its attendant limitations.

70 James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62.


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Bitcoin Ownership was introduced above as an obligation that others have to exclude

themselves from the subject matter of one’s claim, protected indirectly through the

law of wrongs. Information simpliciter, which is inalienable, cannot be the subject of

property rights.71 Neither, for the same reasons, can information per se be stolen.72

Bitcoins, by contrast, fall into the category of digital assets that can be ‘expended so

as to deprive a rightful possessor of their benefit.’73 Unlike bank accounts, bitcoins

exist as transactional outputs independent of the address from and to which they are

sent. So, whilst we cannot say that the bank payee has the payor’s original output –

manifestly he does not – we can (at least in theory) say that bitcoin received is the

bitcoin transferred, even if a new transaction has been added to its sequence. Indeed,

the whole point of the protocol is to create a way – without recourse to a single trusted

third party – to resolve the problem of ‘double-spending’.74 The problem typically

identified with application of property principles to digital assets – and which creates

doubt for bitcoin more specifically – is not, therefore, exhaustibility, but rather

excludability.75

In Canada, the decisive factor in determining whether a digital asset can

amount to property has been held to be whether the defendant’s acts amounted ‘to an

absolute denial and repudiation of the plaintiff’s right’.76 In the US, the question of

property protection for digital assets has been considered in relation to domain names,

and has been answered in the affirmative, on the basis that ‘Registering a domain

name is like staking a claim to a plot of land at the title office. It informs others that

the domain name is the registrant’s and no one else’s’.77

Kremen v Cohen concerned control of the domain name ‘sex.com’. The

defendant fraudulently induced the domain name registrar to transfer the name to him,

and used it to build an extremely lucrative business. The United States Court of

71 S. Green and J. Randall, The Tort of Conversion (Hart Publishing, 2009)141-142; M. Bridge, Personal Property (Oxford: OUP) 6. 72 P. Kohler and E. McKenrick, ‘Information as Property’ in Norman Palmer and Ewan McKendrick (eds), Interests in Goods (London: LLP, 1998) 10. 73 Green and Randall, The Tort of Conversion 123. 74 Nakamoto. 75 As electronic data operate by affecting the physical world,the term “digital asset” is preferred to “intangible” in what follows. See e.g. Your Response Ltd v Datateam Business Media Ltd [2014] EWCA Civ 281 [19]. 76 Unisys Canada Inc v Imperial Optical Company Ltd and ors (1999) 72 OTC 231 [15]. 77 Kremen v Cohen 337 F 3d 1024 (2003).


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Appeals for the Ninth Circuit considered that to establish liability in conversion, a

claimant must show ‘ownership or right to possession of property, wrongful

disposition of the property right and damages’. In holding that a domain name could

indeed be converted, the court applied a three stage test: ‘First, there must be an

interest capable of precise definition; !second, it must be capable of exclusive

possession or control; !and third, the putative owner must have established a

legitimate claim to exclusivity’.78

By contrast, the position in England and Wales remains that possession, and

therefore property protection, has no application in the digital sphere. In Your

Response Ltd v Datateam Business Media Ltd the defendant publishing company

engaged the claimant to maintain its subscribers’ records, which were kept on a

database in electronic form. The defendant terminated the contract and demanded

release of the records.79 The claimant claimed to be entitled to a lien over the,. The

Court of Appeal concluded that the contract must have contained an implied term that

the claimant was under an obligation at its termination to send the defendant by

electronic means a copy of the database in its latest form. Citing the decision in OBG

v Allan, considered below, Moore-Bick LJ said:

It is true that practical control goes hand in hand with possession, but in my view the two are not the same. Possession is concerned with the physical control of tangible objects; practical control is a broader concept, capable of extending to intangible assets and to things which the law would not regard as property at all.80 This statement is revealing, both in the distinctions that it purports to draw,

and those that it does not. We know that property is not just concerned with control:

the peculiar feature of property is exclusive control.81 But we also know that exclusive

control is not a positive concept: there is no legal endorsement available to the owner

of a house who acts so as physically to eject a trespasser. Rather, the content of

property is the obligation that others have to exclude themselves.82

Douglas and McFarlane put this as follows: ‘The ‘right to exclude’ is of

78 Ibid 79 Your Response Ltd v Datateam Business Media Ltd. 80 Ibid. 81 See e.g. K. Gray, ‘Property in Thin Air’ (1991) 50 CLJ 252; J. Penner, ‘The “Bundle of Rights” Picture of Property’ (1995) 43 UCLA Law Rev 711; J. Penner, The Idea of Property in Law (OUP, 1997). 82 Penner, ‘The “Bundle of Rights” Picture of Property’.


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interest to outsiders precisely because it consists of a general prima facie duty not to

physically interfere, deliberately or carelessly, with A’s thing’.83 The primary feature

they identify is the unity of the definitional obligation, which they call the ‘lumpiness’

of property: ‘such rights are defined not by focusing on the individual and varied uses

that A may make of a resource, but on the general duty of the rest of the world not to

interfere with a physical thing’.84 By contrast, ‘when we move away from physical

things, and into the realm of choses in action or intellectual property, this ‘lumpiness’

disappears, as there is no physical thing around which the general duty owed by the

rest of the world can coalesce’.85 They take the example of copyright protection,

which, they correctly point out, is made up of a series of duties to refrain from

particular activities, which duties are ‘fractured and disaggregated’.86

Yet copyright cannot be employed to represent intangible assets more broadly,

precisely because the information that it protects is ordinarily information that people

do not want others to ‘stay away’ from: music is there to be played, art to be viewed,

poems and books to be read. We protect the composer, artist and author so that they

have incentives to create and share their works, whilst acknowledging the

fundamental communality of that process.

Contractual rights pose a different problem. Most people do want third parties

to stay away from their contractual rights,87 and the fact of an interference is

identifiable: the tort of inducing a breach of contract is premised on precisely the idea

that ‘one party can deal with intangible assets in a way which is inconsistent with the

true owner’s interest in them’.88 Nevertheless, it is now clear that contractual rights

cannot be the subject matter of an action in conversion.

In OBG v Allan the claimant company had been in financial trouble, and the

third defendant purported to appoint the first and second defendants as joint

administrative receivers. In this capacity, they proceeded to terminate contracts and

settle claims, and the claimant went into liquidation. The claimant subsequently

brought proceedings against the defendants claiming that the receivers had been 83 S. Douglas and B. McFarlane, ‘Defining Property Rights’ in J. Penner and H. Smith (eds), Philosophical Foundations of Property Law (Oxford: OUP, 2013) 140. 84 Ibid. 85 Ibid. 86 Ibid. 87 See e.g. Green and Randall, The Tort of Conversion 135: “For example, where the asset in question is a debt, it is very important to the party who claims that intangible property as his own that he be recognised as the sole party to whom the debtor can reasonably consider himself indebted”. 88 Ibid 137.


27

invalidly appointed, and that they had suffered loss as a result of the receivers’

conversion of their contracts. A majority of the House of Lords held that contractual

rights were not a species of property capable of conversion.

Their reasons for so doing were many and various: Lord Walker did not rule

out an extension of conversion to contractual rights, but held that any reform ought to

come from Parliament;89 Lord Hoffmann, by contrast, considered that Parliament had

expressed its view on the matter, through the exclusion from the ambit of the Torts

(Interference with Goods) Act 1977 of ‘things in action’.90 Lord Brown’s concerns,

shared by Lord Hoffmann,91 went directly to the consequences of redefining

contractual rights, considering that, ‘it is one thing for the law to impose strict liability

for the wrongful taking of a valuable document; quite a different thing now to create

strict liability for, as here, wrongly (though not knowingly so) assuming the right to

advance someone else’s claim.’92

This distinction is crucial. A strict general obligation not to interfere with the

contractual rights of others is far more onerous than a similar obligation not to

interfere physically with some identifiable thing, and would raise the information

costs associated with commercial transactions considerably, thereby stultifying

economic activity.93 The reason for excluding contractual rights from the sphere of

property protection is not, therefore, that it is not possible for others to comply with

an obligation of non-interference, but that it is not economically desirable that they

should be required to do so.

In Your Response Moore-Bick LJ considered that whilst there was ‘much

force’ in arguments for the extension of property rights in a way that would take

account of recent technological developments, adopting this course ‘would involve a

significant departure from the existing law in a way that is inconsistent with the

decision in OBG Ltd v Allan’.94 But, there is no reason to assume automatically that

the logic identified above will apply with equal force to all those assets that do not

have an immutable physical form.

The relationship of a user to ‘his’ bitcoin is similar to ordinary relationships of

89 OBG Ltd v Allan 72. 90 Ibid 43. 91 Ibid. 92 Ibid 92. 93 Douglas and McFarlane 239. 94 Your Response Ltd v Datateam Business Media Ltd [27].


28

property than it is to copyright: he desires that others should stay away from it until he

chooses to broadcast the opposite to the network. An analogy can be drawn with the

treatment of carbon credits, which have attracted a kind of property-based protection

in private law.95 Similarly, one cannot very well ‘accidentally’ steal bitcoin: the

protocol is designed to make interference both extremely difficult and expensive.96

So, a general duty not to interfere with password-protected exhaustible assets is not

only conceptually plausible, but – if the primary concern in delineating property is

with the risk of high information costs – looks prima facie desirable.

But that policy question is not yet disposed of. Green argues that the increase

in commercial importance of ‘dematerialised assets’ ‘requires the law to keep pace

with these technological developments and recognise that such assets are as worthy,

and in need of, protection, as tangible assets’.97 In Kremen v Cohen the Court

presented a similar argument:

Many registrants also invest substantial time and money to develop and promote websites that depend on their domain names. Ensuring that they reap the benefits of their investments reduces uncertainty and thus encourages investment in the first place, promoting the growth of the Internet overall.98

We must not, however, assume that application of private property protections is

necessary to drive a particular digital economy.99 Currently, a recipient of bitcoin can

have near-absolute confidence that outputs in his control will remain his to spend:

bitcoin transactions are, like executed payment instructions in bank transfers,

irrevocable, and the rate of interference with outputs assigned to particular addresses

is low. In addition to the cryptographic protections built into the system, the presence

of a transparent ledger that records transactions from the point of genesis provides a

strong disincentive for users to abuse the system.

The introduction of private law property protections re-introduces information

costs and, therefore, a need to apply the same security of title protections that are

applicable to notes and coins. Yet, here there are important differences between cash 95 Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156. 96 There is a different concern, that someone’s wallet might be used as a conduit by another person, but such a situation would not meet the minimum criterion for conversion, which is that the interference must be deliberate. 97 S. Green, ‘The Subject Matter of Conversion’ [2010] JBL 218, 225. 98 Kremen v Cohen. 99 Copyright law is the most obvious example of a tool that has fallen far behind in the search to secure sufficient protection to drive industry growth.


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and bitcoin: an academic and commercial infrastructure has grown up around tracking

the path of outputs through the Bitcoin network.100 Since much of that information is

publicly available, precisely how well informed a recipient wishing to raise the

defence of good faith purchase must be is a question that introduces additional

uncertainty.

Of course, whether or not to apply principles of conversion to bitcoin is a

decision that cannot be reached in isolation, without reference to the principles

applicable to other exhaustible, excludable digital assets. But that exercise must be

conducted with full consideration of the economic and practical infrastructures within

which such assets are produced and circulate. And in this regard, there is at least good

reason to doubt whether property principles can provide a framework that supports

the circulation of credit better than Bitcoin protocol itself.

CONCLUSION I began with the observation that the question ‘is this money?’ may not produce a

single answer. We have now seen evidence that it does not. In attempting to define

money, Mann produced a narrow determination of what counts as the State-

designated mechanism for final settlement. Proctor’s definition is wider, and equally

overambitious in its conclusions: centralised issue and accounting are a practical pre-

requisite to a State-wide monetary system, but do not provide us with either the

essential features of money, or a foundation for borrowing in its entirety the logic of a

set of private property principles developed for a particular purpose.

Many other distinctions are borne of an open consideration of context, which

will be crucial for the categorisation of new money media going forwards. In

particular, issues of systemic integrity and consumer protection that arise from the use

of money are now readily distinguishable from those that go to the appropriate

incentivisation of individuals necessary to establish a currency: Bitcoin monetary

actors remain to be subjected to anti-money laundering regulations, not because they

do not deal in negotiable credit, but because the regulations are considered too

onerous for nascent FinTech companies that posed no real risk to financial stability;101

100 Reid and Harrigan; Meiklejohn and others, ‘A fistful of bitcoins: characterising payments among men with no names’. 101 H. Treasury, Digital Currencies: Response to the Call for Information (Online: https://wwwgovuk/government/uploads/system/uploads/attachment_data/file/414040/digital_currencies


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by contrast, the consumer protection objectives of, inter alia, obligations upon the

seller to repair, replace or refund the price apply equally to transactions in which

payment for goods is made (or promised) in bitcoin, as it does to a consideration

denominated in pounds sterling, euros or US dollars.102

In short, whilst it is important to have some working understanding of the role

that money performs, that understanding must not become so prescriptive of a

particular set of legal consequences that the logic of the framework that provides for

them is forgotten. We already have a set of rules surrounding the recovery of bank

funds that are both unpredictable and extremely difficult to justify. A court faced with

the misdirection of bitcoin must approach the problem, not by the automatic extension

of analogical reasoning to a context even further removed from its factual basis, but

with an understanding of how the economic principles that underpin credit and

settlement apply to disparate money media.

_response_to_call_for_information_final_changespdf). 102 Sale of Goods Act 1979.

modern money

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