As tulip mania grew in the 17th century, it was said that ‘the population, even to its lowest dregs, embarked in the tulip trade’.[1] Just before the crash, in 1637, the bulb of a particularly rare tulip, Semper Augustus, was priced at around 5,500 guilders, which was roughly the cost of a luxurious house in Amsterdam. An anecdote arose of a sailor who mistook the valuable tulip bulb of a merchant for an onion and ate it.
In May 2010, 10,000 Bitcoins were used in their first recorded transaction to buy pizza worth about £17. As at the time of writing 10,000 Bitcoins will cost you over £6.5m. Recent reports have given us our modern-day equivalent of the sailor: namely an unsuspecting owner who threw out an old hard drive not appreciating that the Bitcoins on it had come to represent a personal fortune.
If you are making your fortune from Bitcoins, there is perhaps some encouraging news. There may be some way to go before the ‘lowest dregs’ enter this market. A straw poll of my colleagues in chambers revealed not a Bitcoin between us, although one claimed that his son ‘owned part of a Bitcoin’. This is clearly therefore not the place to find prescient investment advice.
We are, however starting to see Bitcoin-related claims. This article is concerned with one question: what causes of action lie if someone steals my Bitcoin?
A brief review of the position with respect to normal currency will put the matter in context. Physical cash is recognised in law as property. Cash can, if taken, probably be claimed for in conversion provided it has not passed into currency or been taken in good faith and for value. So a thief of cash is probably liable in conversion,[2] as is the finder of lost cash.[3] However, once the cash has been paid by the thief to a third party, no claim lies in conversion.[4] The claimant may nonetheless have an action for money had and received insofar as he or she can follow the money, or trace substitute assets, into the thief’s or someone else’s hands, and the latter did not take it in good faith and for value.[5]
Once the cash is deposited in a bank, the position is different. £100 paid into a bank is no longer owned by the payor. Ownership has been transferred to the bank. The payor has become a creditor and has a contractual right to be repaid the money on demand.[6] Thus, if the bank loses the money such that the payor’s account is debited by £100, that does not mean that they have lost their contractual right against the bank for that sum. The payor would only lose this right if the bank discharged their contractual obligation.[7]
How does this compare with Bitcoins? There is no physical currency, so no goods which are capable of being converted.[8] A Bitcoin is simply electronic information. There is no reason to think it would be confidential information, or that it would attract a copyright owned by the holder. Is it therefore possible, in law, to own this information at all, and if so what causes of action could be relied upon against a thief?
This is not only of academic interest. Bitcoins can be lost or stolen, as can any computer file. In order to start using Bitcoins, users need to download software. Purchased Bitcoins are then stored in a digital ‘wallet’ on the user’s computer. The Bitcoins are spent by being sent directly from one computer to another.
Each owner of the currency has a pair of keys, one public and one private. These keys are saved locally in a file. To initiate a transaction, the future owner has to first send his public key to the original owner. This owner transfers the Bitcoins by digitally signing a record of the Bitcoin and the public key of the future owner. In that way every Bitcoin carries the entire history of the transactions it has undergone, and any transfer from one owner to another becomes part of the code constituting the coin.
Many thefts are carried out by compromising private keys. Passwords can be stolen or guessed and accounts can be hacked. Press stories of theft are almost as common as those relating to the price volatility. Cameron and Tyler Winklevoss (the ‘Winklevoss twins’), are among the largest investors in Bitcoins. To keep their holdings secure from hackers, they are said to have taken the codes that represent their holdings off networked computers and saved them on small flash drives stored in safety deposit boxes at banks in three different cities.
However safely they may be kept, are these strings of electronic information recognised by the law as ‘property’ at all? Following the recent case of Fairstar Heavy Transport N.V. v Adkins [2013] EWCA Civ 886, it might have seemed quite possibly not. The issue on the claim was whether Fairstar was entitled to an order requiring its former Chief Executive Officer, after the termination of his appointment, to give it access to the content of e-mails relating to its business affairs. The relevant e-mails were stored on Mr Adkins’ personal computer in England, and were sent or received by him on behalf of the company. Fairstar wished to retrieve and read e-mails concerning its business which were in Mr Adkins’ possession.
At first instance,[9] Edwards-Stuart J gave judgment for Mr. Adkins. He concluded that the content of the e-mails was information and this was not capable, in law, of being ‘property’; so that Fairstar did not have the proprietary right on which it based its claim. In short, Fairstar did not, and could not, own the e-mails.
The Court of Appeal overturned the decision. However, it did so on the narrow basis that Mr Adkins was under a duty as a former agent of Fairstar, to allow Fairstar to inspect e-mails sent to or received by him and relating to its business. As Fairstar was able to establish a right to inspect and copy by relying on its status as principal, it was unnecessary for the court to enter into ‘a jurisprudential debate about the legal characteristics of ‘property’, or whether the content of e-mails was ‘information’ in which property existed in this case or could exist at all.’[10]
Were that the end to it, the proprietary status of the electronic information which constitute Bitcoins would be on uncertain ground. However, further light is shed on the matter in Armstrong DWL GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), not cited in Fairstar. In Armstrong, the court had occasion to consider the proprietary status of European Union Allowances (‘EUAs’), which are essentially carbon credits. These too, were merely electronic information. They were held only in electronic form, were transferable between accounts and each had its own unique number.
A fraud took place and the claimant’s EUAs were transferred from its name into the defendant’s account with no knowledge of the defendant, and then sold on. The claimant brought an action. As part of the decision, Stephen Morris QC (sitting as a Deputy Judge of the High Court) considered where an EUA fell within the scheme of property rights. He accepted (as was common ground) that it was ‘property’:
More specifically, the judge held that ‘an EUA is ‘intangible’ property.‘ As such, the claimant succeeded in its claims to vindicate its proprietary rights in the EUAs, including by a common law restitutionary claim.
This points the way for how Bitcoins might be analysed. Like EUAs, they are made up of information which makes each coin or part of a coin uniquely identifiable. They can be transferred from person to person, have some permanence and stability in the electronic ‘wallets’ of each holder. On this analysis, a Bitcoin is intangible property, and can indeed be owned.
Bitcoins, existing only electronically, are not ‘goods’, so there would be no claim for conversion. However, an owner would be able to bring a proprietary restitutionary claim. The claim would be a personal one, in which the claimant sought to enforce subsisting legal property rights in the Bitcoins by following them into the defendant’s hands, or by tracing the proceeds of the coins as the subject matter of their claim. It would be a defence to such a claim for a defendant to show that they had acquired the coins bona fide for value, and without notice.
Once it is accepted that a Bitcoin is property, there may also be a claim in equity for knowing receipt of trust property, as can arise with cash.[11]
According to John Quiggin, Professor of Economics at the University of Queensland, ‘a Bitcoin is perhaps the finest example of a pure bubble’. Unlike gold or tulips there is nothing of intrinsic value. He predicts that they ‘will attain their true value of zero sooner or later’.[12] In the meantime, the investor can draw some comfort from the fact that the courts would be likely to recognise that, whatever their value, Bitcoins can be owned, and those property rights vindicated.
Michael Taylor is a barrister at 4 Pump Court: www.4pumpcourt.com
[1] ‘The Tulipomania’, Chapter 3, Mackay 1841.
[2] Hall v Dean (1600) Cro. Eliz 841
[3] Burn v Morris (1832) 2 Cr. & M. 579
[4] Lipkin Gorman v Karpnale Ltd [1991] 2 A.C. 584; See also Torts (interference with Goods) Act 1977 s 14(1), in which ‘money’ is likely to mean money in the sense of currency.
[5] The Law of Tracing p 337 (cited with approval by Lord Millet in Foskett v McKeown [1998] Ch 265)
[6] Joachimson v Swiss Bank Corp [1921] 3 KB 110 (CA) 127
[7] Tai Hing v Liu Chang Hing Bank [1986] AC 80 (PC)
[8] See Thunder Air Limited v Hilmarsson [2008] EWHC 355(Ch) at [28]. Although the Channel Island of Alderney is working on plans to mint physical Bitcoins.
[9] [2012] EWHC 2952 (TCC)
[10] [46]-[ 48]
[11] Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at 715
[12] ‘The Bitcoin Bubble and a Bad Hypothesis’, The National Interest 28 November 2013
