English High Court Recognizes Bitcoin as Property — and What It Means for Canadian Investors and Users of Cryptocurrency

Neil Bhatt, 3L, Volume 78 Senior Editor

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Introduction

In a recent decision in AA v Persons Unknown & Others, Re Bitcoin, [1] the English High Court granted a proprietary injunction over bitcoins linked to an account on a cryptocurrency exchange. The Court, approving of the UK Jurisdictional Taskforce’s legal statement on cryptocurrencies, [2] concluded that bitcoins (and other similar cryptocurrencies) constituted property under English common law and, therefore, could be the subject of a proprietary injunction. The UK decision is a well-received result for many Canadian investors and cryptocurrency users as it signals an increasing likelihood that Canadian courts will similarly recognize cryptocurrency as property at common law. 

Background on the Technology

A cryptocurrency is an entirely digital medium of exchange that uses cryptography to secure and perform transactions. The technological backbone of a cryptocurrency is a publicly distributed blockchain (also referred to as a public ledger) and public-key cryptography. [3]

A blockchain is a digital database that is organized as sequential "blocks" of data, with each block containing a reference (a "hash") that identifies the proceeding block in the chain. A cryptocurrency blockchain records the transfer of cryptocurrency between parties by appending the blockchain with a new block that contains entries about the recent transaction. Unlike a central database held by a bank, however, there is no single authoritative ledger. Instead, the blockchain is distributed to various servers (called "nodes") throughout the world, where each server saves an identical copy of the blockchain. As a result, the entire history of the ledger up to the time of a pending transaction is publicly available to all nodes.

The decentralized nature of a blockchain allows for the nodes to validate a transaction without requiring a central authority. In particular, a pending transaction is publicly broadcasted to all of the nodes. The transaction is validated only if a majority of the nodes confirm that, according to their respective versions of the ledger, the payee has sufficient funds at the time of the pending transaction. A subset of nodes, called "miners," each collect recently validated transactions to create a new block and compete against one another to solve complex computational math problems. The first miner to successfully complete the computational problem is rewarded with a cryptocurrency and has its block added to the blockchain. The local blockchains of all of the nodes are then updated to reflect the addition of this new block.

For example, suppose that the initial block in the blockchain contains an entry signifying that A "owns" 100 units of bitcoin. Suppose further that A wishes to transfer 50 bitcoins to B. The transaction is validated if a majority of the nodes confirm that A has at least 50 bitcoins (according to their respective versions of the blockchain). After a miner collects the pending transaction and successfully solves a computational math problem, a block that contains a new entry showing a reduction of 50 bitcoins owned by A and a correlative increase in 50 bitcoins owned by B is added to the chain. Each blockchain is then updated.

The second key feature of cryptocurrencies is the use of public-key cryptography to complete and secure transactions (i.e., transfer and receive cryptocurrency) on the blockchain. Each node on the network has a uniquely generated private key, which is a pseudorandom string of alphanumeric characters. A mathematical function is used to derive a unique public key that is associated with the private key. As a result, each node has a unique private-public key pair. Moreover, due to the properties of the mathematical function, it is nearly impossible for someone to work backwards to derive the private key from the public key. 

The public key acts as an address to which cryptocurrency is sent on the blockchain, analogous to a bank account number. The private key acts as a password that enables the holder to transfer cryptocurrency associated with the public key that is paired with the said private key. Therefore, although funds can be sent to B's public key without his or her consent, no one is able to access B's funds without the knowledge of the corresponding private key. 

The public and private keys are stored on a cryptocurrency wallet. A wallet can be hosted or non-hosted. A non-hosted wallet is simply any means of storage of the public and private keys other than some third-party server. Alternatively, with a hosted wallet, a user makes an account (accessed using a regular password and username, or some equivalent verification method) with a third-party service, such as an exchange. The third-party then issues private and public keys to a user's account. Importantly, the private key is not made available or known to the account holder. Instead, much like a traditional bank, a hosted wallet acts as a financial intermediary that actually transfers and receives bitcoins on the account holder's behalf. 

The legally germane feature of cryptocurrencies is that there is no central ownership or control of the blockchain and, as a result, without the private key, it is not possible to access or transfer cryptocurrencies to a third-party. Consequently, if the real identity of A remains anonymous and A's private key remains private, although law enforcement may be able to monitor the activities of A's public key, law enforcement is unable actually to seize any cryptocurrency acquired fraudulently by A.

Facts and Issue

In October 2019, a Canadian insurance company (the "Company") was the target of a ransomware attack by a group of anonymous hackers (the "Hackers") that infiltrated the Company's computer system, installing a malware that encrypted all the data on the Company's computer system. The Hackers subsequently demanded a payment of US$950,000 worth of bitcoins to specified addresses (linked to a public key) to decrypt the Company's computer systems. 

The Company was insured by the Applicant against cybercrime attacks. The Applicant instructed an intermediary to purchase and transfer the bitcoins to the address that was provided by the Hackers. After the transfer, the Applicant subsequently hired a third-party company to trace the bitcoins that had been paid to the Hackers. The investigation revealed that the majority of the bitcoins had been transferred to a hosted "wallet" linked to an exchange known as "Bitfinex" that was operated by the two individuals (the “Defendants”).

The Applicants sought a proprietary injunction against the Defendants to enjoin them from allowing the account holder (i.e., the Hackers, who remained anonymous) to transfer the bitcoins out of the wallet. However, proprietary injunctions can only be granted to property recognized at common law. Accordingly, the central issue before the Court was whether the bitcoins constituted a recognized form of property capable of being the subject of a proprietary injunction.

Analysis 

English law traditionally recognizes two categories of personal property: chose in possession and chose in action. [4] A chose in possession is the bundle of rights over a tangible object; that is, property capable of being physically possessed. A chose in action, in contrast, is a proprietary right that can only be claimed or enforced by a legal action and not by any other means, including possession. For example, a claim for damages in tort is the property of the tort victim but cannot be claimed by any means other than legal action. 

The Court, agreeing with UK Jurisdictional Taskforce, notes that prima facie bitcoins are not property under English common law as they do not fit neatly within either category of personal property: Bitcoins are not a chose in possession as bitcoins are not tangible but virtual, and cannot be "possessed," nor are they a chose in action as they do not give rise to any rights capable of being claimed or enforced by action. [5]

 

Although it is clear why bitcoins are not a chose in possession, the Court does not clearly analyze why bitcoins do not qualify as a chose in action beyond stating that “[Bitcoins] do not embody any right capable of being enforced by action (para 55). The thought appears to be the following. A bitcoin is merely an entry on a distributed ledger. However, since a Bitcoin ledger is distributed, no one has a claim of ownership over the ledger. Consequently, no one is under the legal obligation to continue to update the ledger and allow transactions. In other words, a transaction is completed on a blockchain through the voluntary consensus of the participants on the network rather than some central issuer — without the miners on the network expending vast amounts of computing power, the holder of private keys will be unable to use the cryptocurrency as a medium of exchange. However, it would indeed be difficult to suggest that a miner, many of whom are entirely anonymous, are under a legal duty to facilitate the completion of transactions or maintain the integrity of the blockchain. As a result, there does not appear to be any legal action against an identifiable person in defined circumstances that is available to holders of private keys that would enforce their exclusive use of the private key. At most, the holder of a private key has a definable interest to use the private key as long as it remains private.

Although bitcoins or private keys themselves may not constitute a chose in action, it should be noted that bitcoins are capable of being the subject of a contract. In particular, there exists an implied or expressed contract between the investor and the host server that provides for the bitcoins to be held by the host server for the benefit of the investor in consideration for nominal transaction fees. This is similar to the legal relationship between a bank and a client with respect to bank deposits. The contractual right against the host server, then, does appear to be a chose in action. Moreover, the nature of the interaction between two parties may also give rise to an enforceable claim under the appropriate circumstances. 

Returning to the case, the Court notes that although bitcoins may not fall under the narrow definition of chose in action, the categories of personal property are not so rigid so as to be closed from technological developments: "[I]t is fallacious to proceed on the basis that the English law of property recognises no forms of property other than choses in possession and choses in action." [6] Instead, the Court notes that cryptocurrency satisfies the four traditional indicia of personal property set out by Lord Wilberforce in National Provincial Bank Ltd. v Ainsworth: [7] property is a right or interest that is (i) definable; (ii) identifiable by third parties; (iii) capable in their nature of assumption by third parties; and (iv) capable of some degree of permanence. The Court held that bitcoins satisfy the indicia above of property, and therefore held that bitcoins constituted property at least for the purposes of a proprietary injunction. [8]

Here, too, the Court fails to provide a precise analysis. Rather, the Court seems to rely on the UK Jurisdictional Taskforce analysis. [9] First, a bitcoin is definable as an entry on the blockchain. Second, since the blockchain is publicly distributed, bitcoins and the public key to which it belongs are identifiable by third parties. Third, bitcoins are able to be transferred from one public key to another. Finally, the blockchain technology makes it virtually impossible for someone to alter the blocks on the chain and, as a result, bitcoins, as an entry on the blockchain, maintain a high degree of permanence.

Comment

In the absence of any specific legislative or regulatory framework governing the transfer, use and ownership of cryptocurrencies, a similar recognization by Canadian courts to would inter alia (i) provide an opportunity for Canadian courts to capture cryptocurrencies within the scope of various statutes that import, to varying degrees, common law notions of property and (ii) provide investors and cryptocurrency users with greater certainty and common-law protection, especially against cyber threats and misuse of virtual assets. 

Under Canadian jurisprudence, there is no agreed-upon test for what constitutes "property" at common law. Nonetheless, Canadian courts have typically held that an essential characteristic of property is a bundle of rights over things to exclude others from the enjoyment of, interference with or appropriation of the “thing.” [10] Bitcoins appear to satisfy this requirement; a bitcoin is an entry on a blockchain and is associated uniquely and exclusively to a public key uniquely paired with a private key that enables the holder to use the funds to the exclusion of others. Moreover, Canadian courts [11] have approved of the indicia of property laid down in National Provincial Bank Ltd., which were also used by the English High Court in AA v Persons Unknown to arrive at its decision. Therefore, assuming that Canadian courts will likely agree with the English High Court in its application of National Provincial Bank Ltd. to bitcoins, it is likely that Canadain courts will soon recognize bitcoins as property under Canadian common law.

In terms of theoretical justifications to ground property rights in a private key, one possibility is to invoke the homestead principle. As open-source software, blockchains are analogous to an unowned natural resource. On this view, generating a private key is performing an act of "original appropriation" that creates a right to exclude others from the use of the private key in the same way that applying one's labour to unowned natural resources grants the person proprietary rights to the product of his or her labour. 

The question of the status of cryptocurrency in property law provides an opportunity for Canadian courts to give a clear statement on the characteristics of property at common law and formally adopt a functional approach to property whereby property rights are recognized in a clear and definable interest or right to the use or enjoyment over a thing that, by its nature, is capable of exclusive possession or control.

 
Property LawUniversity of Toronto Law Review