Cryptocurrency and Law PART I

Dear readers,

this week's blog is on the topic of cryptocurrencies and their place in the legal world. Any terminology needed to understand is, of course, explained in the text. Enjoy!

Cryptocurrency = digital/virtual currencies secured through cryptography. They are protected by a system of technology known as blockchain (which is very difficult to hack or counterfeit or have any kind of double system that goes on). They operate on blockchain = a system of recording information that is very secure and difficult/impossible to hack.

Law firms are now accepting crypto payments.

One of the first large commercial law firms to accept crypto as a form of payment was GunnerCooke Law Firm International last year. This raised the question of the role of crypto in commercial law and in law in general.

According to GunnerCooke they expect crypto to be popular with clients from the tech sector. The reason for this taking this step seems to be to increase the ability for a client to pay their law firm, and increase business by facilitating transactions more easily.

The law on cryptocurrencies

Regulation of crypto has been very slow. Solicitor regulation authorities (UK) have said they have no position on the payment of law firms in cryptocurrencies, therefore there are no specific rules saying that a solicitor has to be paid in something that isn’t cryptocurrency or crypto assets. From this standpoint the use of crypto is effectively unregulated.

Crypto is decentralised, meaning there is no central authority that controls the value of the assets or has the ability to create more of the assets. In contrast to, for example, the European Central Bank which regulates a standard currency – Euro.

Some see this as a positive feature, however, as a consequence the value of crypto is dictated by demand (similarly to and other goods or services). Meaning that, if the demand increases, so does the price. If supply decreases, then demand will increase, subsequently increasing the price.

Effectively anyone can create a cryptocurrency, which leads to there being many not reputable cryptocurrencies.

Where does the law come from? Proprietary injunction on cryptocurrency and crypto as property.

There are very few and far between cases which would have any case law on crypto, however, the few are quite substantial in some of the things they have defined.

One of the major issues is whether we should define ownership of cryptocurrency as ownership of certain property. In the UK there are 2 major classes of property:

1. Real property (land and immovable objects)

2. Personal property (movable objects)

The question is where does crypto fit in this, since they don’t neatly fall into either of the categories. The way the courts have gotten around this issue is by adopting a stance that came from a statement published by the Jurisdiction Task Force from 2019. This statement was a recommendation that even though a crypto couldn’t strictly be viewed as property in possession (real property), we should view it as such for the purpose of regulation.

Case example:

AAA v. persons unknown (2000)

• An insurer has brought/issued/requested a proprietary injunction (this prevent a defendant from dealing with particular assets over which the claimant asserts a proprietary right pending trial) in relation to bitcoins, because one of the insurer's customers was a victim of cyber extortion.

• The facts of this extortion, the customer’s computer was hacked into and then encrypted to a point where they couldn't get into it. The extortionists demanded bitcoin as ransom (payment) and after negotiation the insurer sent over 109.25 bitcoin (roughly now worth around 4 184 708.72 €). In exchange the extortionist would provide the decryption software.

• This transaction took place, and following it, the insurers decided to hire someone to track the bitcoin which was sent over. Some of it was dissipated, but some of it remained in the account of the extortionists. The insurer decided to take legal action and put a proprietary injunction on the rest of the bitcoin.

• When it comes to a proprietary injunction, one of the basic requirements is that the injunction is on some kind of property. The High Court of England held that the bitcoin in question satisfied all the requirements in this regard. This case had definitively concluded that at least in terms of English law cryptocurrencies can constitute property.

*Please note that at no point in this blog am I providing legal advice or claiming to be a professional. These blogs are for entertainment and educational purposes only.*