Cryptocurrencies entrusted to an exchange provider: Shielded from the provider’s bankruptcy?

My article, “Cryptocurrencies entrusted to an exchange provider: Shielded from the provider’s bankruptcy?”, has been published in Charl Hugo (ed.) Annual Banking Law Update 2018: Recent Legal Developments of Special Interest to Banks (2018) at pp. 1-21. The book is a collection of peer-reviewed articles written as a basis for the presentations at Annual Banking Law Update. The full text of my article is reproduced here with permission from the publisher, JUTA.

Annual Banking Law Update

I presented a paper at the ABLU (Annual Banking Law Update) on 27 September. The ABLU is a prestigious conference with decades of tradition organised by the Centre for Banking Law of the University of Johannesburg with the sponsorship of multinational law firms. This year’s programme reflected an emerging interest in cryptocurrencies.

The topic of my paper was the same as for the earlier KLRI/UNCITRAL Trade Law Forum. But I revised the slides with some additions (attached below), reflecting a longer presentation time. Among the added slides are the first and last.

Here is what I said on the first slide.
The topic of this presentation concerns cryptocurrencies in a bankruptcy setting: the bankruptcy of an exchange which acts as an intermediary for trade. The word intermediary might sound strange because the transactions of cryptocurrencies are recorded in a blockchain which permits disintermediation: it dispenses with intermediaries. It is indeed possible to send and receive cryptocurrencies on a P2P basis without any middle person. It does not, however, mean that the users of cryptocurrencies cannot use any intermediary. If they find it more convenient to use third parties, they can use them. That is in fact what most of us do when we trade cryptocurrencies because it would otherwise be difficult to find suitable trading partners. This is why we sometimes still have to talk about intermediaries when we discuss cryptocurrencies.

Here is what I said on the last slide.
Towards the beginning of this presentation, I identified two causes of uncertainty of law in this area. Let me wrap up by coming back to them to see where in the legal analysis they fit into.
The first cause lies in the novelty of cryptocurrencies as assets. They are intangible assets registrable on a blockchain. The novelty will raise the question whether cryptocurrencies can be owned in the context of rei vindicatio and the similar question whether they can be classified as “property” in the context of the tort of conversion. It will also raise the question whether they can comprise trust property.
Another cause is the need to scrutinise legal relationships between an exchange provider and its customers. The legal relationships between them matter when we address the question to whom the entrusted cryptocurrencies belong in the context of rei vindicatio. In the course of addressing this question, it has been observed that depending on the terms of the contract with the customers, an exchange provider sometimes acts as a counter-party to transactions and other times merely facilitates transactions between customers. The legal relationships between an exchange provider and its customers also need to be scrutinised to consider whether there is a trust between them. This is so under the legal systems which allow a trust to be created by the inference of a trust agreement as well as under the legal systems which impose a constructive trust by operation of law.

Very many thanks to Prof. Charl Hugo for his kind invitation.

KLRI/UNCITRAL Trade Law Forum

I was invited to speak at the KLRI/UNCITRAL Trade Law Forum 2018 (Incheon in South Korea on 10-12 September 2018. For the programme, see a link here). The KLRI, Korea Legislation Research Institute, is a government-financed think tank.
My topic was “Cryptocurrencies entrusted to an exchange provider: Shielded from the provider’s bankruptcy?” I attach my powerpoint file below.
Very many thanks to the organisers for invitation and to the audience for stimulating questions.

"Implications of the Blockchain Technology for the UNCITRAL Works" – published.

It has come to my attention that my article “Implications of the Blockchain Technology for the UNCITRAL Works” had been published from the United Nations in November last year.
The 50th anniversary Congress was a big occasion for UNCITRAL and it was my great honour to be part of it.
Here is my article excerpted from the book.

An additional note: In my original manuscript, there were some references to specific chapter numbers. I have noticed that in the published version, they have been changed to “Ch. 0” due to the editorial work which has removed all the chapter numbers from the headings. To see where those were actually referring to, please consult my original manuscript here.

Implications of the Blockchain Technology for the UNCITRAL Works

I will be presenting my thoughts on the subject above in the upcoming Congress of the UNCITRAL for the celebration of its 50th anniversary (4-6 July 2017).

My paper currently on the Congress website is a version which I sent to the UNCITRAL Secretariat some months ago and which no longer represents my latest thinking in some significant respects. I am asking the Secretariat to replace it with the latest version, to which I make a link from here. 

The paper gives a particular emphasis on the topic of proprietary restitution of blockchain-based tokens as an area which calls for a globally unified solution.

Postscript: As from 16 June, the Congress website carries the latest version. Many thanks to the Secretariat for swiftly acting on my request. 

Ownership dispute in the aftermath of the bankruptcy of Mt.Gox

Attached here is the powerpoint file I used in my presentation at the Cyberspace 2016 conference on 26 Nov. 2016.

I examined the Tokyo District Court’s decision in a suit filed after the opening of Mt.Gox’s bankruptcy proceedings. The suit was filed outside the bankruptcy proceedings to obtain a full recovery of the bitcoins of which the claimant had a contractual right to return from the bankrupt exchange. To do that, he sought rei vindicatio of the bitcoins over which he asserted ownership rather than making a contractual claim to join other creditors in the bankruptcy proceedings.

I considered three questions noted at p. 4 of the slides. On the first question, the Court relied on the Japanese law concept of “shoyuken” to deny that bitcoins could be an object of ownership. But if we leave aside the technicality of the Japanese law concept and understand the concept of ownership more broadly to mean a right to monopolize the exploitation of objects, it may be possible to say that bitcoins are fit to be an object of ownership. This would open the possibility of rei vindicatio, if other prerequisites are satisfied. The other two questions I considered relate to those other prerequisites. In most of the cases, a customer of a bitcoin exchange would have difficulties meeting those other prerequisites but the possibility of a successful claim is not foreclosed in all cases.