Recent cyber-attacks have followed an all too familiar pattern: targeting unpatched operating systems of large businesses or government institutions, then demanding ransoms paid in Bitcoin. Those who weren’t already aware of Bitcoin certainly are now.
Whilst the abuse of Bitcoin by anonymous criminals may sully its reputation amongst the population at large, its rapid growth as a medium of exchange amongst more sophisticated internet users continues unabated. Current estimates put the total value of the Bitcoin market at over $20 billion (having had almost nil value when it started trading in 2009), with the crypto-currency market as a whole being worth up to $50 billion. Indeed, this growth is expected to rise exponentially when Bitcoin becomes regulated in Japan later this year, giving users far more certainty and, crucially, confidence.
The UK is behind the curve in some respects, with less than 2% of Bitcoin exchanges being made into Pounds Sterling. However, Bitcoin is now accepted in some shops and bars in the UK and many online merchants expect payment to be made that way.
Given the (rather unfair) association between Bitcoins and cyber-crime, concerns about its security may hinder the adoption of Bitcoin on a wider scale. In particular, the questions of “what is the legal status of a Bitcoin?” and “what happens if they get stolen?” loom large (for lawyers, at least).
These questions have not yet been addressed by a Judge in Court and there is no UK legislation directly on the issue. One significant indicium is its VAT status and, in 2014, Bitcoin trades were given the same status as a foreign currency by HMRC, in that VAT was not charged on exchanges. However, without any regulation or central bank control – indeed without any control, other than its existence on a distributed and immutable blockchain ledger – it is difficult to say that Bitcoin is currency.
Bitcoin bears more resemblance to a traded commodity which brings it into the realm of personal property. The fact that they are placed into “wallets”, controlled exclusively by the owner who may either trade them or exchange them for established currency, supports this proposition. Similarly, as Bitcoin exists on an immutable ledger, each Bitcoin is individually identifiable with a traceable life-span that cannot be altered. The identity of each Bitcoin makes it, and other crypto-currencies, unique amongst traded commodities and even further removed from traditional currency.
The immutability of Bitcoin and its existence on a blockchain was supposed to protect against criminal use, but the anonymity of controllers of the wallets circumvents this protection. A similar concern surrounds the security of wallets (and indeed crypto-currency exchanges) which are vulnerable to being hacked and having their Bitcoins diverted elsewhere.
However, in my view, Bitcoin’s likely status as property means that the English law should recognise the owner as having proprietary rights in the Bitcoins themselves. The fact that the Bitcoin is immutable means that, unlike cash, it could never be converted into something else and should always be capable of being followed. The UK Court has well-stocked armoury at its disposal for finding and compelling the return of property that has been misappropriated.
Of course, locating (likely) anonymous hackers in order to commence legal proceedings will present real difficulties but the ability to identify the Bitcoins themselves means that traditional proprietary remedies should be available.
Finally it must be remembered that proprietary remedies are in addition to any contractual or tortious claims that a Bitcoin owner may have against a counter-party or service provider who happens to be dealing or transacting in Bitcoin.