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Currency

By Craig Wright | 19 Dec 2018 | Economics

Coins remain legal tender without having an economic basis in specie. They hence, as with paper notes, rest on the fiat declaration of a sovereign in the vast majority of existing states (if not indeed all modern states). In the US, UK, and Europe, the respective central bank notes and circulating notes of the respective are decreed to be legal tender “for all debts, public charges, and dues.” At the same time, gold and silver coins are no longer considered legal tender for debts. They do remain as private money, and may be used where agreement is held between the parties, though. We would move that bitcoin, as a commodity money, forms a private money in the nature of other private specie-based monies including coined gold and silver. So, it may be held that bitcoin is not currency. The setting of paper notes as the only category of current money (1) in the narrow sense is more an issue of public policy than of use, and can be seen as a result of a political desire to control the money supply. We may take the law of payment systems to show only a single limitation, the making of state-sanctioned bank notes as the only form of legal tender.

In now looking towards the private law of payment systems, we can adduce very quickly that if party A seeks to engage in an exchange, and make a final (or other) payment to B by means of currency, all that is required is a delivery in final form of the currency.

The laws of negotiability (Miller v Race, 2) allow us to say that at the instant of delivery, the underlying obligation or debt is satisfied in full, and the recipient of the currency is left with a full legal entitlement to the monies received.

The exchange occurs as the payment is instantaneous. As such, a receiver of currency need not be concerned about the credit-worthiness of the other party transferring monies to them.

In Bitcoin, we may have an instant transfer in the event a transaction is valid and sent without prior double spends. That is, the transaction is sent to a miner before another that would spend the same input “coin” or obligation; where such a double spend has occurred, the parties engaging in it are acting on a fraud or theft, depending on the circumstances.

The recipient of a transaction in Bitcoin need only validate the ledger, to ensure no other has sent a payment prior to the one they have received. If such a check has been completed, the only outcome is that the recipient of the currency has received a legal exchange, or there is a conspiracy to defraud them in the nature of a counterfeit note.

Before a single block has confirmed the transaction, a receiver of money as bitcoin may be assured of good payment that has finalised, as long as the transaction meets the required conditions to be accepted by a miner for inclusion in a block.

Although some miners will accept transactions with low (or even zero) fees, the requirement of a transaction to be currency would come only with the suitable fee and base structure to have the super majority of miners accept the transaction. That said, even if a transaction is not accepted into the next block, the exchange to a second party in good consideration makes it final, and an attempt to double spend is an attempt to defraud.

In contrast, we can consider the case of party A making payment to party B through the delivery of a cheque.

In the exchange of payments using a cheque, the delivery is only the initial step in the overall process. Payment is not completed, until B has deposited the cheque into a bank account, and the funds are verified and successfully transferred from A to B’s account. The issue here is in part that B must be concerned with A’s credit.

We have a similar scenario in certain forms of contract, payment channels, and transactions, where the receiver cannot connect to the network immediately, and must trust that the transaction will not be double-spent or otherwise invalidated prior to being able to connect and broadcast the received transaction.

The rules of property transfer differ greatly between currency and all other property (real, chattel, or intangible).

Consequently, we can say that there is no single means and method to assess the transfer of bitcoin. The use as money (cash) will differ in treatment markedly from that of a standard commodity ledger or as a smart contract.

In the rules of chattel property, the transfer principles only provide the recipient with such title as the transfer had before the exchange (u) — Brown, Ray Andrews, (1975) “The Law of Personal Property” ($9.3, 3rd Edition).

The consequence is that where a receiver of stolen goods (chattel property) is discovered, the true owner can recover. This holds true even where the property has been received with no prior notice of adverse claims and in the case of an exchange of good consideration (12 — id).

The “owner” of stolen tokens, contracts, and other commodity use cases as property on Bitcoin can thus seek to recover from adverse sale and theft.

Such an example would include a full recovery of digital goods that are held against tokenised or contracted scripts and contracts on the blockchain. For example, a user who has (for example) a game object such as a “magic sword” with “artefact” properties that is marked by private keys and addresses on the Bitcoin blockchain has a right to recover this digital chattel property, if he can demonstrate a theft of “hack” and transfer of property. The game company/operator would be obliged to allow the owner to recover the digital goods.

Conversely, a merchant that receives a bitcoin as currency in payment for goods or services will not need to be concerned with the source of the monies, as long as the transaction is completed for consideration and without knowledge of the theft.

It allows Bitcoin to be used as currency, but also poses an interesting conundrum, where the merchant (or receiver of the funds generally) can be said to have had knowledge of the theft or other knowledge of the address being misappropriated. Bitcoin, by its nature, is simple to map to the last known address.

If a theft of Bitcoin is reported, the input address of the thief can be widely broadcast. In such a scenario, both miners who validate the transfer and merchants could be alerted to the illegitimate nature of the transaction. In doing so, a severely limited time limit would likely apply.

For example, if A has bitcoin stolen, and moves them to address B and then C within an hour (approximately 6 blocks), and then a report of the theft occurs at a time subsequent to this, the address at C would not be proximally associated with the theft from A. The result being: if an address is advertised as being stolen or otherwise illegitimately taken, and the transfer was conducted (as is simple to achieve) on the Bitcoin network, before a widespread notification is made, the currency principle would make the subsequent transfers good.

The only real matter for consideration would arise where a victim of a theft or fraud is able to immediately notify all involved parties prior to any further movement of the impacted addresses.

In such a scenario, if some party A, who can demonstrate the theft of coins, can do so within a time that is faster than the thief or fraudster can move (or has moved) the addresses, it could be feasible to have miners that are known actively block such a transaction.

For example;

  • A has Bitcoin stolen by B, and is able to prove the providence of a claim.
  • B has not yet moved the illegitimately obtained property nor been able to send these to C, as an exchange without knowledge for consideration.

A notifies all known miners, and allows the super majority of the mining network to be fully informed of the theft and that B maintains control of other coins.

The miners could now be held liable, if it is found that they accepted and processed the transaction from B to a later party.

A would need all miners to have knowledge of such a scenario before B could send to C; in the current Bitcoin network, there is no method to allow the parties to update all members of the network, but it would not be infeasible in the future for a technology that provides such a service to be developed.

The result is that the ability for a title to pass in Bitcoin is dependent on how it is transferred and in what manner — simply put, whether it is a movement of a digital chattel or a payment in currency. A person who takes currency obtains good title even when it is later traced to have come via a thief or fraud.

The used edition for such a matter is Miller vs Race (97 Eng Rep 398 (K.B, 1758)) even though Miller invoked notes and not currency as defined under the law of the time. In Miller, the case was decided on Bank of England notes. In 1758, bank notes were not legal tender. They were generally governed by the laws of money, and this perspective was held in Miller. The owner of a stolen Bank of England note was not able to recover from a third party that had recovered the note for value and without knowledge of the theft.

The principle has been upheld in many cases on the transfer of property received following a theft.

Decisions governed by money rules vs those of ordinary chattels have led to the development of well-tested rules.

In the US case of Chapman v. Cole, 78 Mass (12 Gray) 141 (1858), a minted gold token was ruled to be treated under the ordinary rules of chattels and not under the money rules. It was insufficient that the token was of gold.

Notes

  1. James S. Rogers “Negotiability, Property and Identity” (1990) 12 Carduzo, L. Rev. 471, 503 n. 81.
  2. Miller v Race ((1791), 1 Burr. 452). http://www.commonlii.org/int/cases/EngR/1825/166.pdf
  3. Chapman v. Cole, 78 Mass (12 Gray) 141 (1858).