An Alternative Juridical Take on Cryptoassets

Abstract

Cryptoasset systems are technology stacks, and the cryptoassets that emerge from those systems are susceptible to varied legal characterisations. For property law purposes we need to extract the essence of the thing from the technology muddle, in a form that is compatible with proprietary remedies and pragmatic judicial process. This article seeks to do this by reducing the characterisation of cryptoassets to the perspective of the holder. The analysis that flows from this approach potentially opens possession-based remedies such as conversion, that are not currently available. We may also be able to apply the concept to other commercial law constructs.

Introduction

What if we were to characterise cryptoassets as wallets, not units? It is not too late to be asking. Courts have held that cryptoassets are property or ‘things to which personal property rights can relate’ but have not had to say much about what kind of property they are.1 The Law Commission of England and Wales compiled 1901 pages2 of legal characterisations and conceptualisations for cryptoassets, including its own, culminating in a conclusion that cryptoassets are units manifested by network-operated software and instantiated data. Enough said? Well, possibly no, because this core conclusion led to a second conclusion that cryptoassets are neither things in possession nor things in action: they are ‘third category things’3 that require support from new legislation.4 We are left to wonder whether this path will lead to clearer law. Sir Geoffrey Vos cautioned, ‘We should try to avoid the creation of a new legal and regulatory regime that will discourage the use of new technologies rather than provide the foundation for them to flourish.’5

The Law Commission looked at cryptoasset systems end-to-end6 with an omniscient view and found that the key features of cryptoassets are network systems and instantiated data. This article examines cryptoassets only from the holder’s point of view, to observe how the system provides the holder with a programmed interface via ‘keys.’ Under the conventional approach, the unit is what the ‘token’ ideates—it is the thing traded for value, lent, staked or otherwise dealt with. The unit is controlled by keys and wallet. This article inverts this approach and submits an alternative view, which is that the object or thing is not the unit but the ‘native wallet.’ This wallet becomes the property, rather than the means to control the property. The wallet contains keys, the keys being the means to control the unit. What such an alternative characterisation shares with the conventional approach is that they both recognise the wallet and the unit as belonging to the one and the same cryptoasset system.

This article shifts the object or thing from unit to wallet, while the rights to the property remain the exclusive use of units. Simply stated, the wallet is the object or thing, whereas the rights to it are the benefits from the use (and exclusion of use) of units which the wallet controls. In presenting it this way, we separate the object or thing from the rights emanating from it. This kind of separation is standard for things in possession, but it is not the case for things in action, where the thing is co-extensive with the right it comprises.7

The article unthreads the idea of ‘the wallet as property’ against a backdrop of possession. If arguments relating to possession are not persuasive, the ‘wallet as property’ idea might still have some merit as a concept, so the intention is not to nail the flag of the wallet-as-property idea to the mast of possession. However it is argued that possession is a reasonable alternative to the third category route adopted by the Law Commission, because it brings with it a suite of remedies and commercial law constructs that are suited to cryptoassets. Those remedies and constructs are not available for things in action, and are uncertain for third category things.8

One of the Law Commission’s terms of reference was to make recommendations to solve problems caused by English law’s approach to the possession of crypto/intangible assets,9 which is also why we tie in possession. It makes sense to limit the scope of this article to cryptoassets10 such as Bitcoin, Ethereum and similar layer 1 protocols. The Law Commission reviewed data objects, later called digital things. The Law Commission said, and we should agree, that not all data objects would benefit from a wholesale application of the law of possession,11 but cryptoassets (which are a narrower category with particular features) may benefit.

Cryptoassets belong to a trend of intangible assets dwarfing tangible assets in overall value held by investors.12 Yet if we think of units in mutual funds, stocks, ETFs, or bonds, those proprietary interests are held through intermediaries. Cryptoassets are also often held via custodians or exchanges,13 but this article focuses on a cryptoasset that is self-custodied, not held via intermediaries. The analysis of the wallet holds in circumstances where cryptoassets are held through intermediaries;14 however, the analysis is clearer for self-custody.

The article begins with a brief historical primer on cryptoasset systems, which inevitably leads us to confirming that cryptoassets are intangible things, so the next section addresses the consequences of intangibility. The influential cases of Datateam and OBG v Allan15^. are reviewed in detail for their applicability to cryptoassets. Having presented the difficulties faced by cryptoassets as intangible property, the article expands on the alternative juridical take of cryptoassets by examining the role that data plays, and by expanding on the rationale for choosing the wallet as property. This is followed by an examination of the question of intention, which further contextualises the wallet as property. The final section assesses whether the arguments presented in the article are sufficient to support a case for the possession of cryptoassets. The article concludes that the law can more closely align with the meme, ‘Not your keys, not your coins,’ if the characterisations presented here are taken into account.

1. Cryptoasset systems as distinct from cryptoassets

The Bitcoin whitepaper dated 30 October 2008 does not mention the global financial crisis, but its opening words address certain problems with financial institutions. Bitcoin presents itself as a payment system based on cryptographic proof instead of trust.16 The Ethereum whitepaper pays its respects to Bitcoin17 and states Bitcoin’s innovation is the blockchain, which is a solution to the problem of an open system with no central trusted party or single verifier of transactions. The system that ensures that everyone agrees on the order of transactions—which is needed to avoid double spending—is called a consensus, and it is reached by network participants operating ‘nodes.’ Nodes earn the right to participate in the consensus by performing computational work.18 The system is programmed to disallow the spending of coins that do not exist for a given address (coins already spent), and to prevent transaction senders from spending other people's coins. It does this by programming the validation of a transaction input by recognising a cryptographic signature produced by the private key associated with the address that is tethered by the system as the owner of the cryptoasset unit.

Thus a cryptoasset system can be visualised as having miners or validators operating nodes on their computers, at one end, on the supply side; at the other end of the system, on the demand side, we have a cryptoasset holder who is the owner of an address (or public key), empowered by the system to operate the associated private key to store or transact the units that belong to the address. In between, we have a technology stack which consists of software machines that process the transactions, adjust the state, and govern the consensus.

Which bit should the law select as the cryptoasset property? The unit is the usual choice. This is intuitive because the unit is what is dealt with and attributed value. However, this article explores the idea that the integrated interface presented to the holder—which consists of the combined package of the public key address, to which the unit tethers, and a private key associated with the public address via system code—is the property which the law should recognise. This article refers to the integrated interface as the ‘native wallet.’19

The cryptoasset system is at least partly intangible. The software in the technology stack can be said to be intangible, while the operation of wallets by a holder, and the operation of nodes by miners and validators, both involve tangible actions by humans operating computers or devices. It does not necessarily follow that the intangibility of cryptoasset systems equates with cryptoassets being intangible. It depends on how we define cryptoassets as property, or on which bit of the cryptoasset system we identify as constituting the cryptoasset property. If we select the unit as the property, which the Law Commission does (most credible lawyers do), we will explain below that doing so onboards the difficulties faced in the Datateam case because the concerns that the Court of Appeal had regarding information and intangibility will apply to a considerable degree to the cryptoasset unit. The unit is intangible20 and the information that it constitutes is not property of a kind that is susceptible to possession.21 So a holder who has her cryptoasset usurped will not be protected by the tort of conversion. Moreover, cases that are not even concerned with conversion, such as Datateam, extrapolate from the leading case of OBG to conclude that other possession-based constructs such as a lien are also not available to a wronged holder. In Datateam the party claimed a common law lien to permit it as bailee in possession of property to refuse to redeliver the property to the bailor until he had received payment of an outstanding sum due to him.22 This lien was held to be unavailable due to OBG. Datateam and OBG show us that common law is ultimately shaped by taxonomy,23 and the taxonomy of ‘intangible’ property is powerful and sticky. So what ultimate consequences does Datateam have for cryptoassets? It compels us to conclude that cryptoassets are third category property, which is what Bryan J in AA v Persons Unknown24 concluded.

Conversely, if we identify the ‘native wallet’ as the property and argue that, unlike the unit, the wallet can be possessed, we may be able to distinguish Datateam and deal with OBG, such that possession-based remedies may become available to assist a holder who has suffered economic loss from interference with her cryptoasset.

2. Datateam and the pincer

AA v Persons Unknown25 is a cryptoasset case with typical facts: a ransom was paid in bitcoin and a proprietary injunction was sought by a subrogated insurer to recover bitcoin held on an exchange. Bryan J granted the proprietary injunction in favour of the insurer, but almost didn’t, on account of Datateam, which is not a cryptoasset case but is relevant as a Court of Appeal decision on the subject of intangible property.

For the injunction, Bryan J needed to be satisfied that cryptoassets are ‘property,’ yet His Honour went beyond this narrow task by citing Datateam as authority for possessory remedies not being available for ‘intangible things other than things in action.’ To be clear, possessory remedies were not sought in AA v Persons Unknown. His Honour does so to go on to say that Datateam did not hold that intangible things other than things in action could never be property at all. Cautiously but confusingly, Bryan J distinguishes Datateam on the facts, stating that the intangible thing in Datateam was a database which would not be regarded as property because it was pure information, whereas cryptoassets are intangible assets with ‘special characteristics.’26 This distinction is short-lived and perhaps obiter, since His Honour finds that cryptoassets (like databases) are intangible property and not things in action,27 but—and this is Bryan J’s point—this does not mean they are not property. Bryan J holds that cryptoassets are property for the purposes of the injunction, but His Honour’s multiple references to Datateam shows that intangible property is still vulnerable to the implications of OBG.

We can go further and infer that Bryan J held that cryptoassets actually belong to a third category of property.28 His Honour says, ‘They are not choses in possession because they are virtual, they are not tangible, they cannot be possessed. They are not choses in action because they do not embody any right capable of being enforced by action.’29 His Honour also cites Datateam as expressly using the words ‘third category,’ and Bryan J uses the phrase ‘intangible things other than things in action.’ As noted, in Datateam Moore-Bick LJ expressly uses the term ‘third category’ in his decision (which Bryan J quotes). Moore-Bick LJ says the decision in OBG prevents us from holding that intangible property is susceptible to possession.30 His Honour’s rationale is influenced by the triumvirate of Colonial Bank,31 OBG, and Moore-Bick LJ’s own conclusion that ‘information in databases is intangible and may not be property at all,’32 but we can distinguish the third element away for cryptoassets, since AA v Persons Unknown held that information in respect of cryptoassets is distinguishable from information in databases, which leaves us with the pincer of Colonial Bank plus OBG.

The effect of Colonial Bank on cryptoassets can be gleaned from what Bryan J said in AA v Persons Unknown. His Honour said Colonial Bank is not to be treated as ‘limiting the scope of what kinds of things can be property in law,’33 which we can agree with, since Colonial Bank is not about limiting what things can be property but rather what categories of property they fall into. So the issue lies elsewhere, with what Colonial Bank decides for intangible property. In Datateam, Moore-Bick LJ says the Colonial Bank decision ‘makes it very difficult to accept that the common law recognises the existence of intangible property other than choses in action,’ before he goes on to say, ‘but even if it does, the decision in [OBG] prevents us from holding that property of that kind is susceptible of possession.’34 Moore-Bick LJ says the argument for recognising a ‘third category of intangible property, which may also be susceptible of possession’35 cannot be accepted since that argument is inconsistent with OBG. In other words, third category property cannot enjoy possessory remedies. AA v Persons Unknown led us into categorising cryptoassets as third category property. Datateam tells us that possessory remedies are not available for that category, in the absence of legislation. Thus the Law Commission was compelled to recommend legislation to recognise third category property.36

Does any of this change if we characterise the wallet as property, instead of the unit? Potentially yes, for two reasons. First, because the wallet is less intangible than the unit since it is operated by the holder manually via a device, in the usual course. Secondly, the data component of the wallet is less impactful on the analysis because the thing that the holder is dealing with is not information but a functional interface, being the wallet and the keys it contains. The two points are closely related, and are examined in detail below.

3. Data and property are like oil and water

The concern with data is that information is not property because it can be copied and does not lend itself to exclusion of use, which is a key characteristic of property. If cryptoassets are nothing more than mere information they will not be protected by proprietary remedies. This concern was judicially addressed by Gendall J in Ruscoe, a thoroughbred cryptoasset case. His Honour cites Lord Upjohn’s seminal statement that, ‘In general, information is not property at all. It is normally open to all who have eyes to read and ears to hear.’37 His Honour went on to summarises Lord Upjohn’s reasoning: ‘This reasoning appears to confirm as a principle for not regarding information as property the fact that it can be infinitely duplicated.’ Gendall J then distinguished Lord Upjohn’s statement by considering the facts. His Honour concluded that cryptoassets are ‘far more than merely digitally recorded information. The argument that cryptocurrency is mere information and therefore it is not property is a simplistic one and, in my view, it is wrong in the present context. I dismiss it.’38

Bryan J also briefly took time to distinguish cryptoassets from databases in AA v Persons Unknown, as we noted above. So it seems that the courts can overcome the issue of ‘data is not property’ for cryptoassets. However, it can be said that neither Gendall J nor Bryan J give us a great deal of meat on the bone for this important issue. In the absence of a deeper analysis we are left with two material risks.

The first risk involves characterising cryptoasset property as a data thing, by giving too much weight to data. We must manage this while recognising the data componentry of cryptoassets, given the way cryptoasset systems work. This is a difficult task that is made easier by treating the wallet as property, but the analysis remains delicate. However, the more we particularise the wallet as property, the more we move away from the fragilities of the data element. The second risk has to do with the fact that the private key is itself information, and this risk is dealt with by understanding the native wallet as the thing, rather than examining the private keys in isolation. Sir Geoffrey Vos said we need to ‘decide what is the basic common feature of a cryptoasset’39—simple to state, but hard to do. Deciding the basic common feature of a cryptoasset is a core motivator of this article.

4. Which bit is the property?

Data is a relevant fact for cryptoassets, but it is not a basic common feature of cryptoassets. Data is a feature of the cryptoasset system as a whole, but it is not specifically a feature of the cryptoasset as a (property) thing. In making this argument, this section will provide more detail regarding the native wallet as cryptoasset property.

Cryptoassets are data systems. Fox described cryptoassets as ‘data strings’40 and ‘specific transactional power over unique data entries on the ledger.’41 This influenced the Law Commission’s analysis, which in turn is broadly supported in respect of Bitcoin by Birss LJ of the Court of Appeal in Tulip Trading.42 The Law Commission says this of cryptoassets:

While its form relies on its technical instantiation as a data structure, its function is derived not merely from the abstract existence of the technical system in which it persists, but fundamentally by the active operation of that system by a network of users.43

In its final legal characterisation, the Law Commission refers to a cryptoasset as a ‘composite thing’44 that exists as a ‘notional quantity unit manifested by the combination of the active operation of software by a network of participants and network-instantiated data.’45 Data remains a protagonist in the Law Commission’s final characterisation, albeit overlaid by ‘instantiation’ and the network. ‘Instantiation’ invokes uniqueness, which helps address the ‘data is not property’ concern.46 Whether or not the Law Commission chose instantiation to help defend against the bogeyman of ‘data is not property,’47 we can say that by highlighting the function of instantiation, the Law Commission retains a prominent focus on data not only for the cryptoasset system but specifically for the cryptoasset as property.

Prior to the Law Commission, the UKJT said, ‘[T]he commercial value of a cryptoasset is not in the recorded data itself but in the fact that the person possessing that data is able to effect and authenticate dealings in the cryptoasset in accordance with the rules of the system. Putting it another way, it is not what the data tells you but what it allows you to do.’48 The UKJT encourages us to observe the functionality for the holder, while the Law Commission pays equal if not greater attention to the network in respect of the data. Focusing on instantiation is tantamount to focusing on the network, since the network plays the key role in data instantiation. The cryptoasset holder plays a supporting role by sending a message49 in the system, but overall she is a beneficiary of instantiation.

The Law Commission looks at the holder’s perspective when it says the ‘principal operative functionality of a crypto-token is the ability/power uniquely to perform an operation (or an action) within the crypto-token system in respect of that notional quantity unit,’50 but the Law Commission ties functionality back to the instantiation of data, giving analytical prominence to instantiation: ‘The crypto-token system relies on the active operation of software over network-instantiated data to manifest the operative functionality of crypto-tokens within the system.’51 The Law Commission does not miss anything in its omniscient view of the cryptoasset system as a whole, but it does not give undue weight to any particular element either, other than instantiation. This article argues that, instead, the native wallet should be selected as the central, or basic, feature of cryptoassets.

The difficulty with describing technology stacks and integrated infrastructure, and having to decide which ‘core bit’ should be placed at the heart of the juridical analysis, came up in an adjacent context, in BPS Financial, a cryptoasset regulation case. In that case, Downes J said, ‘[B]ecause other systems, or aspects of them, are required for non-cash payments to be made does not mean those systems are encapsulated in the financial product.’52 Even though BPS Financial was a financial regulation case, it is analogous to our property law analysis because we need to filter out which facts are, or are not, essential features for our analysis. The aim of the next section is to select the ‘core bit,’ or basic common feature, of cryptoassets. Arguments made by Chan,53 Gray,54 and Lai55 are summarised and expanded upon, to highlight the role of the native wallet.

Chan examines the legal nature of cryptoassets and reminds us that a property right is a right in respect of a res, a thing. He concludes that the thing for cryptoassets is transactional ability, being the ‘practical ability to effect a blockchain transaction that will be recognised as valid by all other nodes on the blockchain.’56 Chan tells us that this argument evolved from Sarra and Gullifer, who said an owner of bitcoin has ‘the ability to generate a transfer.’57 What does Chan really mean by ‘transactional ability’? He is indirectly referring to the use of private keys. Chan’s analysis evolves from Fox, who said that, ‘[T]he capacity of the person who holds the private key [is] to effect new transactions which will be recognised as valid by the technical rules of the system. Analysed in this way, the asset can be viewed as a specific transactional power over unique data entries on the ledger.’58 Chan cites the Chen case to point out that when an owner loses access to her private key, she loses the ability to effect transactions to such an extent that ‘those assets should be deemed to have been lost or destroyed.’59 Chan says ‘transactional ability’ is faithful to the exclusionary focus of property law, for this ability is precisely the ‘thing’ that must be safeguarded by its holder, by keeping the private key secure, that is ‘traded for value on a regular basis in the market.’ Chan is thinking of private keys, but does not reduce ‘transactional ability’ to private keys. This article takes Chan’s transactional ability one step further by reducing it to the native wallet, and identifying it as the basic common feature of a cryptoasset.

One reason we might refrain from reducing ‘transactional ability’ to private keys is that a private key is not an instantiated data structure and, in isolation, it is simply information that is not capable of attracting property rights. This is the second risk alluded to above. The Law Commission agrees with the UKJT Statement which said a private key ‘is no more than an item of pure information and, like a password or a telephone number, it cannot itself be treated as property.’60 The Dickson Poon Joint Reply also submits that ‘a private key is simply information.’61

The way to respond to this is to observe private keys not in isolation but as part of a cryptoasset system that offers the holder a private key ‘armed’ with a functionality to store and transact on the system, paired with the public address. It is submitted that the programmed functionality of private keys within the system—characterised here as the ‘native wallet’—is the thing to which personal property rights relate. How might we then overcome the issue that private keys are just data? This key question is explored below, after elaborating on what is meant by a ‘native wallet.’

5. The native wallet is the thing

In this section we take Chan’s ‘transactional ability’ concept and break it down to a molecular level by exploring the ‘native wallet’ as the cryptoasset thing. In doing so we examine in closer detail how private keys work in a cryptoasset system, with a focus on their functional qualities.

Cryptoassets systems enable a holder to exert positive and negative control over units to avail the holder of the benefits. This is done via a paired public address and private key, which is the interface to the system. This interface is programmed within the cryptoasset system to give the holder an in-built transactional ability which we can call a ‘native wallet’ or Wn. Wn is compatible with the system and native to it because the system is programmed to interact with the wallet as an active, functional interface for the holder. Hinkes cites FINCEN as stating that wallets are ‘interfaces for storing and transferring’ cryptoassets.62

When a holder operates private keys, she avails herself of the benefits of the cryptoasset. This is indeed how cryptoassets are designed. Antonopoulos and Wood describe Ethereum wallets: ‘At a high level, a wallet is a software application that serves as the primary user interface to Ethereum. The wallet controls access to a user’s money, managing keys and addresses, tracking the balance, and creating and signing transactions. … More narrowly, from a programmer’s perspective, the word wallet refers to the system used to store and manage a user’s keys.’ 63 The wallet interacts with the system to randomly generate a private key, and its corresponding public key, which the wallet stores. The native wallet stores, and is constituted by, that key-pair which the cryptoasset system functionally programs to enable the holder to control the use of units.

So it is submitted that a cryptoasset ‘thing’ is the holding and control mechanism, which is the native wallet. The units that it controls, via the keys, are the rights or benefits that accrue to the property, and all legal relations and proprietary interests in respect of the units depend in some way on the operation of, or interference with, the native wallet. In this specific way, cryptoassets ‘mimic or replicate the effect of a proprietary relationship with an object.’64 Gray says, ‘The classic common law criteria of "property" have tended to rest a twin emphasis on the assignability of the benefits inherent in a resource and on the relative permanence of those benefits if unassigned.’65 Gray criticises Lord Wilberforce’s Ainsworth66 criteria for being preoccupied with assignability of benefit and permanence of the unassigned portion. Yet cryptoassets match these two criteria quintessentially. This is perhaps why the Ainsworth criteria have been so popularly adopted by the courts in cryptoasset cases. In any event, by characterising cryptoassets as the native wallet we can satisfy Gray’s criteria and also satisfy the Ainsworth criteria. A cryptoasset’s benefits, and a holder’s rights, match Gray’s concept of control over access:

[T]he criterion of "excludability" gets us much closer to the core of "property" than does the conventional legal emphasis on the assignability or enforceability of benefits. For "property" resides not in consumption of benefits but in control over benefits. "Property" is not about enjoyment of access but about control over access. … Herein lies an important key to the "propertiness" of property.67

Control over access is at the heart of how cryptoassets operate. Cryptoassets control access to units via the operation of the native wallet. They do so because of the relationship between the native wallet and units. These characteristics are hinted at by Lai, who refers to container cases.68 Ethereum wallets are ‘containers for private keys.’69 The Wn does not contain the cryptoasset units, but instead holds keys which are controlled by the holder to deal with units. Antonopoulos and Wood say, ‘A common misconception about Ethereum is that Ethereum wallets contain ether or tokens. In fact, very strictly speaking, the wallet holds only keys. The ether or other tokens are recorded on the Ethereum blockchain. Users control the tokens on the network by signing transactions with the keys in their wallets.’70

A cryptoasset is the thing that enables receipt and transfer of units. It provides in-built storage71 of keys which control units. It carries the right to store units and provides the means to transfer units on the system. The wallet comes connected to—and pre-aligned to transact on—its native system, through which it performs its functions 24/7, 365 days a year for its holder. When the holder buys or otherwise receives a unit (via staking, for example), she gets72 a native wallet for free. The Wn enables the holder to control and transact her units (store or send). Gray’s ‘control to access’ is satisfied by this in-built feature. The native wallet is durable in providing this access and is permanently connected to its native system. This permanence or stability satisfies one of Lord Wilberforce’s Ainsworth criteria for property.73 Another criteria is satisfied since the wallet is identifiable by each unique public address which distinguishes its identity publicly.

In his review of Green and Randall’s Tort of Conversion, James Murphy summarises a key insight from the book’s review of conversion case law which, it is submitted, is relevant to the discussion here:

[W]hat the ancient cases materially reveal is the capacity for possessory rights to exist in a thing, rather than the ability of that thing to be lost and found.74

The native wallet gives the holder the capacity to possess actionable rights75 over units and that capacity is contained in the wallet, in the form of keys. This is the wallet’s reason for being. When a unit is minted by a system code, the unit is immediately transferable on its own rails, via the native wallet, for processing by the network. Cryptoassets vary in how they achieve this,76 but they operate without the need for third party rails. When the key-pair is generated, this action can be said to take place at the situs of the validators or miners who physically house the data entries in the ledger in their nodes, on their computers. The holder is given a possessory right to occupy or use the public address for as long as she holds the corresponding private key. Such occupation is akin to an implicit informal licence to occupy and use the keys. The licence is activated by the pairing of the public key with the private key, and by the integrated system design.

A public key can be seen and used by anyone for two of its uses. The first is an informational use, to see transactions that relate to the address77. The second use is to serve as a nominated address for receiving units. This use is also not exclusive. Anyone may instruct a bank to send to a receiving account, and the same applies for a public key address. The third use of a public key is to store or send (not-transfer or transfer) units. This third use is exclusive due to the pairing of the public key with its corresponding private key.

The private key, like the public key, is housed in ledgers operated by validators or miners. The use of the private key by the holder can be said to be authorised by the system pursuant to an implicit informal licence granted to the holder, but this licence is not made explicit and is embedded within the proprietary interests of the holder. The private key functions as a true key when paired with the public key, as a means of unlocking units and sending them. This functionality is exercised through the native wallet. The Law Commission says, ‘[C]rypto-token systems allow for the imposition or creation of varying degrees of technical encumbrances over a crypto-token. This makes it possible for a person to exercise full factual control over a crypto-token. We now refer to this as “self-holding” (although we acknowledge that the market often refers to this as “self-custody”). The capacity or functionality for self-holding is a core design feature of crypto-tokens and is a fundamentally important part of many crypto-token ecosystems.’78

The Bitcoin and Ethereum systems have different technological rules, but they both function as described above. In the Ethereum system the identifier address is derived from the public key and is manifested as a 20-byte address. This article focuses on externally owned accounts, which are controlled by private keys. An externally owned account connects to the native code79 but the account itself has no code.80 It is ready-made for the holder to send ‘messages’ from. She operates her Wn to activate instructions for a transfer, signed through private key control. The term ‘transaction’ is used in the Ethereum system to refer to the signed data package that stores a message to be sent from an account. Unlike Bitcoin, Ethereum blocks contain a copy of the transaction list and the most recent state.81 Ethereum describes itself and Bitcoin as transaction ledgers, and says its goal is to ‘facilitate transactions between consenting individuals.’82 The cryptoasset system is designed for the holder to transact. In the Bitcoin system the key-pair owns unspent transaction outputs or UTXO83 (denominated as Satoshis). UTXO are fully ‘spent or unspent.’84 The system allows, or denies, the address to send the UTXO if the bitcoin unit amount in the address is sufficient, or insufficient, to cover the instructed amount at the precise time of instructions, allowing for transaction costs. Bitcoin transactions contain a private key signature from the holder, a hash of the immediately previous transaction, and the public key of the transferee, so that a chain of signatures is created, in lieu of maintaining an account system within the wallet. Nonetheless, a Bitcoin address has a publicly visible record of all transactions that received units and sent units into or out of the address. A simple scan service can publicly show the running balance of units85 for the Wn. The Bitcoin system creates new units effectively because of the full spending of the UTXO and returns the unspent Satoshis as a new UTXO, but the common law (without reliance on equity) recognises claims to substitute assets or their products, and allows the tracing of an asset into a changed form in the same hands.86

By definition, public addresses represent a huge but finite universe. Due to the hashing of the public key into the 20-byte address, more than one public key could in theory have access to the same address. This would mean that the address would not only not be exclusively possessed: it would not even be unique. There may be no answer to this mathematical concern,87 other than to say that it could be parked as a theoretical curiosity.

Cryptoasset critics say cryptoassets have no intrinsic value, but they overlook the wallet functionality with the features characterised above. This observation is not a legal point,88 but is mentioned to highlight the fact that the features are at the heart of the value proposition of a cryptoasset.

This analysis highlights the property characteristics of the native wallet, as lock and key. The cryptoasset qua property is characterised by the native wallet and the units it controls. It controls the units thanks to the system code that makes the operation work, not due to the ‘mere information’ contained in the private key.

In the seminal High Court of Australia property case, Yanner v Eaton, Gleeson CJ, Gaudron, Kirby and Hayne JJ concluded that the property held by the Crown represented a right to control the resource. The Court was justifying why the fact that the Fauna Act gave the Crown ‘property’ in crocodiles was not sufficient to extinguish the native title rights held by the appellant. Gummow J explained this by citing Hohfeld:

‘Sometimes [property] is employed to indicate the physical object to which various legal rights, privileges, etc., relate; then again—with far greater discrimination and accuracy—the word is used to denote the legal interest (or aggregate of legal relations) appertaining to such physical object. Frequently there is a rapid and fallacious shift from the one meaning to the other.’ 89

To apply this to cryptoassets, the unit is commonly identified as the property object, which is akin to applying the first meaning in Gummow J’s statement. A unit is not ‘physical’ but it is ideated as an object by the term ‘token.’ This article submits that we should instead be applying the second meaning in Gummow J’s statement above. If we do this, the native wallet, and not the unit, is the object to which ‘legal rights, privileges, etc.,’ relate. We can also say that the native wallet has more physicality to it, as it is directly operated by the holder.

Pollock said that the property thing or object is ‘not precisely the object as we find it in common experience, but rather the entirety of its possible legal relations to persons.’90 Property refers to ‘rights to things, not the things themselves.91 We should apply the second meaning described by Gummow J, and thus accept that the native wallet’s control of units is the core right or benefit in the aggregate of relations appertaining to a cryptoasset as property. Units are the rights or benefits of the property, they are not the property itself. Property ‘rights’ are synonymous with benefits, and do not imply a thing in action. Rights are erga omnes, such that a holder of the cryptoasset has the right as against all parties outside the system to use the corresponding private key to cause the system to ‘recognise a new transaction involving the cryptoasset.’92 A holder does not control units, but units are not the property. A holder controls a native wallet to operate keys that control the use of units.

Chan says that ‘the characteristics of transferability and excludability programmed into the blockchain render the control over a cryptoasset exercised by the holder of a private key functionally similar to the control over a tangible asset exercised by the person in possession. For this reason, Fox suggests that ideas ‘analogous to physical possession’ have relevance in the context of the blockchain.’93

Chan further states that ‘the general rule should be that title in a cryptoasset passes when a confirmed blockchain transfer is executed, such that the asset becomes associated with the transferee’s public address.’94 Note that the public address is part of the ‘native wallet’ package that the holder operates to manage her property. The case of sending units involves the holder operating her native wallet to permanently remove units from her control, in exchange for a different cryptoasset or fiat currency.

The Uniform Law Commission and American Law Institute help us see this, in their presentation of Article 12 of the Uniform Commercial Code,95 where a person has control of a cryptoasset (called a “controlled electronic right”) if the record, or the system in which it is recorded, gives the person the power to avail herself of ‘substantially all the benefits’ of the record, being the ‘native’ benefits that the system gives the holder:

In determining whether a person has the power to avail itself of substantially all the benefit from a controllable electronic record … or to prevent others from availing themselves of substantially all the benefit from a controllable electronic record … only the benefit that the system makes available (subject to the system’s inherent limitations) should be considered.96

Article 12 cites the example of Bitcoin: ‘[T]he benefit afforded by control of a bitcoin is that it can be held or disposed of (sold or spent).’97 This power is exercised by the holder via control of the native wallet.

To emphasise the degree of tangibility and physicality involved in dealing with cryptoasset property, we can think of cryptoassets as ‘unit switches.’ Electricity works by electro-magnetic fields which extend outside wires into the environment, so the analogy is not perfect, but a user of electricity does not own the electricity. Rather, she controls her use of it via a switch. The switch is her exclusive interface with the grid, in the absence of unlawful interference. The switch is intended to be operated only by her, to the exclusion of others.98 A cryptoasset wallet is permanently connected to the system, ready to transact units associated with the key pair. The enabling of that connection is like a switch that connects to remote data and systems. The switch might function like a remote control in offering multiple options for dealing with units, but it is a switch nonetheless. The control of the switch is in the hands of the holder, while units that are represented by data are reflected in ledgers on physical computers of validators or miners.

This section has sketched out an alternative characterisation of the thing, being the native wallet. The next task is to touch on the requirement of intention, as this is potentially a risk for cryptoassets due to the degree of automation in cryptoasset systems. It is argued below that there is automation there, but the system is not the right bit to focus on. The right bit to focus on is the native wallet, which is operated manually by the holder.

6. Controlling wallets with intent

A holder of a native wallet gets practical control over the relevant unit, immediately from inception, because a native wallet gives the holder the ability to operate the paired keys to store and transact units. For this to be recognised juridically, though, we need to show that the holder is manifesting her intention to be holding the thing in a way that is intended to exclude the use of others, and that she intends to transfer title when she transacts. Pollock concludes that, ‘[A]ny power to use and exclude others, however small, will suffice if accompanied by the animus possidendi provided that no one else has the animus possidendi and an equal or greater power.’99 More recently, Fox noted that transfers of cryptoassets involve ‘outward publicity’ showing a change in legal rights over things, 100 which is analogous to corporeal moveables transferring ownership by delivering possession of moveable things.

Three arguments are presented below to support the conclusion that when a holder operates her native wallet, she can be said to be intending to transfer title (transacting units) or to exclude others from the use of units (storing units). The first argument is a legal argument regarding the nomenclature of ‘physical’ control used by the courts, including in Datateam—it has to do with what is meant by ‘factual’ control. We can show that a holder is intending to exercise the requisite factual control. The second argument is that native wallets are analogous to containers, and the intention to control and operate a container can be evidenced by the operation of keys. This argument weaves in some analysis presented by Lai. The third argument is that intention can be better understood when we apply the conceptualisation of the native wallet as a switch.

(a) Intention by factual control

The leading authority referred to by the Law Commission is the Supreme Court decision in Manchester Ship Canal v Vauxhall, where Lord Briggs JSC approved the following summary by the Court of Appeal’s Lewison LJ (who was applying Pye v Graham101): ‘What amounts to a sufficient degree of physical custody and control will depend on the nature of the relevant subject matter and the manner in which that subject matter is commonly enjoyed. The existence of the intention to possess is to be objectively ascertained and will usually be deduced from the acts carried out by the putative possessor.’102 Pollock formulates this for the law of possession, but evidence of intention is equally required to support the passing of title to property.

The courts have grappled with the difficulty of proving intention to physically control an intangible thing that consists of data. Moore-Bick LJ in Datateam says that ‘practical control’ falls short of ‘physical control.’103 His Honour was dealing with a database and not cryptoassets, but we need to address the distinction. To distinguish Datateam and make the case that there is no ‘magic’ in ‘physical control’ we can make three points. First, we can rely on arguments made by Green and Randall that were accepted by Thomas J in Henderson v Walker104. They argue that for certain types of property the better test is ‘manual control.’ Secondly, Arden LJ (as she then was) refers to ‘actual’ rather than ‘physical’ control in Mainline Private Hire, a case about a Peugeot car. Her Honour says, ‘person must have not only the requisite degree of actual custody and control …,’105 referring to ‘actual’ rather than ‘physical,’ despite quoting Browne-Wilkinson LJ who refers to ‘physical’ control. Thirdly, in Pye v Graham, a case about squatters on a farm, the word ‘physical’ was used, but even in that context Lord Browne-Wilkinson called the test one of ‘factual possession.’ Along similar lines, Lai discusses how the control test can use the adjective ‘factual’ instead of ‘physical’:

The argument that only tangibles are capable of possession is based on a misconception that physical control is the only form of factual control. Factual control denotes nothing more than control in fact rather than in law. Physical control is a form of factual control, but not the only form. The practical control of cryptoassets is factual control because it is a matter of fact without the requirement to rely on legal action, and it can signal title information to the world at large. Therefore, there is in essence no legal distinction between the "practical control" of cryptoassets and the "physical control" of tangibles. The former constitutes factual control in the same way as the latter.106

Fox says: ‘An intangible thing cannot be possessed for the purposes of common law tort claims simply because one person can exercise exclusive control over access to it,’ citing Datateam as the authority.107 In Datateam, Moore-Bick LJ concluded: ‘All we know is that the data manager did not in fact exercise exclusive control over the database,’108 so Moore-Bick LJ did not decide that the database could not be possessed despite it being exclusively controlled. It was not exclusively controlled, on the facts.

The concern around ‘exclusive’ control can also be addressed by observing the mechanics of the wallet and how factually distinct a wallet is from a database: a wallet is not mere information.109 A holder of a native wallet is not managing information in a database. She is manifesting her intention to exercise exclusive control by operating her wallet, as a switch. This makes sense for cryptoassets that are self-custodied in an externally owned account,110 or equivalent, given the degree of control exercised over private keys. This should establish at least prima facie evidence of intention. Theoretical support for the degree of intention required, and what is involved in signalling intention, can be gleaned from Crawford, who says that ‘What is crucial to understand is that ... the significance of those particular relationships between people and things is not to be found in the extent of the putative possessor’s control. Whilst it might be that the higher degree of control, the clearer the “signal”, it remains true that the significance of those relationship lies in the fact that, within particular populations, they constitute legitimate ways of an announcing one’s intention to stake a claim to an object that is capable of being “owned”.’111

(b) Intention for a container

To further overcome Moore-Bick LJ’s concerns, we can refer to Lai who cites cases that address the factual control of a container. Factual control of a thing can be either control of the thing itself, or of a container (such as a safe, box, car, warehouse, or room) in which it is contained.112 Lai’s analysis can be complemented by general cases on constructive possession, but for the purposes of this article it suffices to refer what Lai says about certain container cases: ‘It is clear that a person is in factual control of a thing stored in a container if they have not only the factual control of the container but also the key. … In Ancona v Rogers, Hewitt placed some goods in some rooms at a house and retained the keys to the rooms, with the consent of the house owner. The Court of Appeal found that Hewitt was the only person in possession of the goods. In Stadium Finance Ltd v Robbins, a car owner left a car which he wished to sell with a car dealer and took the ignition key away with him, intending to control the sale of the car himself. However, he left the registration book in the locked glove compartment, which could not be opened without the key. According to Willmer LJ, the car dealer was not in possession of the car without either the key or the registration book. Taking away the key was a manifestation of the owner’s intention to control the car and the registration book inside the car. The authorities indicate that where a container (a house, car, box, etc.) and the key to the container are in two different hands, the key holder is in possession of the contents as long as they have access to the container and can retrieve the contents.’113

This illustrates how the law characterises keys for the purposes of assessing control, and intention to control. This can be applied to cryptoassets by observing how a holder’s control of a native wallet can signal to the world her intention to control the units. Lai helpfully suggests that cryptoassets can be shown to be factually controlled. He says: ‘[P]ossession does not require physical contact. Suppose that a gold bar is locked up in a safe and an owner holding the key to the safe never actually opens the safe to take out the gold bar. The owner has no physical contact with the gold bar but is still in possession of it. By analogy, a cryptoasset is a "gold bar" locked up eternally in a "safe" (public key) and is never taken out. A private key is analogous to a physical key used to open the "safe." Although a person never physically touches the cryptoasset, they are still in factual control of it as long as they hold the private key.’114

While agreeing with Lai, we can clarify that a cryptoasset is not a container per se. Units are not contained in the wallet but are controlled by it.

(c) Land and things pertaining to it

The relationship between native wallets and units is between property and rights or relations to it. In this regard we can complement the above analysis with a mention of the High Court of Australia case of Mills v Stokman,115 as an example of the specific role played by intention in determining property claims. We might say there is something land-like about cryptoassets, in the way in which the rights or benefits (ie units and their use) can be the subject of claims of interference, highlighting that the property itself (the native wallet) is the object of the proprietary interest. In Mills v Stokman a slate quarry was abandoned and the dross that remained was untouched except by the forces of nature; it consolidated it into a heap but twenty years later the slate in the heap was in demand. The Court was influenced by Boileau v Heath, which decided that the ‘tap-cinder’ from an iron mine was not a chattel, and instead formed part of the land, because the tenant who was claiming it ‘did not want to sell it, and when they piled it on the earth their intention was that it should once more form part of the earth.’ 116 Barwick CJ says that the slate dross heap represented ‘unwanted dross cast on one side with the intention that it should remain on the land indefinitely and, by implication, that it should form part of it.’117 His Honour legally infers this intention of the party (to not own the dross) from the facts that signal that intention. This inference is similar to the inference that is implicit in the container cases. It is, as Lai says of the container cases, ‘a deliberate act that conveys a presumption of intention to possess.’118

When a holder uses her native wallet to transfer units to a third party, to stake or delegate the units in exchange for a yield (or another benefit), prima facie the holder will be demonstrating a level of control and intention over the native wallet that is sufficient to determine that any yield units that accrue from the staking or delegating belong to the sending wallet because those units result from the staking or delegating and are intended to form part of her property of the sending wallet. The native wallet functions in this regard like land, in that the units that emanate from the sending wallet belong to that wallet, in the absence of contrary facts. This prima facie position operates in a similar way to dross or tap-cinder that is held to belong to the land on which it is found, in the absence of contrary facts that indicate an intention to separate it from the land.

This relationship between the native wallet and units is an additional reason for supporting Lai’s analysis above, while recognising that the container analogy is not entirely accurate because the wallet does not ‘contain’ units.

Units thus exclusively ‘belong’ to the native wallet. Differences in system design, such as consensus mechanisms, go to how systems ensure the accuracy of transactions and protect interference from bad actors, but those differences do not disturb this core analysis.

7. Can wallets thus be possessed?

If we are to apply the above analysis to assert that possessory remedies can be available for cryptoassets, we are left with at least one remaining task, which is to distinguishing OBG.

Admittedly this task is made easier outside the English jurisdiction. In Henderson v Walker,119 Thomas J recognised that intangible property is ‘by its nature not physical, so at first glance appears incapable of being physically controlled, and therefore possessed.’ Her Honour reviewed Datateam and OBG and, sitting on the High Court of New Zealand as she was, Her Honour was free to decide that neither decision should be followed.120 The rationale for her decision nonetheless relies mostly on the analysis of Green and Randall121 that possession requires manual control and cognitive control—the latter being a manifested intention to control. Green and Randall suggest that physical control—which is often held to be a hard requirement for possession—is simply one form of manual control. Thomas J concludes that manual control is sufficient to exclude others from a digital asset, either by ‘physical control of the medium or by password protection, which can be considered analogous to locking-up tangible property with a key.’ 122

In addition to mechanisms of control, we can add here that another factual feature of cryptoassets that distinguishes OBG is the transparency of control of cryptoassets, which lends itself to precise timestamping of an interference, enabling a valuation to be calculated at a definitive moment. This is crucial for conversion, which applies strict liability. Lunney and Ball help us see the relevance of this, in relation to OBG:

[T]he majority’s reluctance does not necessarily come from the reform to scope of the tort of conversion per se, but rather the application of strict liability to a wide range of potential new actions.123

Lunney and Ball’s argument can be expanded to say that the majority in OBG was anxious about: (a) strict liability, and (b) calculating the value of the property to determine the quantum of liability. For goods, evidence will prove when a good is interfered with, and a value can be calculated for the specific time of that event. Interferences with contractual rights are trickier to reduce to a single event; it is more difficult to calculate the value of an interfered contract because the value may fluctuate over time rather than being confined to one moment of definitive interference. The majority in OBG reveal this specific concern when they speak about documents. Lord Hoffman relies on Scrutton LJ’s rationale124 to substantiate why documents and not the underlying thing in action can be converted. Lord Brown narrows the eligible category to ‘business document(s)’ which evidence some ‘debt or obligation.’ Such documents make sense to be included, Lord Brown says, because they have ‘a determinable value as at the date of their seizure.’125 Importantly for the majority, the contractual rights in OBG had fluctuated in value from the time the contracts were terminated to when they were settled.

Calculation uncertainty is a real problem for things in action, but it is not an issue for cryptoassets. This is because cryptoassets are like goods in that their interference can be precisely timestamped, their value can be marked to market precisely, and timestamps are preserved and protected by the immutability of the blockchain.

The mechanics of control that apply to cryptoassets are well suited to pinpointing when a cryptoasset is interfered with. This factual feature of cryptoassets should assist in distinguishing OBG. We ought to conclude here that cryptoassets and contractual rights are at opposite ends of the intangibility spectrum.

Lord Nicholls and Baroness Hale dissented on the issue of conversion in OBG. Baroness Hale referred to Ayres v French, a Connecticut case, to make the point that shares and horses should equally be protected by proprietary remedies—since tangibility is not a good reason for not making available proprietary remedies. Baroness Hale says the reliance on ‘some other tangible token of the existence of the obligation may be understandable as a relic of the history, but it is not principled’126 before going on to say that ‘it makes no sense’ that the defendants in OBG should be strictly liable for what was lost on the tangible assets but not for what was lost on the intangibles.127 Baroness Hale says the facts speak loudly: ‘The defendants took control over all the company’s assets. They entered the company’s premises and changed the locks. They took charge of all its plant and machinery and other chattels. They had no right to do so.’128 Baroness Hale’s dissenting judgment has been highlighted by Green129 and Her Honour’s remark that, historically, conversion is the remedy to protect the ownership of goods against usurpation resonates for cryptoassets.

Conclusion

The native wallet and unit switch conceptualisations are intended to support the case that cryptoassets can be controlled with intention and potentially possessed. More analysis is required to determine whether we should apply the law of possession to cryptoassets.130 The Law Commission believes the better path, or perhaps the only available path, is to fork off to a new branch of third category things with concepts of control that are materially similar to control elements for possession. The author is of the view that we are still in time to craft the law of possession for cryptoassets, and this may lead to better legal outcomes to protect holders, even if it will present some bumpy roads at times. This article seeks to present an alternative characterisation of the native wallet as cryptoasset property with a view to potentially staying with possession, which ultimately would align with the wishes of at least some senior practitioners.131

The characterisation of the native wallet as property is also curiously consistent with the Australian Tax Office’s treatment of Bitcoin. The ATO says that ‘Apart from a dealing in individual bitcoin it is possible for there to be a dealing relating to the Bitcoin wallet (which would necessarily be a dealing in each and every bitcoin in the wallet and the private key), or just in the private key. Rights may exist in relation to either. Bitcoin wallet rights are essentially the same as the Bitcoin holding rights but represent a more extensive interest, the whole (the wallet) including the lesser (individual bitcoin).’132

This article has argued that when we objectify the unit as the cryptoasset property, it not only makes concepts of possession inapplicable, but those difficulties may trouble the control analysis for third category things too. The article has argued that the way to manage this concern is to elevate the focus on the native wallet and the holder’s control of it, and to place less emphasis on the network and its instantiation of data. If we do this, we can see how cryptoasset wallets are not just data, and they are controlled with intent and some physicality.

The idea of distilling the key functions of cryptoasset property from the point of view of the holder importantly aligns with market practice and the meme ‘Not your keys, not your coins.’ This is no accident, since it resonates with what Babie calls the functional approach to understanding types of property:

The functional approach considers what the parties seek to create, which is a thing capable of forming the subject-matter of property, the content of which is filled by the parties’ intentions.133

System designs reveal intentions.134 A holder operating her native wallet constitutes a deliberate act that conveys a presumption of intention to control and transfer. The Law Commission says manifested intention is ‘harder to establish’ for cryptoassets because cryptoasset systems are ‘automated in their operation,’ executing in ‘an automatic process.’135 This is true if we are talking about the system and instantiation of data136 and not true if we are talking about the operation of a native wallet by a holder.137 The native wallet is the functional domain that we should be observing at the cellular level. The analysis should focus on the tangibility of the holder intentionally operating a switch, and recognise the proprietary interests that pertain to the native wallet.