I. An Introduction to the “Internet of Money”
Not only a new star, but a complete zodiac sign is born in the sky of money. This, at least, is the belief of the people behind Libra, as the former “FacebookCoin” is now officially called. In June 2019, Facebook and its allies, joined in the so-called Libra Association, published what has become their blueprint—critics might say the creed—for everything related to blockchain, tokens, and cryptocurrencies. Their whitepaper is available at libra.org (not libra.com or even facebook.com). It has been translated into several languages besides English, i.e. Japanese, Chinese, German and French. The key message of the whitepaper is Libra’s mission: creating “a simple global currency and financial infrastructure that empowers billions of people.” It also states: “We believe that people have an inherent right to control the fruit of their legal labor.” The whitepaper’s initial virtual pages are characterized by the goal of giving almost two billion people access to modern financial services.
In M-Pesa, a mobile phone-based payment and financing system in countries like Kenya, South Africa, and India, a partly comparable model already exists. M-Pesa is owned by Vodafone, which is also a member of the Libra Association. But M-Pesa uses traditional currencies like the US dollar or the Euro. In the same context, Libra sounds like a development aid project, which intends to make the world a better place—with the little catch that the Association’s members are predominantly private companies, whose legitimate goal is making money: Spotify, Uber, Lyft, Vodafone, and of course, Facebook.
Nevertheless, whether or not the Libra Association is correct to expect a promising business case is not a legal question. Financial gains might result, inter alia, directly from the collected data, the maintenance of the so-called Libra Reserve and the issuance of Libra, or indirectly, from the strengthening of the market position of—what I call—the primary product. The primary product is what the Libra Association’s members sold before founding Libra. For example, Facebook’s product portfolio includes two instant messaging services: Facebook Messenger and WhatsApp. Without technical difficulties, both could be complemented by a payment function. Whoever has tried using WeChat Pay or Alipay in China and has seen their incredible market penetration might have an idea of how Facebook could leverage its 2.7 billion messaging service users. Competitors would face a higher entry threshold because customers would expect every messaging service to offer a similar range of services. Moreover, economists have calculated a significant seigniorage income for the members of the Libra Association. Assuming a network of one billion users with an average balance of 1,000 USD in Libra, the seigniorage income is expected to reach 7.5 billion USD per year.
Aside from the outlined commercial background and corresponding market power, Libra is supposed to have a technical DNA which is markedly different from that of popular cryptocurrencies like Bitcoin or Ether. The common link between them is that these cryptocurrencies run on blockchains, a major application of distributed ledger technology. But the Libra blockchain is designed to be more efficient, more effective and more flexible than, for example, the Bitcoin blockchain. For these reasons, the Libra blockchain uses a new programming language called “Move” and a Byzantine Fault Tolerant (“BFT”) consensus approach. The BFT consensus promises significant advantages compared to the Proof-of-Work concept used on the Bitcoin and Ethereum blockchains. It is supposed to be reliable even if up to one-third of the validator nodes fail. Moreover, a greater number of transactions can be processed at the same time, and it is intended to be much more energy-efficient.
Beyond the aforementioned technical distinctions, there is another structural difference between the Libra and Bitcoin networks. Libra is designed to function as a stable coin. While Bitcoin increasingly has become an object of speculation instead of a pure means of payment, Libra—per its whitepaper—“brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance, and fungibility.” The key to achieving these goals lies in the so-called Libra Reserve. The whitepaper expressly refers to the former gold standard, through which paper money was directly linked to a certain quantity of gold.
This system was based on the Gold Standard Act of 1900 in the US and met its demise in 1971 in the wake of a famous speech by President Richard Nixon, a historical milestone that later would become known as the “Nixon shock.” Libra as designed would not be backed with gold, but instead with a reserve of real assets consisting of bank deposits and short-term government securities. The value of each Libra coin depends directly on the value of the Libra Reserve. The size of the Libra Reserve is to be synchronized with the circulating volume of Libra. But in clear contrast to the historic gold standard, the owner of a unit of Libra apparently has no legally enforceable right to convert Libra into fiat money. The whitepaper is vague, even nebulous in this regard.
A potential obligor of such a conversion right could be the Libra Association. It is the governing entity of the Libra ecosystem including the Libra Blockchain and the Libra Reserve. The Libra Association is supposed to be independent of individual stakeholders like Facebook. Legally, the Libra Association is a not-for-profit membership organization, which has its seat and headquarters in Geneva, Switzerland. According to the Libra whitepaper, the decision in favor of Switzerland was made due to its “history of global neutrality and openness to blockchain technology.” Decisions of the Association are made by its council, in which all members have one vote. Major decisions require a two-thirds supermajority of the votes. Both the creation of new Libra coins, called “minting”—and the destruction, called “burning”—are the exclusive competence of the Libra Association. But neither the minting nor the burning is processed by the Libra Association itself. Instead, the Association makes use of authorized resellers, which buy Libra coins from the Libra Association or sell them back to the Libra Association. The purchase of Libra coins by these resellers leads to the minting of the corresponding coins by the Libra Association, while the purchase price is added to the Libra Reserve. On the other hand, money is taken from the Libra Reserve in case of a sale from the resellers to the Libra Association. For these reasons, the Libra Association intends to act as a “buyer of last resort.”
Keeping the development aid approach and potential distribution via messenger apps in mind, one might doubt the usability of Libra for international business transactions under the legal regime of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). The Convention does not include most consumer transactions, as “goods bought for personal, family or household use” do not fall within the scope ratione materiae by virtue of Art. 2(a) CISG. Nevertheless, high-volume transactions also can be processed via the Libra platform. The Libra transaction network theoretically is able to process up to 1000 transactions per second. In addition, machine-to-machine payments and smart contracts can be embedded in the Libra blockchain. Libra as a transnational transaction currency could reduce the transaction cost resulting from necessary currency exchanges when the parties are located in different currency areas. Moreover, blockchain technology has the potential to render intermediaries such as banks and payment service providers unnecessary—as Bill Gates once said: “Banking is necessary, banks are not.” In light of the Libra Association’s members, one might doubt such a development in the case of Libra.
II. Libra Transactions Under the CISG’s Regime
Libra is potentially relevant for the CISG under two scenarios: first, the sale of Libra coins with payment in fiat money, and second, the sale of any goods with payment in Libra coins.
1. Sale of Libra
a) Definition of “Sale“
With regard to the first scenario, one has to clarify whether a sale of goods occurs and opens the CISG’s scope of application. The CISG lacks a precise definition of a sales contract. Nevertheless, the Convention itself provides for an autonomous concept which is derivable especially from Art. 30 and 53 CISG. According to these provisions, a sales contract obliges the seller to deliver goods, to hand over the necessary documents and to transfer property of the goods; the buyer’s obligation consists of the payment of the price and taking delivery of the goods. The follow-up question is whether Libra coins constitute “goods” within the meaning of Art. 1, 30, 53 CISG.
aa) Libra Coins as “Goods”?
The Convention does not define “goods.” Taking Art. 7 CISG into account, the definition of “goods” must not be derived from domestic law, but is subject to an autonomous interpretation of the CISG in its international character. Among scholars and courts, it is generally accepted that goods are at least moveable and tangible items; the time of delivery is decisive. Whether the definition goes beyond this narrow concept is subject to controversy. Some courts have excluded an interest in a limited liability company or an assigned debt, while others expressed some openness to including intangible goods. Standard software is supposed to fall into the CISG’s sphere of application, but tailor-made software is subject to controversy. Moreover, there are scholars who argue in favor of also applying the CISG to digital goods. But the concept of what constitutes a “digital good” is broadly unclear and vague.
Technically, a Libra coin—like Bitcoin or Ether—represents a token on a blockchain. In legal terms, the owner’s power to dispose over the token might be the object of a sales contract. Neither this legal and factual power nor the token itself is tangible. On the flipside, Libra coins are characterized by a high level of standardization. They lack legally relevant individualization. Like standard software, Libra coins might be classified as mass products, which are not tailor-made. One might argue in parallel to standard software that the form of storage—on a tangible device or online in a digital cloud—should not lead to a different legal outcome.
bb) Exception for Money (Art. 2(d) CISG)
The decision on the classification of Libra coins as goods under the CISG’s regime can be left open if the sale of Libra coins is, irrespective of the definition of goods, not covered by the CISG’s scope of application. By virtue of Art. 2(d) CISG, “sales of stocks, shares, investment securities, negotiable instruments or money” do not fall within the Convention’s scope of application. The provision’s rationale refers to often mandatory rules of domestic law governing these objects. A conflict between the CISG’s legal regime and these rules should be avoided. Currently, most jurisdictions lack specific rules on cryptocurrencies (e.g., Libra coins or Bitcoin) within the traditional concept of currency, and legal tender is restricted to fiat money issued by a sovereign or state. There is, consequently, no actual conflict between domestic and transnational rules. This absence of conflicting rules might be used to argue that cryptocurrencies cannot fall under the exclusion for money in Art. 2(d) CISG. But such an interpretation of Art. 2(d) CISG is too narrow. The Convention simply assumes the existence of mandatory domestic law with respect to money. It does not require an actual conflict; a mere theoretical conflict is sufficient for the application of Art. 2(d) CISG. Otherwise, the application of Art. 2(d) CISG would have to distinguish between cases in which mandatory law exists and those in which such provisions do not exist. The extent to which money is regulated diverges from state to state. In sum, for the purpose of Art. 2(d) CISG, the potential existence of mandatory domestic rules is sufficient.
Regardless of this abstract concept, it is a different question whether cryptocurrencies such as Libra’s would fall under the term “money” set out in Art. 2(d) CISG. The CISG does not define “money.” In light of Art. 7 CISG, the definition must be an autonomous one, which should not be interpreted with reference to domestic ideas. In general, money is a dazzling phenomenon, which has strong ties to the fields of legal history, psychology, sociology, politics, economics, and of course, law. Independent of Art. 2(d) CISG, most would probably agree that fiat currencies such as the US dollar, the Euro, the Japanese yen, the Swiss franc or the Chinese renminbi constitute money. But the legal concept of money is often unclear and lacks a precise definition. Both case law and scholarly work dealing with Art. 2(d) CISG mainly refrain from drawing up a definition of money. Some scholars limit money to “all lawful coins and paper money,” which excludes dematerialized means of payment such as book money from Art. 2(d) CISG. It seems to be widely accepted that commemorative or collector coins do not meet the term’s requirements. The issuance by private institutions without the involvement of a sovereign is, according to some scholars, no obstacle in recognizing cryptocurrencies such as Bitcoin as money within the meaning of Art. 2(d) CISG.
Most jurisdictions do not have a cohesive and self-contained law of money. On this account, most jurisdictions lack a legal definition of money. Economists tend to accept everything as money that simply fulfills the basic functions of money: money is what money does. The two basic functions of money are to be a unit of account and a universal means of exchange. Sometimes, the storage of value over time is added as a third function, but it is ultimately an aspect of the exchange function: storing value is carried out by two exchanges that occur separately in time. From a legal perspective, the hurdle for money might be higher. Some jurisdictions are more reluctant when it comes to private money such as book money although money does not equal legal tender; money is a much broader concept open to party autonomy in many ways.
b) Interim Conclusion
Concisely, I would like to limit myself to the concept of money contained in Art. 2(d) CISG. Here, the scope ratione materiae should be found by a systematic interpretation in light of the other exceptions in Art. 2(d) CISG. The provision covers several financial instruments, which stem from a private issuer. As money is in line with these financial instruments, there should also be no distinction between money issued by a private or a state institution. Moreover, Libra coins might—depending on the final concept, the distribution and market acceptance—become a universal medium of exchange.
In conclusion, Libra coins are likely to fulfill the requirements for being money by virtue of Art. 2(d) CISG. Therefore, a sale of Libra coins is very likely not covered by the CISG.
2. Sale of Goods with Libra Payment
Although the purchase of Libra coins with fiat money does not constitute a sales contract under the CISG, this interim result does not automatically lead to the conclusion that the purchase of goods paid with Libra coins in turn falls outside of the CISG’s scope of application. In regard to this question, the focus shifts from the definition of goods and exceptions, by virtue of Art. 2 CISG, to the obligation of the buyer under the CISG.
a) Concept of the “Price for the Goods”
The Convention names the buyer’s duty to pay the purchase price, inter alia, in Art. 53 CISG. The wording of Art. 53 CISG is almost identical with Art. 56 ULIS, which also includes the term “pay the price for the goods.” Older scholarly works tend to view only cash and cheques as conforming funds. In more recent literature, some scholars give priority to party autonomy and the contractual agreement of the parties. Other scholars limit this autonomy to the quantity of the payment and require a payment of money. This question must not be mistaken for the discussion on the default currency of payment.
Taking the provision’s wording as a starting point for its interpretation, the use of the verb “to pay” could be seen as a mandatory connection with the object “money”; only money could be paid. But the Convention expressively speaks of the payment of a “price,” not of money. Moreover, Art. 53 CISG adds: “as required by the contract.” This amendment makes clear that the Convention acknowledges at least some discretion of the contracting parties with respect to the determination of the price. The provision does not show any tendency to restrict this party autonomy to the quantity of the payment.
bb) Context and Ratio Legis
Nevertheless, the autonomy granted to the parties contains two significant restrictions. First, the discretion of the parties ends where a sale becomes a barter contract. The exchange of goods is not covered by the CISG. Consequently, the price must not be composed of the delivery of goods. Second, the subject of the duty to pay the price must, like money, function as a unit of account and as a neutral medium of exchange. This requirement also follows from the delimitation to “goods.” But mainly, this functional approach arises out of a systematic interpretation of Art. 53 CISG.
Art. 56 CISG gives rise to the possibility of calculating the price in direct correlation to the weight of the goods. The provision consequently requires the price to be divisible in any desired way. Moreover, Art. 44 and 50 CISG allow the buyer to reduce the price proportionally, or more precisely: “in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time.” If the price were not divisible arbitrarily, a proportional reduction would not be possible. Money always meets this requirement due to its function as unit of account. But cryptocurrencies like Bitcoin and most likely also Libra coins fulfill this function, as well.
As a neutral medium of exchange, the price is negatively characterized as a non-good. In a positive way, the payment of the price should enable the seller to acquire other goods of arbitrary quality and quantity on the market. This requires universal recognition as a medium of exchange. In general, such universal recognition can be geographically restricted, e.g., to the state in which the seller is located. Depending on the specifics of the transaction, the area of recognition can vary. Cryptocurrencies like Bitcoin today in general lack such a universal recognition even if a purely virtual monetary area were sufficient. However, the Libra project due to Facebook’s involvement alone could hold immense market power to the extent that universal recognition could emerge (e.g., directly from the customer base of Facebook’s messaging services).
In sum, Libra coins would—based on the June 2019 whitepaper—meet the requirements to constitute a price for a CISG sale contract.
3. Requirement of a Contractual Agreement
Traditionally, the content of the payer’s duty to pay a given price is determined by two factors: the relevant currency and the number of its units. As the term “currency” might be limited to monetary units and systems governed by a sovereign, cryptocurrencies issued by private entities, like Libra coins, or lacking any central entity at all, like Bitcoin, might not fit into this equation. Nevertheless, the criteria used to determine the currency of payment should also be applied to cryptocurrencies, private forms of money and commodity money.
Primarily, the currency of payment results from the contractual agreement of the parties. Only in the event of such an agreement has not been concluded and the currency is not contractually stipulated, the Convention refers alternatively to usages pursuant to Art. 9 CISG. Lacking a sufficient usage, this gap in the CISG must be filled via reference to general principles by virtue of Art. 7(2) CISG. In light of Art. 57(1)(a) CISG, the local currency at the seller’s place of business is therefore decisive. Under the existing currency regimes, such a local currency can only be a state currency. Private cryptocurrencies are not tied to a geographical territory, in which their use and acceptance are either legally promoted or at least factually dominant. Libra sees itself as a protagonist in the “Internet of Money,” which forgoes a geographical and analogue link. In general, only if a sovereign were to create its own cryptocurrency would the necessary geographical reference exist. As a consequence, the purchase price can only be due in Libra or other private cryptocurrencies if the parties have agreed precisely on this means of payment. An application of Art. 57(1)(a) CISG has to be ruled out.
4. Replacement of the Currency
In general, the CISG does not provide for the buyer’s right to fulfill its payment obligation in a currency different from the currency contractually agreed on. Provisions in domestic law that allow the buyer to discharge its debt not only in the contractual currency, but alternatively in the currency of the place of payment—as they exist, e.g., in the German Civil Code—are therefore not applicable. Nevertheless, the buyer can have a right to unilaterally modify the stipulated currency in exceptional circumstances. The Convention itself establishes a unilateral right for the adjustment of the sale contract. This right is based on the parties’ commitment to good faith by virtue of Art. 7(1) CISG. Additionally, the modification of the contract in case of a substantial change of external circumstances constitutes an international trade usage pursuant to Art. 9(2) CISG. It is true that soft laws such as the Unidroit Principles of International Commercial Contracts (“Unidroit Principles 2016”), the Principles of European Contract Law (“PECL”) and the Draft Common Frame of Reference (“DCFR”) lack binding legal force. However, they can function as “persuasive authorities” and thus influence trade usages. A unilateral right of contract modification due to a substantial change of external circumstances is recognized by Art. 6.2.3(4b) Unidroit Principles 2016, Art. 6:111(3b) PECL, and Art. III – 1:110(2a) DCFR.
In sum, the Convention contains a buyer’s right to unilaterally modify the payment currency in exceptional circumstances by virtue of Art. 7(1) and Art. 9(2) CISG. Such a substantial change of external circumstances might, for example, result from capital controls or similar measures of foreign trade and currency legislation that could not have been reasonably foreseen at the time of the conclusion of the contract. With respect to Libra coins, if the buyer has the obligation to pay in Libra at the seller’s place of business in Country A, which after the conclusion of the contract bans Libra, the buyer could unilaterally change the currency to the local currency. The Convention does not force any party to carry out illegal acts.
To conclude, the CISG shows an openness to further developments and the evolution of money and currency. A transnational notion connects the Convention and global cryptocurrencies. Nevertheless, the CISG is not limited to projects such as Libra, but would also recognize similar concepts run by central banks or other private institutions. The future of Libra is still written in the stars, as leading central banks and politicians including those in the current US administration have spoken disapprovingly of it. Even if the Libra project fails, the technological concept must be considered separately with respect to a viable monetary revolution in international commercial transactions deploying blockchain technology, smart contracts, and machine-to-machine payments.