4.01  The search for comprehensive characterization of cryptocurrencies in terms of existing private legal categories has not yet led to a conclusion.¹ For this reason, it may be helpful to perform a more in-depth examination of the State-sponsored forms of currency that, to a greater or less degree, are related to cryptocurrencies. It may come as a surprise that, in what follows, bank notes, as well as central bank reserves, can be regarded as relatives to cryptocurrencies. The reason becomes clearer when considering the so-called ‘money flower’: a taxonomy of money recently presented by the Bank for International Settlements (BIS)² in the form of a Venn-diagram. It refines the original money flower of Bech and Garatt.³ The BIS version:

focuses on the combinations of four key properties: issuer (central bank or other); form (digital or physical); accessibility (widely or restricted); and technology (token- or account-based). Money is typically based on one of two basic technologies: tokens of stored value or accounts ( … ). Cash and many digital currencies are token-based, whereas balances in reserve accounts and most forms of commercial bank money are account-based.⁴

4.02  What the BIS labels as ‘technology’ ultimately consists of the various manifestations in which money may appear. These manifestations make a sum of specific monetary units—which in the first instance is a purely ideational creation—more readily accessible to human perception. In doing so, the manifestation of money through a certain kind of technology enables the units to be exchanged and stored in a traceable and verifiable way, which enhances legal certainty. What the BIS classifies as ‘form’ likewise takes its place alongside many different manifestations of money.

(p. 59) 4.03  In what follows, any such technology, form, or other appearance will be referred to as a manifestation of money. The aim in doing so is to distinguish substance from form. That is to say, a distinction will be made between an asset representing value and the great variety of outer shells in which it may appear. This is because in private law it is the specific manifestation of an asset that determines the legal relationship between this asset (as a legal object) and its holder (as a legal subject), as well as its effects vis-à-vis third parties in terms of the rules governing the title, transfer, and protection of commercial dealings.

4.04  The idea advanced here is that cryptocurrencies are assets consisting of rivalrous and excludable data recorded by a trusted technology (instead of being booked by a qualified intermediary). They are rivalrous in the sense that only one person can consume the data by using it in a transaction. Unlike many other forms of data, consumption of them cannot be shared with the world at large. They are excludable in the sense that the holder of the cryptocurrency data can exclude third parties from transacting with them. This manifestation allows cryptocurrencies to be treated as one of many types of what will be termed ‘value data’. The view advanced here is that this new category of asset will eventually be subject to a legal regime, although what form that regime may take has not yet been laid down. It would be appropriate, however, that any regime applied to them should be closely modelled on the set of rules governing entitlements to assets deposited with a prudentially supervised and, hence, trusted party. These rules would include segregation rights and the burden of bearing losses arising from the insolvency of a holder of other parties’ cryptocurrency. They should also be subject to the rules governing the transfer of money using instruction-based book entries in data records, and in that way, be treated comparably to the accounts used in conventional money transfer systems.

4.05  The rest of the chapter is structured as follows: Section II will analyse the changes that selected monetary assets and manifestations—namely banknotes and central bank reserve balances—have undergone over time. Section III then distinguishes three modes of money creation: by temporary and outright transactions and by issue of helicopter money. All three lead to different categories of monetary assets. Section IV will discuss the consequences for the rules governing title, transfer, and the protection of commercial dealings in connection with an asset. Section V concludes with a résumé.

4.06  The first banknotes issued by central banks were in some ways similar to modern promissory notes. Like the privately issued goldsmiths’ notes that came before them,⁵ they represented an acknowledgment of debt by the issuer for payment of legal tender in the form of metallic money. For instance, the banknotes that the Banque de France issued by virtue of the Act of 24 Germinal Year XI (14 April 1803) originally contained the name of the individual beneficiary, the subscriber’s signature, the maturity, and a nominal amount that differed from note to note. These restrictions were gradually abandoned. The development reached a peak when banknotes became transferable, free of a third party’s adverse claims and prior parties’ defences.⁶ From then the

banknote was regarded as a negotiable instrument or debt instrument transmissible from hand to hand, bearing in mind that the bearer could demand payment on sight of a certain quantity of specie. In this system the banknote represented a pecuniary right in personam, and hence, a chose in action.⁷

4.07  Once this transformation was complete, a banknote could no longer be a promissory note in jurisdictions that ratified and implemented the Uniform Law for Bills of Exchange and Promissory Notes (ULB),⁸ which included twenty European countries and several others outside the Anglo-common law region. This is because Article 75 ULB excludes instruments from being promissory notes, unless, among other things, they contain the term ‘promissory note’ and disclose the payee’s identity.⁹

4.08  In Switzerland, the Swiss National Bank commenced operation in 1907. From the beginning, it issued banknotes in standardized (wholesale) denominations of 1000, 500, 100, and 50 Swiss francs. The banknotes were payable to the bearer in legal tender (which in those days was the gold and silver coins of the member States of the Latin Monetary Union).¹⁰ However, the convertibility was only (p. 61) effective in two relatively short periods. The first lasted until 1914, and the second from 1930 until 1936. At other periods, the Swiss Federal Council suspended the central bank’s duty to convert banknotes into coins and declared banknotes to be legal tender; this occurred for the first time on the eve of World War I.¹¹ This procedure was repeated when the Great Depression forced the remaining countries off the gold standard, and the Swiss franc was devalued by an average of 30%.¹²

4.09  Swiss banknotes have remained legal tender and been inconvertible ever since. Initially, the respective decrees were of a provisional nature only. The same was true for the successor regulation, which the Federal Council enacted in 1954. It had become urgently necessary after an amended version of the Constitution¹³ excluded the right of the Confederation to suspend the redeemability of banknotes ‘except during periods of war or in disturbed currency conditions’. In consequence, the revised National Bank Act then came into force.¹⁴

4.10  A comparable situation existed in Canada for some time. As of 1934 (when the Bank of Canada was authorized to commence business), sec. 25(1) of the Bank of Canada Act (1934) contemplated the right of redemption of banknotes in gold. However, the Governor in Council passed an order-in-council every year pursuant section 25(2) suspending convertibility for that year. This practice continued until 1966, when the right of redemption was abolished altogether.¹⁵ By this combination of being legal tender and permanently inconvertible, banknotes became so-called fiat money.¹⁶

4.11  To summarize, in the examples listed above, central bank money in the form of banknotes conferred on its bearers the right to convert banknotes into legal tender. Seen from the other point of view, it constituted a corresponding liability in the form of a debt of the central bank. Later, during a temporary suspension, the nature of this legal liability was not essentially altered, but only deferred. It therefore remained fundamentally an obligation, and as such a part of the central bank’s debt capital. Only the permanent suspension converted it into what was called a ‘natural obligation’ under civil law principles (the closest common law equivalent would be a moral obligation). It constituted an existing obligatory (p. 62) claim, which nonetheless could not be enforced by legal means.¹⁷ The consequences are discussed in more detail below in the context of today’s digital central bank reserves.¹⁸

4.12  France moved to a permanently inconvertible currency system in 1936. By that time, banknotes issued by the Banque de France had already been legal tender for more than half a century, according to the Act of 12 August 1870. In 1914, the redeemability of banknotes was temporarily suspended.¹⁹ It was then only partially resumed in 1928, when banknotes became convertible in exchange for a minimum quantity of 12 kg of gold bullion.²⁰ Finally, under the Monetary Act of 1 October 1936, the Banque de France was released from the obligation to reimburse banknotes in specie, so that the currency could no longer be converted into gold.²¹ As a result of this modification, banknotes were from then on treated as ‘movables of a particular type’,²² in that, unlike all other corporeal movables, they had no intrinsic value.²³

4.13  In Switzerland, banknotes definitively became irredeemable in 2000, when the completely revised Swiss Constitution came into force. Since then, and in contrast to the former constitutional rule, provision was no longer made for an obligation of the central bank to convert any payment instruments into gold, gold exchange, or other assets whatsoever.²⁴ In the same year, the Swiss Federal Act on Currency and Payment Instruments (CPIA) came into force. According to the CPIA, banknotes issued by the Swiss National Bank (SNB) are considered legal tender,²⁵ and everyone must accept them as payment without restriction.²⁶

4.14  The legislative change brought a fundamental shift in the legal nature of central bank money. It ceased to represent a debt of the issuer. This finding, however, (p. 63) about the substance of banknotes does not alter the legal characterization of their manifestation. In line with the ius commune and even before the Swiss Civil Code came into force in 1912, scholarly exposition had applied property law concerning chattels to cash where appropriate. However, as none of the existing property law types of acquisition of a right in rem would fit for money, doctrine filled this statutory lacuna by developing a form of acquisition sui generis. It was called acquisition by blending (Vermengung, réunion).²⁷ Later, case law confirmed both the application of property law to coins and banknotes and their acquisition by blending.²⁸

4.15  As already mentioned, in Canada, banknotes have been permanently irredeemable since 1966.²⁹ Consequently, the promissory language (ie the Bank of Canada’s promise to pay to the bearer on demand the face value of the note) was eliminated from the banknotes.³⁰ But in 1977 the view that banknotes were promissory notes prevailed in court³¹—though in a case relating to banknotes in pre-1967 form. It was held that even after banknotes had become legal tender and inconvertible, textbooks and treatises had been published or re-edited with relevant sections still considering notes of central banks as promissory notes.³² In vain, a dissenting opinion argued that to the extent that the liability on an inconvertible banknote can be satisfied by the tender of another banknote of the same nature and value, such a liability was not real and was basically unenforceable. This would have turned the promise of payment into an empty and ‘sterile’ formula.³³ Both positions are in line with the arguments advanced in a decision from 1932.³⁴ Speaking for the majority, one of the judges stated that even without an express promise to pay ‘the note has the same effect’ as a banknote containing the promise on the face.³⁵ The dissenting view was summarized as being that a perpetually renewable promissory note would have no value, (p. 64) because it is never payable.³⁶ Both decisions taken together prompted Parliament to provide in 1980 that Bank of Canada notes are not promissory notes under the Bills of Exchange Act 1882.³⁷

4.16  English law does not have a provision comparable to section 25(6) of the Bank of Canada Act. This helps explain why a more traditional view still prevails, which characterizes a banknote as a promissory note, without any reservation. This is mainly because of the promise to pay³⁸ and because the other formalities meet the definition in section 83 of the Bills of Exchange Act.³⁹ However, the right of a holder of a banknote to redeem it for payment in metallic coin was abolished in 1914. With the abandonment of the gold standard in 1936, this result has remained to this day. Therefore, it is acknowledged that nowadays the promise to pay is more symbolic than real. Yet, it is still said that banknotes ‘continue to take the form of promissory notes’.⁴⁰

4.17  However, there are contrary views as well. Among the progressive exponents is Michael Bridge, who explains:

Although a banknote is literally cast in the form of a promissory note ( … ), which is a documentary intangible, it is no longer redeemed by the maker of the note, the Bank of England, in gold or other precious metal. ( … ) The banknote has therefore become a chattel, and the same applies a fortiori to coins.⁴¹

4.18  Getting to the heart of the matter, Benjamin Geva elaborates on the fascinating evolution of banknotes, as follows:

Undoubtedly, the character of banknotes as ‘money’ has come to overshadow their qualities as ‘promissory note’ so as, possibly, to supersede such qualities altogether. Indeed, it is quite likely that points relating to the juridical nature of the banknote and not explicitly provided for by banknotes legislation may well be decided by analogy to principles governing promissory notes ( … ). At the same time, there may be compelling policy reasons to avoid the automatic application of the Bills of Exchange Act to the banknote in a wholesale fashion.⁴²

4.19  This observation is all the more accurate as it describes two general principles that are equally true for civil and common law systems as will be outlined in an interim conclusion at the end of this section.

4.20  In essence, central bank reserves are the account-based form of central bank money, which are currently booked and transferred electronically. According to Kumhof and Noon:

Electronic central bank money is not a new concept. It has existed for decades, most ubiquitously as balances (commonly referred to as ‘reserves’) that are held by commercial banks and other selected financial institutions at the central bank to facilitate electronic settlement in Real Time Gross Settlement (RTGS) systems.⁴³

4.21  Historically, reserves and other electronic liabilities were an insignificant part of central bank’s balance sheet.⁴⁴ However, when central banks made large-scale asset purchases in response to the financial and sovereign debt crises and the resulting breakdown of the interbank money market, these purchases were paid for by creating bank reserves, which led to a corresponding increase in those balances.⁴⁵

4.22  Until recently, most monetary regimes regulated reserves only in connection with the central bank’s mandate and scope of business. They did not comment further on the legal nature of those reserves.

4.23  For instance, the Bank of Canada Act stipulates that the central bank shall, inter alia, ‘buy and sell foreign currencies and maintain deposit accounts with banks or foreign banks, either in or outside Canada, to facilitate such operations’.⁴⁶ In fact, the deposit accounts are provided to the members of the Canadian Payments Association⁴⁷ in order to facilitate the exchange, clearing, and settlement of financial obligations among financial intermediaries by means of a risk-free asset. Yet, only banknotes issued by the Bank of Canada and coins of the Royal Mint are declared legal tender.⁴⁸ In contrast, the Currency Act does not provide for other—particularly electronic—forms of assets being legal tender.⁴⁹

(p. 66) 4.24  A comparable picture can be discerned in the Euro-Zone. In order to conduct operations, the European Central Bank (ECB) and the national central banks maintain accounts for credit institutions, public entities, and other market participants.⁵⁰ Beyond that, national central banks may open accounts for other parties, such as insurance companies, based on national regulation.⁵¹ Depending on the use, the reserve account balances can be qualified as deposits (with overnight or other fixed-term duration),⁵² holdings of required minimum reserves⁵³ and pure balances. Only the latter, namely balances in TARGET2 Payments Module accounts and those sub-accounts,⁵⁴ are readily available sight deposits. These function as money in settlement procedures predominantly related to monetary policy instruments of the Eurosystem,⁵⁵ without falling under the definition of ‘legal tender’.⁵⁶ The EU legal framework does not define the legal nature of the underlying asset itself, ie of the balance’s content. Consequently, this has to be determined in accordance with the national law applicable to the relationship between the account-keeping central bank and its counterparts. In general, private law governs custody and current accounts.⁵⁷ Therefore, reserve balances in its substance seem to constitute a debt obligation of the central bank vis-à-vis the account holder, which confers upon the latter a claim against the bank for delivery of legal tender. However, this preliminary finding needs to be put into perspective as it highly depends on the mode by which a central bank creates money.⁵⁸

4.25  Without going into further detail, this finding reflects a general understanding: in initial form, reserve balances seem to represent a claim on the central bank to supply legal tender on demand.⁵⁹ The same would be true for a possible future (p. 67) cryptocurrency issued by central banks provided that they were to include a guaranteed, on-demand convertibility into legal tender.⁶⁰ In private law terms, the legal nature might ultimately be characterized as comparable to e-money: an intangible asset in the form of a claim on the issuer.⁶¹ The striking difference to privately issued e-money is that reserves entitle the holder to claim delivery of an asset that can be created by the issuer itself. Therefore, the credit risk of this ‘debt’ is virtually non-existent, which makes it particularly suitable for circulation as money among financial intermediaries with access to a reserve account, as legal tender does in the public domain.

4.26  In Switzerland, there was no express statutory provision with regard to reserve balances in the NBA of either 1905 or 1953. Despite this, there was no doubt about the validity of the principle just described. It was precisely the common perception that reserves are a debt of the central bank convertible into legal tender on demand, combined with the fact that a credit on the central bank entails virtually no credit risk, that soon helped reserve balances win the status of quasi-legal tender.⁶² Since then, as a longstanding practice, commercial banks have used reserve balances in a Mises-ian way for interbank payment. The bank accepts a credit in the reserve accounts as final discharge, without the central bank (by whom the claims would be payable in banknotes) ‘ever being called upon to settle it’.⁶³ Of course, commercial banks always exchanged a portion of reserves for banknotes, but this was commensurate with the public’s demands for payment transactions and to not settle open receivables owed by the central bank.

4.27  In order to enshrine this practice—ie the use of reserve balances for final settlement—in a statutory rule, the reserve balances were awarded the official status of legal tender in May 2000. Since then, the Swiss monetary order comprises a third form of legal tender apart from government-issued coins and central bank–issued banknotes:⁶⁴ sight deposits at the SNB.⁶⁵ However, the relevant provision⁶⁶ concerns only the manifestation of the reserve balances. By itself, it would not have altered the underlying substance (which is a personal right against the SNB).

4.28  This only occurred in combination with a second provision: Article 3(3) CPIA, which stipulates that ‘Swiss franc sight deposits at the Swiss National Bank must be accepted in payment without restriction by any person holding an account there’.⁶⁷ By that, a Swiss reserve balance has become irredeemable in the sense that it no longer obligates the central bank to convert it into cash upon first request of an account holder. Admittedly, the central bank still has the duty to ‘issue banknotes commensurate with the demand for payment transactions’.⁶⁸ This obligation is no longer linked to individual reserve balances, but rather must be fulfilled in executing the general task to ensure the supply and distribution of cash.⁶⁹

4.29  In this way, reserve balances have become compulsory tender, no different from modern fiat money banknotes. Although all central bank money is still recorded as debt on the liability side of the central bank’s balance sheet, neither Swiss banknotes nor all reserve balances are any longer true debts in the traditional sense.⁷⁰

4.30  With regard to banknotes, this view does not stand alone. The fact that, in substance, banknotes act more like equity capital than debt obligations, bear no interest and are perpetual in character has led Archer and Moser-Boehm to suggest that banknotes could be treated as a component of central bank capital, because:

they provide a stable funding base for income generation. To the extent that net income can be retained when needed, a large share of banknote liabilities provide a base for rebuilding equity if it has been depleted by a negative shock.⁷¹

(p. 69) 4.31  What seems to be true for irredeemable banknotes ought also to apply to irredeemable reserve balances. It is to be expected that reserve balances will become inconvertible in other monetary systems as well (eg in order to prevent undesirable use of cash—as can presently be observed⁷²—or a ‘run’ on the central bank in response to drastically negative interest rates allegedly set in the interest of monetary policy), at the latest once a possible de-cashing has been completed. But even for convertible reserves, the result does not alter, as far as they do not oblige the central bank to exchange them against an asset on its balance sheet but can only be redeemed against banknotes that are irredeemable for their part.

4.32  In light of this, and in order to requalify the legal nature of the monetary base, it may be helpful to restate this conclusion using an analogy from the Basel III standards. Of course, Basel III does not apply to central banks, but it is informative with regard to general accounting considerations, which are committed to standards reflecting economic reality (as legal order should be). In particular, Basel III defines criteria for liabilities to be classified as additional Tier 1 capital, a form of common equity.⁷³ Special emphasis should be placed on criterion 4, providing that capital has to be ‘perpetual, ie there is no maturity date and there are no step-ups or other incentives to redeem’.⁷⁴ In addition, the set of criteria requires full discretion regarding accessory payments, such as interest (cancellation, conditions, etc.).⁷⁵ Finally, criteria concerned with a default event must not be taken into account. These are tailored to meet the commercial bank’s risk of insolvency, while central banks are not exposed to the same risk and it is well known that they can operate at reduced or even negative capital levels.⁷⁶ Negative levels, however, would turn to positive levels if base money was no longer classified as debt capital.

(p. 70) 4.33  Bholat and Darbyshire have argued against a requalification of base money’s accounting treatment, because it:

would look through the legal form of banknotes as demand liabilities to the economic reality of their permanent circulation ( … ), banknotes are not available to absorb losses, which is one of the purposes of capital. Also, the level of banknotes in circulation is not determined by central banks, whilst other components of capital typically are.⁷⁷

4.34  The first argument, however, runs the risk of circular reasoning, because, especially in legal terms, it is highly questionable to characterize something as a debt that does not imply any onerous duty of the alleged debtor. The second argument focuses on the situation where a central bank takes a severe loss on the asset side. Let it be supposed that, as an exception, the bank would not be able to improve its capital situation in due time and would end up having difficulty operating with negative capital: the consequence then would be a devaluation of its currency. In other words, every holder of banknotes or reserve balances would incur a loss in purchasing power; thus, absorbing the losses that arose initially on the asset side in proportion to its holding. Third and lastly, in contrast to central banks, ordinary companies can determine both the components of capital and the components of liability. At least companies should in order to avoid ending up in over-indebtedness. In other words, the fact that the level of banknotes in circulation (as well as the level of outstanding reserve balances) is not determined by central banks is not due to the alleged liability nature, but rather a consequence of the ‘business model’ of central banks.

4.35  The interim results gained so far can be summarized as follows. It appears that money is an additional type of manifestation of an asset alongside what are called uncertificated personal rights in civil law or choses in action at common law (such as the pure liability of an ordinary custodian to deliver specified property to the depositor); certificated securities or documentary intangibles (such as a promissory note which reifies a right to the payment of money); and movable physical objects or chattels (such as a gold bullion).

4.36  Obviously, a selected combination of asset and (pre-monetary) manifestation can determine whether they are used as means of payment. If ultimately an asset is deemed to be money by social acceptance or even by state recognition, specific monetary legislation becomes applicable and takes precedence in case of conflict. For instance, under Swiss law, the place of performance switches to the creditor’s (p. 71) residence,⁷⁸ and in case of delay of payment special provisions derogate⁷⁹ and enforcement proceedings are carried out under a completely different type of procedure according to the Swiss Law on Debt Collection and Bankruptcy.

4.37  This principle was already discernible in the way Lord Mansfield in 1758 described Bank of England bearer notes, which in those days were not legal tender:

Now they are not goods, not securities, nor documents for debts, nor are so esteemed: but are treated as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind; which gives them the credit and currency of money, to all intents and purposes.⁸⁰

4.38  In light of the above, it becomes obvious that this remark was solely concerned with the manifestation of the banknote, not the asset represented by the note (which was at the time still analysed a claim on the issuing bank). In other words, the fact that an asset is deemed to be money may alter the legal effects of that specific manifestation on third parties (such the rules governing title, transfer etc.), but not its substance. A debt of the central bank does not cease to exist when used as money. But being money, it bears all its economic and legal advantages and disadvantages.

4.39  Then again, if an asset ceases to be money, the rules governing the pre-money manifestation of the asset are as a general rule reactivated. For instance, if a coin ceases to be money (e.g. because it is withdrawn from circulation), henceforth, property law and contract law regarding moveables will apply without being derogated by any leges speciales monetae. The same principle can be observed in the area of public law.⁸¹

4.40  Finally, in the absence of specific monetary rules, such legislative loophole (Rechtslücke; lacune de droit) is usually filled by way of analogy with the rules (p. 72) governing a pre-money manifestation of the asset. In the example mentioned above by Geva, a gap in banknotes legislation relating to the juridical nature of banknotes may well be decided by analogy to principles governing promissory notes—at least in non-ULB States.

4.41  However, a dogmatic divide can be observed between legal systems that have undertaken to comply with the ULB⁸² and systems that have not. In the latter, the discussion centres much more on the manifestation of a banknote and the question whether it qualifies as promissory note. Its substance is in danger of being sidelined, as will be illustrated by two brief examples.

4.42  Firstly, the wording of the ‘promise to pay’ was a cause for discussion during the passage of the Currency and Bank Notes Act 1954 through the United Kingdom Parliament. Recognizing its anachronistic nature, the Bank of England consulted its solicitors on whether to delete the phrase. Eventually, advice was given to retain it—owing to the character of the note as a promissory note—and so it has been preserved, up until the present day.⁸³

4.43  Secondly, staff members of the Bank of England only recently stated that banknotes:

are an IOU from the Bank of England to the rest of the economy ( … ). As stated in their inscription, banknotes are a ‘promise to pay’ the holder of the note, on demand, a specified sum ( … ). This makes banknotes a liability of the Bank of England and an asset of their holders ( … ).

It was admitted that:

although the Bank of England is in debt to the holder of its money, that debt can only be repaid in more fiat money. The Bank of England promises to honour its debt by exchanging banknotes, including those no longer in use, for others of the same value forever.⁸⁴

Ultimately, this finding does not alter the conclusion that banknotes are in substance an IOU.

4.44  This perception of money in the form of banknotes has been the dominant view in the economic and legal writings on money.⁸⁵ Though it is understandable in the light of the historical roots outlined so far, it is self-contradictory—it should be reiterated—insofar as banknotes nowadays can only be exchanged for other (p. 73) banknotes of the same total face value. Therefore, an exchange of central bank money against central bank money never leads to any form of repayment of the central bank’s ‘debt’ capital. In other words, although the packaging or the manifestation has remained the same, the substance of banknotes has changed. Obviously, the converse is also true: even though the substance has changed, the manifestation has remained the same. As described above, the aforesaid holds true for central bank reserves too.⁸⁶ Therefore, although still recorded as debt capital on the central bank balance sheet, neither banknotes nor all reserve balances are any longer true debts in the traditional sense. The same will also apply to future crypto- or other digital currency issued by central banks to the public—whether they are convertible or not.⁸⁷

4.45  This finding is important for the characterization of the nature of cryptocurrencies. As demonstrated below, the usual practice is that the legal effects relating to an asset (notably the property and transfer applied to it) depend on its manifestation rather than on its substance.⁸⁸

4.46  Thus, it seems that the rules governing the legal relationship between cryptocurrency as a legal object and its holder as a legal subject and the resulting effects towards third parties will have to be determined irrespective of whether such asset in its substance is classed as a liability or as something else. Its status (as a liability or something else) is only important with regard to the legal relations between holder and a potential issuer. The details will be outlined shortly, after tracing the modes of creation of money and their effect on the substance of an asset.

4.47  Should the substance of central bank money be systematically characterized as a form of (quasi) equity capital because it no longer obliges the central bank to exchange it for an asset other than central bank money? The answer is both ‘no’ and ‘yes’. The reason is that three parts of the monetary base have to be distinguished, according to the type of operation by which each was created. The following concerns the substance of any kind of central bank issued money and would even be true if one day central banks were to issue their own cryptocurrencies. In other (p. 74) words and based on the arguments put forward so far, the observations regarding the substance are true irrespective of the manifestation of such money (eg banknotes or book entries in traditional centralized registers or in distributed and cryptographically secured databases). In addition, the same general result is true for cryptocurrencies created by private parties regardless, again, of whether they are token- or account-based—if only they are issued under the same modes of creation as described now.

4.48  If money is issued in the course of a temporary operation such as a liquidity repo or a liquidity swap, then, as a consequence, the central bank is subject to an obligation to execute a reverse transaction later. In other words, the performance of the future leg implies a duty on the central bank to deliver assets in exchange for money. The same result applies if the central bank enters into a short forward contract or a comparable future (ie it promises to acquire its own money later in exchange for another asset) or if it writes a put option. At the maturity date or if the option is exercised by the counterparty, then the money will be sterilized, ie redeemed to the central bank in exchange for an agreed asset.

4.49  In all of cases, the central bank money is bound as to the amount concerned. The central bank has no discretion about whether it will or will not redeem its money against other assets. The nature of such finite or fixed-term money is still closer to classical debt capital than equity capital.⁸⁹

4.50  For the value of temporary money, this means that it is still closely connected to the intrinsic value of its collateral on the asset side of the central bank’s balance sheet. This becomes particularly apparent if such collateral suffers a decline in value. In this case, the central bank will ‘call for addition margin in the form of extra securities’.⁹⁰

4.51  Alternatively, if money is issued over the course of an outright transaction, then it remains at the full discretion of the central bank whether it will exchange assets (p. 75) in order to sterilize a corresponding amount of money. In principle, this portion of the monetary base could circulate permanently and would never have to be redeemed outside of liquidation. Even in a liquidation, it would likely only be exchanged against money of the successor institution, as is customary in currency reforms. This is true even if the collateral acquired in exchange for the money consists of a debt instrument. If the central bank does not wish to have the money due sterilized at maturity, then it will exchange the instruments prior to the expiry date against titles with a later maturity.

4.52  Since the financial crisis, a number of major central banks have implemented so-called quantitative easing in the form of outright transactions. Among the banks that have done so are the US Federal Reserve, the Bank of Japan, the ECB, the SNB, and (more moderately) the Bank of England. Based on the arguments put forward above, such outright money can no longer be qualified as debt capital of the central bank. Rather, it is a form of equity capital of its own kind, thus making each bearer, like any bearer of a banknote, a silent partner of the central bank.⁹¹ A forerunner of this view was stated by Duden:

The idea is that the bearer of money is actually a member of a community.⁹²

4.53  The same applies to every bearer of a banknote. Banknotes are a form of central bank owned funds, because each is, without exception, issued in outright transactions. Holders of sight deposit accounts, which primarily include commercial banks, withdraw banknotes in exchange for a debit of the counter value to the reserve balance, and individuals exchange (eg damaged) banknotes against legal tender of an equal amount. But under no circumstances, whatsoever, does this give its holders the right to withdraw any assets of the central bank.

4.54  As a consequence, the value of outright money is definitively disconnected from the intrinsic value of individual assets or classes of assets on the central bank’s balance sheet. However, the bank retains the capacity to influence the overall value of its money by its monetary policy—one option being the sale of foreign reserves in order to support the currency. In this sense, even outright money is not entirely dissociated from the asset side of the balance sheet. But the value of today’s money and, hence, its capacity to be money, is no longer secured by foreign reserves and management alone. Rather, as Sáinz de Vicuña explains:

The value of money depends on the central banks’ monetary policy within a given institutional and normative framework.⁹³ ( … ) The term ‘institutional’ is borrowed and adapted from the ( … ) New Institutionalism, arising within the law and economics movement. It uses the concept of ‘institution’ to encompass structures, (p. 76) organizations, rules and customs, shaping economic behaviour with a high degree of resilience and permanence. ( … ) it refers to the role and legal set-up of the currency issuer, the central bank (.. .).⁹⁴ The institutional theory of money entails not only a duty for states to abstain from interfering with the monetary policy of the central bank, but a positive duty to add their bit to ensure the success of monetary policy: sound fiscal policies. The fiscal policy of the state is made subordinate to the superior objective of monetary stability.⁹⁵

4.55  The last remark contains a deeper truth. Most of central bank’s foreign reserves still consist of government securities. As just pointed out, fiat money remains connected to those assets by ensuring leeway for the central bank to sterilize money (decrease liquidity) to support its value. In order to preserve the asset’s intrinsic value, the fiscal soundness of its issuer should be kept as high as possible.

4.56  A third mode by which money can be created is against no collateral or asset exchange whatsoever. The same effect would take place if the risk of galloping loss or a forced debt relief affecting the central bank’s foreign reserves were to materialize. If so-called ‘helicopter money’⁹⁶ was booked on the capital side of a central bank’s balance sheet, a corresponding counterpart would have to be entered pro memoria on the asset side as well.⁹⁷ In case its manifestation was the same as collateralized central bank money, this simply would lead to a dilution of the overall assets and would reduce the marge de manoeuvre of the central bank accordingly.

4.57  In order to illustrate the characteristics more clearly, it will be assumed in extremis that helicopter money is the only form of money issued by a central bank. This is exactly how some of today’s cryptocurrencies, and in particular bitcoin, are set up by default (as they are generally issued against no collateral). Notwithstanding the general concern whether it could fulfil the functions of money in the long run, there is serious doubt as to whether helicopter money could be regarded as central bank (debt or equity) capital at all. Rather, in its ‘substance’, it would have to be categorized as a mere clearing unit—a unit of account deprived of any intrinsic or derived value.

4.58  Consequently, the central bank would be incapable of active monetary policy to control money supply by means of exchange contracts at market conditions. (p. 77) Instead, if it wished to sterilize a part of the money, then it would have to refer to some form of expropriation (whereas cryptocurrencies would have to change the code⁹⁸). With regard to central banks, this would raise serious legitimacy issues as it clearly goes against the joint objective envisaged by the fundamental principles of price stability and nominalism: to strengthen and preserve the confidence of the public in a stable currency.⁹⁹

4.59  To conclude, helicopter money (whether issued in a register-based form, in the form of banknotes or in any other manifestation), in the sense of a pure account unit, could only function properly if it was allocated automatically, instantaneously, and in an amount commensurate with the value added by the business economy directly where the value arises. If such an algorithm is ever to be developed, central banks will no longer be needed. However, the cryptocurrencies created thus far are nowhere close to this ideal. Rather, they are neither issued commensurate with the value added within the community of its users (which would make monetary policy obsolete to a great extent) nor in a mode providing for an active money supply or any other form of monetary policy that could realign liquidity with economic growth and temper the intense volatility (price movements compared to state currencies).

4.60  A number of consequences follow from this analysis, which relate to the rules concerning legal title, transfer, and protection of commercial dealing in connection with an asset. First, the examples have shown that the label of being money is itself a kind of manifestation of an underlying asset. As a result, all other possible types of manifestation—for instance, movable physical objects or chattels, certificated securities or documentary intangibles, as well as uncertificated personal rights or choses in action—that comprise such asset before it was chosen as money (by statute, custom, contract, or otherwise) are often overshadowed as soon as an asset is treated as money.

4.61  Second, an asset can switch from one category of asset to another with its manifestation remaining unchanged. A textbook example is the claim to refund a deposited amount of gold coins comprised in a banknote: as a rule, the banknote (p. 78) remains money (under a conservative UK law approach it also remains a promissory note), even if redeemability is permanently abolished later. The converse is only true if the change of the asset’s category causes its value to erode, thus eliminating its monetary functionalities.

4.62  Third, questions of title, transfer and protection of commercial dealings need to be determined by the manifestation of an asset alone (eg as an intermediated security) and by rules governing the substance of the asset (eg as an uncertificated claim). A set of brief examples will illustrate this in the following sections. These are largely based on Swiss law, but the main principles outlined can also be found in other civil law jurisdictions.

4.63  To begin, an asset in question could be a gold coin, its basic manifestation being a corporeal thing capable of possession. As a possession is easily observable by external parties (or at least it was in ancient societies with its members having direct contact in everyday life), the law traditionally ties rights and obligations to it with effect erga omnes. For instance, it is presumed in terms of title that the person in possession of the coin is the owner,¹⁰⁰ and that acquisition of ownership by long possession is possible (subject, however, to further requirements, such as good faith).¹⁰¹ The transfer of ownership mainly depends, inter alia, on the transfer of possession¹⁰² (although the law has developed some exceptions commensurate with business needs). In case of insolvency, assets which do not belong to the bankrupt estate may be recovered by the owner, and the respective roles of claimant and defendant are determined by which party has possession of them.¹⁰³

4.64  If the coin is deposited in such a way that the depositary acquires legal ownership, the personal claim for the refund of it¹⁰⁴ becomes an asset in its own right. (p. 79) Since the right is of an intangible nature, possession of it is not possible, and the creditor’s entitlement to the coin applies inter partes only. Transfer has to be made by assignment in written form;¹⁰⁵ a requirement that has its roots in the desire to protect the bankrupt estate of the assignor.¹⁰⁶ In case of the depositary’s bankruptcy, the claim for refund is satisfied out of the proceeds of the forced sale of the depositary’s estate in proportion to the remaining total unsecured debt (to the extent that the proceeds have not been distributed to privileged creditors).¹⁰⁷

4.65  If the claim is embodied in a certificated debt security, the security is analysed as both an asset in its own right and a manifestation of the claim. The rules of title, transfer, and protection of commercial dealings are then determined by the rules applying to securities of the type in question. In other words, the possession of the certificate is a visible manifestation which, subject to rare exceptions,¹⁰⁸ prevails over the legal consequences associated with the barely observable manifestation of an intangible claim. That is to say, in all cases, the transfer of a certificated security requires the transfer of possession of the instrument¹⁰⁹ and, as a rule, all rights of the transferor deriving from the security pass to the acquirer (and not only the ones that arise from the instrument itself expressis verbis).

4.66  Such a security may eventually evolve into money, as banknotes did. As outlined in detail before, it will then be governed by all kinds of monetary legislation.¹¹⁰ Only where there is gap in that legislation will the rules governing the pre-money manifestation of the asset be applied by analogy.

4.67  In general, if a corporeal money is deposited,¹¹¹ the same rules apply to it in a subsidiary way as apply to ordinary fungible tangible movable assets.¹¹² This is (p. 80) also true for incorporeal money (ie bank money). In the absence of a specific provision, the rules regarding uncertificated debts apply to it.¹¹³ Therefore, it cannot be segregated in the case of the depositary’s bankruptcy, and the claim for repayment is satisfied pro rata out of the remaining proceeds. In two cases the depositor retains ownership of the money. First, if corporeal money is not mixed with the depositary’s own money, so that it remains identifiable, the holder can reclaim it and segregate it from the depositor’s bankruptcy estate (in this respect it is like every other fungible tangible).¹¹⁴ Second, if a bank deposits its client’s corporeal or incorporeal money on a fiduciary basis with a third party, it can be segregated in the case of the bank’s insolvency. Here, the rules developed for assets taking the form of entries in a register kept by a trusted party (which will be described shortly) govern the situation.¹¹⁵

4.68  The transfer of corporeal money is largely governed by statutory provisions regarding tangible moveable assets and will not be discussed further. The transfer of incorporeal money is of greater interest, as there exists a specific payment mechanism. Even though incorporeal money consists basically of a debt owed by a commercial bank to its client, transfer does not happen by means of assignment. The same general principle applies in both common law systems¹¹⁶ and civil law systems. Because the pertinent provisions under Swiss law are far less concise,¹¹⁷ it will be described here with the words of Fox:

The transfer consists in the reduction of the payer’s bank balance with his or her bank and a corresponding increase in the bank balance of the recipient with his or her bank. The essential feature of the transfer is the payer’s instruction to his or her bank to arrange the adjustment in the value of the debts owed to the payer and recipient by their respective banks. The amount of that adjustment of debts represents the value of the transfer between them.¹¹⁸

As a consequence, the asset which the beneficiary acquires by means of the transfer is wholly distinct from the asset which the originator had before the transfer. As the subject of a proprietary interest nothing passes from the originator to the beneficiary.¹¹⁹

(p. 81) 4.69  To that end, Geva is right to note that ‘the characterization of the process as a “transfer” is certainly a misnomer’.¹²⁰ The reduction of the payer’s bank balance reflects the claim to reimbursement of expenses incurred by his or her bank,¹²¹ whether because the bank directly credits the account of the payee (thereby creating a new debt owed to the payee) or whether it has to cover the claim to reimbursement of the payee’s bank or of a corresponding bank.

4.70  Based on the arguments put forward thus far, it is claimed that the payment mechanism does apply even if the money ‘transferred’ no longer exists as a debt, as long as the manifestation is maintained as an entry in a register kept by a trusted party.¹²² Here, the reserves of the Swiss National Bank can serve as an example. As described above, they used to be claims on the central bank and were later converted into sui generis rights with either a (temporary) claim-like or an (outright) equity-like nature.¹²³ Nonetheless, irrespective of their nature, transfers of the reserves are rightly still required to be made under the same payment mechanism.¹²⁴ Such transfers amount to an average turnover of CHF 159’060 million Swiss francs per day.¹²⁵

4.71  Instead of becoming money, a certificated debt security may become an intermediated security. This happens if a qualified custodian accepts it and credits it to a so-called securities account. From then on, the legal treatment of it is determined by the special provisions concerning intermediated securities. However, a qualification has to be entered at this point: as is well known, the commercial law of securities is an inherently complex and disparate field, especially since it has transcended its old roots in negotiable instruments law and moved into a more abstract framework of intermediation. The very nature of assets in the form of intermediated securities continues to be subject to widely varying views, and the same is true with regard to the entitlement of securities account holders.¹²⁶ In the words of Bjerre:

(p. 82)

Intermediation in this context refers to the maintaining and transfer of property rights in securities by means of book entries in accounts maintained by brokers, banks, or other custodians acting as intermediaries, often in several tiers, between an issuer and its ultimate investors. Transactions between buyers and sellers or other commercial actors are carried out by debits and credits to the appropriate accounts, with the intermediaries themselves being linked as needed on their respective books or on those of a central securities depository.¹²⁷

4.72  Space prevents a detailed description here of the security entitlement model applied the United States and Canada,¹²⁸ and the direct legal ownership model used in Germany and Austria,¹²⁹ as well as on the pragmatic French approach of transferable securities (valeurs mobilières)¹³⁰ that has inspired Italy and Spain to implement comparable solutions.¹³¹ As a consequence of such diversity, the Unidroit Convention¹³² that was meant to complement the Hague Securities Convention¹³³ and to harmonize parts of this legal minefield, tackles only matters located at the periphery of the right of ‘ownership’.

4.73  Switzerland enacted a special law regarding intermediated securities in 2009.¹³⁴ It puts their legal nature as a sui generis form of property right on a statutory basis.¹³⁵ In case a custodian is subject to proceedings for compulsory liquidation, the holder’s assets are segregated ex officio. Shortfalls are borne by depositors in proportion to the number of assets of the missing kind credited to the respective securities accounts.¹³⁶ Transfer is executed by instruction-based booking entry or by a control agreement between holder and custodian.¹³⁷ Finally, good faith (p. 83) acquisition is possible.¹³⁸ What is required, however, is that all pre-existing manifestations are ‘immobilised’.¹³⁹ The custodian accepts collective custody either by collecting certificated securities, global certificates, or by registering uncertificated securities in a main register.¹⁴⁰

4.74  Such special rules are much needed. Without them, the legal regime governing asset manifestation by written but uncertificated consent would apply. In particular, transfer would be made by written assignment¹⁴¹ and, as seen, clients’ assets could not be segregated in the case of a custodian’s bankruptcy.¹⁴²

4.75  What is most important, however, is that for the time being these rules (namely the segregation right and the pro-rata loss bearing rules) brought a drawn-out legislative process to a close. These rules consist of a growing number of regulations that confer quasi-property status on intangible assets. They apply where the assets are recorded by a particularly trustworthy entity, such as one whose accounts are prudentially supervised.¹⁴³

4.76  In Switzerland this process started half a century ago. Previously, scholars had tried rather desperately to explain why investors in collective investment schemes could be thought to have co-ownership of assets entrusted to fund management.¹⁴⁴ By such interpretation the investors’ right of segregation was ensured in the event that a contractual fund manager became bankrupt. But the co-ownership analysis never caught on. Instead, from 1967, a new Federal Act granted investors a right of segregation even though the investment was based on mere contractual agreement and consisted of uncertificated rights.¹⁴⁵ Thirty years later, in 1997, a corresponding solution for banks came into force. Since then, selected deposit items, (p. 84) including uncertificated claims,¹⁴⁶ can be segregated. (This happens today in accordance with the FISA¹⁴⁷ rules.) In 2004 securities dealers followed suit, as did Swiss mortgage bond institutions in 2011, and financial market infrastructures.¹⁴⁸

4.77  The goal of all these rules is identical: an equivalent substitute to Article 242 DEBA¹⁴⁹ should be made available for intangible assets in case of bankruptcy. The article is not directly applicable, since its wording only allows the segregation of tangible assets.¹⁵⁰ Tangible assets are manifested in a form that allows them to be identified and controlled by the holder. As a consequence, tangible assets are in a form that allows them to be possessed and owned, which allows them to be claimed back.

4.78  Intangible assets lack these qualities. Instead, their capacity for identification depends exclusively on book entries in accounts maintained by an individual legal person.¹⁵¹ Furthermore, false entries (particularly double bookings) can occur. As a result, even though obligors may issue so-called uncertificated securities created by entry in a book established for that purpose,¹⁵² the rules governing title and transfer follow the rules for simple debts¹⁵³ because the obligors do not enjoy any exceptional trustworthiness.

4.79  As a result, the aforementioned leges speciales have been created in order to avoid the legal uncertainty about a possible analogous application of Article 242 DEBA to intangible assets. To this end, book entries with an increased level of credibility are allowed the privilege of segregation in bankruptcy. In Switzerland, this credibility is enjoyed by prudentially supervised financial intermediaries and selected (p. 85) public entities.¹⁵⁴ This closed list of trusted parties is complemented by the rule of pro-rata participation in the event of a loss arising from the insolvency of a trusted party. Thus, the risk of a false entry is borne jointly by all holders in the class of assets affected. The holders of each class of fungible book entries at a trusted custodian form, to some extent, a separate and privileged bankruptcy class. They share the fate of the ordinary bankruptcy class only in relation to a potential claim for compensation after a shortfall in recovery.

4.80  Now, what does all this mean for cryptocurrencies? As mentioned in the introduction, these assets are data recorded by trusted forms of technology rather than being recorded as account entries by a qualified intermediary.¹⁵⁵ As data, they are what has been called ‘rivalrous’ and ‘excludable’. Rivalrous assets are those where one person’s consumption of the asset necessarily causes some reduction in another person’s consumption of it. They contrast with non-rivalrous assets, which are goods ‘which all enjoy in common, in the sense that each individual’s consumption of such a good leads to no subtractions from any other individual’s consumption of that good’.¹⁵⁶

4.81  They are excludable in the sense that it is possible, or at any rate economically feasible, to exclude non-purchasers from consuming them.¹⁵⁷ However, it is the rivalry in use that provides the main rationale for so-called absolute rights in the form of the exclusive property rights created over physical assets. Accordingly, data, although an excludable resource, do not generally support an analogy to (p. 86) physical property. Data are generally non-rivalrous in nature, ‘which means that the use of data by one market player does not limit the availability of the same data for use by other market players’.¹⁵⁸

4.82  With the introduction of distributed ledger technology, however, a new class of data has emerged, which is both of an excludable and rivalrous nature.¹⁵⁹ We can call this ‘value data’ (Wertdaten, données de valeur). In the case of cryptocurrencies, the units of value booked on a specific address are of just this sort. They are either non-itemizable, like bitcoin,¹⁶⁰ or itemizable like wingcash.¹⁶¹

4.83  What makes this kind of data both excludable and rivalrous assets is the elliptic curve cryptography used to protect and transfer them in a permanent and traceable way. Thus, by reducing the risk of double spending to a negligible probability, the private key (which is itself a non-rivalrous asset since it is publicly viewable to other users of the system)¹⁶² gives its holder exclusive access to the rivalrous balance.

4.84  In practice distributed ledger technology is still very young and not yet fully developed. Since the emergence of bitcoin, the underlying technology has been used countless times as a base protocol layer, on top of which new layers with new rules are being built. The same is happening to alternative base protocol layers, such as Ethereum. As was predicted in 2012, these layers allow for the production of new digital creations that ‘provide initial funds to hire developers to build software which implements the new protocol layers’.¹⁶³ In 2013, the first so-called initial coin offering of its kind took place.¹⁶⁴ Since, a vast number of digital creations (p. 87) have been programmed on a variety of distributed ledgers. Although commonly referred to as cryptocurrencies (or cybercurrencies or virtual currencies), only a small fraction has been built with the aim of functioning with the usual attributes of money as a means of exchange, as a store of value and as a measure of value. Whether this small fraction indeed is yet capable of fulfilling these functions is a different question.

4.85  Cryptocurrencies can be analysed as a specific asset consisting of data. The question of whether they are categorized as a kind of monetary data, a digital commodity, an investment contract, or something else, will be decided by their substance rather than their form.

4.86  But only the form in which cryptocurrencies manifest themselves will be relevant to the legal rules governing title, transfer, and the protection of commercial dealings that are applied to them. In essence, the manifestation of cryptocurrencies consists of book entries secured by elliptic cryptography. For that reason, it is vital that the credibility of the underlying algorithms reaches or even exceeds the level of credibility of prudentially supervised financial intermediaries. Only then, can cryptocurrencies be deemed value data and subject to legal rules closely modelled on the regime governing an absolute entitlement to assets deposited with a trusted party who is prudentially supervised.

4.87  The rules governing title would mainly require the recognition of an absolute right to recovery of value data of a similar kind and quality (economically comparable to the rei vindicatio); a remedy against unlawful interferences similar to the actio negatoria; and, in insolvency proceedings, segregation rights and pro-rata loss bearing burden.

4.88  Who would be the bankrupt person? Intermediaries have emerged even in distributed networks such as the bitcoin blockchain. For instance, wallet providers and cryptoasset exchanges offer their services which often imply custody of either the value data or the means of access (private key) of the beneficial holder. Moreover, insolvency questions arise if value data can only be transferred by a multi-signature transaction, and, for example, one of two persons authorized to sign becomes insolvent.¹⁶⁵ Likewise, the recipient of an unauthorized transfer can go bankrupt.

(p. 88) 4.89  If such bankrupt person is subject to proceedings for compulsory liquidation, a person allegedly entitled to the value data has to provide proof of his or her right of disposition in order to segregate such assets. At the same time, the bankrupt person will indicate and make available to the liquidator the value data held for its own account and for the account of third parties, as well as claims related to value data against third parties. The latter will have the same obligation to inform as the bankrupt.

4.90  The liquidator will then exclude value data, as well as claims to receive delivery of value data from the bankrupt’s estate up to the quantity of value data owing to third parties and credited to addresses maintained by the bankrupt. In case of doubt, any value data held by the bankrupt would be presumed to belong to its creditors. If the value data segregated from the bankrupt person’s estate are not sufficient to satisfy its creditors in full, value data of the same kind held by the bankrupt’s own account would also be segregated insofar as necessary. Finally, shortfalls would allocated pro-rata to all creditors in proportion to the quantity of value data of the missing kind owed to them.

4.91  In view of this, a legislative proposal recently introduced by the Liechtenstein Government, and intended to come into force in summer 2019, comes as no surprise.¹⁶⁶ At first sight, it seems revolutionary, as it acknowledges data created and stored by a trusted technology (vertrauenswürdige Technologie) as a new form of absolute right (called Token) that can be segregated in the case of bankruptcy. However, even though the trusted technology does not need to be maintained by a legal entity subject to approval, issuers will be supervised, and custodians will be subject to licensing requirements. To that extent, tokens under future Liechtenstein Law will ultimately be comparable to existing legal systems that reify assets according to their manifestation as an entry in a register kept by a trusted party. This should, however, not lead to the—overly conservative—argumentum e contrario that value data booked outside a trusted party’s responsibility should never enjoy protection against third parties generally. Rather, all tokens held by parties (called ‘delegatees’) in their own name but for account of a third party (called ‘delegator’) benefit of a legal position comparable to the one of physical objects. In particular, a delegator they can demand surrender of tokens held in custody by a delegatee that has become subject to insolvency proceedings, even if the bankrupt delegatee has been acting on a private basis and thus had not been licensed. In that regard, Liechtenstein indeed is about to pioneer, as it confers (p. 89) an absolute legal title to the holder of data, even if they are not held by a trusted party, provided that they are booked on a trusted technology.

4.92  The focus of the Lichtenstein Law, however, remains on delegates acting on a commercial basis. This seems to be a prudent choice until distributed ledger technology matures to the point where it is so safe and reliable that it will no longer depend on the guardianship of a trusted party.

4.93  The latter probably will go hand-in-hand with a change in meaning given to legal persons (as opposed to natural persons).¹⁶⁷ Scholars in the United States and Europe have demonstrated how existing company laws already offer the option of establishing a company entirely controlled by nonhuman autonomous systems. That control can be wide-ranging in the United States¹⁶⁸ or permitted within narrower confines in the European Union.¹⁶⁹ As a result, such a system can have legal personality. The legal effects of the transformation from robots being objects of property to subjects of property cannot be considered in detail here.¹⁷⁰

4.94  In conclusion, the appropriate mode of transfer for cryptocurrencies will be analysed. It is fascinating to observe the basic similarities between payment mechanisms,¹⁷¹ the disposition of intermediated securities,¹⁷² and even other types of disposition over rights by modification of a register entry.¹⁷³ In essence, the transfer requires an instruction to the record-keeping entity and corresponding book entries. In the case of cryptocurrencies, it is particularly interesting to see (p. 90) that the transfer of value de facto results in the extinction of existing value data (an unspent transaction output (UTXO)¹⁷⁴ of the sender in the case of bitcoin), as well as in the creation of new value data (a UTXO of the recipient/s). The parallel to the payment mechanism is obvious: there, the transfer of value de jure leads to the extinction of an existing asset (bank money of the payer/originator in the form of a claim on the bank) and the creation of a new asset (bank money of the recipient/beneficiary in form of a claim on the bank).

4.95  Admittedly, unlike the transfer of corporeal assets, which requires only two parties, transfer through a classic payment mechanism ‘needs at least three participants if it is to operate’.¹⁷⁵ In the case of cryptocurrencies and especially in the case of bitcoin, however, there is not necessarily¹⁷⁶ an entity with legal personality that could be identified as intermediary. Rather, the distributed ledger technology assumes the corresponding role. As outlined before, this gap might be overcome by a broader interpretation of what is a legal person in the future.¹⁷⁷

4.96  Nevertheless, it seems more appropriate to justify the application of the payment mechanism by analogy to the freedom of contract: whoever acquires value data booked on a distributed ledger accepts the uncertainty due to the absence of a trusted intermediary (and sometimes even welcomes it for ideological reasons) or simply does not care. As a consequence, if the parties are ready to entrust a nonhuman autonomous system with duties and responsibilities traditionally assumed by intermediaries, the same regulatory regime governing payment mechanisms should be applied to them.

4.97  First, this means that for regulatory purposes book entries should be treated as fully effective and legally valid inter partes just as if they had been executed by a (p. 91) traditional intermediary. The sender’s asset ceases to exist and a new asset is created in the hands of the recipient.

4.98  Second, the parties would be deemed to have waived any claims that could arise out of relation to a traditional intermediary. They would therefore have no claims against any person who had responsibility for setting the rules of the cryptocurrency system.

4.99  Third, finality in the sense of an irrevocable transfer and, hence, the discharge of a respective obligation would coincide with the first node confirming a transaction. After confirmation, it is not possible for the payer to replace an existing transaction with a new one by means of a so-called (legitimate) replace-by-fee attempt. Here, the payer tries to use the same inputs (value data) spent in one transaction in a second transaction again by increasing the fee offered to miners for the second transaction.¹⁷⁸ In contrast, other attempts of double spending can only be reduced to a negligible probability after several confirmations (six by rule of thumb).¹⁷⁹ However, none of them is deemed legitimate. Therefore, a party may well require six confirmations to pass before it accepts a transaction in order to reduce the risk of fraud. But this is not to be confused with irrevocability of a transfer that occurs, when no legitimate cancellation is possible any longer.

4.100  The legal effects of book entries made by nonhuman autonomous systems in relation to third parties would need to be clarified. Provided that such a system complied with the standards of elliptic cryptography and thus is capable of creating rivalrous and excludable value data, it would be appropriate to acknowledge that the holder of the data had an absolute legal title to it. It would therefore be entitled to have it segregated in the event that a custodian became bankrupt and it would have to bear pro rata the burden of any loss of that data.

4.101  This does not turn value data into property for all legal purposes. Property was developed even before humanity was capable of understanding that electricity was more than thunder and lightning, and perceived it to be exclusively controlled by gods. Today, electricity and electronic means are used to shift growing parts of our material world into digital, virtual equivalents. These deserve a separate set of rules which should be modelled along the broad lines of the general property law (or rather asset law) that has evolved over centuries and which has been partly explained in this chapter.(p. 92)