8.01  Cryptocurrencies—of which Bitcoin is the first and most well-known—are decentralized by design. Nevertheless, to the extent that it is possible for these decentralized networks to have a heart, there is little doubt that it lies in Asia, specifically East Asia. Three countries in particular play vital roles in cryptocurrency markets—China, Japan, and South Korea. In the second half of 2016, transactions in Chinese yuan accounted for 98% of global Bitcoin trading volume.¹ Even accounting for the chicanery of the Chinese cryptocurrency exchanges, Bitcoin (p. 200) transaction volumes in China were estimated to account for 85% of the global trading volumes.² In a flurry of activity in September 2017, China banned both ICOs (initial coin offerings)³ and cryptocurrency exchanges.⁴ Even then, however, China remained at the heart of the Bitcoin network because the key activity which makes Bitcoin work—mining—was predominantly conducted in China. By April 2016, Chinese mining pools controlled over 70% of the network’s hash rate.⁵ Despite the regulatory clampdown in September 2017, more than two-thirds of new bitcoins were still mined by Chinese mining pools,⁶ although it remains to be seen if this dominance can be maintained in the light of crackdowns on preferential benefits, particularly in terms of cheap electricity enjoyed by mining companies.⁷ China’s regulatory crackdowns have seen some cryptocurrency trading activity shift to its neighbours Japan and South Korea.⁸ However, whilst some of the increased trading activity in Japan and South Korea is probably the result of trading moving offshore from China following the regulatory crackdown,⁹ there is (p. 201) also genuine interest from local retail investors drawn to the then boom in bitcoin prices.¹⁰ Investors’ affinity with leverage in Asia¹¹ doubtless had an impact on the dramatic increases in market share of these three Asian markets, albeit at different times.¹² Soon after the regulatory clampdown in China in September 2017, Japan took over from China as the leader in market share in bitcoin trading,¹³ and it remains the market leader at the time of writing¹⁴ despite having the dubious honour of having hosted both of the cryptocurrency exchanges to have suffered the two worst hacks of all time.¹⁵ In late 2017, South Korea accounted for about 12–20% of the world’s bitcoin trades.¹⁶ Whilst this was significantly less than the 40% that Japanese trading comprised, this is still a notable figure given that ‘[the Japanese] economy is four times larger than that of South Korea, and bigger in terms of financial investments.’¹⁷ Such was the cryptomania in South Korea that for a period of time; prices of cryptocurrencies listed on South Korean exchanges were significantly higher than those of other exchanges elsewhere in the world, a premium sometimes called the kimchi premium.¹⁸ This led to South Korean exchanges being briefly excluded from price averages calculated by CoinMarketCap, a leading source for cryptocurrency data, ‘due to the extreme divergence in prices from the rest of the world and limited arbitrage opportunity.’¹⁹ For a while, this (p. 202) made South Korea the third largest crypto trading market in the world despite only ranking twenty-seventh in terms of population and eleventh in terms of gross domestic product.²⁰ Whilst it had fallen behind the Eurozone in terms of market size at the time of writing, following a series of regulatory clampdowns by the South Korean government, it remains to be seen whether the government will have the political will to maintain its hard-line stance.²¹ Japan, in the meantime, has suffered its second major hack of a cryptocurrency exchange,²² when some 523m XEM tokens worth roughly US$500m were ‘stolen’ from Coincheck, bringing back memories of the infamous Mt Gox hack, which held the previous record for the most serious hack of a cryptocurrency exchange, where roughly US$460m worth of bitcoins were allegedly ‘stolen’ from Mt Gox.²³ Coincheck was one of several exchanges set up in the wake of new regulations following the Mt Gox hack, and this more recent hack has called into question the regulatory regime in Japan.²⁴ All of these rapid changes in the regulatory environment have made the study of the law relating to cryptocurrencies very difficult, given the fluid attitudes of the regulatory authorities, who on the one hand are rightly concerned about market excesses and on the other hand are reluctant to accidentally throttle a nascent technological innovation through disproportionate regulation. Whilst the regulatory terrain relating to cryptocurrencies has seen furious activity, little has been articulated about the characterization of cryptocurrencies as a matter of the civil law in any of these three jurisdictions. This, it is suggested, leaves courts untethered as they struggle to deal with disputes relating to cryptocurrencies. Likewise, regulatory efforts are necessarily hampered by the lack of clarity in the law. Owing to the dominance of these three jurisdictions in terms of both exchange activity and mining capacity, this issue is also of importance to courts of other jurisdictions. The decentralized nature of cryptocurrencies dramatically increases the likelihood of disputes relating to them having an international dimension and the pre-eminence of these three East Asian jurisdictions in terms both of trading and mining activity means that a link with one or more of them (p. 203) is a prospect that cannot be readily dismissed. Their characterization is therefore also of interest to foreign courts and lawyers as a matter of the conflict of laws.²⁵

8.02  Despite comparisons to gold²⁶ and tulips,²⁷ Satoshi Nakamoto, the mysterious inventor of Bitcoin, the original cryptocurrency, initially intended it to serve as a peer-to-peer electronic cash system,²⁸ ie digital money. This should also be obvious from the name given to Bitcoin and its ilk as a class—cryptocurrencies. As the name implies, this class of digital money is backed by a cryptographic system, as opposed to fiat currency. It is debatable whether Bitcoin or one of its myriad challenger cryptocurrencies has managed to achieve the economic functions of money, but one thing is clear. So far, as the law of the three jurisdictions under consideration are concerned, they are most definitely not money in the legal sense of the word. This is because all three jurisdictions adopt the so-called State theory of money,²⁹ meaning only those monies issued under the authority of the law in force within the State of issue would be legally regarded as money.³⁰ Although China has been named as one of numerous countries considering the (p. 204) issue of fiat cryptocurrency,³¹ neither it nor Japan or South Korea have actually proceeded with such an issue. As such, the only cryptocurrencies presently circulating in all three jurisdictions are of the non-fiat variety that cannot legally qualify as money.

8.03  On a spectrum of legal accommodation of cryptocurrencies, China and Japan sit on opposite ends of the spectrum, with South Korea falling somewhere between them. In Japan, ‘virtual currencies’ have recently been included as a means of payment by way of a 2016 amendment to the Payment Services Act.³² Although the Act uses the term ‘virtual currency’, commentators have construed it to encompass cryptocurrencies such as bitcoins.³³ This has caused numerous commentators to mistakenly believe that cryptocurrencies have achieved the status of legal tender in Japan,³⁴ but this view is clearly mistaken.³⁵ The amendment was clearly intended to enable the government to regulate cryptocurrencies rather than facilitate their use as a means of payment. Nevertheless, the cryptocurrency (p. 205) community has chosen to regard its inclusion in the Act as an endorsement of sorts,³⁶ which is a very curious construction of the Act since payment by cryptocurrency was never prohibited in the first place. Without conferring legal tender status to cryptocurrencies, it is difficult to see how their inclusion in the Act ‘facilitates’ anything other than their regulation. Neither South Korea nor China has promulgated similar legislation. Indeed, in China, cryptocurrency exchanges have been banned since September 2017.³⁷ The government’s refusal to recognize cryptocurrency as money has been clear since December 2013 when the People’s Bank of China and four other ministries and agencies issued a notice curtailing financial institutions’ involvement with bitcoin. According to the notice:

[a]lthough bitcoin is called a ‘currency’, but as it is not issued by a monetary authority, it does not have the legal tender characteristics of a currency, and so cannot really be regarded as a true currency. Based on its characteristics, bitcoin should be treated as a form of virtual commodity that does not share the same legal status of a currency. Nor can, or should, it be circulated or used in the marketplace as a currency.³⁸

8.04  That said, in the absence of an outright ban, cryptocurrencies may presumably still be used in isolated transactions in a manner akin to barter in China. In South Korea, although cryptocurrencies have not been accommodated by any legislation, neither has its trade through cryptocurrency exchanges been banned by the authorities. Nevertheless, despite the absence of guidance, it is clear that they are not money as a matter of law.

8.05  But if Bitcoin and other cryptocurrencies are not money in these three jurisdictions, the next obvious question would be whether they would be regarded as some form of property (ie assets) instead. Can cryptocurrencies be the object of ownership in any of the three East Asian legal systems under consideration?

8.06  Before we can begin to contemplate the characterization of cryptocurrencies as property in Japan, China, or South Korea, it is necessary to briefly introduce their respective legal systems. Property law in Japan, China, and South Korea is respectively called ‘bukkenhou’ (物権法‎/Japanese); ‘wùquánfǎ’ (物权法‎/Chinese); and ‘mulkwonbop’ (물권법‎/Korean).³⁹ In fact, the translation ‘property law’ does not precisely capture the nuance of the original term used in each of these languages. A more precise and accurate translation would be ‘the law of real rights’ or—to resort to Latin—the law of in rem rights or rights erga omnes. This branch of the law mainly provides for those rights that are in principle exigible against an unspecified number of persons or—to use a more vivid colloquialism—the world at large. The reason the term ‘property law’ may cause confusion when used in a civil law context is that it might denote an area of law that concerns property in the sense of assets or wealth, yet property in this sense can involve debts, ie a personal right. However, used in this sense, ‘property’ is respectively translated as ‘zaisan’ (財産‎/Japanese); ‘cáichǎn’ (财产‎/Chinese); and ‘jaesan’ (재산‎/Korean).⁴⁰ While the former sense of ‘property’ focuses on the nature of the right (specifically its exigibility), this wider sense focuses instead on the nature of assets. It accordingly does not inquire into the nature of the right in question, therefore both tangibles (ie land and chattels) and intangibles (ie debts, intellectual property rights) are included. As with the case of ‘property’, ‘ownership’ has a strict legal meaning that is distinct from its colloquial usage. Ownership is respectively translated as ‘shoyuuken’ (所有権‎/Japanese); ‘suǒyǒuquán’ (所有权‎/Chinese); and ‘soyukwon’ (소유권‎/Korean).⁴¹ In its strict legal sense, only tangible things are capable of being the object of ownership. This, however, cannot prevent laypersons from describing their rights in other assets as a form of ‘ownership’ in the colloquial sense. For example, when B owes A money, it is not uncommon to encounter statements to the effect that A ‘owns’ a debt owing from B. However, this is not ‘ownership’ in the strict legal sense of the word because the debt is not a tangible thing, and, furthermore, unlike ownership, A’s right is in personam and binds B only. The verb ‘own’, as used colloquially, is thus a neutral and elusive (p. 207) expression that can be used whenever a tangible or an intangible asset belongs to us. Although a debt can, somewhat confusingly, form the subject matter of a real right (ie a security interest over a debt), the debt itself is a personal right (ie rights in personam) rather than a real right. Since the law of real rights in East Asian civil jurisdictions under discussion only deals with rights in rem, it is therefore preferable to employ the translation of ‘the law of real rights (or rights in rem)’ in order to avoid any misunderstanding arising out of translation.⁴² The first question is thus: what is the source of the law of real rights in these three jurisdictions?

8.07  The primary legal source for the law of real rights in Japan⁴³ and South Korea⁴⁴ is the Civil Code. Whilst China has yet to enact a comprehensive Civil Code, it has a separate piece of legislation called the Law of Real Rights⁴⁵ that adopts the structure of the part of the Civil Code that deals with the law of real rights. China is expected to enact a Civil Code in the near future,⁴⁶ and it is highly probable that (p. 208) the Law of Real Rights will be incorporated into their new Civil Code. So far as the Japanese and South Korean Civil Codes are concerned, their systematic structure follows that of the German Civil Code (BGB), which adopts the Pandectist system. This system is named after the Pandectae (also called the Digesta or Digest) within the Corpus Iuris Civilis⁴⁷ since many rules of the German Civil Code are derived from it. Structurally, the German code is influenced by the Christian geometric systems which moved from the general to the particular.⁴⁸ Thus both Japanese and South Korean Civil Codes⁴⁹ also adhere to such a structural system and consist of five Books: General Rules of Civil Law (Book I); Law of Real Rights (Book II); Law of Obligations (Book III); Family Law (Book IV); and Law of Succession (Book V).

8.08  Book I (ie General Rules of Civil Law) of both the Japanese and South Korean Civil Codes provides for the common elements of all private legal relationships, such as personhood (both natural and legal); manifestation of intent (ie juridical acts such as agreement, will etc.); and prescriptions, to name but a few. Therefore, it applies to all aspects of private law in those jurisdictions. Then the Codes move on to topics that are more specific. Book II deals with the Law of Real Rights (ie Rights in rem). Following the geometric system, Book II of both Civil Codes is also divided into a General Part and a Particular Part. The General Part enshrines the rules relating to the creation of real rights, the modes of transfer, and the reasons for extinction. These rules are common denominators that can be generally applied to the specific and individual real rights-relationships such as ownership, security interests (ie hypothec, pledge, and lien), and usufruct (ie easement, superficies etc.) that are to be found in the Particular Part.⁵⁰ The Civil Code forms the infrastructure and cornerstone of all aspects of private law in Japan and South Korea. Although China presently lacks a comprehensive Civil Code, its (p. 209) modern civil law is also heavily influenced by the German tradition.⁵¹ Its General Principles of Civil Law, enacted in 1986, was modelled on the Civil Code of the Soviet Union, which was itself substantially influenced by the German Civil Code, and it resembles what appears as Book I of the Japanese and South Korean Civil Codes. It is now supplemented by the General Provisions of Civil Law, enacted in 2017, which is intended to serve as Book I of a future Civil Code.⁵² Likewise, China’s Law of Real Rights, enacted in 2007, is also akin to Book II of the Japanese and South Korean Civil Codes in terms of its systematic structure, likewise comprising a General Part and a Particular Part. Although the Germanic influence is less explicit, it will be seen that the dominant view of real rights in China remains Germanic.

8.09  With this brief background of the legal systems of the three jurisdictions, in particular, their laws relating to real rights, we can explore the two questions that this chapter attempts to answer: First, can cryptocurrencies be considered a thing recognized in the Civil Code? Second, if not, how can they be accommodated under the current Civil Code regime?

8.10  With the growing consciousness of cryptocurrencies, it is increasingly commonplace to hear statements to the effect that ‘I own bitcoins’. But are such statements accurate as a matter of law? Do persons in China, Japan, and South Korea who hold cryptocurrencies actually own them in the legal sense of the word ‘ownership’? To begin our study on the accuracy of such commonplace statements, it is necessary to distinguish a real right from its subject matter, the object or thing or res that lies at its heart. For example, when we say that A has ownership of a pen, ownership is the real right that exists in the pen but this right is separable and distinct from the pen itself. The pen is the subject matter of A’s ownership (ie a real right). Such a juxtaposition of subject matter and right can also be found in an obligational relationship. For example, if A contracts with B to borrow money from B, A is contractually entitled to B’s performance, which in this case entails the transfer of money to A. In other words, the subject matter of A’s contractual right is B’s performance. Again, we have a subject matter (ie B’s performance) and a right (ie A’s contractual right). However, there are a number of crucial differences. First, since A’s right only binds on B under the latter contractual relationship, its (p. 210) legal nature is that of a personal one, thus a right in personam, as contrasted with the former real right (ownership) that is in principle exigible against the world.

8.11  Second, the subject matter of a real right is always an object or a thing. The same, however, cannot be said of obligational rights such as contractual rights. Whilst A can say A has ownership of the pen, it is nonsensical to say that he has ownership of B’s performance. Whilst it is semantically possible for A to say he owns a contractual right to B’s performance,⁵³ it makes no sense to speak of A having ownership of B’s performance, as opposed to his right to B’s performance. B’s performance per se, the transfer of money, is not capable of being the subject matter of ownership. It is only possible to speak colloquially of ownership by blurring the right with its subject matter, hence the commonly encountered ‘A owns a contractual right to B’s performance’. This can be contrasted from the case where A says he owns a pen. The term ownership carries with it an exclusive right to use, benefit, and dispose of a thing, in this case, a pen. Therefore, owning a contractual right is in principle demarcated from having ownership of a thing owing to the exclusive nature of the latter required to have a separable, tangible object at its heart.⁵⁴ The subject matter of the former (or of obligational relationships in general) is the obligor’s performance, whereas that of the latter is always an object or a thing. Are cryptocurrencies such as bitcoins capable of being ‘objects’ in the legal sense of the word in the Chinese, Japanese, or South Korean legal systems?

8.12  Before we can consider whether cryptocurrencies can be the object of ownership as a matter of Chinese, Japanese, or South Korean law, it is necessary to examine how these legal systems respectively define ‘ownership’ as a matter of their civil law. According to Article 206 of the Japanese Civil Code, ‘an ownership holder has the right to freely use, obtain, profit from, and dispose of the thing owned, subject to the restrictions prescribed by laws and regulations.’ In a similar vein, Article 211 of the South Korean Civil Code provides that ‘an ownership holder has the right, within the scope of law, to use, take the profits of and dispose of, the thing owned.’ According to Article 39 of the Chinese Law of Real Rights, ‘an ownership holder of a real property or movable property has the rights to possess, use, seek profits, and dispose of the real property and movable property according to law.’ Although these provisions prescribe the various rights that an owner possesses in relation to the thing owned, they do not set out what subject matter may (p. 211) qualify as an object of ownership. What may qualify as an object of ownership is instead defined in the General Rules of Civil Law in each jurisdiction.

8.13  In this respect, Japanese law appears to adopt the strictest approach. According to Article 85 of the Japanese Civil Code, ‘things’ as used in this code shall mean a tangible thing’. Japanese law, under influence from the German Civil Code, confines the scope of things to that of tangible objects.⁵⁵ Thus, in order to be recognized as a thing under the Japanese civil law, it must be a thing that physically occupies space. Things such as land, water, or goods, for example, would have no difficulty being recognized as things that can serve as objects of ownership. However, this does not mean anything corporeal is capable of being classified as a thing capable of being owned. The orthodox view imposes a further requirement for a tangible object to become a thing: exclusive controllability.⁵⁶ Thus, tangible objects such as humans, the Sun, other stars, or oceans etc. are not categorized as things as such since they cannot be subject to any individual’s exclusive control. The rationale of the rule that only tangible things may be the objects of ownership is that intangible things are indiscernible by the public in the real world, so that unless otherwise specially provided for, should not become things capable of being the objects of ownership lest they harm the security of commerce.⁵⁷

8.14  Such a view of the objects of ownership has been criticized for being too narrow and out of touch with the experience of the average person in daily life. Thus, some modern commentators, while generally accepting that debts or rights cannot be recognized as objects of ownership, argue that controllable intangibles such as electricity⁵⁸ and natural forces (ie heat or gas) ought to be admitted to the scope of things capable of being the object of ownership.⁵⁹ This seems to be the position under South Korea law. Apart from tangible things, the Korean Civil Code, under Swiss influence, further incorporates some specific intangibles within the scope of things, viz., electricity or other natural forces can also fall within the scope of things so long as they are confined within a space and under control.⁶⁰ Thus, Article 98 of the South Korean Civil Code provides that ‘things mentioned in this (p. 212) code shall mean corporeal things, and electricity or other natural forces which can be controlled.’ However, despite this modest expansion, the fundamental object of ownership still consists of tangible things, and commentators in South Korea do not consider that debts or rights can be objects of ownership.⁶¹

8.15  On the other hand, the recently enacted General Provisions of the Civil Law of China⁶² proves rather more cryptic, with Article 115 providing that ‘things’ include immovables and movables. Rights can be the subject matter of a real right if other legislation permits it.’ The first part of Article 115 confines the objects of ownership under Chinese law to immovable and movable property. ‘Immovable property’ denotes land or buildings, and ‘movable property’ is interpreted as involving physical and tangible objects such as chattels and goods, though some commentators are in favour of including controllable electricity and natural forces (ie heat, gas etc.) as objects of ownership.⁶³ Although the necessity of a tangible object is not explicit in Article 115, it appears implicit when read with Article 114, especially when the official comment of the latter is taken into account.⁶⁴ This would then, if electricity and other controllable natural forces are regarded as proper objects, be a similar position to that under South Korean law. As to the cryptic second sentence of Article 115, while it appears to suggest that rights may be the subject matter of a real right, they cannot truly be considered objects of ownership. Thus, while debts and other rights can be the object of a security interest (ie, a type of real right), they cannot be the objects of ownership, strictly so-called. Furthermore, as the Article clearly articulates, such quasi-real rights over rights exist only where it is permitted by a separate piece of legislation.

8.16  So far as the ‘asset’ sense of ‘property’—‘zaisan’ (財産‎/Japanese); ‘cáichǎn’ (财产‎/Chinese); and ‘jaesan’ (재산‎/Korean)—is concerned, the concept certainly seems sufficiently wide to encompass bitcoins and other cryptocurrencies. After all, as we have seen, property, in the sense of assets, includes intangibles⁶⁵ such as debts and intellectual property rights. Bitcoins and other cryptocurrencies certainly (p. 213) hold economic value for now.⁶⁶ That they do possess economic value appears to have been acknowledged by the South Korean courts, and it appears that they are considered to be assets or ‘jaesan’ (재산‎) as a matter of law and therefore liable to confiscation. The case⁶⁷ involved one Ahn, who was indicted for operating a pornographic website with some 1.2 million members, in which he took membership fees in bitcoins. According to the Act on the Regulation and Punishment of Concealment of Criminal Profits, Article 8(1)(i),⁶⁸ criminal profits acquired through illegal crime are liable to be confiscated. When the Southern Gyeonggi Provincial Police Agency ‘seized’ Ahn’s 216 bitcoins, therefore, the question arose as to whether or not the police’s actions were appropriate. Initially, the Suwon District Court⁶⁹ ruled: ‘It is not appropriate to confiscate bitcoins because they are in the form of electronic files without physical attributes, unlike cash. Virtual currency cannot assume an objective standard value.’⁷⁰ However, on appeal by the prosecutor, the Suwon District Court reversed its previous decision and concluded⁷¹ that ‘Among the 216 bitcoins confiscated by the prosecution, Ahn’s 191 bitcoins’ were traced to email addresses of the pornography site members, so that ‘it is appropriate to confiscate the 191 bitcoins as these were the profits from criminal activities’.⁷² This decision has since been upheld by the Korean Supreme Court.⁷³ According to the District Court, ‘Korean law stipulates that a seizable hidden asset ranges from cash, deposits, stocks, and other forms of tangible and intangible objects holding value’. Granted ‘bitcoin is intangible and comes in the (p. 214) form of digitized files, but it is traded on an exchange and can be used to buy goods. Therefore, receiving bitcoins is an act of taking profits.’ Two reasons in particular were considered significant by the District Court on appeal. First, it was possible to identify the bitcoins held by the accused and to transfer the illicit profits to the government’s account using the cryptographic key obtained from the criminal. The fact that the Bitcoin blockchain was updated with fresh blocks every ten minutes did not cause the bitcoins at issue to lose their identity. Second, bitcoins are capable of being exchanged for legal currencies (with an exchange rate applying), and some businesses accept bitcoins. Moreover, various transactions can be made via bitcoins so they clearly hold economic value. A similar position appears to hold in Japan where the bitcoins held by Mt Gox for its customers have been treated as assets by its trustee in its liquidation.⁷⁴ While there has been litigation over whether or not these assets took the form of property in the sense of real rights, Japanese law appears content to assume that cryptocurrencies are at least ‘zaisan’ (財産‎), even if they may not be ‘bukken’ (物権‎).

8.17  The position in China is more complicated. Article 127 of the 2017 General Provisions of Civil Law provides that ‘data or online virtual assets shall be protected if the law has provisions on the protection of them.’ As no new legislation has been passed following the enactment of the General Provisions of Civil Law, it would appear that cryptocurrencies exist in a sort of legal limbo. In theory, the Chinese law relating to property in the sense of assets should be as broad as that of Japanese or South Korean law. However, paradoxically, the explicit inclusion of a provision relating to virtual assets in its General Provisions of Civil Law appears to prevent their inclusion for consideration as assets pending further legislation. This is perhaps not surprising, since China has proscribed bitcoin exchange transactions and holds a sceptical and negative attitude toward cryptocurrencies. One of the reasons for the past popularity of Bitcoin in China, it has been speculated, has been that it allowed users to evade capital controls. Although some experts have ‘said the evidence suggests this is not a significant phenomenon’,⁷⁵ one of the reasons for the Chinese government’s clampdown on cryptocurrency exchanges reflects its fears that it facilitates capital outflows.⁷⁶ Although one of the drafters of the General Provisions of Civil Law had suggested in an interview (p. 215) that he considered bitcoins to be a form of ‘virtual movable asset’,⁷⁷ it is notable that this interview was conducted before the Chinese government’s clampdown on cryptocurrencies. Most major monographs published recently seem to be in line with the more recent hostile governmental policy, since none of them includes cryptocurrencies within the ambit of this Article. Instead, they consider that virtual assets mainly involve game money, game items, points earned from a particular website etc.⁷⁸ So far as cryptocurrencies are concerned, it is more likely than not that the only cryptocurrency that will be accommodated within Article 127 of the General Provisions of Civil Law will be an as yet unreleased fiat cryptoyuan.⁷⁹ Non-fiat cryptocurrencies including bitcoins would seem to be wholly excluded from legal protection in China at the moment. If so, however, their exclusion would appear to be politically driven rather than the result of a fundamental incompatibility with the civilian conception of ‘asset’, as both Japanese and South Korean law take a different position and a drafter of the General Provisions of Civil Law had previously considered Bitcoin to be a form of movable asset.

8.18  Whilst South Korean and Japanese law consider cryptocurrencies to be assets, there is much less clarity about what sort of assets they are precisely (apart from the fact that they are not money) and how they are protected by the law. After all, whilst assets encompass intangibles such as debts and intellectual property rights, such rights are protected by other provisions in the Law of Obligations or the Intellectual Property Act, rather than under the rubric of ownership since the subject matter of the latter primarily consists of tangible assets such as land or chattels that must be amenable to exclusive control. So far as the narrow meaning of ‘property’ in the sense of ‘bukken’ (物権‎/Japanese); ‘wùquán’ (物权‎/Chinese); and ‘mulkwon’ (물권‎/Korean) is concerned, it would appear that the qualities of cryptocurrencies render them incompatible with such a classification since they are intangible and a tangible object is generally regarded as a necessary object of ownership. For this reason, it is not surprising that a Japanese District Court has expressly rejected the suggestion that bitcoins, the cryptocurrency par excellence, can be the object of ownership. The case was filed at the Tokyo District Court, (p. 216) and it arose out of the infamous collapse of Mt Gox owing to a hack. At the time, Mt Gox was the biggest Bitcoin exchange in the world, and the hack it suffered was until recently, the worst hack to have hit the cryptocurrency community.⁸⁰ The claimant had been a customer of Mt Gox and had held 458.8812618 bitcoins in his wallet (‘account’) when Mt Gox suspended trading and closed its website and exchange services on 25 February 2014. This was swiftly followed by a declaration of bankruptcy on 16 April. The claimant sued the trustee in bankruptcy, arguing, inter alia, (i) the claimant had ownership of the bitcoins kept in his wallet; (ii) since all valuable property (used in the sense of asset or wealth) deserves protection, Article 85 should include his bitcoins within the ambit of the term ‘thing’; (iii) though the claimant’s bitcoins may be considered to be mixed with other customers’ bitcoins, the claimant still had co-ownership of all bitcoins held by the defendant with other customers;⁸¹ and (iv) therefore he should be entitled to require the administrator to segregate and carve the bitcoins out of the bankruptcy estate.⁸²

8.19  Given the narrow construction of ownership under Japanese law, it was hardly surprising that the claim was dismissed. According to the Tokyo District Court:⁸³

8.20  After setting out the requirements for a thing to be capable of being the object of ownership, the court briefly explored the characteristics of bitcoins⁸⁷ and concluded that:⁸⁸

(3) … It is obvious that bitcoins are not tangibles that can occupy certain physical space since (1) bitcoins are ‘an alternative currency invented by digital technology’, (2) the contract used by the Mt. Gox exchange itself expresses that ‘they are [an] internet commodity’, (3) its mechanism relies only on an internet network.

i. … Those who want to join a bitcoin network can have on their own computer the blockchain that shows the digital record which is open to the public on the internet. Thus, the data relating to such blockchains are held or shared by multiple parties who have joined the blockchain.

ii. … when bitcoins are sent from account A to account B, it is not a process that simply sends the digital data representing the bitcoins being transferred from account A to account B. In fact, those who are not the parties to the transaction also need to join the transaction.⁸⁹ [Footnote added]

iii. … it is therefore very difficult to regard those holders of a cryptographic key to a bitcoin address as having an exclusive control to the bitcoin balance in the address.

iv. As explored above, bitcoins lack the tangibility and exclusive controllability required to be an object of ownership. Therefore, bitcoins cannot be the object of ownership.⁹⁰ [Footnote added]

b. Finally, the same court further emphasised:⁹¹

c. As mentioned above, since bitcoins cannot be the object of ownership, the claimant does not have ownership of the bitcoins at issue. As a corollary of this, the (p. 218) claimant has no share under co-ownership in relation to the bitcoins held in the bitcoin address administered by the bankrupt. … Therefore, as to the bitcoins at issue, the claimant is not entitled to exercise any right of segregation that is predicated on ownership.⁹² [Footnote added]

8.21  Although no South Korean court has pronounced on this issue, it is expected that a similar conclusion would be reached because the characteristics demanded by the law of an object of ownership are essentially identical across all three jurisdictions. The position so far as Chinese law is concerned would be a fortiori since cryptocurrencies would not even appear to be assets under Chinese law. Whilst not all assets are the objects of ownership, all objects of ownership are assets. Whilst Japanese and South Korean law appear to better protect holders of cryptocurrencies, such users remain in an unenviable and invidious position in both jurisdictions. To say, as Japanese and South Korean law appears to say, that cryptocurrencies are assets but not capable of being the object of ownership tells us precious little about how the law would go about protecting such assets. Unlike more established intangible assets such as debts or intellectual property rights, which are protected by other provisions in the Law of Obligations or the Intellectual Property Act, there is no clarity as to how (if at all), rights in cryptocurrencies are protected under Japanese or South Korean law. We therefore have to contend with the following inquiry: if cryptocurrencies cannot be the objects of ownership, then what rights follow from their ‘ownership’ in the colloquial sense?

8.22  While cryptocurrencies are undoubtedly intangible, it does not follow that that which is intangible is property, even in the wider ‘asset’ sense of the word. Information, for example, is often valuable and intangible, but while it may be subject to obligations of confidence, it is not, in itself, an asset. In Japan and South Korea, cryptocurrencies appear to have been accepted as assets—‘zaisan’ (財産‎/Japanese) and ‘jaesan’ (재산‎/Korean), respectively. In China, it certainly appears open to Chinese law to adopt the same view and accept cryptocurrencies as ‘cáichǎn’ (财产‎/Chinese), although it has not done so as yet. But what sort of assets would they be? In all three jurisdictions, owing to their civil law heritage, the in rem and in personam dichotomy is deeply rooted in the private law system and in the minds of legal practitioners. But just as cryptocurrencies are difficult to fit within the classification of real rights, properly so-called, many (but not all) cryptocurrencies are just as incompatible with the category of personal rights. (p. 219) After all, the ‘owners’ of many cryptocurrencies have no right to anyone’s performance. Instead, if he has any right at all, it would be a right to something that only exists in cyberspace. Furthermore, as far as civilian systems are concerned, a personal right is generated either by parties’ mutual consent or by operation of law. The archetypal examples of the former are contractual rights, and examples of the latter would be rights arising out of negotiorum gestio, unjust enrichment, and tort.⁹³ If a right to bitcoins or other cryptocurrencies were to be classified as a personal right or a right in personam, it is also necessary to determine the basis upon which it is generated. Bitcoins and many other cryptocurrencies rely on a process called ‘mining’ to maintain the integrity of their distributed blockchain ledgers.

In essence, this involves the miners’ computers engaging in a guessing game and the odds of winning are dependent on how quickly a miner’s computer can perform calculations as compared to those of other miners. Such users are described as miners because, in order to incentivise participants to engage in this process of validation, the system rewards the first to solve the puzzle with a pre-set quantity of new bitcoins.⁹⁴

It would be difficult to fit such a process within any of the known categories that generate personal rights. While it is in theory possible for the law to recognize a new basis for the generation of a right, the absence of an obligor, a person subject to the personal right, will probably remain an insurmountable hurdle for their classification as rights in personam.

8.23  On the other hand, it is possible to classify some newer cryptocurrencies as personal rights. Despite the disastrous DAO (or Decentralized Autonomous Organization) experiment,⁹⁵ a rash of new cryptocurrencies began to be offered as ICOs. Increasingly, these offerings are being treated as securities.⁹⁶ Such cryptocurrencies, (p. 220) which are not mined but sold to investors with promises of either returns or future services, will probably qualify as personal rights in much the same way other conventional securities (whether shares or debt) are personal rights. In China, the legal characterization of such cryptocurrencies or coins should, in theory, only be of historical interest following their ICO ban in 2017.⁹⁷ ICOs have also supposedly been banned in South Korea at the time of writing,⁹⁸ although recent reports suggest that it is mulling new regulations permitting ICOs.⁹⁹ Moreover, since the announcement of the ban, ‘the administration has yet to implement the ICO [ban] and has not forced companies to return ICO funds. It also continues to let local investors put money into foreign ICOs and digital currency exchanges operating within the country.’¹⁰⁰ This may be contrasted with the Chinese ban, which mandated the refund of investments.¹⁰¹ Japan is again the most tolerant jurisdiction in respect of such in personam cryptocurrencies, with a government-backed study group recently laying out basic guidelines for further adoption of ICOs.¹⁰² The proposal is due to be considered by Japan’s Financial Services Agency, with a view to potentially becoming law in a few years.¹⁰³

8.24  The solution to the conundrum lies in the recognition that, despite the firmly embedded belief in the dichotomy between rights in personam and rights in rem, none of the three jurisdictions conforms to the dichotomy slavishly. Apart from ownership, lesser forms of real rights exist. For our purposes, the most relevant real right is that of security. Unlike ownership, which demands a tangible object, (p. 221) the Civil Codes of all three systems permit a pledge of rights (including personal rights such as debts) as a security interest.¹⁰⁴ This exception holds profound significance for the characterization of cryptocurrencies since it shows how, despite their inability to form an object of ownership, the law nevertheless accommodates intangible assets as the subject matter of a form of real right, albeit only as an exception. Another exception that is perhaps more obvious is that of intellectual property rights. Whether it takes the form of expression (ie the object of a copyright); invention (ie the object of a patent right); or mark (the object of a trademark right), intellectual property rights, despite their intangibility, take the form of rights erga omnes, thus sharing a characteristic feature of a real right, ie, exclusive controllability.

8.25  However, whilst these exceptions are recognized under the law, they are nevertheless regarded as falling outside the conventional category of real rights.¹⁰⁵ While they enjoy the effect of exclusive controllability, these exceptional real rights over intangibles are nevertheless not real rights. Instead, they are only treated as if they were real rights because reality and practice demand it. Thus, they carry with them that most deprecatory of legal epithets: ‘quasi’. Both the pledge of a debt and intellectual property rights are more accurately characterized as quasi-real rights rather than real rights properly so-called.¹⁰⁶ Owing to their nature of exigibility against the world, they must be expressly supported by some special provisions or legislation in order to be consistent with the numerus clausus principle.¹⁰⁷ So far as cryptocurrencies are concerned, this need for special legislation is most clearly evident in Article 127 of the newly enacted Chinese General Provisions of Civil Law.

(p. 222) 8.26  Bitcoins and other cryptocurrencies clearly have economic value, and it would appear that the category of quasi-real right is the most appropriate category for such assets since no other classification is possible.¹⁰⁸ After all, ‘when you have eliminated the impossible, whatever remains, however improbable, must be the truth’ [emphasis in original].¹⁰⁹ What then of the objection of the Tokyo District Court that a holder of bitcoins does not enjoy any exclusive control over them because the relevant ledger, being distributed, is stored by all the nodes in the network? It is suggested that this argument is flawed since the focus should be on the claimant’s exclusive right to control the amount of bitcoins in his own account rather than the entire Bitcoin blockchain. Nor can the concept of exclusive control be taken too seriously as a condition of admission into the category of quasi-real right. After all, the entire point of legislating for intellectual property rights is to provide the exclusive control that would be missing absent legislative intervention.

8.27  Although policymakers and lawmakers in China, Japan, and South Korea have yet to clearly legislate to this effect, a quasi-real right characterization is the most plausible means of defining traditional, non-security, cryptocurrencies. Indeed, in Article 127 of the General Provisions of Civil Law, China has already taken half a step in this direction. If the right to cryptocurrencies is eventually conceptualized as a quasi-real right, it should possess the archetypal incidents of being treated as a real right. The most important incidents to follow such a characterization would be the remedies available should such rights be interfered with. For reasons of space, this chapter will concentrate on only two remedies, one arising from the law of real rights and the other from the law of obligations: the right of rei vindicatio and the right to damages.

8.28  The two major incidents of having a real right are: (i) that the right-holder is entitled to assert rei vindicatio if someone interferes with his real right, and (ii) that the right-holder enjoys priority should the person holding something to which his real right is attached becomes bankrupt. These effects are related to a fundamental feature of real rights, their exigibility against the world at large. So far as bankruptcy priority is concerned, this is prescribed in the Bankruptcy Act¹¹⁰ in Japan, the Debtor Rehabilitation and Bankruptcy Act¹¹¹ in South Korea, and the Bankruptcy Act¹¹² in China. As to the former incident, although the Japanese (p. 223) Civil Code is silent as to the right to assert a rei vindicatio, it is unequivocally conceived to be inherent to every real right, even those that are only quasi-real rights.¹¹³ The South Korean Civil Code, on the other hand, expressly provides that a person with ownership rights is entitled to ask for return of the thing held by another and exclude any interferences made with that thing.¹¹⁴ The Code also further applies mutatis mutandis this right of rei vindicatio to other real rights (such as usufruct and security interests) as well as quasi-real rights.¹¹⁵ Of the three jurisdictions, the Chinese Law of Real Rights is the most direct in its legislative style. It explicitly provides that a holder of a real right can demand the return of the thing held by another who has no title to possess it, as well as exclude any interferences with his real right.¹¹⁶

8.29  Although holders of bitcoins and other non-security cryptocurrencies should, in theory, enjoy a rei vindicatio claim, the efficacy of such a claim will necessarily be affected by the feature of immutability that is common to most blockchains.¹¹⁷ An illustration will perhaps best explain how a rei vindicatio claim would ordinarily operate, as well as the problems posed by immutability. Suppose A owns some bitcoins that were illegally transferred to B after B obtained A’s private key through hacking. A rei vindicatio claim would ordinarily entail the denial of B’s title to them even though the bitcoins are now associated with B’s public address instead of A’s. In this respect, it is important to note that the identification of cryptocurrencies is possible. This is implicit in the judgement of the South Korean District Court.¹¹⁸ The confiscation would not have been possible but for the possibility of identification. What the South Korean government confiscated were precisely the very bitcoins earned from the commission of the criminal act by tracking the relevant blockchain transaction records. So far as bitcoins are concerned, it is important to note that they are pseudonymous rather than anonymous. However, in theory, cryptocurrencies with stronger anonymity protocols, such as darkcoin and monero, may be similarly confiscated provided evidence for tracking them is available. Here, it is important to emphasize that a ‘mixture’ of cryptocurrencies ought not to stymie this process. Thus, If B has mixed A’s bitcoins with C’s bitcoins in his public address, it should be possible for A and C to argue they share the bitcoins in B’s wallet pro rata. This conclusion follows from an analogy to a case (p. 224) where a thief steals some oil from X and Y, respectively, and puts it in his container. Even though the oil is mixed and it is impossible to tell which oil belongs to X and which oil belongs to Y, X and Y would nevertheless enjoy co-ownership of the oil and share the oil pro rata between themselves.¹¹⁹ The only difference between the cases is that the nature of the right is differentiated. In the former case, the ‘co-ownership’ is not a true co-ownership but an equivalent concept as applied to quasi-real rights whereas in the latter case, it would be a true co-ownership, in the true sense of the word ownership. In both cases, this does not entail the claimant recovering the very same oil or cryptocurrencies that were put into the mixture.¹²⁰ Such an analysis should, in theory, allow a cryptocurrency holder to enjoy priority in bankruptcy over ordinary unsecured creditors, unlike the position that presently prevails under Japanese law as evident in the Mt Gox case.

8.30  It is important to note, however, one important limitation to the rei vindicatio claim in respect of cryptocurrencies. Owing to the distributed nature of their blockchain ledgers and the feature of immutability,¹²¹ a successful rei vindicatio claim will require the cooperation of the defendant, who must provide his private key so that the relevant bitcoins or other cryptocurrency can be transferred to the successful claimant. Where the defendant has forgotten or lost his private key or is otherwise simply obdurately recalcitrant, the rei vindicatio claim is practically worthless since there is no point to enjoying a legal order that a specified quantity of cryptocurrency in another person’s public address belongs to him if the claimant has no practical means of accessing the same.

8.31  If ‘ownership’ of cryptocurrencies is characterized as a species of quasi-real right, then infringement of such rights would also usher in liability in tort. All three jurisdictions under examination have a general provision on tort liability. In Japan, Article 709 of the Civil Code provides that, ‘A person who has intentionally and negligently infringed any right of others, or legally protected interest of others, shall be liable to compensate any damages resulting in consequence’.¹²² As this Article shows, the subject matter so protected includes ‘rights’, as well as ‘legally protected interests’. Examples of ‘rights’ include personal rights (ie, debts or a contractual right); real rights (ie, usufruct and security rights); quasi-real rights (p. 225) (ie, patent rights and copyrights); bodily rights; family rights; privacy rights; etc.¹²³ An example of infringement of a legally protected interest, according to the Supreme Court of Japan,¹²⁴ would include a situation where a fraudulent legal suit is filed or where a witness perjures himself, resulting in the innocent defendant losing the case and suffering economic loss. The scope of Article 709 is therefore extremely wide and would certainly be sufficient to embrace the ‘ownership’ of cryptocurrencies if they are legislated as quasi-real rights. South Korean law is very similar. Article 750 of the South Korean Civil Code similarly provides that, ‘A person who causes losses to or inflicts injuries on another person by an unlawful act, intentionally or negligently, shall be bound to make compensation arising therefrom’. Consequently, the analysis would be similar to that under Japanese law.¹²⁵

8.32  Chinese Tort Law contains not only a general tortious liability provision akin to Articles 709 and 750 of the Japanese and South Korean Civil Codes, respectively, but it also contains a provision that sets out the objects that fall within its protection. First, Article 6 prescribes that ‘One who is at fault for infringement upon a civil right or interest of another shall be subject to tort liability’. The term ‘fault’ includes both intentional and negligent acts,¹²⁶ and the statute further provides the list of subject matter protected by Article 6, viz, Article 2. This Article provides that:

Those who infringe upon civil rights and interests shall be subject to tort liability according to this Law. ‘Civil rights and interests’ used in this Law shall include the right to life, the right to health, the right to name, the right to reputation, the right to honour, right to self-image, right of privacy, marital autonomy, guardianship, ownership, usufruct, security interest, copyright, patent right, exclusive right to use a trademark, right to discovery, equities, right of succession, and other personal and property rights and interests.

The upshot is that anyone who intentionally or negligently infringes on another’s right to cryptocurrencies will be liable to pay damages under the law of tort if cryptocurrencies come to be recognized as quasi-real rights.¹²⁷

8.33  On this account, if rights to cryptocurrencies are recognized as quasi-real rights, a claimant ought to be able to select between the aforementioned two remedies, with the choice being largely driven by pragmatic concerns. Should the defendant be insolvent but acquiescent, a rei vindicatio claim is preferable. Should the defendant be solvent but recalcitrant, a damages award would be more practical. All things being equal, given the extreme fluctuations in value of cryptocurrencies, sharp rises or drops in value will also likely drive claimants to prefer one remedy over the other. This can be seen in the Mt Gox saga, when the sharp rise in bitcoin prices led claimants in the bankruptcy proceedings to seek to have the company undergo civil rehabilitation¹²⁸ instead,¹²⁹ a course which was recently approved by the Tokyo District Court¹³⁰ despite the sharp fall in prices from the time of petition to its grant. This mostly had to do with the unprecedented rise in bitcoin prices from the time of the Mt Gox hack to its peak in late 2017, when the petition for civil rehabilitation was taken out. The losses since then, whilst severe, were far outstripped by the gains between 2014 and 2017 as bitcoin prices grew by roughly eighteen-fold in that period.

8.34  At the time of writing, Bitcoin was nearing its tenth birthday. Although Satoshi Nakamoto chose a Japanese pseudonym and claimed to be based in Japan,¹³¹ doubts have been cast as to his Japanese origins,¹³² and his identity remains a mystery.¹³³ However, it is perhaps nevertheless fitting for his invention and its (p. 227) progeny to flourish in a part of the world with which he explicitly chose to associate himself. As is the case with many innovations, the law has lagged behind technology, and similarly to many other jurisdictions, much of the early flurry of legislative activity has centred on regulation rather than private law characterization. This is explicable given that retail investors have been known to be swept up by the fear of missing out or ‘FOMO’,¹³⁴ despite not fully understanding the true risks and potentials of their investment.¹³⁵ In Asia, investors’ affinity with leverage,¹³⁶ and the proliferation of outright fraudulent schemes¹³⁷ greatly amplify the risks for such investors. However, the paucity of attention given to the private law characterization of cryptocurrencies remains regrettable. It has left the courts confused and adrift, as the cases from Japan and South Korea demonstrate, which ultimately further hurts the very investors intended to be protected through regulation. While there is a growing consensus that cryptocurrencies are (or may be in the case of China) property in the sense of being assets, it is much less clear as to what sort of assets they are precisely. The traditional dichotomy of in rem rights and in personam rights that make up most of a person’s assets are both unsuitable categories,¹³⁸ the former because of the absence of a tangible object, the latter because of the absence of an identifiable obligor. Although we consider that they are best regarded as quasi-real rights, in a manner analogous to intellectual property rights, the commitment of the three East Asian jurisdictions under consideration to the primacy of the dichotomy, as well as the numerus clausus principle, means (p. 228) that they cannot be regarded as such without separate and specific legislation. Pending specific legislation, they would appear to be vagrant assets absent settled (if any) rights. At least that appears to be the case in Japan and South Korea. In China, their status appears to be even more perilous in that they do not even appear to be assets at all. If so, then they are ‘virtual assets’ in more ways than one. Not only are they devoid of form in the physical world, they appear also to be currently non-existent in Chinese law as well.

8.35  It is questionable how tenable the position in Chinese law—at least as a matter of pure textual reading—will prove. An arbitral tribunal, the Shenzhen Court of International Arbitration, in a dispute concerning the legality of contracts to transfer cryptocurrencies, has recently suggested that in the absence of any relevant legislation, it was not possible to regard cryptocurrencies as ‘data or online virtual assets’ in accordance with Article 127 of the 2017 General Provisions of Civil Law. Nevertheless, the tribunal appears to consider Article 127 purely permissive, and it suggested that bitcoins may nevertheless be considered ‘cáichǎn’ (财产‎) despite not falling within Article 127 because ‘[b]itcoins bore the attributes of assets, being capable of allocation and control, having economic value, and being capable of providing the claimant economic benefits.’¹³⁹ Curiously, this analysis is only to be found in the summary of the decision (案例综述‎) published online but not in the published decision (仲裁庭意见‎) itself. The tribunal, at least in its discussion on contractual liability, appears to have been swayed by the fact that although some cryptocurrency-related activities such as the operation of cryptocurrency exchanges and initial coin offerings have been banned, the mere holding of cryptocurrencies remains perfectly legal as a matter of Chinese law.