DIGITAL ‘CURRENCY’ AS TRUST PROPERTY – WHAT ARE THE LEGAL ISSUES FOR TRUSTEES?
What is a digital currency?
Digital (or “crypto”) currencies continue to make the global news. Although not yet recognised by UK regulatory authorities/lawmakers as “currency” or “money” in the strict legal sense, Coinbase (which opened the world’s first regulated bitcoin exchange in the US this year) is in talks with financial watchdogs about establishing a regulated bitcoin exchange in the UK. Major companies have begun to accept digital payment in their on-line stores and Bitcoin (one of the world’s biggest digital currencies) funds have been established.
While bitcoin exchanges such as Mt Gox have suffered huge thefts and Bitcoin has struggled to shake off its image as the preferred currency of elements of the criminal community (and its price has fluctuated wildly since its launch in 2009), such fluctuations are expected to be less volatile going forwards. It seems that while digital currencies are as yet far from widespread in their acceptance, with nearly 14 million Bitcoins alone now in circulation (valued at more than $3.4 billion), they are likely to be here to stay.
Digital currencies and trusts
Aside from the fact that given the virtual and decentralised nature of a digital currency it may be difficult to determine jurisdiction or what country’s laws apply to it in the first place, the most important legal question is whether a digital currency is actually “currency” or “money” that is, whether it constitutes a unique category of “property” in law. The answer is important because it may limit the extent to which beneficiaries and/or trustees may be able to assert (and vindicate) a continuing beneficial interest in trust property which has been dissipated in breach of trust. It may also impact on the ability to “trace” property representing that property, whether against wrong doing trustees, or against third parties into whose hands that property has come. While such a “proprietary” claim is undoubtedly of greater value to a trustee or beneficiary than a purely “personal” claim for damages (for example, in an insolvency it will take priority over the claim of an unsecured creditor) the added complexity of retrieving/tracing a digital currency is likely to make it a difficult, lengthy and costly task.
So how are digital currencies regarded in law?
Unhelpfully, the position is not yet clear. Bitcoin for example, is described not as “currency” but as “a consensus network that enables a new payment system and a completely digital money. It is the first decentralised peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet.”
There is, as yet, no authority in either the Courts of England and Wales or the Channel Islands that specifically considers the question of how a digital currency will be regarded. In the United States two federal courts have recently found that Bitcoin is “money” and have interpreted federal statutes to encompass a more general definition of money that does not restrict the term solely to government-issued and backed money (i.e. a ‘Fiat’ currency).
In these US cases the presiding judges commented that “It is clear that Bitcoin can be used as money…It can be used to purchase goods or services…The only limitation of money is that it is limited to those places that accept it as currency…any other reading of the law would be “nonsensical”.” But, in June 2014, a court in the Netherlands found that Bitcoin did not meet the definitions of “common money”, “legal tender”, or “electronic money” in Dutch law.
Closer to home, the 2012 High Court of England and Wales case of Armstrong v Winnington Networks Ltd may assist in clarifying the position by analogy. In that case the claimant brought a proprietary restitutionary claim (or, alternatively, a claim for unconscionable receipt of trust property) seeking a money judgment in respect of stolen EUAs (European carbon dioxide emissions allowances) which, like a digital currency, were entirely electronic and not evidenced by a title document. The High Court decided that being an instrument under a statutory framework (which, to date, digital currencies are not), which conferred on the holder an exemption from a fine and had a tradeable economic value, an EUA was a form of intangible property and that therefore a proprietary restitutionary claim at common law was available in respect of it. That case is important because, it may be possible to argue by analogy that a digital currency is indeed “property” thereby providing trustees/beneficiaries with a proprietary remedy.
The Regulators and legislators are actively considering these issues and it is to be hoped that more legal certainty will follow soon.