The paradigm shift promised by blockchain-driven ecosystems is heavily reliant on the irreversibility of on-chain transactions. Immutability does not, however, negate the possibility of the transaction being the result of fraud or a breach of the contractual arrangement to which it purports to implement. It is therefore only inevitable that we should be actively considering whether the drastic judicial tools available to us in relation to conventional assets, such as tracing and freezing orders, can be deployed in relation to cryptoassets.
Any transaction over assets should result in an enforceable change over the rights attaching to or deriving from the asset concerned. Accordingly, cryptoasset transactions should be able to economically and legally manifest in the real world. Cryptographic assets have functional characteristics determined by the purpose and use of the blockchain on which they exist. Freezing cryptoassets presupposes they are assets in the legal sense, no matter how novel their nature.
From a common law perspective, the answer to the question of whether cryptoassets are assets is increasingly answered in the affirmative. Lord Wilberforce’s classic definition of property in National Provincial Bank v Ainsworth requires that the four criteria of certainty, exclusivity, control and assignability are satisfied.
In the UK, the High Court judgment in Vorotyntseva v Money-4 Ltd (T/A Nebus.com), treated cryptocurrencies as property and a freezing order was issued in that respect. The Singapore International Commercial Court in B2C2 Ltd v Quoine Pte Ltd held that cryptocurrencies fulfilled Lord Wilberforce’s definition of property.
The UK Jurisdiction Taskforce of the Lawtech Delivery Panel, an industry-led initiative, recently published a Legal Statement on cryptoassets and smart contracts. Although it does not deliver a binding position of any nature, the Legal Statement addresses whether cryptoassets are property. It concludes that cryptoassets have all of the indicia of property and that the novel features possessed by some cryptoassets do not disqualify them from being property.
There are thus increasing indications that common law will treat cryptoassets as property, subject to satisfaction of the cardinal characteristics of property. Consequently, cryptoassets that meet the relevant criteria should be subject to tracing and freezing orders.
Beyond the theoretical considerations, however, the tracing and freezing of cryptoassets present unique practical challenges. Respondents to proceedings pursuing the tracing and freezing of cryptoassets could range from the apparent holders of the assets to crypto-exchanges. Depending on the nature of the blockchain concerned, other parties may become subject to such orders. Tracing cryptocurrencies through a court order might be of relevance for permissioned blockchains, which lack the transparency of permissionless ones.
Some technologists may resist the idea that cryptoassets can be subject to procedures used to find and recover conventional assets. However, the view that a blockchain can create a normative order of its own and exist above conventional legal orders – and therefore immune from tools such as freezing orders – is effectively at odds with the recognition of cryptoassets as assets. I previously suggested that this proposition is not merely false but effectively operates to derail the realisation of the most advanced implementations of blockchain technology. Blockchain technology should not attempt to circumvent existing legal constructs but rather find its place within a regulatory framework that will allow it to be harnessed to its profound potential.
As such, the trustless promise of blockchain is not negated by the possibility of tracing and freezing cryptoassets. On the contrary, being subject to tracing and freezing would afford cryptoasset transactions a certainty that counters the high risks involved in transacting on blockchains and could unleash their full potential from a legal perspective.