Cryptocurrency and property rights by Russell McVeagh

Crypto currency and property rights

Crypto currency and property rights Is a claim in the tort of conversion available in New Zealand against someone who steals your bitcoin? In particular: •

What can we learn from two overseas cases about a pornographic website and mask and amulet?

•

What approach have courts in other common law jurisdictions adopted?

•

What do cases in New Zealand suggest about the likely approach here?

Crypto currency has no physical form. If you own a Bitcoin, for example, what you have got is a private key (a long string of numbers and letters) which allows you to access an electronic address with which the Bitcoin is associated. If you lose your private key, or if you unwittingly transfer your Bitcoin to another address, for all practical purposes, you have lost your Bitcoin. We asked, in a previous article in this series,1 what you could do about it. If someone steals your wallet you can sue the thief (or anyone who takes possession of it) in conversion, and ask the court for an order that it be delivered back to you. But suppose they take your Bitcoin; what legal remedies might then be available? The answer will come into focus following an unorthodox detour; first to a pornographic website, then to a mask and an amulet.

1 Blockchains – Debugging Bad Drafting

Russell McVeagh

CRYPTO CURRENCY AND PROPERTY RIGHTS

An eye for the main chance In 1994 domain names were free and easy to register. The registrar for “.com” names at the time was Network Solutions Inc (“NSI”). The hero of this story is Gary Kremen, an entrepreneur with an eye for an opportunity. He registered with NSI the domain name “sex.com” to his business “Online Classifieds”. He gave his own details as the contact. Meanwhile, the villain, Stephen Cohen, was in prison for impersonating a bankruptcy lawyer. He had designs on the domain name too. So once out of prison he forged a letter which looked like it had been sent to him from Online Classifieds. His letter said that Online Classifieds had been forced to dismiss Mr Kremen, so he was no longer their contact for the purposes of the domain name. It went on to say that Online Classifieds now wished to abandon the domain name, and were happy for it to be transferred to Mr Cohen.

Cohen’s sex.com business card

Mr Cohen forwarded the forged letter to NSI asking for them to transfer the domain name to him. NSI was taken in. It took the letter at face value and registered the domain, in good faith, to Mr Cohen. Mr Kremen sued Mr Cohen in the Californian Courts, seeking the return of the domain name and disgorgement of his profits. He had a good day in court and won US$40m in compensatory damages and for good measure another US$25m in punitive damages. But Mr Cohen fled the country and took his assets with him. He could not be found and Mr Kremen was unable to enforce his judgment. Mr Kremen’s next move was to put up a “wanted” poster, on the sex.com site, with a mug shot of Cohen offering a US$50,000 reward to anyone who brought him to justice. When that did not work he sued the NSI. He argued that he had a property right in the domain name sex.com and that NSI had committed the tort of conversion by giving it away to Cohen. Leaving Mr Kremen there for a moment, we must now consider a case about a mask and an amulet. For that, we have to leave the USA and go to Holland.

CRYPTO CURRENCY AND PROPERTY RIGHTS

Russell McVeagh

Live by the (digital) sword, die by the sword It is late summer in 2007, and a 13 year old boy is cycling home from school. He is nothing special to look at. But appearances can be deceptive. Look beneath the surface and he has riches beyond compare. He plays in the online fantasy world of RuneScape, where he has recently become fabulously wealthy and almost impossible to beat in a fight. This is because he owns a mask and amulet which give him great powers. He found them on the dead body of another online character, and has since then been much envied by other players. As he cycles home, however, he is not so strong. He is approached by two boys. They rough him up, and demand that he give them the mask and amulet. They take him to one of their homes, and force him to log on to his RuneScape account, while one of the aggressors logs into his own. In this way he is forced to hand over his riches. The aggressors were eventually caught and charged with the equivalent of robbery under section 234 of the Crimes Act: that is theft with violence. The case reached the Supreme Court of the Netherlands, because theft, under the Penal Code of Holland, has to be of “goods”.

Virtual property is (in some places) capable of legal protection: the international view Pausing there, we have two courts considering related issues. That is whether something which does not exist physically (a domain name, and objects from an online game) can be converted or are goods. The courts held that they could be converted and are goods. • In the “sex.com” case of Kremen v Online Classifieds Inc (2003) 337 F 3d 1024, the United States Federal Court of Appeals held that the domain name was intangible property which Mr Kremen owned, and that NSI had converted that property by giving it away to Mr Cohen. As liability for conversion is strict, it did not matter that NSI acted in good faith. They were liable to Mr Kremen for converting his property.

Russell McVeagh

CRYPTO CURRENCY AND PROPERTY RIGHTS

• In the RuneScape case of BQ9251, Supreme, J. 10/00101, the Dutch Supreme Court upheld the conviction of the two aggressors, on the basis that the mask and amulet were “goods” for the purposes of their Penal Code. Goods included virtual goods. These had value by reason of the time and effort invested in obtaining them. They were (until taken) under the exclusive control of the victim. On the facts, there had therefore been a theft. What these decisions show is that there is no conceptual reason why Bitcoins, or any other intangible thing, should not be treated in law as property, capable of being possessed and stolen or converted. The courts in these examples have, after all, done just that.

You would lose because, in English law, only physical goods are capable of being converted. Before turning to the courts of New Zealand, it is worth recalling how the courts of England and Wales see things. If you brought a case there in the tort of conversion claiming that someone had stolen your Bitcoin, you would lose. You would lose because, in English law, only physical goods are capable of being converted. The leading case is OBG v Allan [2008] 1 A.C. 1. In one of the conjoined appeals, receivers invalidly appointed by the claimant’s creditors terminated by negotiation a number of contracts between the claimant and various subcontractors. The question that arose was whether that wrongful interference with intangible contractual rights could amount to the tort of conversion. By a majority of 3-2 the House held that it could not. All judges acknowledged that there was no conceptual difficulty with these facts amounting to conversion. The difference between them was their view as to whether allowing the conversion of intangibles: (i) would simply be the development of the common law to keep up with the modern world, (as the minority thought); or (ii) would instead be a radical step and better left for legislation by Parliament (as was held by the majority).

CRYPTO CURRENCY AND PROPERTY RIGHTS

Russell McVeagh

Indeed, Lord Hoffmann, who gave the leading judgment, spoke somewhat disparagingly of the American domain name case (an example of what he called the jurisdiction’s “profligate extension of tort law”). There, he said:

“

the court held that the domain name was intangible property which could be converted in the same way as a chattel and that the registration company could be liable for its value. [However]… the notion that a registrar of such property can be strictly liable for the common law tort of conversion is, I think, foreign to the English law. [101]

”

The decision in OBG v Allan decisively upheld the sharp distinction between tangible and intangible property. Thus in English law, tangible property (tables and chairs) being capable of physical possession, are “goods” and can be converted. Intangible property (domain names and online amulets) cannot be possessed in the relevant sense, are not “goods” and cannot be converted. Whenever it has been tested, the distinction has been relied upon and reinforced (despite some of the difficulties it gives rise to in the modern world). For example: • In St Albans City & District Council v International Computers Ltd [1996] 4 All ER 481, the Court of Appeal considered (obiter) that software could only be considered “goods” for the purposes of the Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982, if it was recorded on some physical object such as a disc. It might seem arbitrary that one’s legal rights turn on whether the software purchased is delivered by disc or by a download, but software on its own was not considered “goods” and so was not subject to the Acts. • In Thunder Air Ltd v Hilmarsson [2008] EWHC 355 (Ch) an application was made under section 4 of the Torts (Interference with Goods) Act 1977, for an interim order for the delivery up of various materials including a set of documents held by the defendant on its computers. The judge held that there could be no claim under the Act for wrongful interference with (and thus for delivery up of) any documents stored on the defendant’s computers because they were not “goods” and so not subject to the Act under which the application was made. • In Your Response Limited v Datastream Media Limited [2014] EWCA Civ 281, the Court of Appeal considered the Defendant’s claim to exercise

Russell McVeagh

CRYPTO CURRENCY AND PROPERTY RIGHTS

a possessory lien over an electronic database. A possessory lien is a right to retain possession of someone else’s property until you have been paid for working on that property. It would, for example, permit a car mechanic to keep your car until you had paid him for servicing it. So the issue before the Court of Appeal was whether an electronic database – an intangible thing – could for these purposes be treated like a car (or any other physical object). Was it capable of being subject to a possessory lien? The Court held, that it was not. The database was intangible property and therefore was not capable of physical possession and could not therefore be the subject of a possessory lien. Australian Authority is to much the same effect. For example, in Hoath v Connect Internet Services Pty Ltd [2006] NSWSC 158, the conversion alleged by the plaintiff related to the right to use a domain name. As there was no associated tangible chattel (such as a hard disk, server or other piece of computer equipment), it was held that there could be no conversion. Yet OBG v Allan has not, in all commonwealth jurisdictions, put to rest the views of the minority, who thought it unprincipled that conversion should be restricted to tangible property. In Canada, the Alberta Court of Queen’s Bench accepted that the value of intangibles may factor into an assessment of damages for a successful claim in conversion (Royal Bank v W. Got & Associates Electric Ltd [1994] 17 AR (3d) 23). Indeed, the New South Wales Supreme Court noted (albeit in obiter) in a decision subsequent to Hoath that “the powerful dissenting opinions… in OBG may one day find favour if the law is to keep pace with the advances in technology in our modern society” (Telecom Vanuatu Ltd v Optus Networks Pty Ltd [2008] NSWSC 1209). In the words of Lord Nicholls, “In principle an intangible right not recorded in writing may merit protection just as much as a right which is recorded in this way… This is especially so today when information is increasingly stored and communicated, and transactions are effected, by electronic means.” The increased prevalence and capabilities of information technology have only strengthened the minority case in OBG v Allan. A distinction resting on whether a document has been printed (which can be converted) and one which remains in electronic form (which cannot be converted), seems derived from a fast receding world. We now routinely, think of digital files as property just like items in the physical world. The man in the street would be surprised to learn that the law treated them so differently.

CRYPTO CURRENCY AND PROPERTY RIGHTS

Russell McVeagh

New Zealand: early signs of a progressive view Those minority views found expression in the joint judgment of the Supreme Court in the New Zealand case of R v Dixon [2015] NZSC 147. The court held that digital CCTV footage obtained by Dixon was “property” for the purposes of s 249(1)(a) of the Crimes Act 1961. In an echo of Lord Nicolls in OBG v Allan, the Court cited a remark from the New York Court of Appeals that “[a] manuscript of a novel has the same value whether it is saved in a computer’s memory or printed on paper” (Thyroff v Nationwide Mutual Insurance Co 8 NY 3d 283 (NY 2007)). Functionally, tangible and intangible property are equivalent, thus (the court in Thyroff held) they should be treated equivalently by the law of conversion. R v Dixon was a criminal appeal, turning on the construction of a criminal statute. It was not the occasion for resolving the common law treatment of intangible property (nor were the cases applying it, such as Graham v Queen [2015] NZCA 568). The court’s sympathetic treatment of authorities such as Thyroff, however, suggests that in New Zealand the modernising voices in OBG v Allan, may yet prevail.

Back to Bitcoins All of this matters if you have lost your Bitcoin. It matters particularly if, as you might expect, the thief has spent the Bitcoins and cannot be traced. The more obvious claims available to target a third party recipient would not work if the third party received them without knowing they were stolen and for value (the so-called ‘bona fide purchaser’ defence) – putting to one side the question of whether bitcoins fall within the scope of, for example, the Sale of Goods Act, or within one of the common law exceptions to the strict rules at play in a claim for conversion. Thus, a claim in knowing receipt (Torbay Holdings Limited v Napier [2015] NZHC 2477 at [184]), a proprietary restitutionary claim (Armstrong v Winnington Networks Ltd [2012] EWHC 10 (Ch) at [84]) or a claim for unjust enrichment (Armstrong at [95]) would not work against such an innocent third party. Conversion, however, is a tort of strict liability. It would, therefore, significantly expand the rights of recourse if the New Zealand courts extended the tort to apply to intangibles. It requires only the right case to test just how far the courts would be prepared to go.

Russell McVeagh

CRYPTO CURRENCY AND PROPERTY RIGHTS

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