Like a current, money flows, it circulates, it’s liquid.
In fact, English law regards currency as one of the key attributes of money. But should new, virtual forms of money like bitcoin enjoy currency status? The question is far from settled.
Simon Gleeson, a partner at law firm Clifford Chance, explains why these definitions matter.
“Currency is simply another word for negotiability,” writes Gleeson in a new book called the Legal Concept of Money.
“It was initially an attribute of physical coins, and referred to the fact that the transfer of money falls outside the application of the rule that nemo dat quod non habet.”
Nemo dat quod non habet (in English, ‘you can’t give what you do not have’) is the legal principle that a thief cannot pass off or resell stolen property as his own. Instead, the original owner can reclaim it from a third party.
The act of spending transforms stolen notes and coins into currency
But this rule doesn’t extend to money. In his book, Gleeson explains how money’s nemo dat exemption works.
“When a thief spends stolen notes and coins, the payee [the person receiving the payment] receives good title to those notes, regardless of the fact that the person who transferred them had none,” he says.
It’s the act of spending that transforms stolen notes and coins into currency.
“If a thief steals five £10 notes from your wallet, and you immediately apprehend him and can identify the specific notes, the £10 notes are still yours,” says Gleeson.
“But if he can get to a shop and spend them before you catch him, you cannot recover them from the shopkeeper,” he explains.
Despite receiving stolen money, the shopkeeper also enjoys protection.
“The person accepting the notes is entitled to rely on a legal presumption that the possessor of money is the legitimate true owner,” Gleeson adds.
But if the law of currency seems an open invitation to theft and money laundering, there are constraints.
For money to pass into currency, there are two additional provisos: it has to be exchanged for some form of value, and it has to change hands in good faith.
So a gift by the thief of the stolen money wouldn’t turn it into currency. And if the shopkeeper knew that the pound notes were stolen, he’d have to give them up to the original owner.
These exemptions from the normal rules governing property may seem surprising. But it’s easy to see why they entered English law several hundred years ago.
If all notes and coins were subject to reclaim by their original owners, whether one, ten or a hundred transactions back in time, legal processes might multiply and commerce would grind to a halt.
But the distinction between money—a type of property with privileged legal status—and other, non-money forms of property is a difficult one. And it’s a topic that has gained renewed urgency as a result of the invention of decentralised virtual money like bitcoin.
Money has no ‘earmark’
One of the reasons it makes no sense to try to follow money through a series of past transactions is that, by contrast with an imaginary stolen pig, money has no ‘earmark’.
In other words, you can’t differentiate one note or coin from another as a result of its previous history.
But what if money could be earmarked, say digitally? In fact, that’s exactly what the blockchains (decentralised databases) underlying digital assets like bitcoin offer.
If you open a software application like bitcoin’s block explorer, you find a transparent record of transactions in the currency since its inception.
Let’s say you used stolen bitcoin, or bitcoin that had been used in a past drug deal, to buy goods from a shopkeeper.
Shouldn’t we forget about money’s liability exemption and rely on the inherent traceability of the digital asset to try to catch the crooks, say by linking the identity of those making past transactions with some real-world actors?
Given blockchain’s status as a new form of public record, it’s unsurprising that some seek to divide digital assets into ‘clean’ and ‘tainted’ currency units.
For example, a group of researchers at the University of Cambridge says it proposes to make bitcoin legal—to confer on it the status of money—by separating the outstanding coins into good and bad cohorts, and treating only the former as currency.
Virtual currency can always be traced, but so can banknotes
But this approach may not have the law on its side, says Clifford Chance’s Gleeson.
“There is an argument that it cannot be possible to treat virtual currency as currency, since it can always be traced,” he writes in the Legal Concept of Money.
“The difficulty with this argument is that the same is true of banknotes. Each banknote (in the UK, and in many other countries) has a unique identifying number which in theory enables it to be traced.”
But what about the traceability inherent in the blockchain? In theory at least, a distributed ledger could be used, unlike the serial number of a banknote, to show which hands money had passed through.
Gleeson rebuts this too.
“This [argument] is wrong for two important reasons,” he says.
“First, no examination of the ledger can reveal whether the transferee of a unit was a purchaser for value,” he says, citing one of the conditions for money to gain exemption from the nemo dat rule.
“Where money is found in the hands of a person,” he goes on, “it is presumed to have been negotiated to him for value unless the contrary can be proved. This is as true for virtual currency units as it is for individually identifiable banknotes.”
And Gleeson goes back to the main structural feature of a distributed ledger: it has no controlling entity.
Regulators’ approach to digital assets remains uneven
“The second problem is that information which would be revealed to an omniscient party with complete access to all of the relevant public and private keys is irrelevant if no such party exists,” he writes.
These legal arguments matter, not least because the regulatory approach to digital assets like bitcoin remains uneven.
Central bankers’ criticisms of digital assets like bitcoin have often tended to focus on their perceived lack of utility, rather than their legal status.
However, there’s also been a dogmatic tone to statements from the Bank for International Settlements and the European Central Bank. And securities and futures market regulators have noticeably preferred to label bitcoin as a token or commodity, rather than as money.
It’s human custom that eventually prevails
But according to one of the UK’s leading financial lawyers, there’s no reason in principle why these new digital assets should not serve as currency. Money is, after all, a social construct, and it’s human custom that eventually prevails.
In his book, Gleeson argues that regulators and lawyers should remember their limitations in dictating new rules for this emerging sector.
“Legal certainty should support social consensus, but is a very poor tool with which to try and create that consensus,” he says.
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