Enforceability of Legal Rights Relating to Cryptocurrencies, Digital Tokens, and Smart Contracts
What rights may be legally enforced in relation to cryptocurrencies, digital tokens, and smart contracts? What is the legal basis for enforcing any such rights? Are digital assets choses in possession, choses in action, or some third category of property? Can proprietary claims and tracing be availed for such assets? What legally happens when tokens are transferred or mined? Will the enforcement of rights be pursuant to an assignment or novation or a fresh contract? This article examines these issues.
This article addresses this question: what rights may be legally enforced in relation to cryptocurrencies, also known as virtual currencies, digital tokens, and smart contracts?
This question may be addressed by considering (1) what cryptocurrencies and digital tokens are; (2) the different types of cryptocurrencies and digital tokens which offer different “rights”; and (3) the legal issues relating to these “rights”, including enforceability of rights after tokens have been transferred, and rights in relation to smart contracts.
What are Cryptocurrencies and Digital Tokens?
Cryptocurrencies, such as Bitcoin and Ethereum, and digital tokens or coins are digital assets which operate on open-source peer-to-peer blockchain network systems. Their value depends wholly on what people ascribe to it (as opposed to government fiat). While it could be a store of value, a digital token or coin has no inherent value apart from the rights (if any) purportedly attached to it.
Most cryptocurrencies offer no rights at all and are therefore purely a medium of exchange. Although the term “currency” is used, cryptocurrency is unlike money dominated in national currency which would be legal tender, and therefore may or may not be accepted for making good payment obligations. The broader term “digital token” refer to tokens which may confer rights or functions.
Cryptocurrencies and digital tokens are based on peer-to-peer blockchain network systems in that they do not require a third-party intermediary (eg, PayPal) to process transactions but instead distributes the intermediary functions across the whole network of users of the blockchain underlying the cryptocurrency. In simple terms, it does this by distributing all the relevant information about every transaction across the network of users. Transactions are verified against and recorded on the distributed blockchain ledger. The verification and recording are done through cryptographic algorithm. For example, the fact that Person A had 1 Bitcoin (BTC) and has just transferred to Person B the 1 BTC will be verified and recorded on the blockchain ledger distributed across the network of Bitcoin blockchain users.
A blockchain is essentially a digital database with two core components: (1) cryptographic hash functions for data integrity, ie, persistent, tamper-proof data records; and (2) public key infrastructure for authentication of the identity of parties to each transaction.1See Bacon, Jean and Michels, Johan David and Millard, Christopher and Singh, Jatinder, “Blockchain Demystified” (20 December 2017). Queen Mary School of Law Legal Studies Research Paper No. 268/2017 at 4-5. Available at SSRN: https://ssrn.com/abstract=3091218. Strictly speaking, a blockchain need not be a distributed ledger. The preference for distributed ledger is driven by the scepticism to centralised authority. However, a blockchain can in fact be stored in a centralised manner.
Nonetheless, most, if not all, cryptocurrencies and digital tokens circulating today are based on blockchains which operate on distributed ledger technology (DLT). These distributed ledgers are managed by peer-to-peer networks which have particular protocols that govern how new blocks are added to the chain. While the term “users” is used, the users do not actually manually or actively process transactions on the chain. Instead, blockchain protocols use smart contracts which are run by computers to process the verification and addition to the blockchain ledger.
The unique characteristics of blockchain on DLT in relation to cryptocurrencies and digital tokens are: (1) that it operates without requiring no trust among the users, and has no central authority holding or dealing with the blockchain; (2) payment verification protocols which ensure no double-spending, ie, the token holder cannot use or transfer or otherwise dispose of the same token twice. The latter is significant (as will be seen below) because this key component distinguishes digital tokens from any other digital information.
Given that a blockchain is essentially a digital database, it can be used to store and retrieve data, and run any application developed on the chain. It has the capacity to run applications or smart contracts on the chain. So blockchain can be used for many different purposes.
Types of Cryptocurrencies, Digital Tokens, and Their “Rights”
Today, there are many different types of cryptocurrencies and digital tokens available. Different digital tokens offer different “rights” or functions. While the term “rights” is used, it is not to be assumed that these are enforceable legal rights. A few types of cryptocurrencies or digital tokens and their rights or functions are discussed below.
First, there are cryptocurrencies or digital payment tokens that are purely a medium of exchange for payment for goods or services or discharge of debt, and offer no rights or functions. An example is Bitcoin.
Second, there are digital tokens that offer a right to some profit or returns. This may be akin to a right to dividends attached to a company share or right to returns in relation to a collective investment scheme. However, it does not necessarily mean there will be rights such as voting rights or information rights. The rights depend on what the token issuer purports and confers in respect of the token. There are relatively few of such tokens and are likely deemed as securities in most jurisdictions, hence are referred to as “security tokens”. If the token issuance was not done in compliance with the applicable securities law of the jurisdiction, there may be uncertainty about the legal validity of these tokens.
Third, there are digital tokens known as “stablecoins” that offer a right of redemption at a certain price or value, usually pegged to a fiat currency or asset or basket of assets. The token issuer holds itself out as being obliged to pay the token holder the pegged value for a redemption of the token.
Fourth, there are digital tokens which confer blockchain governance rights. These rights allow token holders to vote on decisions concerning the particular blockchain network and protocol.
Fifth, there are digital tokens which confer community contribution rights. These rights allow token holders to exercise certain roles in the community of users of the particular blockchain network, often in exchange for network transaction fees in the form of additional tokens. These include roles such as adjudicating disputes among users and running certain types of applications.
Sixth, there are digital tokens known as utility tokens which confer rights to the token holder to specifically receive certain goods or services provided by the token issuer. For example, if the token issuer runs a service of providing excess computing power to users, a token holder may pay the token issuer for such a service using the digital tokens.
Cryptocurrencies or digital tokens may be obtained from a blockchain protocol by “mining”, that is providing computing power to process transactions on the blockchain by solving certain algorithmic puzzles, as it were. This gives rise to a real cost to obtain the digital tokens.
Cryptocurrencies or digital tokens may also be obtained from another token holder by transfer. This means that a token holder can sell or make a gift of a token to another person. Or a token issuer can sell tokens in an Initial Coin Offering (ICO) or variations of the same such as Initial Exchange Offering (IEO), promising certain rights or functions in respect of the tokens.
Legal Issues Regarding “Rights” Attached to Cryptocurrencies and Digital Tokens
Although various tokens purport to confer “rights” or functions, it cannot be assumed that these are legally enforceable rights. While these “rights” may be enforceable by way of the architecture of the blockchain network or specific applications on the blockchain, there are legal issues regarding whether these rights are legally enforceable and whether any legal rights may be transferred along with the transfer of a token.
Digital Tokens as Property
At the very fundamental level, the legal characterisation of the nature of cryptocurrencies and digital tokens has been subject to academic debate, particularly whether cryptocurrencies and digital tokens are a form of property. If they are, then dealings in them would of course give rise to certain property rights, including eg, the right to assert proprietary claims when wrongfully taken.
In the recent Singapore International Commercial Court decision of B2C2 Ltd v Quoine Pte Ltd  SGHC(I) 3 (Quoine), Simon Thorley IJ held at  that cryptocurrencies (in this case Bitcoin and Ethereum) were treated as a form of property for the purpose of constituting a trust:
“142 … Quoine was prepared to assume that cryptocurrencies may be treated as property that may be held on trust. I consider that it was right to do so. Cryptocurrencies are not legal tender in the sense of being a regulated currency issued by a government but do have the fundamental characteristic of intangible property as being an identifiable thing of value. Quoine drew my attention to the classic definition of a property right in the House of Lords decision of National Provincial Bank v Ainsworth  1 AC 1175 at 1248:
“it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”.
Cryptocurrencies meet all these requirements. Whilst there may be some academic debate as to the precise nature of the property right, in the light of the fact that Quoine does not seek to dispute that they may be treated as property in a generic sense, I need not consider the question further.”
In Armstrong DLW GmbH v Winnington Networks Ltd  EWHC 10 (Ch) (Armstrong) at -, Morris QC (sitting as a deputy High Court Judge), considered the legal principles on what constitutes property and found that carbon emission allowances known as European Union Allowances (EUA), administered under the EU Emissions Trading Scheme established under EU Law, which exist only in electronic form, were a form of intangible property.
In analysing the matter, Morris QC outlined a taxonomy of types of property. First, tangible property or choses in possession are corporeal things which possession can be taken. Second, choses in action are intangible things which must be recoverable, claimed or enforced by action rather than by taking physical possession. They cannot be subject to conversion.2OBG v Allan (2008) 1 AC 1. Third, documentary intangibles which are “rights to money, goods or securities which are “locked up” in paper in such a way that the document is considered to represent the right, which thus becomes transferable by transfer of the document itself”, citing Goode on Commercial Law (4th Edition) at page 32. The document which evidences the rights is itself to be equated with goods and is susceptible to the same remedies for specific delivery and damages for conversion. The debt secured by the document is a chose in action, but the actual document is a chose in possession and can be subject to conversion.
Morris QC considered that EUAs do not confer holders’ rights enforceable by civil action and are thus not strictly speaking choses in action. They represent at most a permission to emit CO2. EUAs have economic value, because they can be used to avoid a fine, and there is an active market for trade in EUAs. At , he held that EUAs were a form of property: “It is definable, as being the sum total of rights and entitlements conferred on the holder pursuant to the ETS. It is identifiable by third parties; it has a unique reference number. It is capable of assumption by third parties, as under the ETS, an EUA is transferable. It has permanence and stability, since it continues to exist in a registry account until it is transferred out either for submission or sale and is capable of subsisting from year to year”. He left it open at  whether EUAs were choses in possession or tangible property, eg, a type of documentary intangible albeit the document is only in electronic form.
EUAs were held to be intangible property. In coming to this conclusion, Morris QC considered Morritt LJ’s three-fold test for property in In re Celtic Extraction  Ch 487, where it was held that waste management licences granted pursuant to a statutory scheme for waste management constituted “property” for the purposes of section 436 Insolvency Act 1986. Morritt LJ opined: “First, there must be a statutory framework conferring an entitlement on one who satisfies certain conditions even though there is some element of discretion exercisable within that framework … Second, the exemption must be transferable … Third, the exemption or licence will have value.”
In Swift v Dairywise Farms Ltd  1 WLR 1177, Jacob J held that milk quota under the EU legislative regime was property which could be held on trust (ie, in which equitable interests could subsist).
The analysis in Armstrong can be applied by analogy to cryptocurrencies and digital tokens. As accepted in Quoine, digital tokens can be deemed property upon the application of the principles set out in National Provincial Bank v Ainsworth  1 AC 1175 at 1248. Digital tokens are definable in the most fundamental sense as a digital record of a transaction; some may be definable as a set of “rights” or functions and entitlements. Digital tokens are identifiable by third parties and capable in its nature of assumption by third parties by way of holding under, or transfers to, specific addresses. And they have some degree of permanence or stability in that they are recorded in the blockchain as such and do not change in nature or form.
The decision of Your Response v Business Media  EWCA Civ 281 may be distinguished. In that case, the Court of Appeal held that there can be no common law possessory lien over an electronic database. However, this analysis about electronic database simpliciter should not apply to digital tokens. Moore-Bick LJ drew a distinction between practical control and physical control amounting to possession, and found that the database manager could not exercise physical control over the database information and so could not be said to have possession over the information: at . The distinction between database information and digital tokens is that digital information per se can be duplicated, among other things, whereas digital tokens cannot. For example, if someone duplicated some database information and shared it with 100 persons, there would then be 101 copies of the identical digital information. It is meaningless to say the 101 copies are different “things”. Possession becomes an impossible concept for such a “thing”. Digital tokens on the other hand cannot simply be duplicated, because of the confluence of the blockchain cryptographic hash functions, DLT, and payment verification protocols. Either a person has that token or someone else has it. Hence digital tokens can be meaningfully possessed. The touch stone for possession should not be “physical” control but exclusion of a unique thing. Physical things can be possessed because even if they multiply (such as certain onion plants, which multiply by division until of course one is negligent in tending to them as I have been guilty of), they become separate unique things. By the term “unique”, I do not suggest that it may not be fungible, but merely not identical in substance. For example, bottles of the same wine may be fungible but each bottle is a unique thing which cannot be duplicated out of thin air and may thus be possessed. If a digital thing is similarly unique and capable of exclusion, it must surely be capable of being possessed.
Moore-Bick LJ also rejected the argument that database information is a form of intangible property that is also not a chose in action—presumably a third category of property other than choses in possession and choses in action—and which may be subject to possession and conversion: at -. He considered counsel’s arguments based on Sarah Green and John Randall QC, The Tort of Conversion (Hart Publishing, 2009). In this respect, Moore-Bick LJ was unwilling to depart from OBG v Allan and thought that this should be left to Parliament (presumably in the same manner that patents are treated). However, if the analysis regarding possession is centred on the exclusion of unique things, then so long as the digital thing is capable of possession, it would be a chose in possession albeit digital possession. Hence Morris QC in Armstrong entertained the possibility that EUAs are choses in possession.
Apart from the analysis of whether digital tokens are choses in possession, are digital tokens alternatively or additionally choses in action? This would matter if they are not considered choses in possession. If a digital token is only a chose in action, then they are recoverable or enforceable by action as opposed to possession, and may not be subject to the tort of conversion.
On this question, different types of digital tokens may give rise to different analyses. A digital payment token simpliciter which confers no rights or functions whatsoever is unlikely to be a chose in action because it cannot be recoverable or enforceable by action. It may only be obtained by way of a digital transfer in the sense that the blockchain ledger is updated to record the transaction. A question which arises then is whether it is possible to apply to the court for a transfer of such a digital token, as one would for instance apply for a delivery up of a tangible movable property. If a trust arose or the wrongful transfer was made in breach of some equitable duty, then a constructive trust may be imposed and tracing may be availed.3Low, Kelvin F. K. and Teo, Ernie, “Legal risks of owning cryptocurrencies” (2017). Handbook of Digital Finance and Financial Inclusion. Vol 1: Cryptocurrency, FinTech, InsurTech, and Regulation, 225-248. Research Collection School Of Law. This would be in the alternative to say an in personam claim for damages in unjust enrichment. Where there is no element of trust or equitable duties, and the party in question is insolvent, it is not clear whether a property tort claim such as conversion would be available given the intangible nature of the property. There would be no practical, principled or policy-based objection to such a remedy. The majority view in OBG v Allan  1 AC 1 excluding intangible property from the scope of the tort of conversion has been criticised as outdated.4Sarah Green, “The Subject Matter of Conversion”, J.B.L. 2010, 3, 218-242. The substantive consideration should be whether the intangible property may be the subject of manual control, ie, whether it may be excludable or exhaustible, and whether any cognitive indicia of possession is present. Digital tokens are on such an analysis capable of being such property that may be subject to conversion.
What about a security token which confers rights of profit and participation in the management and control of the token issuer? It is likely that such a digital token is a chose in action akin to a company share. The digital token may grant the holder certain rights pursuant to a contract (to be discussed further below). The bundle of rights attached to such tokens may be obtained by action. Just like company shares today, which are recorded digitally on an electronic register in many jurisdictions and no longer on a piece of paper, a security token is recorded digitally on the blockchain ledger.
A token that grants the holder access to certain functions or utility may or may not be a chose in action. It would depend on whether the functions are legally enforceable rights. If it merely offers certain practical functions but not legal rights, it would be similar to computer programs which give its user functions or utility but do not constitute chose in action.5Ken Moon, “The nature of computer programs: tangible? goods? personal property? intellectual property?” E.I.P.R. 2009, 31(8), 396-407. A digital token is like a shopping mall voucher. The voucher entitles the holder to certain goods or services up to the value represented by the voucher, subject to terms and conditions. The voucher does not equate to or represent the right to the goods or services. The voucher may be transferred from one person to another, and the transferee will be entitled to the same rights. The entire framework governing the exchange of rights concerning the voucher is a matter of contract. There are of course differences. Most such vouchers would constitute a stored value facility under the present Payment Systems (Oversight) Act (Chapter 222A), soon to be repealed and replaced by the Payment Services Act 2019 when it comes into force, whereas most digital tokens would be unlikely to. Nonetheless, legislation do not determine the terms and conditions; the private contract does. Another comparison would be to EZ-link cards for MRT access, although that analysis is complicated by the fact that there would be an interplay of contract law and statutory regulation.6See Rapid Transit Systems Regulations, Regulations 32-34. This is not to say that the analysis of how a contract in such a scenario (whether voucher or train card) is formed is simple; indeed, there is a great diversity of analyses regarding train and bus tickets.7Chitty on Contracts, 33rd Edn (Thomson Reuters, 2018) at paragraph 2-018.
In summary on this section, while it appears that cryptocurrencies and digital tokens are a type of property, it is not clear whether or where they fall within established categories of property, namely choses in possession and choses in action. It is possible but not presently supported by authority that there is a third category of property. There is a strong case to be made that cryptocurrencies and digital tokens are choses in possession although intangible. The specific characteristics of the cryptocurrency or digital token have to be considered in analysing whether it is a chose in action.
Legally Enforceable Rights?
The further issue is whether the purported rights attached to digital tokens are legally enforceable rights. Unlike shares, in respect of which the attached rights are based on statute and general law, the so-called rights attached to digital tokens can only be based on contract law, or practically in the architecture of the blockchain which allows for practical enforcement of the rights but not necessarily legal enforcement.
For the rights to be legally enforceable rights, a valid contract must subsist. Would all the elements of a valid binding contract be satisfied in the case of someone mining tokens on a blockchain? Arguably, the consideration exchanged is the digital token for the successful mining ie, successful processing of a transaction on the blockchain. However, who makes the offer and provides the intention to create legal relations?
In some cases, a blockchain may be established and maintained by a single entity which communicates to the world at large certain ‘rights’ and terms in respect of the blockchain and associated tokens. It is possible that such scenarios may give rise to valid offers and acceptance. The intention to create legal relations is found in the blockchain operator having designed and implemented the blockchain and smart contracts such that anyone who successfully mines will receive a token and such token will automatically grant the token holder certain functions (although this is admittedly a reductionist account). It may be analogised to the classic case on unilateral contracts Carlill v Carbolic Smoke Ball Co Ltd  1 QB 256. However, in such a scenario, the rights are enforceable vis-à-vis the blockchain operator. Are they enforceable against other users of the blockchain? It is possible to analyse this as a multilateral contract entered into between the miner, the blockchain operator, and all the other users of the blockchain. This would be similar to an analysis of the legal relations between members of an unincorporated association. On this, we consider next.
In some cases, a blockchain may be established and maintained by an anonymous community of persons. Such a community may be an unincorporated association of persons like a members’ club. While the identity of a contracting party is not necessary for a valid contract — eg, a shopkeeper does not need to know whom he sells good to — the fact that it is an unincorporated association of persons may create various legal issues about the validity of any contract. It is possible to enter into a contract with an unincorporated association despite the latter being not a legal person. The legal relation among members of the association or club is a contract, typically in the form of the rules or constitution. A contract made by one member with some person on behalf of the association is deemed a multilateral contract between the member and all the other members.8Chitty on Contracts, 33rd Edn (Thomson Reuters, 2018) at paragraph 2-118. A member can sue the other members who have breached such a contract. It is possible then that a user of, and token holder in relation to, such a blockchain is party to a multilateral contract, which all other users and token holders are party to.
The analysis is more straightforward where a person purchases or receives digital tokens from a token issuer or another token holder pursuant to a contract which specifies the terms and conditions in relation to the purchase, transfer and tokens. It is common to find extensive terms and conditions in token sale agreements in an ICO. These agreements would specify eg, the price and mechanism for transfer of tokens and the uses and rights of the tokens. The token purchaser who is party to the contract can therefore legally enforce the terms of the contract if breached.
Transfer of Tokens
What happens when a token holder transfers a token to a third party? Does the third party automatically receive the rights conferred in relation to the token, either on the initial token purchaser pursuant to the token sale agreement or a token miner who received the token without entering into any agreement? The question would thus be whether by way of the transfer, the rights and benefits in respect of the token were assigned to the recipient, or transferred by way of novation.
Assignment of rights attached to tokens would present practical problems. Only rights and benefits, and not obligations, may be assigned. Rights involving a personal element cannot be assigned. While a bare right to litigate is not assignable, it has been held that rights of action which are incidental and subsidiary to property may be validly assigned when the property is transferred.9Dawson v Great Northern & City Ry (1905) 1 KB 260; Ellis v Torrington (1920) 1 KB 399; Chitty on Contracts, 33rd Edn (Thomson Reuters, 2018) at para. 19-050. However, this principle may be reserved uniquely for immovable property and it is not clear if it would apply to other forms of property or types of obligations.10See eg, Kemp v Baerselman (1906) 2 KB 604 (CA), 609, where the Court held that a contract to supply eggs to a business which had been assigned to the plaintiff was not enforceable because it was a personal contract.
Ordinarily, assignments may be statutory or equitable. A statutory assignment requires an absolute assignment in writing under the hand of the assignor and express notice is given to the other party to the contract which the assignor is party to. Equitable assignments do not require notice, but the assignee must join the assignor to any legal proceedings enforcing the transferred rights. An equitable assignment need not be in writing or in any particular form (subject to certain exceptions) and can be made by an assignor informing the assignee he transfers the rights to him, or by instructing the counterparty to discharge its obligations by performance for the assignee.
Accordingly, while in theory rights attached to digital tokens may be assigned in equity by transfer of the tokens to the transferee-assignee, whether the rights are legally assignable depends on the rights in question. And the transferee-assignee would have to join the transferor-assignor in any proceedings enforcing such rights. Often in the crypto-world, the identity of token holders and transferors of tokens are unknown.
Alternatively, the rights and obligations relating to a token and the contract in respect of the token may be transferred to a transferee by way of a novation, which would require the consent of the transferor, transferee, and the counterparty to the contract, giving rise to a new contract altogether. It is possible to analyse, if the facts permit, a transfer of tokens from one person to another as the formation of a new contract between the transferor, transferee, and the blockchain operator, whether the operator is a legal person or an unincorporated association comprising all other token holders. The elements required for this new contract are fulfilled: (1) an offer is made by the blockchain operator to the world at large that it will perform certain obligations to, and obtain certain rights against, a token holder; (2) acceptance is made by the transferor and transferee of the token by doing everything necessary for the token to be transferred; (3) all the parties to this transaction intend to create legal relations evidenced by the architecture of the blockchain and smart contracts, and the steps taken to implement the transaction which will be recorded on the blockchain ledger; (4) consideration is exchanged by the blockchain operator taking on obligations to the transferee, the transferor being released of obligations to the blockchain operator, and the transferee taking on obligations to the operator.
Again, if the analysis of the relationship between all token holders and the blockchain operator is analogous to an unincorporated association or members’ club, and the relationship between all members is that of contract, contract rules which apply to the entrance and exit of members to the association or club would likely apply in the same way to users of a blockchain and token holders. This analysis would be especially suitable to tokens which confer governance rights or community rights. It is also suitable to tokens which confer rights to property, profit or returns, since contracts between members of associations or clubs can confer property rights.11In re Sick and Funeral Society of St. John’s Sunday School, Golcar (1973) 1 Ch. 51.
Or if analogy is to be drawn from passenger tickets, then it is plausible that a train operator makes an offer to the world at large to provide train services on certain terms, which may be accepted by whoever holds the ticket and boards the train; it does not matter how the ticket was first obtained, which may be subject to a separate contract: MacRobertson-Miller Airline Services v Commissioner of State Taxation  ALR 131, at 147; Chitty on Contracts, 33rd Edition (Thomson Reuters, 2018) at paragraph 2-018. This analysis would be suitable to tokens which confer utility or access rights.
The above analysis assumes there are clear terms about the rights and obligations relating to the tokens. Where there are no clear terms, or where the obligations in the circumstances are only on the token operator with no corresponding obligations on the token holder, the analysis may be questioned.
Smart Contracts and Legally Enforceable Contracts
The above analysis can apply also to the question of whether smart contracts are, or may give rise to, legally enforceable contracts. Smart contracts are self-executing digital computer programs on the blockchain ledger. They have been analogised to vending machines: drop a coin in and you get your drink without any other human involvement. Whether a smart contract constitutes a legally enforceable contract would invariably depend on the facts — particularly whether there is an intention to create legal relations, whether there is an exchange of consideration, and whether the material terms are clear and sufficiently complete.12See Max Raskin, “The Law and Legality of Smart Contracts” 1 Geo. L. Tech. Rev. 305 (2017). If for example a computer program on a website that shows you advertisements based on your surfing history is not a legally enforceable contract, then it makes no difference that this program is on a blockchain. On the other hand, if a website operator implements a computer program to provide you with a service in exchange for a certain sum of money of say emailing your friend spoilers to the Game of Thrones TV series, it is likely a legally binding contract as good as any; it makes no difference whether it is on a blockchain or hosted on a web server.
Two unique characteristics of smart contracts on distributed blockchain must be noted. First, they are self-executing. Second, they are irreversible, unless subject to some hard fork on the blockchain or some rectifying transaction13See Bacon, Jean and Michels, Johan David and Millard, Christopher and Singh, Jatinder, “Blockchain Demystified” (20 December 2017). Queen Mary School of Law Legal Studies Research Paper No. 268/2017 at 33-34. Available at SSRN: https://ssrn.com/abstract=3091218.Ronald JJ WongDirectorCovenant Chambers LLCE-mail: [email protected]Ronald JJ Wong is a Director at Covenant Chambers LLC, practising in litigation, advisory, and non-disputes work, with special interest in technology, corporate disputes and transactions, investments and acquisitions, financial regulations, and employment. The practical irreversibility of blockchain transactions is illustrated by an incident in 2017 where a user accidentally activated a flaw in the Ethereum chain in relation to digital wallets built by a developer Parity.14Alex Hern, $300m in cryptocurrency accidentally lost forever due to bug, The Guardian, 8 November 2017, (20 March 2018) https://www.theguardian.com/technology/2017/nov/08/cryptocurrency-300m-dollars-stolen-bug-ether?CMP=share_btn_tw. These characteristics mean that if a smart contract was built with an error, it would be difficult to reverse. To the extent that this constitutes a breach of contract, the remedy would likely lay outside of the blockchain itself. That is, legal recourse would have to be taken. Further, a smart contract may be designed in a way that did not cater for the performance of all the legal rights arising from the legal contract in relation to the smart contract. This penumbra may also be subject to dispute for which legal action may be required.
The discussion on smart contracts is pertinent to the question of rights attached to digital tokens. It would be anticipated that the rights attached to many types of digital tokens would be practically exercisable by triggering smart contracts on the blockchain. Hence, an analysis of the applicable terms and conditions relating to those rights would have to consider whether there is more than one legally enforceable contract on the facts, and whether the terms of these contracts are harmonious or otherwise. For example, if a person A purchases a token on the representation that certain rights would be offered, person A transfers the token to person B, and person B uses the token to execute a smart contract which has coded the performance of certain rights, there may be two separate contracts in respect of this same token which may conflict. Can person B enforce the terms of the contract which person A entered into in purchasing the token? What are the terms? How would any conflict be resolved?
The above hypothetical scenarios also illustrate the practical difficulties of enforcing legal rights. It would of course be easier to consider one’s legal rights and obligations, and practical legal recourses, when one obtained the digital token from a sale pursuant to a written token sale agreement, as would be typical in an ICO. The situation becomes murkier where there is no written agreement or when one obtained the token by transfer. Would the transfer be analysed as an assignment or novation? Who should be sued? Is the claim based on contract or a general tort of misrepresentation?
The extension of long-established legal principles on contract and property to the world of cryptocurrency, digital tokens and blockchain is fraught with difficulty. While there has yet to be disputes determined by the courts involving the above issues regarding the enforceability of rights attached to tokens, it would not be long. The legal analysis of the rights and obligations in each scenario would have to depend on the facts. This is of course quite apart from the practical difficulty of enforcing these rights in legal proceedings in a world where the identity of parties is often opaque and transactions are cross-border, giving rise to jurisdictional issues.
|↑1||See Bacon, Jean and Michels, Johan David and Millard, Christopher and Singh, Jatinder, “Blockchain Demystified” (20 December 2017). Queen Mary School of Law Legal Studies Research Paper No. 268/2017 at 4-5. Available at SSRN: https://ssrn.com/abstract=3091218.|
|↑2||OBG v Allan (2008) 1 AC 1.|
|↑3||Low, Kelvin F. K. and Teo, Ernie, “Legal risks of owning cryptocurrencies” (2017). Handbook of Digital Finance and Financial Inclusion. Vol 1: Cryptocurrency, FinTech, InsurTech, and Regulation, 225-248. Research Collection School Of Law.|
|↑4||Sarah Green, “The Subject Matter of Conversion”, J.B.L. 2010, 3, 218-242.|
|↑5||Ken Moon, “The nature of computer programs: tangible? goods? personal property? intellectual property?” E.I.P.R. 2009, 31(8), 396-407.|
|↑6||See Rapid Transit Systems Regulations, Regulations 32-34.|
|↑7||Chitty on Contracts, 33rd Edn (Thomson Reuters, 2018) at paragraph 2-018.|
|↑8||Chitty on Contracts, 33rd Edn (Thomson Reuters, 2018) at paragraph 2-118.|
|↑9||Dawson v Great Northern & City Ry (1905) 1 KB 260; Ellis v Torrington (1920) 1 KB 399; Chitty on Contracts, 33rd Edn (Thomson Reuters, 2018) at para. 19-050.|
|↑10||See eg, Kemp v Baerselman (1906) 2 KB 604 (CA), 609, where the Court held that a contract to supply eggs to a business which had been assigned to the plaintiff was not enforceable because it was a personal contract.|
|↑11||In re Sick and Funeral Society of St. John’s Sunday School, Golcar (1973) 1 Ch. 51.|
|↑12||See Max Raskin, “The Law and Legality of Smart Contracts” 1 Geo. L. Tech. Rev. 305 (2017).|
|↑13||See Bacon, Jean and Michels, Johan David and Millard, Christopher and Singh, Jatinder, “Blockchain Demystified” (20 December 2017). Queen Mary School of Law Legal Studies Research Paper No. 268/2017 at 33-34. Available at SSRN: https://ssrn.com/abstract=3091218.Ronald JJ WongDirectorCovenant Chambers LLCE-mail: [email protected]Ronald JJ Wong is a Director at Covenant Chambers LLC, practising in litigation, advisory, and non-disputes work, with special interest in technology, corporate disputes and transactions, investments and acquisitions, financial regulations, and employment.|
|↑14||Alex Hern, $300m in cryptocurrency accidentally lost forever due to bug, The Guardian, 8 November 2017, (20 March 2018) https://www.theguardian.com/technology/2017/nov/08/cryptocurrency-300m-dollars-stolen-bug-ether?CMP=share_btn_tw.|