A leading set in banking, fi nancial services and consumer law, and pre-eminent in consumer credit, Henderson Chambers fi elds a highly experienced team of barristers with both contentious and transactional expertise. Members regularly act for the UK’s fi ve largest banks as well as off shore creditors and regulatory authorities, and write for some of the key practitioners’ books. Chambers is recommended by Legal 500 for banking and fi nance law and is ranked by Chambers & Partners for consumer law.

Author Peter Susman QC Virtual money in the virtual bank: legal remedies for loss KEY POINTS ––Historically, money has developed to become a token rather than an embodiment of value, the size of computers, it began to become and this holds good in a computerised world. feasible to bring into ordinary commercial ––Cryptocurrency was hoped not to be susceptible to fraud, but there can be no guaranteed use computerised ledgers, both in protection against human error. conjunction with credit cards to provide ––There are lessons to be learned from recent litigation, including that arising from the revolving credit, and then to control and to collapse of Mt. Gox. effect transfers of money. ––English common law is robust enough to facilitate the development of legal remedies for In 2009 the introduction of Bitcoin as lost cryptocurrency. the first “peer-to-peer” cryptocurrency was intended to bypass established financial This article summarises the development of coins, paper money and institutions by creating a virtual currency. cryptocurrencies as tokens rather than embodiments of value, explores some Cryptocurrency, existing only as a record in VIRTUAL MONEY IN THE VIRTUAL BANK: LEGAL REMEDIES FOR LOSS recent litigation in the US and Japan, and speculates on the likely juridical basis of a computerised ledger, operates as a medium future developments in English common law. of exchange. It also fulfils other functions of money by being used as a benchmark of value (a unit of account) or wealth (share A BRIEF HISTORY LESSON England they continue to recite on their of economic value), and is capable of being Once upon a time, more than a face the promise to exchange the note for exchanged with other established currencies ■couple of thousand years ago, and most value, even though it is more than a hundred at a floating exchange rate, which in practice probably in the Middle East, a bright idea years since the legal obligation to do so was tends to fluctuate wildly. occurred to some official. It had been the abolished, and it is 85 years since the pound Such a cryptocurrency is not to be custom to stamp an identifying mark on sterling was last pegged to the value of gold. confused with “electronic money”, for example a large and heavy ingot of precious metal, So we still use metal and paper currency as money designated in pounds sterling and by which government certified its value. tokens, certified by legislation as legal tender, made available to spend by a customer of The official thought of similarly stamping with government obviously able to control the the issuer using an electronic device such small pieces of precious metal, more easily amount of such currency in circulation. as a mobile phone. The issuer is required carried around, and so invented the coin as Banks and other financial institutions to register with the Financial Conduct a medium of exchange. A few hundred years also kept ledger records of their transactions, Authority under the Electronic Money ago someone else realised that there was no including ledger records of customers’ credit Regulations 2011, which however do not need to worry about the value of the coin balances (“money in the bank”). This credit purport to apply to a cryptocurrency. being “debased” by adding base to precious balance would be a notional amount once the Perhaps the devising of Bitcoin was metal, so long as the law provided that the money had been lent elsewhere. From ancient motivated by a general feeling that electronic coin had a nominal value as legal currency times banks allowed customers the facility transfers of virtual currency could not be (“legal tender”). The coin was thus no longer of giving a paper order to transfer money to safely entrusted to banks, who were being an embodiment of that value but a mere token a third person, for example by way of what in blamed for prompting the September 2008 of it. Of course, more “primitive” cultures England is called a “cheque”, or by way of a stock market crash by bulk sales of the right had already for generations been using “confirmed irrevocable letter of credit”, such to enforce inadequately secured mortgage cowrie shells, feathers, or other tokens for as is typically used to finance international loans. Perhaps a different or additional the same purpose. trade by payment for goods in exchange for motivation was a perception, right or wrong, Meanwhile banks or their equivalent documentary proof of delivery of the goods. that banks were independently or collusively had for centuries also been issuing paper charging at excessive rates for electronic promissory notes or bills of exchange ALONG CAME COMPUTERS transfers of money. (almost certainly first in China), promising From about the middle of the twentieth to exchange the paper for valuable metal century, and the invention first of the IS CRYPTOCURRENCY SAFE? on demand, and still called “bank notes” electronic computer, and then of the However, if anyone thought that in England and “dollar bills” in the US. In transistor enabling drastic reduction in cryptocurrency was safe from

150 March 2016 Butterworths Journal of International Banking and Financial Law VIRTUAL MONEY IN THE VIRTUAL BANK: LEGAL REMEDIES FOR LOSS FOR REMEDIES LEGAL BANK: VIRTUAL THE IN MONEY VIRTUAL Feature

misappropriation, they were mistaken. computer fraud, covering ‘loss of … money collapsed in February 2014 after 850,000 Cryptocurrency holdings are recorded … or other property resulting directly from bitcoins valued at hundreds of millions of on an electronic ledger accessible only to the use of any computer to fraudulently pounds virtually vanished. Aspects of the authorised users by means of an encrypted cause a transfer of that property from inside ensuing litigation are instructive. key. With Bitcoin that electronic ledger is the premises or banking premises’. The On 24 February 2014 Mt. Gox KK filed called a “block chain” because the structure definition of “money” was later extended an application in court in Japan seeking a of the electronic ledger comprises blocks by agreement between insurer and insured form of administration that might enable of data in the form of a chain. Safety was to cover Bitcoin. In the proceedings in the sale as a going concern and thus avoid supposed to be guaranteed by having the District Court, the plaintiff is alleging that liquidation, but on 16 April 2014 applied electronic ledger exist in multiple electronic a fraudster sent an email which caused the to be put into liquidation. At the time copies, which would be inherently difficult plaintiff to connect to a fraudulent website, of writing, the fifth meeting of creditors to change simultaneously. It is reported that where the plaintiff was deceitfully persuaded had been fixed for 17 February 2016. several leading banks (including Barclays) to disclose the key to its Bitcoin account, and Comparable steps appear to have been taken are now actively considering whether to lost bitcoins to the value of US$1.85m. The with regard to Mt. Gox, Inc., an associated adopt the “block chain” electronic ledger insurer has filed a defence denying liability company incorporated in Delaware, US, system to effect money transfers. on grounds that include a denial that the whose principal place of business was So impressive does all this sound that lost bitcoins were removed from inside the also in Japan. Meanwhile, on 27 February on 19 January 2016 Sir Mark Walport, the plaintiff’s premises or banking premises, and 2014 the proceedings Greene v Mt. Gox, British Government’s chief scientific adviser, the litigation continues. The other grounds Inc. were commenced in the US (federal) told BBC Radio’s Today programme that the of defence may be arguable, but one recalls District Court for Northern Illinois as a Bitcoin method ‘was a way of reducing fraud, the dictum of HH Judge Mackie QC sitting class action against a number of companies a way of reducing corruption: it’s a way of in the English High Court in W v Veolia and individuals alleged to be involved. potentially distributing benefits to people Environmental Services [2011] EWHC 2020 Joyce v Mt. Gox, Inc. is a similar lawsuit who haven’t got a bank account’. He seemed (QB) at para [40] that ‘Cheerful, prompt and pending in the Ontario Superior Court of surprisingly unaware of the risk of fraudsters knowing overpayment of claims by insurers Justice in Canada. On 24 February 2014 a gaining access to whatever electronic is unheard of, at least in this court’. partial settlement of the US District Court devices might be employed. For example, a card reader surreptitiously attached to Either way, the implication seems to be that a cash point can give access to a “chip and losers of bitcoins are unlikely to be compensated pin” credit card, likewise a smartphone surreptitiously held near a “contactless” in full. card, and so on, all of which demonstrates that no electronic device can guard against a On 7 December 2015, a US (federal) class action was reached with two of the human being succumbing to fraud. As is well criminal court in San Francisco imposed a individual defendants, on what appear to known, financial institutions tend to prefer 71 month prison sentence on a man called be very limited and modest terms, namely to bear loss from fraud themselves, rather Bridges, who while a member of the US that those two individual defendants would than lose transaction fees, or pay insurance Secret Service’s electronic crimes task take certain steps in an attempt to bring premiums. Previous articles in this Journal force investigating Silk Road, an online the Japanese insolvency proceedings to an have included interesting discussions criminal market place that was part of the end, and to substitute a “reorganisation whether it is theoretically possible to use “dark internet”, had participated in stealing plan” for distribution of recovered assets cryptocurrency as security (see for example, bitcoins that at the time were worth some among losers. On the face of it, that might David Quest QC, ‘Taking security over US$350,000. seem to be a forlorn hope. Either way, bitcoins and other virtual currency’ [2015] These examples would seem to indicate the implication seems to be that losers of 7 JIBFL 401), but perhaps the practical that Sir Mark Walport’s confidence that bitcoins are unlikely to be compensated in question is whether a lender would ever want someone on benefits who has a computer full. Nor is compensation in full for losers a to take that particular risk. but no bank account would be immune likely result of the criminal prosecution That cryptocurrency goes missing is well from uninsured loss through fraud seems for misappropriation pending in Japan documented. A company called Bitpay, Inc. somewhat naïve. against Mark Karpeles, the former head of commenced proceedings on 15 September Mt. Gox KK. 2015 in the (federal) District Court in COLLAPSE OF MT. GOX A claim was made in the insolvency of Mt. Atlanta, Georgia, US against its insurer More notoriously, a Japanese company called Gox KK in the Tokyo District Court, against for failing to pay under a policy against Mt. Gox KK, trading as a Bitcoin exchange, the insolvency trustee, by an individual

Butterworths Journal of International Banking and Financial Law March 2016 151 Biog box Feature Peter Susman QC is a barrister at Henderson Chambers specialising in commercial and IT litigation. Email: [email protected]

claiming to be a preferred creditor by virtue Justice in accepting that no VAT is payable closer analysis than the length of this of a proprietary interest in the bitcoins he on an exchange of Bitcoin with another article allows. had lost. On 5 August 2015 the court ruled currency: Skatteverket v David Hedqvist English criminal law has sometimes in favour of the trustee. The ruling has (Case C‑264/14), report available at ht t p:// seemed to struggle with the concept of been widely misinterpreted as a decision www.bailii.org/eu/cases/EUECJ/2015/ intangible assets, and whether there can that no proprietary interest can subsist in C26414.html be the statutory crime of “theft” of a bank a cryptocurrency. However, as pointed out Similarly, it makes little difference credit balance of which the only record by Akihiro Shiba, a Japanese attorney, in an that in the absence of express contractual of its existence is in a ledger, electronic or internet article for CoinDesk, the decision provision, particular rights and remedies otherwise; or only some such statutory did no more than decide that the individual may depend on physical possession of crime as “gaining a pecuniary advantage by did not have a sufficient proprietary interest something tangible, which cryptocurrency deception”. However, the Fraud Act 2006 to be classed as a preferred creditor, leaving is obviously not. For example, it has been may be seen as dispelling any remaining him to claim as an ordinary creditor; and it held that no non-contractual possessory confusion by concentrating attention on what was a first instance decision, on a question lien is capable of subsisting in the contents the fraudster has done, rather than whether of the interpretation of a Japanese statute, of an electronic database: Your Response Ltd he has done it to something tangible. and is subject to appeal. However, one may v Datateam Ltd [2015] QB 41 (CA). In Re So there is no necessary conceptual comment that within its very limited scope, Lehman Brothers International (Europe) (in difficulty in the law of contract as developed the judgment would be hard to criticise, administration) [2012] EWHC 2997 (Ch), on a case by case basis under English VIRTUAL MONEY IN THE VIRTUAL BANK: LEGAL REMEDIES FOR LOSS and that an English insolvency judge would Briggs J had to construe express contractual common law continuing to be applied on the be likely to reach the same conclusion. provisions alleged to create a lien over same basis to cryptocurrencies, to answer intangibles. He recorded at para [34] questions whether contractual obligations LIKELY APPROACH OF AN ENGLISH that all counsel before him (4 leaders and have been incurred, on what terms, whether COURT 5 juniors) agreed that the rule was that performance of such obligations may be In English law, money as a token of value ‘rights properly classified in English law as avoided or brought to an end, and what has long been regarded as property, as a general lien were incapable of application remedies may be available. As explained convincingly argued by Dr David Fox in to anything other than tangibles and old- above, the claim of the individual loser his monograph Property Rights in Money fashioned certificated securities’, and that, of bitcoins in the Japanese insolvency (2008). English law should therefore although ‘I invited the parties to consider proceedings was not dismissed on the have no conceptual difficulty in treating whether the time might have come for ground that a right of property could not cryptocurrency as being worth its exchange English law to take a broader view of the exist in cryptocurrency, but only on the value. When printers of bank notes matter … counsel continued to invite me ground that he could not claim as a preferred were tricked into permitting fraudsters to treat the established limitation of the creditor. In any event, many transactional to circulate unauthorised bank notes in scope of a general lien to intangibles as and litigation lawyers both in practice and Portugal, a majority of the House of Lords set in stone, or at least too firmly set to be of necessity tend to think of the juridical held the printers liable in damages for disturbed at first instance’. In the end, basis of money less as personal property the exchange value of the spurious bank he did not have to decide the issue, because in ownership or use, and more in terms of notes, rather than just for their nominal he construed the relevant security as a obligations owed by and to persons with value as printed paper: Banco de Portugal charge. The significance of his decision, respect to that money; and therefore less v Waterlow and Sons Ltd [1932] AC 452. and its relationship to the decision of in terms of proprietary rights and more Similarly, in Fairstar Heavy Transport NV Vos J in the earlier case of Re F2G in terms of available remedies. Further v Adkins [2013] EWCA Civ 886, the Court Realisations Ltd (in liquidation), Gray v GTP developments may be expected! n of Appeal held that a principal was entitled Group Ltd [2011] 1 BCLC, [2010] EWHC to recover its business emails from a former 1772 (Ch) was well distilled in an article by Further reading agent who had control of the only copies, Daniel Saoul, ‘Lehman: liens untied’ [2013] there being no reason in such a context to 3 JIBFL 143. ––Taking security over bitcoins and distinguish between printed and electronic Whether English law is yet ready other virtual currency [2015] 7 documents. to provide effective remedies in tort JIBFL 401. It hardly makes a difference that or restitution for misappropriated ––Lehman: liens untied [2013] 3 HMR&C treats Bitcoin as foreign currency cryptocurrency is a more complex JIBFL 143. for the purposes of income, corporation and conceptual issue, and Armstrong DLW ––LexisNexis Financial Services: capital gains tax, and as regards VAT will GmbH v Winnington Networks Ltd [2013] Practice Notes: An introduction to necessarily follow the European Court of Ch 156 (Stephen Morris QC) deserves virtual currencies.

152 March 2016 Butterworths Journal of International Banking and Financial Law