STAFF NEWS & ANALYSIS
'Tokyo, We Have a Problem.' Bitcoin's Fatal Flaw?
By Philippe Gastonne - April 06, 2015

[U]nder the United States' UCC code (uniform commercial code) as long as bitcoins are treated as general intangibles, no high value investor can be sure that an angry Tony Soprano won't show up one day to claim that the bitcoins they thought they received in a completely unencumbered manner are actually his. – FT Alphaville

Bitcoin, the cryptocurrency allegedly invented by one "Satoshi Nakamoto," is starting to gain some traction. Some top online merchants now accept bitcoin as payment, banks are learning how to process payments and the Winklevoss twins plan to launch a fully licensed and legitimate exchange called Gemini.

Will all this progress come to a grinding halt? It could, if a lawyer named George K. Fogg, Esq. is right.

The problem lies in contract law. As a legal matter in the United States, bitcoin is not a currency. Bitcoin is property. It's not physical property, but neither is an e-book you buy from Amazon.com. Both are property that can be "encumbered."

The summary of Counselor Fogg's theory continues:

In fact, it's only if and when Tony Soprano publicly renounces his claim to the underlying bitcoin collateral he is owed that the bitcoins stand a chance of being treated as unencumbered. Until then, a hot potato claim risk exists for every future acquirer of Soprano's bitcoin.

Indeed, given the high volume of fraud and default in the bitcoin network, chances are most bitcoins have competing claims over them by now. Put another way, there are probably more people with legitimate claims over bitcoins than there are bitcoins. And if they can prove the trail, they can make a legal case for reclamation.

This could be a thorny problem. If you accept bitcoin in payment for something, how do you know that the person transferring it does not owe it to someone else?

The blockchain efficiently and securely tells everyone a transfer occurred from wallet A to wallet B. It doesn't record any conditions attached to the transfer. That means the paying party might owe the same bitcoin to someone else – who can then come after the recipient.

This problem doesn't exist with fiat currencies like the dollar, or with negotiable instruments like stocks, because they have a different legal status. Bitcoin could theoretically gain this status, but under current law only if it is transferred through a licensed custodial bank, trust company or broker-dealer.

This might not be a deathblow, but the need to involve regulated transfer agents would certainly remove some of the cryptocurrency's allure. Those institutions have to follow the standard "know your customer" and money laundering rules. Good-bye, privacy.

Here is Counselor Fogg's conclusion:

My libertarian friends have a belief they have created something that is outside of any statutory governance, and my response is you have created something novel that can help in transferring value across borders but you can't pretend that the UCC doesn't exist and because it does exist it affects bitcoin.

Bitcoin is governed by the UCC. You can be an ostrich and pretend that it's not covered by it, or you can address that it is in fact covered by the statute and find a way to solve the problem.

Satoshi, if you're out there, we could use some ideas.

Posted in STAFF NEWS & ANALYSIS
  • Bruce C

    I must confess that I really don’t understand bitcoin that much mainly because once it reaches a certain level of abstraction and complexity I tune out. It loses all of its appeal because to me it is not elegant. Just the fact that it requires an advanced technological network system practically invalidates it as a practical currency (money ?) system, or at least one that makes it better than the paper fiat systems we have now.

    But that’s just me, so I’ll suspend all of that for the moment and just say this: If non-privacy and the transaction fees that are associated with conventional monetary transactions are so undesirable, then perhaps the small chance of someone laying claim to one’s bit coin is a tolerable one. After all, as Kogg says, this most likely applies only to “high value investors”. It’s not likely that a cyber sleuth is going to go through the trouble to prove a claim to a relatively small amount of bitcoin. And, if you think she might, then transact in some other way at least for that exchange.

    • Bill Ross

      not just you. Complexity equals higher reliability risk and, more points of vulnerability to fraud. Not to mention the internet WILL be a target in the WAR between those who seek a “division of spoils” (controlled) versus “division of labor” (free) civilization.

      better a good old gold nugget or something REAL and desirable as a medium of exchange / barter. Then “possession” and ability to defend is 9/10 of the law”

      and, the cynic in me reads the “grudging” (may be illusion) acceptance of Bitcoin by central control forces MEANS they perceive some advantage (to THEM), most likely in the area of control.

      • RED

        Agreed!
        The “CCF” seem just a bit too accommodating.

    • bouf

      It’s actually the most elegant piece of computer science to arrive in a long while. While I’m not an attorney, I have studied the UCC. This attorney’s sentiments as relayed in the article don’t make sense. There is no collateral with Bitcoin. If I send them to you, you have an entirely different private key than I did. There is nothing I can do to get them back and there is no way for me to encumber them before or after I’ve sent them. I’ll read the relevant UCC section again (too bad Senor Esq. didn’t cite the statute he is basing this on) and get back to y’all but for now I’d say its safe to leave your bitcoins as bitcoins and your keys in cold storage.

  • Neil

    Why is this article not arguing why Bitcoin is anti liberty and pro authoritarian? Rather then skipping past that and setting the argument up as if that is already acceptable to have a fully trackable digital currency (which some say the elites monetary goal is). To me the question is not what this article puts across but why would we the people even endorse a currency that gives us up all anonymity, but is this “digital currency” the free markets choice over gold and silver!

    • Bill Ross

      cuz anything peaceful involving mutual (only involving parties trading) consent which requires “permission” from uninvilved (but VERY interested) parties is, by definition “authoritarian”.

      So, Bitcoin is NOT “anti liberty and pro authoritarian”. Arbitrary power sticking their noses in other people’s business IS.

    • Anon Wibble

      Because it’s not?

  • Treat gold, silver and cryptocurrencies as legal tender, not as an asset.

    • Neil

      Legal tender comes about as a Law which is issued from a central authority. So Ideally I wouldn’t want to treat anything as legal tender! The free market would probably choose gold and silver as the money we use. In my view a crypto currency cannot be seen as money by the free market as it has a flaw and that is it relies on a third party.

  • Thanks DB for presenting this very abstract but very legitimate concern about crypto currency. Even if participating in a hard asset backed version of same, that in and of itself would not obviate spurious (or legitimate) claims. If the PTB are allowing bitcoin (as they obviously are) then one has to wonder – just as Bill Ross mentions below – what is their purpose in allowing crypto-currency, and where is all of this headed? There can be little doubt that the overriding aim of the globalists is a cashless, one world currency over which they have complete control for both the issue of said currency, and whether you as an individual are allowed to spend it. Those who disagree with the PTB are likely to find that their accounts/plastic cards/implanted chips have been “frozen” and no funds are available. Have a wonderful day : ) – and, oh, here is an 800 number you can call to talk to our computer……..

    • Excellent debating points and I believe Greg and Bill have the measure. The only way TPTB can control everything is do as Gregg says, eliminating cash all together and using some form of digital implant or whatever a scientific furturist might prescribe. Of course long before this scenario plays out the people will have adopted their own means of exchange, be it local currencies, forms of barter, labour notes of credit or whatever colour of the financial rainbow suits each person at the time. In fact this is already beginning to happen where local currencies are used today throughout the UK. http://www.theguardian.com/local-government-network/2013/jun/17/bristol-pound-local-currencies

  • robertsgt40

    “As a legal matter in the United States, bitcoin is not a currency. Bitcoin is property.” As a legal mater in the United States, the Federal Reserve Note(FRN) is not a currency. The Coinage Act of 1792, signed into law by George Washington, the “Dollar” is defined as a coin containing 371.25 grains (troy) of fine silver. Fiat paper was not mentioned.

    • robert

      Ah, but there were 6 other coinage acts, the last one in 1965 that progressively redefined all that until we have what we have now.

      • ScroodeMcDuck

        The six other coinage Acts were enacted by a Treasonous and illegitimate group of dual citizens with allegiances to foreign powers.
        Corp. U.S’. Myth 6:
        President Woodrow Wilson served as President of the United States of America in its original jurisdiction Constitutional Republic form of government for two full terms of office. Though this topic is under construction, we will introduce this myth now my simply noting that President Wilson did so serve for one term. However, after he was elected, by the Electoral
        College, for his second term, his election was confirmed by a Corp. U.S. only Congress; but, such a Corp. U.S. confirmation could not possibly lawfully qualify as confirmation into the original jurisdiction government’s presidential office for his second term; because that confirming body of congressmen included Senators that had no original jurisdiction capacity. http://www.teamlaw.org/Mythology-CorpUS.htm#formGovt Now, given the facts of the SSA cardholder relationship (see: Corp. U.S. Myth 9), let’s look at how SSC cardholders interface with FRNs and or Money; and, at this point take notice of the fact that FRNs are not now and never have been “money”; rather, from the actual records of our history we learned they are merely transaction instruments that were rented by Corp. U.S. (in their bankruptcy) and marketed into circulation. http://www.barefootsworld.net/real13th.html No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State. Article 1 section 9 clause 8 http://hobnobblog.com/2009/08/the-constitution-of-the-united-states-article-i-section-9/

        • robert

          I take it you mean that for esoteric technical reasons we don’t have to obey any laws or Acts enacted since the signing of the Constitution, or at least the Coinage Act of 1792. Or something.
          Realistically speaking, the laws and Acts are on the books until they’re changed, and anything else is sophistry. Just ask the people who claim the IRS is illegal how they made out in court when they tried to withhold payment of their taxes.
          Anyway, currency of a nation is simply something that is defined as such, as the original Coinage Act did. The final result of these Coinage Acts is that rather than being defined relative to some particular tangible substance or object, the dollar is simply defined in self-relative terms, i.e. a dollar is defined as ‘a dollar’. It’s now just a word. The legislators defining this term were elected representatives under the laws of the United States, and the result of their debate and votes is now law.

  • A freshly minted metal coin is not individually identifiable and so cannot be claimed as property if stolen and subsequently thought to be in the possession of some third party. Gold bullion the same but a numbered gold bar not so; if you can prove a numbered gold bar is your stolen property it is yours.

    A bank note may be possible to identify individually as one stolen from you but it is of no more value than the worthless flimsy paper on which it is printed. What a bank note represents is a contract, or promise, made by the issuer which specifically says: whosoever holds this paper, the bearer, is entitled to the value – not necessarily the ‘owner’ but necessarily the ‘bearer’. The value is not in the physical paper but in the contract one’s ‘bearing’ of the paper entitles you to benefit of.

    A rare and collectable bank note would be different. Its value to its owner is not the specific contract expressed but rather the special value the piece of paper has assumed itself. So too would be a collectable metal coin that was perhaps photographed in such detail that it could be uniquely identified if recovered.

    A BitCoin does not represent a contractual obligation from the original issuer to ultimately exchange the unique right to the code for a value to whosoever is the bearer or legitimate owner of the ‘code’. The value is just the property of the code, the block chain supposedly simply records and establishes who presently owns the property of code. The work it takes to produce (or mine) the code is of consideration but the value is established by the market: what a buyer is willing to give and a seller is willing to accept in exchange.

    Therefore a BitCoin is property and is uniquely identifiable, like a numbered gold bar. BitCoins can be stolen and good title to them cannot be subsequently passed-on with any more legitimacy than the original thief had to the property. BitCoins are not like paper money where the actual value represented is in the contract between the issuer and whosoever the bearer of the note may be even if they do not own the paper on which that promise is writ.

    Banknotes and Their Vindication in Eighteenth-Century Scotland
    Kenneth Reid – University of Edinburgh – School of Law
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2260952

    • Bill Ross

      You do “know”, of course that the ONLY “reason” for “legal tender” “laws” is so that all transactions / trades MUST be “accounted for” in terms of this “value”, for the purpose of taxation. Otherwise the “renenuers”, if they want “cut / percentage” must seize and warehouse a percentage of all (diverse) production, formerly (agricultural economy) called a tithe.

      I would go so far as to state that the revenuers have destroyed all productive value of having a common medium of exchange, to the point that barter is “on the horizon”.

    • EU this is a very useful post, thank you for elucidating.

  • Mr. Bill

    This is a little off-point, but maybe worth noting. Securities carry a similar risk of competing claims to the same asset. A street name owner has only a “contractual claim” to the stock he “owns”. In the event of brokerage bankruptcy he stands behind someone who borrowed his stock against collateral. (David Webb and others)

  • The other problem for BitCoin is that any number of identically structured BitCoin codes can be issued should BitCoin look as if it is going to reach critical mass (where it starts to act as an everyday means of exchange and not just an ‘off the wall’ investment for the relatively few who understand the potential for growth in BitCoin value that will take place with wide adoption and no competition).

    I am not talking about other forms of crypto-currencies of which there already are many. I am talking about a technically identical BitCoin2, and if that does not soak-up the market demand for a means of exchange BitCoin3, 4 and so on. With a BitCoin2 launched by a known and ‘trusted’ authority such as a major government or global banking eternity there will be a gravitation towards that by the mass of the public who may feel the known ‘brand’ offers legitimacy and security.

    Ultimately the existing money-power authorities have the market advantage – legislative ability and being a known ‘brand’. I consider current tolerance of BitCoinOne is to allow an experimental learning curve stage after which it will be snuffed-out by legislation and competition.

    Indeed the fear that your BitCoins could, at any time, be rendered valueless by a legal requirement for amending the block-chain to show all BitCoins that have had a disputed ownership at some point in their circulation would be enough to kill the whole BitCoin job stone dead.

  • Samarami

    I have a feeling we’re not in Kansas any more. Could we already be over the rainbow? Sam

  • Ezra Pound

    “Put another way, there are probably more people with legitimate claims over bitcoins than there are bitcoins.” So you mean bitcoin is run like ALL DEPOSITORY BANKING INSTITUTIONS?

  • Webforager

    And bitcoin’s conundrum rears it’s ugly head. If bitcoin is to gain wider traction, it will be brought into the fold, so to speak. Otherwise, one’s risk, perceived or otherwise, increases, keeping bitcoin in the little leagues.
    I think it will become widespread and this was the intention all along. Bitcoin and liberty…not in this construct.

  • George

    I would very much like to use bitcoin in transaction, but have been unable to date to comprehend it. If I don’t understand it, I have no business getting involved in it until I do. Bitcoin seems so ready for exploitation by the PTB, so far I have found it difficult to trust, and trust is at the foundation of transaction in my world.
    Some years ago I purchased bullion. Now, when I need currency for an expanding business season, I simply take bullion to my dealer who writes me a cheque and places the bricks into his safe. I sign an agreement to pay him interest until I pay back the money. When I repay, I then pick up the same bricks from him. To me, that is elegant simplicity. It is perhaps brutally simple and involves the risk of transport, but overall, there are many benefits:
    1. I no longer have the need to go hat in hand to the bank to increase a line of credit with paper work involved, pledging collateral, complex calculations of worth and leveraging, and all that implies including time and the demeaning aspect of subordination to bank managers, not to mention the costs.
    2. I have the quiet confidence that precious metal provides
    3. The transaction is satisfying for both parties and fairness is transparently negotiated at the counter through interest rate
    4. The transaction bares the truth: I provide a solid real asset; the other party provides fiat currency. It’s a strange feeling having delivered real value, yet walking away with paper that promises to be worth whatever the government says it is worth in transactions between others, not even with the government as the promise of redemption in value in silver or gold is now long gone. The promise of redemption at all by the government for anything other than another note has also been removed lately; I don’t recall exactly when, but some slight of hand did it nonetheless. I used to deal in the eastern middle east before the foreign “interventions” due to false flag terrorism claims, where they still used silver certificate US dollars. Today, the dollar bill makes little to no promise. As a fiat currency of a state suzerain to the US, the Canadian dollar has recently been converted to some polymer (read plastic) so one cannot even use it to light a campfire or for toilet hygiene. Its intrinsic value is completely, totally gone. It’s a symbol of one’s confidence in each other and the government. Since Canada’s involvement in illegal foreign interventions, my confidence in the government has also completely evaporated and the smell of that evaporation is worse than burning plastic.
    So long as the NSA seems to be able to know all on the internet, the Five Eyes system ensures cooperation between government thieves, and our governments behave so absolutely irresponsibly slavishly to their masters and beyond to the banksters, hopeful as I am for “crypto” currencies, I haven’t the necessary confidence to proceed with them in little more than small personal transactions.
    But I have found a way that works for us.

    • Dimitri Ledkovsky

      People who declare they ‘comprehend’ Bitcoin do so in defense of their egos or their academic chairs or whatever shell game they’re running on their “clients”. A lot they’ll be able to finance with Bitcoin after the next Carrington Event.

  • DrBryant

    Okay, a simple question I have always wondered. What happens to “buying power” during a widespread / lengthy power failure? What could a well-placed EMP device do to “availability”?

    This has the making of a great science-fiction movie. Storyline: Magnetic poles shift; the phenomenon of “electricity” is lost….right along with all those bitcoins.
    For me, just a simple man, I will prefer simple gold/silver over another fiat currency, especially one that looks capable of “burning out” like a light bulb.

    • DrBryant

      I would also add,…anything made my man is subject to destruction and why gold has been so widely accepted throughout history.

      • Marten

        Amen Bro….

      • Anon Wibble

        Shame Chinese companies are selling tungsten filled 1 oz gold coins for $1.40 that are the same size, the same weight and very close to the same density as the real thing.

        • DrBryant

          I would suggest American/Canadian coins over anywhere else…..wouldn’t really consider China……..now, about that “availability” issue??

  • Anon Wibble

    LOL, what a hunk of crap. They’ll do what exactly, get a court order to repossess the blockchain?

    “Can I have all the bitcoins please?”
    “lol no”
    “But I have a court order”
    “so what?”
    “Ok then the court mandates that all the machines in country x say that bitcoin is mine”
    “congradulations, you can get 5% of the blockchain to agree with the courts decision, but the 95% of the world’s blockchain doesn’t consent”

  • the answer is

    Monero (XMR)

  • Brabantian

    Tho I fully favour the right of computer nerds to have their own currency, there are hopeless concerns for many of us, who worry that:
    – Bitcoin will crash like Microsoft windows
    – Bitcoin can be hacked like computer everything
    – Bitcoin is run by the NSA
    – Bitcoin transactions with US parties will soon require any global counterparty to file a USA Form 1099-BTC

    So as one wag said early on, maybe ‘buttcoin is for luzerz’

  • Attorney Miles Cowan and I thoroughly discussed this issue in Bitcoin Knowledge Podcast Episode 111 (http://podcast.runtogold.com/2014/11/btck-111-2014-11-27/). It seems one of the largest issues is what is the expected ROI for attempting to enforce the claim.

    After all, Bitcoin has created an entirely new property rights scheme defined by software code and not legal code. For the legal code to be effective it must be able to exert dominion or control over the bitcoins but it is plainly obvious that no amount of violence can solve a math problem.

  • Jorge

    If you have to call this attorney “Counselor Fogg” and “Esq.”, you are most likely trying to snow us. I see no issue here.

  • What is BitCoin anyway….???

    Is it MONEY….??? No, it isn’t MONEY, because it is not a physical commodity, such as gold, which serves as a standard of value. Gold is not an obligation to anyone, hence no problem with the UCC. Furthermore, with gold there is no problem conforming to Section 8 and Section 10, Article I of the U.S. Constitution.

    Is it a CURRENCY…??? For sure, it is not a redeemable currency. There is no fixed standard as to value, either in quantities of gold or anything else, and it cannot be redeemed for specie. Redeemable currency conforms to provisions of Section 8 and Section 10, Article I of the U.S. Constitution. BitCoins do not.

    It is not a currency created by monetizing sovereign debt made “legal tender” by government edict, and for which value is determined by the government’s own central bank agency.

    As to BitCoin being PERSONAL PROPERTY, the question arises, how did ownership title attach to the personal property…??? With reference to John Locke, clear title attaches to private property only through contribution of LABOR. Personal Property is physical property. BitCoin certainly is not physical property. The use of Personal Property as currency lacks legitimacy as regards Section 8 and Section 10, Article I of the U.S. Constitution.

    BitCoin maybe INTELLECTUAL PROPERTY, as are e-books. Rights to Intellectual Property are covered by copyright and patent laws.
    Can these rights to Intellectual Property be turned into currency which conforms to Section 8 and Section 10, Article I of the U.S. Constitution….??? They cannot…!!! So, what is BitCoin…???

    • Greg Jaxon

      Ingo’s last two questions cut to challenge made by the article. I find it hard to limit the scope of Ingo’s and Fogg’s criticisms to just bitcoin, however. Most financial property is held in the form of records of account with fragile legal backing or easily overloaded claims. So these concerns do not discredit bitcoins specifically. The first two questions are ill-posed, I fear. Moniness is in the eye of the intermediator. Bitcoin is a highly marketable medium of exchange. It is not as marketable as legal tender, gold, or T-bills, but especially for the niche of international funds transfer it exceeds those. How it fits with the Constitution is really irrelevant once its organic place in the market of monies is carved out. No government is likely to bless bitcoin with legal tender status.

      • Moniness……??? If you could define the term, I might understand your comments better.

    • ManAboutDallas

      “So, what is BitCoin…???” A: The latest distraction cleverly designed, assiduously crafted, and diabolically deployed to distract the clueless, the gullible, and the illiterate from reality.

      • Sadly to say, I couldn’t agree with you more…….

  • Christan

    I guess Bitcoin laundry and Bitcoin mixing company’s will have a future after all. 2.5% is a hit but it might be worth the price if you buying something expensive. Is a way to mix your coins for free?

  • Vess

    This article is written by some lawyer without a clue about how Bitcoin actually works. There are no physical (or even electronic) bitcoins that change hands and you cannot tell one bitcoin from another. When you say that you “own” X bitcoins, you actually mean that you have the private key that controls access to X bitcoins. You don’t have any particular X bitcoins. One Tony Soprano gives you the private key to X bitcoins, it is irrelevant where they came from and how much he owns to someone else. He can’t give you “the same bitcoins” that he owns to someone else. He can only give you access to X bitcoins that he provably has access to.

    • Christan

      If that is true why have a coin mixing feature or a coin laundry?

  • Pilgrim

    The cliche “knowledge is power” applies. Bitcoin transactions, like credit card transactions, leave a trail. True liberty is anonymous.

  • Charles Savoie

    One research report only on Bitcoin details how the big boys, the really big boys, have moved to control Bitcoin

    http://www.silvermarketnewsonline.com/articles/TakeoverOfBitCoin_Savoie012315.pdf

  • ManAboutDallas

    No need for lawyers here; BitCoin will collapse of its own dead weight. And soon.

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