Bitcoin and the common law: an exploratory perspective from Singapore
The writer is a final year law student at Singapore Management University who may or may not have graduated by the time of print. The views expressed here are his own and do not represent any body or institution, it is also not to be taken as any form of legal advice or opinion. It is merely an exploratory piece of work by a student exploring the study of law and the phenomenon that is bitcoin. This is not a legal work.
Bitcoin and the common law: an exploratory perspective from Singapore
To begin with, I will skip or gloss over the technical aspects of the virtual currency Bitcoin. It has been described as emailing money, the advent of the internet revolution all over again, decentralized maintained ledger amongst other catchy phrases. I tend to think of it as a bittorrent for money, a decentralized register for the transmission of value changes.
Rather than a currency or a commodity, I tend to see it as a form of new technology. As Buffett has observed, it was not the first carmaker that survived to this day, nor the first trainmaker. It was not myspace or friendster that triumphed, but facebook. Not yahoo, but google. Conversely, you have technologies where the first mover advantage proved insurmountable. (or the second mover)
Above all, I am struck by how it resembled negotiable instruments in international trade, of bills of exchange, bills of lading and letters of credit. (and while it does resemble bearer bonds, cheques and all for the traditionally retail capacity, that is not my focus. You may wish to refer to Nikolei M. Kaplanov’s 2012 work on that, but note that it’s American)
Letters of Credit, Bills of Exchange, Documentary Credits
The focus here would be on letters of credit, grossly simplified, is a form of payment finance for use in International Trade. The sum is a guarantee from the issuing bank to pay X amount, regardless of whether the buyer would actually be able to pay in the end. In the case of counterparty failure, the bank would still pay to the seller before finding the buyer to seek recourse. There would be usually a confirming bank on the other party’s end.
Letters of credit are irrevocable, and this is something that have been interpreted strictly by the courts. They have been enforced even when there have been suspicious activities bordering on fraud and so on. (confer demand guarantees and performance bonds)
Phantom cargoes may have been shipped, wars breaking out halfway and all other sorts of frustration are part and parcel. It has been described as two groups of gangsters on the roof of the carpark, one side with the contrabrand and the other with the cash. The cash is kicked over and examined, before the contraband flies across. At any point, defection may occur, or displeasure that leads to gunfights. (In today’s world, even gold could be contraband say in India. Perhaps chewing gum meant for sale in Singapore too?)
Such is the nature of international trade, where claims in country A are unlikely to be enforced in country B, or even should it be easily done, probably prohibitively expensive in costs.
The letter of credit allows the seller to keep the money, full stop. It is irrevocable.
This is something of course shared with Bitcoins.
In the case of Documentary Credits, the verification and payout takes place through the banking system and enforcement should it be required in a case of a dispute takes place through the legal system. The legal position however has been to make letters of credit irrevocable (to grease the lubricants of international trade and commerce etc). For bitcoins, the blockchain itself is the ledger that makes each transaction irrevocable.
Thus the common objections against irrevocability and non-recourse that have often been pointed at bitcoins, are features that are “fundamental” to international trade finance. “Features”, mind you, not glitches. The best part is, there’s no need to pay international banks their steep fees and interests, more so if there is a confirming bank (as there is often) and the 30 minutes to 1 hour lag time of bitcoins effectively obviate the need for discounting.
And you have had with the hedge fund transactions (Fortress is suspected, but it is for now anonymous), $160 million of funds moving overnight, in a matter of minutes and hours. These are sums not unlike that of international trade, be it cargoes of produce or heavy machinery, done with letters of credits, but now without the costs of the issuing bank, the confirming bank, and the applicable jurisdictional days of clearing to encash the documents. Of course, China may ban bitcoins and crash it by 80% overnight. But that’s also a normal risk when using clearing currencies such as the dollars, which China is trading out of by doing direct currency trades with its trading partners. Hedging to a certain extent is also available with bitcoin through solutions such as coinbase and bitpay. (but likely not for 160 million dollars worth for now)
With Documentary Credits, you have to deal with Sovereign risks and Currency risks (Argentine? Cyprus? Greece?), Force Majeure, Counter Party defaults (say Cyprus nationalizes a bank and implement new laws out of thin air), usual counterparty defaults by banks (London Whales, burst trading books, bank runs, insolvencies). It is a brave new world we live in.
Micro International Trade
But, that is not to say that Bitcoins should be the currency for par in huge international trade transactions. On the contrary, bitcoins allow for micro and nano international trades! There is no need for Western Union, which charges an arm and a leg, or Paypal (that charges a few % in currency conversion). Micro International Trade by the man (and woman) on the street can take place in a fashion that has yet to be seen in the world. Someone in America can ship a Alpaca Socks or Flavored lollipops to someone across the world in Singapore. The person would have received moneys in bitcoins, and is confident enough to shell out the goods onto a ship, as well as handle shipping fees. Had Paypal or Credit card been used, a 2% fee would have been levied, along with the ignominable risk of charge back (where the buyer engages a fraud upon the seller) A bank transfer would have been similarly impracticable, with a starting fee of over $20, currency charges ripoffs and more fees upon fees, and clearing days for what may perhaps be $15 of goods. This would be a trade that would not have happened without bitcoins.
On the buyer end, he may risk fraud by the seller. However, he would be doing his own due diligence onto the reputation and veracity of the seller, and where that is absent, take upon himself a calculated risk. His payoff is that he is able to leverage upon globalization and international competition to obtain the best value, which may be price. A pair of electronics may be selling for $600 locally, he finds that they are made in China, and he is able to find their manufacturer, who is selling it a fraction at say $60. Even if the first manufacturer is a fraud, he can find a second, he can run through 9 fraudulent makers before he really needs a working one, and once he finds one, a business relationship is established.
With bitcoins, he is able to effectively eviscerate the middleman, or middlemen, and source as if he was a Multinational corporation. Globalization and price cost supply is no longer restricted to the domain of big international companies. If your employer outsources your job, you are likewise with bitcoins able to outsource your employer’s products.
It brings international trade to the man on the street. (Away from Wall Street)
An interesting thing about intellectual property rights have been the different treatment of technology and code in different countries. Depending on whether copyright or patents (or say design) are the protections accorded programs, codes and string of text.
But there is an interesting question for the private key. Is it protected by copyright? (in jurisdictions where codes are copyrighted) Would the transaction be irrevocable, but in law the use of the private key being unlawful allow for equitable restitution? Would governments be able to kill bitcoins this way?
Or can you patent a key in a particularly lax jurisdiction? Or certainly JP Morgan is trying to patent its own “bank cryptocurency”. Would it be engaging in patent troll trench warfare against existing cryptocurrency startups and companies?
This is just speculation.
The Torrens Register, Notarization
The ledger of the blockchain, as well as certain other new modifications cryptocurrencies brings exciting potential to legal systems such as the torrens register (in Singapore, Australia and New Zealand), the ideas, concepts, processes and executions of title. It also puts authentication, verification and security in new light. Notarization have had quite a few startups cracking onto it.
Jurisdiction and Conflicts
This is beyond me, but it is for sure a conflicted issue.
This might well test the extent to with courts have in personam or in rem jurisdiction over internet related “stuff”. Do you truly own bitcoins? Or just have access to the key? The silk road may show America’s approach to this.
That is not to say trade cannot take place without the law! It has been documented that even during wars, where governments are notably hostile and implementing all sorts of regulations that voids enforceability, (for way of some illegality or other) trade between businesses still takes place. Money changes hands, goods changes hands, contracts remain unenforceable.
Or in certain countries, the law says one thing, the people do another.
Leapfrog Banking systems (and legal systems)
In places such as Africa, there is great potential as $1 goes a different way. Having access to the internet flips the banking system all the way around, and the usual perks of say dollars is not really in existence there. This is also somewhat existing in a lesser form in places like Argentina and Cyprus
Democratizing value transfer is one exciting possibility. Another would be the arbitrage of electricity to resolve global warming, or trading of computing/processing power (but without the manipulation of say Banks or Enron in fixing numbers)
With Thanks to Professors Furmston, McMeel and Llewellyn, for the learning experience in the associated bodies of knowledge. All errors within are mine and all faults mine, to stress, none of them have had made any statements on the cryptocurrency as of yet.
Teo Chen Shien