Lawyers, Legislators, and Labels: What Is “Crypto” Anyway?
Lee Reiners, executive director of the Global Financial Markets Center at Duke Law School, has a firm line on digital financial services. The former regulator is of the general opinion that the crypto boom in recent memory had more to do with loose monetary policy by the Federal Reserve than the inherent long-term investment potential of such assets as Dogecoin
He may well be right, I couldn’t say that, and everything I say about cryptocurrencies is for entertainment purposes only. And even if it wasn’t, you’d have to be crazy to take investment advice from me and not just about crypto. But what exactly is “crypto”?
John Paul Koning posted on Twitter that we should be a little careful about using it as a catch-all term. As he pointed outgiven the range of instruments across the sector (e.g. bitcoin, stablecoins, NFTs, DeFi, L2s and so on), the word “crypto” has become less meaningful to the point where it can actually undermine the general discussion and undermine understanding of the topic.
I think this is a good point. While JP and I may be few against many, I think it would be useful to at least distinguish cryptocurrency from tokenized assets of one form or another, whether traded in a centralized or decentralized market.
(As one commenter I saw on Twitter put it – at least I think it was on Twitter, but subject to internesia – you wouldn’t lump astrology and astronomy together and call them “astro”.)
Therefore, I will try not to use the word “crypto” for these new types of digital assets in the future. Instead, I will refer more specifically on the one hand to cryptocurrency (or “unstablecoins”) and on the other hand to digital assets of one form or another that are bearer instruments that are exchanged without clearing and settlement as “stablecoins” when backed by reserves of fiat currency and something else is yet to be determined (we’ll come back to this later) when I mean tokens that are backed by real assets.
However, I will continue to use the word in a different context. I’m not a lawyer (or IANAL, as the kids say), but my good friend Charles Kerrigan is. And rather a good one at that. He is a partner in the international law firm CMS and wrote a nice article about the word recently. In this he said that “crypto is not a what, it’s a how – a way of doing things.” It is a very good way, so from now on I will only use the dreaded word “crypto” when I mean a way to exchange both fungible and non-fungible tokens directly and in a decentralized manner.
A Rosecoin by any other name
But back to what I’m going to call these tokens which are a kind of digital asset that’s kind of new and kind of different, and of which stablecoins are a specific subset. How should we think about these? People have become so used to using the centralized services of Web2 to (as Richard Bartle so memorably put it) “buy things that don’t exist from people who don’t own them” that the idea of actually owning things – these new kinds of digital objects you can sell, exchange or take elsewhere – appears as new. Heading into the metaverse, this will change, because the metaverse is a virtual world where this type of property will be integrated into the economy, but right now we don’t quite know how to categorize or classify such objects.
We know that the simplistic token maximalist position that if the token is in your wallet, then it’s yours, simply cannot be correct. Advocates of these strong digital property rights see computer code as the equivalent of real-world courts, contracts and correctional facilities. Hence the mantra “the code is law” and the idea that the metaverse becomes “digital serfs to householders.”
Codes are the law.
This is an appealing perspective, given a legal framework rooted in another age, but is it the right one? The issues here have been brought into sharp relief by the collision between NFTs and intellectual property law. Copyright and trademark laws was not written with NFTs in mindwhich means that it will be up to the courts to settle disputes in the current legal framework until revised articles of association have been adopted.
That sounds reasonable, I think, but what might these revised statutes look like? Informed industry observers focus on the proprietary treatment of such assets, and in common law jurisdictions there appears to be a tendency to engage with “downstream” conceptual and doctrinal issues of property law.
The third way
The Law Society of England & Wales, to focus on a key example, has a consultation on such matters underway right now. They note that while the law (by which they of course mean the law of England and Wales, not the concept of law generally) has been able to some extent to accommodate these new digital assets as objects of property rights, certain aspects. of the law now needs reform to ensure that digital assets benefit from what the society calls “consistent legal recognition and protection”.
One thing I learned from reading the consultation, while IANAL, is that there are currently two different types of property. The first is “things in possession”, which broadly means assets that are tangible, movable and visible, such as a bicycle or a gold bar. The other is “thing in action”, which means property that can only be claimed or enforced through legal action or process, such as debt or shares in a company.
The Bar Association quite interestingly suggests adding a third category to allow for what they call new, emerging and idiosyncratic objects of property rights. I might be tempted to label this category “things in wallets”, but they’ve opted for the more generic “data objects” (rather than, say, “tokens”.)
The reason I like the wallet label is that it has connotations of personal control. The lawyers actually say that when it comes to these digital objects, the actual concept of control (as opposed to the concept of possession) best describes “the relationship between data objects and people,” which I think is their way of saying “not your keys, not your coins.” I agree with this general point: the owner of the token for a seat at the ballgame is the person who controls the private key of the wallet that the token is in.
As for the assets themselves, they say the law should “recognise and give effect” to the freedom of commercial parties to design tailored contractual arrangements. This includes systems where the holder of a given token is deemed to have a legal right to whatever is somehow associated with the token (eg the seat at the ball game.)
But being lawyers is the beginning rather than the end of the story. They go on to say that holding a token should not necessarily be considered a “definitive record of (superior) legal title” to the token. Or, in other words, code is not allowed, and just because you have the keys that do it does not make them your coins. And while it may sound like turkeys voting against Thanksgiving, they have a point.
(I once, many years ago, gave a lecture on the use of digital signatures in commercial transactions. One of the benefits, I said, was non-repudiation. A lawyer in the audience was quick to tell me that, in his opinion, good advisors can reject anything.)
Assets and objects
In parallel with the legal consultation, the UK government has just published its new Financial Markets Bill. This includes reference to regulation of both cryptocurrencies and web3 (including stablecoins) in an attempt to guide the transition to the mainstream. The bill refers to what it calls “digital means of settlement that can be used to settle payment obligations; can be transmitted, stored or traded electronically, and use technology that supports the recording or storage of data (which may include distributed ledger technology).”
I think they mean tokens.
(Perhaps it makes sense to integrate “data objects” and “digital means of settlement” into the single parent category of “digital assets”, but I’m genuinely interested in what different perspectives there might be around this labeling. Labels are important.)
I am not enough of an expert on the Law of England & Wales, regulation of financial markets or decentralized finance protocols to propose a definitive set of definitions at this time, but I think I can say that:
John Paul is right: Let’s stop talking about “crypto” and talk about cryptocurrencies, tokens and DeFi;
- Charles is right and we can use “crypto” to describe is a way of working;
- The Bar Association is right that code is not law;
- The government is right and tokens should be regulated into the mainstream; and
- I’m right (about things in general.)
Great, now we have a platform to build on!
