'Tokyo, We Have a Problem.' Bitcoin's Fatal Flaw?
[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.
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