Now a Bit more certain: the legal status of Bitcoin

For some years, the legal status of Bitcoin and other cryptocurrencies has been a subject of controversy: are these "exchange tokens" property, as a matter of law?

Common sense has always suggested that they must be.  But in England and other common law jurisdictions, this has been difficult to square with legal theory. The traditional view, enshrined in case law, is that there are two forms of property: choses in possession (tangible things that can be possessed, such as land and chattels) and choses in action (intangible things which derive value from the fact that they can be enforced by legal action against another party, such as contractual rights). Historically, English law has not generally recognised as property anything that does not fit into one of these buckets.  The law has refused to recognise any "tertium quid".

The issue with "exchange tokens" is that they are clearly intangible, but it is difficult to view them as choses in action.  For a holder of cryptocurrency, there is no obvious person to sue, if his rights in respect of what he holds are breached; and indeed, it is not entirely clear what those rights are, or whether the concept of a right is coherent where there is no-one against whom the right can be enforced.  In this respect cryptocurrency is very different from "fiat" currency, where a significant holding normally takes the form of a bank deposit, i.e. a contractual right against a known financial institution.

UK tax law has for some while been more flexible, or less prescriptive about the criteria that something needs to meet for it to qualify as property or an asset.  For example it has been recognised that a right or thing should be regarded as an asset for CGT purposes if it is capable of being "turned to account", i.e. if it has a realisable value; even if it does not fall neatly into one of the two categories of property within the schismatic legal theory discussed above (O'Brien v Benson's Hosiery).  

Moreover, for IHT purposes there is a statutory definition of "property" which includes "all rights and interests of any description" (IHTA 1984, s 272).  There has always been a strong argument that this statutory definition is capable of encompassing a right or interest that isn't a chose in possession or a chose in action, provided that the right or interest has an existence independent of who holds it, has value, and is not purely ephemeral (see OBD v Allan). 

Nevertheless, very speculative arguments have from time to time been advanced to the effect that cryptocurrency is outside the scope of CGT or IHT on the basis that, as a matter of law, it isn't an asset or does not constitute a form of property.

The prospects of such an argument prevailing, which were always weak, have been further enfeebled by a recent High Court decision, AA v Persons Unknown.  This concerned a cyber-attack on a company, which "locked" the company's computers, and a USD950,000 ransom payment to the cyber-blackmailers, made to obtain a decryption tool that was needed to regain access to the servers.  The ransom payment was made in Bitcoin. The claimant was seeking various orders, inter alia to try to establish the identity of the holder of a cryptocurrency account at a particular exchange, believed to "contain" some of the relevant Bitcoin, and to "freeze" that account.  The important point about the application was that the orders could only be granted if the court was satisfied that the Bitcoin in the account was "property", as a matter of English general law.

In a radical but sensible departure from previous authority, Bryan J decided that cryptocurrency is a form of property.  He considered it "fallacious to proceed on the basis that the English law of property recognises no forms of property other than choses in possession and choses in action".  In reaching this view he drew support from a Legal Statement on Crypto-Assets and Smart Contracts, published in November 2019 by the UK Jurisdictional Taskforce. That Statement noted that there have been English cases which have, expressly or by implication, accepted that rights or things that do not fit neatly into the chose in possession / chose in action dichotomy can nonetheless be property. For example, in one case it was held that an EU carbon emissions allowance could be the subject of a tracing claim as a form of "other intangible property", even though it was neither a thing in possession nor a thing in action (Armstrong v Winnington).

AA v Persons Unknown is probably the last nail in the coffin of the "Bitcoin isn't property and can't therefore be taxed" idea - a notion which, as noted above, was already moribund.  However, controversies about the tax treatment of cryptocurrency still abound.  In particular, as discussed in a previous article (see "Cryptositus") the situs of "exchange tokens" for the purposes of IHT and CGT continues to provoke debate.  Given the real doubt about whether HMRC's published guidance in this area is right, and the substantial fortunes that have been made by some "early adopters" of cryptocurrency, it is surely only a matter of time before these issues are litigated.