Three legal papers in one week
Last week, three interesting legal papers have been published that might turn out to be helpful for Crypto Nation Switzerland. First, our own regulatory working group has published an article titled "Verfügungsmacht und Verfügungsrecht von Bitcoins im Konkurs" (pdf). In it, we deepen the thoughts touched previously in this article. The article shows how Bitcoins can be returned to their rightful owners in case a custodian like Xapo goes bankrupt. This has far-reaching regulatory consequences even if no bankruptcy ever happens, as it implies whether Bitcoins have to be kept on or off balance sheet and thus also whether the long-term storage of Bitcoins for clients requires a banking license. Thanks to our article, the legal certainty about this issue has been further increased. The other two interesting legal articles by Prof. Mirjam Eggen and by Prof. Rolf Weber and Salvatore Iacangelo both provide an interpretation of Swiss law that would allow the issuance of printed securities (Wertpapiere) as tokens. The main challenge here is to argue that the word "Wertpapier" does not imply that physical paper (Papier) is needed and that something as abstract and intangible as a token also satisfies the definition of "paper" in that context. While both papers still get the classification of Bitcoins wrong (they base it on the false assumption that Bitcoins are data), their thoughts on what constitutes a security are of great help for Crypto Nation Switzerland, as they provide a (somewhat risky) legal pathway for crypto startups to issue equity-like tokens with an actual promise behind them. Today, "investments" into ICOs are often essentially donations.
Extended Abstract of our paper
Under Swiss law, the terms possession (Besitz) and ownership (Eigentum) are reserved for tangible things (apart from a few specific exceptions). As Bitcoins are not tangible, these terms do not apply. Instead, we propose the terms Verfügungsmacht (power to dispose, analogous to possession) and Verfügungsrecht (right to dispose, analogous to ownership). This distinction helps to discern what belongs to whom in case of bankruptcy. Using the example of the Tezos foundation, whose crypto assets are secured with two keys, one of which is controlled by Tezos itself and the other by Bitcoin Suisse AG, we demonstrate that the storage location of private keys alone does not suffice to meaningfully answer the question to whom the foundation's assets belong. Instead, the context and the contractual arrangement, from which the right to these assets can be derived, also need to be taken into account. This view provides a legal basis for the storage of Bitcoins on behalf of a client without taking them onto one's balance sheet, ensuring that the client's assets are protected in case of bankruptcy and that they are not included in the bankruptcy estate. Furthermore, we classify the Internet currency Bitcoin as a new type of asset. It is neither book money nor physical cash. Bitcoin is a rival, fictive, intangible asset sui generis. Being a new type of asset, we opine that there is a gap in the law regarding Aussonderung (removing an asset from the bankruptcy estate and returning it to the rightful owner) and Admassierung (adding an asset to the bankruptcy estate from a third party), which the law so far only specifies for tangible things. It follows that courts and bankruptcy administrators should fill this gap in accordance with article 1 of the Swiss Civil Code and that they should allow Aussonderung and Admassierung also for Bitcoins even though they are not tangible things.
General comment on why we like the Swiss legal system
Switzerland's legal system has a long tradition of being based on general principles that leave room for interpretation by courts and scholars. For example, the first article of the Swiss civil code says that in case a law is obviously missing, a judge can rule as if that law existed. To computer scientists like me, this is quite astonishing, as we tend to interpret the law as a strict set of rules and to take them literally. But thanks to its principle-based legal system, Switzerland can remain agile and competitive despite having a rather slow legislative process. The deeper wisdom behind this is that it is impossible to write perfect laws anyway. In fact, contrary to the first intuition, the more detailed a law is, the more holes it usually contains because when regulating something at a very high level of detail, it is much more likely that edge-cases are overlooked. In contrast, a principles-based legal system with laws that are kept at a high level of abstraction allow to take local or new information into account and can lead to much better and reasonable results. This is part of what makes Switzerland a decentralized political system and open to new developments such as crypto-currencies.
(As a side-remark, this is one reason why our principles-based legal system is not so compatible with the detail-loving approach of the EU. For example, the European Commission recently proposed a new regulation on the law applicable to the third-party effects of assignments of claims, which can be relevant when transferring certain types of claim-backed tokens. It contains 34 pages with 17000 words to regulate a particular aspect of the assignment of claims and frequently refers to national regulations which also need to be taken into account. In contrast, the 20 Swiss articles that regulate the assignment of claims contain 1260 words and apply to a much broader scope of cases.)
Conference presentation and contact
In case you want further information about the storage of Bitcoin, I recommend to read the paper itself. Furthermore, I will be presenting our findings at the 10th Zurich conference of the Internet Security Society Switzerland. Members of Bitcoin Association Switzerland get a rebate and only pay the partner rate of CHF 490. Furthermore, I have three free tickets that I can hand out to our readers (first come, first serve). Also, if you are interested in the regulatory working group of Bitcoin Association Switzerland, please also do not hesitate to get in touch with me (email@example.com).