What do you legally own with Bitcoin?

Credit: fiatjustitia.nl

The question of ownership with Bitcoin — what does someone really own while holding coins on a very fundamental level — has plagued not only legal discussions for a while now. The inherently technical nature of this debate often times poses more questions than it provides answers. For all we know Bitcoin or something like it (hard digital money) is here to stay which begs the question — what is it (legally)?

Given that this is a cross-jurisdictional issue I will try to keep my German and EU-law bias in check and approach the question at hand more generally. I consider this to be a work-in-progress and always welcome polite disagreement.

This is not investment or legal advice. I am not your lawyer.

Property — Ownership — Possession

Different jurisdictions deal differently with what one would loosely define as property, ownership or possession. Legally they can be subsumed to mean different things. For this high level approach we are going to combine them to mean „property“ and as such ownership of said property should grant us what follows:

„The owner of X can, as far as the law or rights of third parties do not oppose, proceed with X at will and exclude others from any influence.“

If you are walking down the street with your phone in hand in general no one questions whether or not this is actually your phone. If there is a dispute you should be able to provide reasonable proof through the corresponding bill referencing a serial number and that will be the end of it. If you own a piece of land the proof is provided by the chain of title stating the sequence of historical transfers leading up to yours.

In the digital realm scarcity is rarely a thing and therefore providing proof of property is no trivial task in a world of copy&paste.

Enter Bitcoin

Before Satoshi Nakamoto solved the Byzantine Generals´ problem with his proof of work chain all prior attempts at digital money lacked at least one major ingredient. If Bitcoin however is hard digital money — or as Andreas Antonopoulos aptly described it “money as a content type — scarcity, providing proof of ownership and being able to exclude others from any influence over your money becomes essential.

In legal publications the question of what really constitutes „a“ bitcoin often times either gets avoided by simply subsuming it to be an immaterial object or (better) approached negatively by delimiting it from physical objects (can´t touch this) or claims (no one issuer of coins). In my opinion there are different reasons for that. The main one being that getting to the bottom of what „a“ bitcoin really is gets very technical.

However, if we are to better understand the opportunities provided by „blockchain technology“ and are looking to put the existing legal framework in perspective a closer look at what Bitcoin actually is becomes mandatory. What (capital B) Bitcoin has in common with other „blockchain networks“ is the fact that there is a native token involved — (lower case) bitcoin — , but that is usually where the comparability ends. This is why a closer look is indispensable. The question remains…

What is „a“ Bitcoin (legally)?

The question „What is Bitcoin?“ is understandably answered differently by different people. As far as a legal perspective is concerned it is most likely not too far from accurate to describe it as a „decentralized digital currency that enables instant payments to anyone, anywhere in the world.

Looking at how those payments come to be is probably not a bad place to start when assessing what you actually “own” in the sense of the law while “holding” Bitcoin.

UTXOs

When your wallet tells you that there is 1 btc in your balance that means you have 1 btc in one or more UTXOs while the overall Bitcoin UTXO set is basically a database showcasing all spendable outputs on the network.

Those UTXOs — Unspent transaction outputs — can be spent as an input in a new transaction. Because each output of a particular transaction can only be spent once, the outputs of all transactions included in the Bitcoin blockchain can be categorized as either UTXOs or spent transaction outputs. For a transaction to be valid, it can only use UTXOs as inputs.

Block reward

All „coins“ originally stem from the block subsidy, a part of the block reward. The first transaction in a block must be a coinbase transaction which should collect and spend any transaction fees paid by transactions included in this block.

All blocks with a block height less than 6,930,000 (presumably reached in the year 2140 with a new block created every ten minutes) are entitled to receive a block subsidy of newly created bitcoin value, which also should be spent in the coinbase transaction (the block subsidy halves every four years, started at 50 and is currently 12.5 bitcoins). Block subsidy and transactions fees are combined to be the block reward that miners compete over. Miners sell their bitcoin (UTXOs) in order to pay for their operations and this — in short — is how they eventually end up displayed as a number in your wallet.

Owning and spending bitcoin

If you intend to spent that UTXO or part of it you create an input referencing the transaction(s) that got you the bitcoins by its/their hash (txid), and the specific output used as well as the sigscript (public key + signature). Those outputs also contain a “a pubkey script for indicating what conditions must be fulfilled for those satoshis to be further spent”.

The signature is defined as a value related to a public key which could only have reasonably been created by someone who has the private key that created said public key. What this essentially comes down is that when you sign a transaction you are using your private key to create a signature. By virtue of this signature it is verifiable that you have access to the private key associated with an address without the other (verifying) party knowing what that private key actually is (great detailed explanation here).

Legally speaking the signature signals to the pubkey script that the individual owns (or is in possession of) the private key that created the public key. In other words the private key enables „power of disposition“ over the UTXOs in question or to put it differently: in comparison to the coveted touch of real world objects the private key grants those in possession of it a „digital touch“ with regards to the corresponding UTXOs or “bitcoins”.

Taking it back to the beginning:

„The owner of the private key can, as far as the law or rights of third parties do not oppose, proceed with the corresponding UTXOs on the Bitcoin network at will and exclude others from any influence.“

There is a plethora of follow up questions e.g. how to possibly differentiate between the private key and the UTXOs because technically even if you lose your private key the UTXO is still sitting there but that would go beyond the scope of this article.

Conclusion

For the first time in history public key cryptography, hash functions and merkle trees combined with Bitcoin´s monetary policy grant us digital scarcity and with it a unique „digital touch“. It is therefore not surprising that over the last couple of years (legal) discussions on that subject struggled with the task of subsuming Bitcoin and this new paradigm under existing legalese.

So, what do you legally own with Bitcoin? To me you own a part of the Bitcoin UTXO set uniquely assigned to you, and only you — by virtue of the corresponding private key. With this comes great responsibility. If you lose your private key, you lose your bitcoins. If your private key gets stolen civil law may dictate that the key itself and the UTXOs accessed by it are still “yours”. As far as the Bitcoin network is concerned though the private key grants power of disposition to whomever is in possession of said key.

The features described above are Bitcoin-specific. Other cryptocurrencies may utilize similar or even identical approaches. After taking a closer look however it is evident that we have to examine each „token“ or „coin“ specifically by the properties and rules set in the network in question.


I want to say thank you to my friend hasufly for his invaluable feedback. I´m @Swoo_p on Twitter and would love to hear from you, the reader.