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An much easier solution to UCC 9 bitcoin issues

February 2, 2015

There is an fascinating legal problem with bitcoin and the US Uniform Commercial Code Article 9 which is described here

The basic issue is that under American law, bitcoin appears to be a general intangible.  The thing with general intangibles is that when you sell a general intangible and someone has a lien against the intangible, the lien remains attached, so someone could sell and resell bitcoin and find that a lender has rights to repossess the bitcoin.  The proposed solution is to define bitcoin as a security under article 8, but that is messy since you have to go through a lot of legal hoops to make sure that the bitcoin is actually a security.

I have an easier solution.  Bitcoin is a good, and when someone sells a good, any liens usually disappear unless it is an agricultural product under UCC 9-320.

But you could say, bitcoin can’t be a good since goods must be *movable*, and since bitcoin is virtual, it can’t be moved, like software.  At that point, I would argue that this is false.  Bitcoin is not *tangible* or *physical* but it is in fact *movable*.  I can refer to a long line of court decisions over whether electricity is movable.  There is dispute about this in the courts, but the fact that courts are open to the idea that electricity is a good means that something doesn’t have to be tangible or physical to be a good.

So let’s ask the question.  What makes an thing *movable*.  If you move a chair from one place to another, what happens.  It disappears from one place, and appears in another.  Same thing happens with electricity.  This is also the case with physical objects.  If I take a car, and it’s location changes, then it disappears from one place and ends up in another.  This is a property of most physical objects, if you move from location A to location B, it disappears from location A.  This is not true with most non-physical objects.  I can’t “move” a copyright, software, or a stock, because when I transfer it from location A to location B, it does not necessarily disappear from location A.  But bitcoin (and electricity) are *movable*  in that when it changes location, it disappears from the previous location.  To give a more concrete example, movie tickets are obviously goods evening if you don’t get a physical ticket, because there is a finite supply and if I had you a ticket, I lose that ticket.

This focus on movability, fits in with the goal of the UCC.  “General intangibles” don’t lose any liens when they are sold because if you transfer an intangible, the security interest still exists because even though the item has been transferred.   But because bitcoin has the property of a good, if ownership moves from person A to person B, then it disappears from person A’s hands, and so any security interests should also disappear.

The other issue with security interests is that they can’t be asserted against a third party that wasn’t a party to the first transaction.  I own bitcoin, there is a lien against the bitcoin.  I transfer the bitcoin to you.  At that point anyone that has a lien against the bitcoin for me is in trouble since they can’t repossess the bitcoin from you, since I’ve transferred possession and ownership of the bitcoin to you.  You might wonder how this works for cars and boats, but in those cases the US governments maintain registries of ownership that prevent transfers if there is a lien to get around this problem. I can’t transfer ownership of a car in the United States without the approval of the lienholders.  I can transfer ownership of bitcoin (and for that matter television sets and refrigerators).  Once the bitcoin has been transferred, then effectively the lienholder can’t do anything about it, which is why this issue as never really come up.  But that shows the importance of “movability”.  Bitcoin and most physical objects are such that if I transfer them to someone else, they disappear from me, and the borrower can’t enforce a lien against me.

This also goes to some interesting issues that connect law, markets, and mathematics.  There are some mathematical property of physical objects which are mapped into law.  Physical objects are such that if you move them from locations, they disappear from the original location.  Virtual objects have unique mathematical characteristics which you can invent, and trying to map those characteristics can be quite interesting.


From → bitcoin, law, ucc

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