Published in "The Brief" Law Society of Western Australia - 26 March 2024
"Bitcoin is the first engineered monetary system in human history” – Michael Saylor[1]
Bitcoin is digital property in the form of a monetary technology protocol. This article contends that Bitcoin is an emerging monetary technology that has wide-reaching implications for lawyers specifically and society writ large.[2] I intend this article to be a high level and entertaining discussion. It will introduce certain concepts and terminology but will deliberately be non-technical. Bitcoin is a complex topic and evades definition.
The pseudonymous creator of Bitcoin, Satoshi Nakamoto, himself described this phenomenon "Sorry to be a wet blanket. Writing a description for this thing for general audiences is bloody hard. There's nothing to relate it to."[3] The undertaking of considering a recent technology like Bitcoin is made even harder in the context of law. The Honourable Justice Kirby elegantly put this when he said "The hare of science and technology lurches ahead. The tortoise of the law ambles slowly behind"[4]
While the jurisprudence around Bitcoin is nascent, it has been recognised at law as a form of digital property.[5] Since the release of the Bitcoin software protocol (a MIT license open-source software) approximately 15 years ago an increasing number of people[6] have chosen to adopt the use of this technology. The protocol is permissionless meaning anyone can join or leave the network at any time.
A preliminary schema to allow us to define Bitcoin is to make a differentiation between “Bitcoin” and “bitcoins”. When reference is made to “Bitcoin” what is referred to is the wider network of computer processing, the human (and non-human person) parties interacting with the network and the wider social community involvement with the network. For example, to use in a sentence, “Bitcoin is a savings technology that will allow the middle class to save for the long term”. On the other hand, “bitcoins” (with the ticker “BTC”), refers more specifically to the crypto token that is used to represent the transfer of value upon the network. Bitcoins or BTC can also be used to denote a specific exact value amount. For example, “I own 0.53 bitcoins”.
Why is it important for lawyers to understand bitcoin?
Firstly, Bitcoin will be an ever-increasing matter of general import for the population writ large[7]. This paper points to several metrics in support of this proposition – increasing adoption, increasing price denominated in dollars, increasing total bitcoin addresses, increasing market capitalisation, and increasing hash power applied to the running of the network. As discussed below, Bitcoin displays exhibits desirable traits for a monetary technology.
Clients, and community members generally, may seek your views on Bitcoin. They may own or use bitcoin for themselves and their organisations. Should practitioners be appointed to the bench, you may be asked to decide on matters in which Bitcoin is a topic. Practitioners may find themselves in a position to influence law reform or involved in the parliamentary process (noting the high proportion of lawyers in parliament).
In the writer’s view since the decision in Grayscale Investments, LLC v Securities and Exchange Commission (“SEC”)[8] Bitcoin has “crossed the Rubicon” from a speculative store of value to an established store of value. In that case the United States Court of Appeals for the District of Columbia Circuit provided a firm rebuke to the SEC calling their decision to not approve a spot bitcoin ETP “the Commission failed to reasonably explain why it approved the listing of two bitcoin future ETPs but not Grayscale’s similar proposed bitcoin ETP. Without such an explanation, inconsistent treatment if similar products is arbitrary and capricious”.
Following this decision, the SEC has now approved multiple Bitcoin spot ETF including from Blackrock and Fidelity amongst other major institutional players. This occurred on 10 January 2024 with SEC Chair Gary Gensler noting “Importantly, today’s Commission action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities[9]. Bitcoin can now be used as an institutional grade asset for nearly all pools of capital in US markets. The ASX will shortly consider the listing of an Australian Bitcoin ETF[10]. This effective adoption by Wall Street now dramatically reduces the prospect of negative regulatory treatment. China (via Hong Kong) [11], the United Kingdom[12] and Australia have followed suit in announcing they are looking at the admission of ETF’s or similar products to their stock exchanges.
Secondly, lawyers, who are ultimately at the coalface of the rule of law and the administration of justice, might be interested in the practical rights conveyed by Bitcoin and its native features. Bitcoin is a digital instantiation of property rights for all humanity. For the first time, one can own something digital, without the risk of seizure by physical force or the arbitrary debasement of their property by a centralised authority.
What is Bitcoin?
While the second and third order effects of Bitcoin’s continued adoption may be wide-reaching and complex, the Bitcoin the protocol itself is a reasonably simple technology in its operation. The Bitcoin White Paper is a mere 8 pages long. It allows for the transfer of value over the internet between two parties without the need for a centralised body to facilitate and verify the transfer.
In computer science, Bitcoin solves a previously unsolved problem called the Byzantine Generals Problem. The problem is achieving consensus among distributed and potentially untrustworthy parties, especially when they need to coordinate actions in the presence of faulty communication or malicious actors. The analogy explores the problem of ensuring that a group of generals, each commanding a portion of a Byzantine army surrounding an enemy encampment, can reach a consensus on a common battle strategy, despite the possibility of unreliable messengers or traitorous generals. In this analogy the Generals are the geographically distributed parties to a transaction and the messenger/runner is a financial intermediary (say a bank).
For the first time in history, a message (representing value) is able to be sent over the internet between party A and party B without the risk of a “double spend”. The process of nodes broadcasting transactions and miners only validating valid blocks means that the same bitcoins funds cannot be sent twice. Until now, transactions over the internet have required a central authority to intermediate and review valid transactions. Bitcoin’s proof-of-work consensus mechanism and distributed ledger obviates the need for an intermediary for online transactions. This seemingly straightforward process has operated without flaw for 15 years on a global, free, permissionless internet protocol. This is revolutionary in that this is the first time this intermediary free transfer can be done digitally. To date, intermediary free payments could only be made from one person to another in person by using physical cash or some other physical instrument of payment such as silver or gold.
In the abstract to the Bitcoin white paper “Bitcoin: A Peer-to-Peer Electronic Cash System”[13] Satoshi defined it as follows:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
From this, we can see that at its most foundational understanding, Bitcoin is a monetary network.
Bitcoin has unique properties as a form of property including:
A hard cap of 21 million coins - absolute scarcity.
Known supply schedule.
Final settlement – receipt of transaction is proof of settlement.
Immutable ledger – the blockchain is a tamper proof record of transactions or a time chain.
Ability to self-custody.
Censorship resistance and anonymity.
Audited every 10 minutes by a distributed network of nodes.
The ability to hold coins in multi-signature account – e.g. a 2/3 keys custodial arrangement. See how an Australian court dealt with a multi-signature bitcoin custody arrangement in the context of a commercial litigation: Chen v Blockchain Global Ltd; Abel v Blockchain Global Ltd [2022] VSC 92.
The functions and attributes of Bitcoin as money
Money is simply a tool by which humans can engage in the exchange of resources, goods, and services with each other. Similarly, money allows the storage and transfer of value across space and time. Finally, money is a ledger to record transactions in furtherance of the first two functions. Money emerges first as a collectable, then as a speculative store of value, then an established store of value, then as a medium of exchange, then finally as a unit of account.[14]
We can see then that money is widely considered to perform three functions:
A store of value;
A medium of exchange; and
A unit of account.
To assist in the performance of these functions a thing used as money should hold certain attributes. These attributes include scarcity, durability, divisibility, recognisability, fungibility and portability. Bitcoiners have also added “censorship resistance” and “finality of settlement” to the list of attributes making a thing suitable or preferred as money.[15]
Bitcoin is the first money to ever have a fixed total supply. There will only ever be 21 million bitcoins. Other things may be absolutely scarce, the Mona Lisa for example, but these type of “one-off” or limited-edition items do not satisfy the other attributes of money. Bitcoin also has scarcity in its supply schedule as well as it total supply. Specifically, the number of coins issued to miners (as reward for their efforts) who bunch and validate transactions into blocks is divided in half every 4 years. No matter how great the demand for Bitcoin may be, its supply cannot be increased. This is counter to what we know about every other asset in existence (other than niche cases such as the fine art example) whose supply will be increased as demand rises. A common example given is that of gold. If the price of gold increases, the supply of gold too will increase as mining operations become more profitable. It is a common contention amongst bitcoin advocates that market participants acting rationally will decide to apply an increasing amount of their financial energy into a scarce asset whose supply cannot be inflated. They further contend that over time, with short-term volatility, that the price of goods and services denominated in bitcoin will continue to become lower.
Bitcoin, perhaps counter-intuitively given its digital nature and relatively brief history, is extremely durable. The primary reasons for this are its decentralised nature and the network security derived from its sha-256 hashing. The algorithm for Bitcoin is uncrackable. There has never been a successful double-spend on the Bitcoin network. The Bitcoin network has the world’s greatest computational power attached to it.[16] To actually destroy Bitcoin (thus rendering it not durable) all the nodes of the network would need to simultaneously be shut down at the same time. This is practically impossible as tens of thousands of nodes are distributed globally in all areas of the world and indeed in space.[17]
Bitcoin is divisible into as many small units as required. Currently the smallest denomination of bitcoins are “satoshis” (equivalent to the “cent” of Bitcoin) of which there are 21 quadrillion. A common misconception is that infinite divisibility means Bitcoin is not scarce. A simple anecdote should suffice. A 1-kilogram pizza remains only 1-kilogram of pizza no matter how many slices you cut it into. Divisibility is important for use of money so it can facilitate trade for any amount of goods or services and also allows for precise denomination of prices and records of transactions.
Fungibility means the mutual exchangeability of like items. For example, a $100 physical note in your purse is able to be exchanged for another note. A further example may be a pure piece of gold is the same as another piece of pure gold of the same weight, both being just elemental rocks. Any one bitcoin or satoshi can be exchanged for another without issue. This attribute of money is important in that it excludes many commodities or assets as ‘good money’. Real estate for example is not at all fungible as two pieces of real property are not the same. Likewise, cattle or other agricultural commodities have poor fungibility as they cannot be interchanged easily without inefficient grading and sorting.
Recognisability is an important attribute for money, after all, no-one will provide you with a good or service if you cannot offer them something recognised as having value. With Bitcoin, cryptographic techniques can be used to verify ownership. The blockchain accurately and irrevocably records transaction and ownership. An excellent paper has been delivered by an Australian lawyer explaining explains how an individual’s right to access, redeem and use the value associated with an unspent transaction output (‘UXTO’) on the Bitcoin blockchain amounts to a proprietary interest for the purpose of Australian law[18].
Bitcoin’s digital nature makes it inherently portable. Portability is a major obstacle for many forms of money including the main form of money throughout human history, gold. Gold physicality makes it difficult to transport. Firstly, it is literally heavy so requires much energy to actually transport it. Furthermore, security is required to transport gold. It is therefore expensive and cumbersome to transport gold. This is why historically gold has tended to have a centralising nature. The portability of Bitcoin, coupled with the unique ability to self-custody it, means Bitcoin has high quality as a censorship resistant financial instrument. This has far-reaching implications for civil liberties and geo-politics.
In a seemingly inherently centripetal process gold tends to be centralised into the largest and “safest” storage as people outsource the security of their gold holdings to larger and more powerful custodians. This results in those centralised custodians issuing paper claims on top of the physical gold. This has been done historically both by privately issued gold certificates and state issued central bank certificates.[19] Other than early human barter systems, history has generally seen the use of gold as money or gold-backed state issued money as the primary form of money. In 1971 President Nixon “temporarily” suspended the gold backing of the US dollar. This temporary measure has not been rescinded and the world now has the United States dollar backed by “the full faith and credit of the United States government” as its global reserve currency. This era of money is known as the fiat money era whereby governments issue monetary units backed only by their own debt and the fiat or decree that is to be used as money. It appears an inevitability of the fiat money credit system that additional units of money will be entered into circulation over time.[20] Bitcoin has been described as “digitalizing gold”[21] and this characterisation is probably a helpful one for lawyers to consider. The Bitcoin blockchain is the base layer with layer-2 solutions such as Lightning and Liquid networks the equivalent of credit cards and banking services on top of government treasuries. A further likeness of Bitcoin to gold is the use of a “mining process”. Australia is ideally placed to take advantage of its abundant natural energy and existing resources industry infrastructure. It is increasingly acknowledged that Bitcoin uses a high proportion of sustainable energy sources and using stranded energy.[22]
In the writers view the two key aspects to Bitcoin as a monetary technology are that of absolute digital scarcity and its decentralised nature.
No other asset has both attributes. This applies to both gold and fiat currency but also to other forms of digital assets. While often compared to them, or indeed misidentified as them, Bitcoin is a unique form of scarce digital property – it is not stablecoins, digital currencies (i.e. CDBDC’s central bank digital currencies), cryptocurrency “alt-coins” such as Ethereum/Solana/Dogecoin, or various other digital assets usually marketed as ‘blockchain technology’, DEFI (centralised finance) or DLT (distributed ledger technology). While they may properly constitute digital assets of varying utility, they are not decentralised and not scarce.
How is Bitcoin treated at law?
Practical treatment in Australia
The treatment of Bitcoin by the authorities (ATO etc) to date in Australia is aligned with its use as a ‘store of value’ discussed above. Simply put, while Bitcoin displays all of the functions of money it is really only recognised by the relevant authorities as a ‘store of value’ at this time.
Bitcoin does not have formal recognition as a currency and is not legal tender in Australia[23]. With this said it is entirely legal to transact in Bitcoin or use it to buy goods and services, and to receive as payment for goods and services. However, contract debts and governmental liabilities such as tax need to be denominated in and paid in Australian dollars.
A likely consequence of the regulatory landscape in Australia is for the continued adoption as a “store of value” rather than as a “medium of exchange”. The reason being is that the use of Bitcoin will likely result in a capital gain triggering event. However, the Australian Tax Office has provided some sensible guidance on personal use exemptions for personal use and smaller amounts.
Bitcoin treatment in case law & statute
The leading case authority with precedential value discussing Bitcoin as property is the New Zealand High Court case of Ruscoe v Cryptopia Limited (in liq) [2020] NZHC 728[24].
The Court relied on Lord Wilberforce’s opinion in the House of Lords in the English case of National Provincial Bank Ltd v Ainsworth [1965] AC 1175 (HL) at 1247–1248, where he said:
“Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability.”
The Court in Ruscoe was “satisfied the criteria for Lord Wilberforce’s definition of ‘property’ were clearly met in this case” and further stated:
“They are a type of intangible property as a result of the combination of three interdependent features. They obtain their definition as a result of the public key recording the unit of currency. The control and stability necessary to ownership and for creating a market in the coins are provided by the other two features – the private key attached to the corresponding public key and the generation of a fresh private key upon a transfer of the relevant coin.”
The Court was satisfied that cryptocurrencies met the criteria outlined by Lord Wilberforce so as to be considered a species of “property.” While this was in the context of the New Zealand Companies Act definition of ‘property’ there was extensive discussion of the common law. There was discussion of the digital nature of the property and whether digital assets where distinguished from ‘pure information’ which the Court held was the case.[25]
After having decided this point the Court went on the consider whether the cryptocurrencies in question could form the subject of a trust to which they also decided positively.
The Australian government through the Treasury is currently in a consultation process to consider legislation “fit-for-purpose” for regulating digital asset platforms.[26] Bitcoin-only custodians have sought to clarify that Bitcoin is a commodity distinguished from other non-commodity crypto tokens.[27]
The regulatory treatment and legal consideration to date has clarified Bitcoin as a digital asset capable of being the subject property of a trust. Time will tell the extent of adoption of this technology, but the legal framework appears available for this to take place.
[1] Michael Saylor is the first CEO of a major publicly listed American company to hold Bitcoin on its balance sheet.
[2] It should be acknowledged that implicit in some of the following commentary is the understanding that, at this time, Bitcoin is in its infancy. Bitcoin has only existed since 2008. Axiomatically, this means that much of what can be said about Bitcoin is speculative. We do not have an extensive history in time to review. To the extent that I provide a speculative view of the future I reserve the right to change or abandon those views with time. All views expressed are the personal opinion of the writer.
[3] Satoshi Nakamoto, ‘Re: Slashdot Submission for 1.0 ', BitcoinTalk (Forum Post, 5 July 2010) #6 < https://bitcointalk.org/index.php?topic=234.msg1976#msg1976 >.
[4] Justice Michael Kirby, ‘Medical Technology and New Frontiers of Family Law’ (1987) 1 Australian Journal of Family Law 196, 212
[5] Ruscoe v Cryptopia Ltd (in Liquidation) [2020] NZHC 728.
[6] Both natural persons and legal entity persons such as companies.
[7] Opinion of the writer based on current information. Unknown factors or occurrences may affect this outcome.
[8] Decided 29 August 2023, No. 22-1142
[13] Bitcoin: A Peer-to-Peer Electronic Cash System, Satoshi Nakamoto. Available at bitcoin.pdf
[14] Saifedean Ammous, The Bitcoin Standard, (Wiley, 2018).
[15] Vijay Boyapati, The Bullish Case for Bitcoin, (2021).
[16] Total Hash Rate (TH/s), Blockchain (Web Page) < https://www.blockchain.com/explorer/charts/hash-rate>.
[17] What is a Bitcoin node?, Blockstream (Web Page) < https://blog.blockstream.com/education/nodes/what-is-a-bitcoin-node/>.
[18] “Bitcoin: Property, Money, Currency or Legal Tender?”, Damian Lloyd, 27 October 2021 https://ssrn.com/abstract=4051062
[19] Nik Bhatia, Layered Money; From Gold and Dollars to Bitcoin and Central Bank Digital Currencies (2021).
[20] Parker Lewis, Gradually, Then Suddenly (Blog Post, 26 July 2019) < https://unchained.com/blog/dollar-crisis-to-bitcoin/>.
[22] What is Stranded Energy? Why it Matters to Bitcoin | by NRG Bloom | Coinmonks | Medium; Bitcoin Miners Riot, Verde Driving Innovation And Emissions Reduction (forbes.com)
[23] Seribu Pty Ltd v Commissioner of Taxation [2020] AATA 1840
[24] This case referred extensively to the United Kingdom vis-à-vis AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 (Comm) (13 December 2019) and the UK Law Commission paper - “Digital assets”: Final report HC 1486 Law Com No 412
[25] Companies Act 1993 (NZ) s2.
[27] See Australian Bitcoin Industry Body, <https://treasury.gov.au/sites/default/files/2022-12/c2022-259046-australian_bitcoin_industry_body.pdf>.
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