The Breakdown - The UK Argues Crypto Is a New Type of Property

Episode Date: August 7, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   On this edition of the “Weekly Recap,” NLW homes in on an interesting report out of the U.K. that would define crypto as a fundamentally new type of property – something that some crypto lawyers have been arguing in the U.S. for some time.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Peter Dazeley/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, August 6th, and that means it's time for the weekly recap. Before we get into that, a quick note. There are two ways to listen to the breakdown podcast. You can listen on the Coin Desk Podcast Network, which comes out every afternoon and features not only the breakdown but other great shows, or you can listen on the breakdown-only feed, which comes out a few hours later in the evening. Wherever you choose to listen, I appreciate all of you who have taken the time to leave a rating or review. Lastly, a disclosure, as always, in addition to being a sponsor of the show, I also work with FTX.

All right, well, it has been a hell of a week. Yesterday I called this hack week, as we discussed the nomad exploit from Monday and the private key slash wallet attack on Tuesday and Wednesday that led to a significant number of salana-based wallets being drained, and that was far from the only thing going on. The institutional discussion came back in a big way. Fairfax County announced that its pension funds were approved to start investing in yield farming operations, and BlackRock, the world's biggest asset manager, announced an integration with Coinbase Pro for customers using its Aladdin platform. Now, right after I covered that

institutional show, we also got news that Brevin Howard, a $23 billion hedge fund, was explicitly getting into the crypto game as well. One of their founders, Alan Howard, has been one of the most active Tradfie hedge fund folks in the crypto space for some time. But according to Blockworks, that action is now moving into the hedge fund's main portfolio. According to four sources with knowledge of the matter, Brevin Howard's first official digital assets-focused vehicle has raised more than $1 billion from institutional investors. What's more, at least one source claims that they are radically outperforming the market. Their returns, the resource said, relative to the market, are unbelievable. This person claimed that the fund had lost only 4 to 5% from inception to the end of June,

which would be impressive given how much everything has fallen. The fund currently apparently employs about 60-ish people and is getting involved in crypto in a lot of different ways, from Blockworks. Strategies, including quantitative trades and relative value plays, are implemented by teams of portfolio managers structured in so-called pods that feature supporting analysts and engineers. The division additionally now has more than 20 external blockchain engineers working under full-time retainers. Now, part of the appeal, according to these sources, is that Brevin is the type of player that could actually bring in LPs that haven't gotten involved yet. Quote, that's the thing about Brevin. Limited partners that haven't touched crypto

with a 10-foot pole trust them. The fact that they're an unproven new launch almost doesn't matter. If I'm an endowment, who am I going to trust with my money? One of the world's smartest macro guys or a crypto-native native who doesn't speak my language. Anyways, more evidence that this post-narrative institutionalization is in full swing. Another big thing going on this week is that we are, of course, in the countdown to merge for Ethereum. One of the big last steps from a technical perspective is the final merge on a test network environment, goarly. This is happening between today the 6th and the 12th, And there are a number of technical specifics that make this one a little trickier than the previous test, so the community will obviously be watching it closely.

On top of that, Ethereum fork discussions continue to heat up. Tron Founder and Polonex owner Justin's son has pledged to donate ETH to a forked version of the network which will continue using proof of work. A lot of discussion in the community is now about what happens to various defy protocols should a hard fork actually happen. The main thing, however, that I wanted to cover today is something I found really interesting, but which hasn't really fit with other shows yet. In the U.S. regulatory conversation,

one of the things that we've seen fairly clearly is regulators trying to shove crypto into the lens through which they see the world. In other words, the Securities and Exchange Commission sees everything in crypto as securities. Some new work out of the UK is very different. The Law Commission of England and Wales, which is an independent statutory advisory body in the UK,

released a 500-page report last week, outlining their advice for how digital assets in the crypto industry should be dealt with by the law. Now, this report is not about specific minutia of regulations or compliance. Instead, it's tackling some really big legal questions around property rights for digital assets, as well as whether smart contracts need their own legal framework in addition to regular contract law. The biggest picture suggestion in the report is that digital assets should be given a new custom set of property rights at law and recognition as a new third type of

of property called data objects. This would be in addition to the two existing types of property rights, things in possession, which are tangible objects like a bag of gold or an apple, and things in action, which are intangible claims over something like a share in a company or a debt instrument. The report recognizes that digital assets, quote, do not fall neatly within either category, and that without clear property rights, digital asset holders could be left without legal resource to losses from hacks or scams. Sarah Green, the law commissioner for Commercial and Common Law said, quote, Our proposals aimed to create a strong legal framework that offers greater consistency

and protection for users and promotes an environment that is able to encourage further technological innovation. Jason Ricks, counsel and commercial litigator lawyer at Allen & Overy said, property rights matter because, unlike, say, contractual rights, they can be asserted against anyone, not just the other person to the contract. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. NXO is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets.

Learn more about NXO's reliable business model and start your crypto journey at nexo.io. That's N-E-X-X-O.I-O. eager to make more informed decisions around crypto, chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi, gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at chainalysis.com slash coin desk.

The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FtXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCs, you pay $9,000. no gas fees. Download the FTX app today and use referral code breakdown to support the show.

So let's dig a little bit deeper into this idea of data objects, a proposed third category of personal property. Someone who is in possession of a data object is able to exclude others from the data object, to use the data object, such as transferring control to someone else, and to identify themselves as the person with the ability to do these things. The idea of spelling out a legal definition of possession might seem a little obvious, but it carries an important ramification. If you can define what it means to be in possession of a data object, then you can define what it means for someone to unlawfully take possession of someone else's data object. The report then uses this concept of possession to set out suggestions for how court should

deal with other aspects of crypto like NFTs, custodial arrangements, and collateral arrangements. The main point of having property rights is that it provides a set of default rights that can be relied upon, if a contract is unclear, a situation is vague, as well as ensuring that simple situations like fraud and theft are well-defined. Now, if this all seems sort of wonky, let's turn to Twitter for some help contextualizing. Emily Nicole, a crypto reporter at Bloomberg, writes, this is a big deal. The UK Law Commission says the government should consider creating a new category of property law

to accommodate crypto, a move that would set an international standard for how digital assets fit into traditional legal structures. This could make it easier for courts to decide ownership over digital assets like crypto and NFTs. mostly it fills a major gap globally in private law. And given a lot of crypto can't fall under a single jurisdiction, international precedents are more important than ever. Lawyers also say it's arguable that court should be allowed to award remedies in crypto. This means that if a firm goes bankrupt and crypto deposits are at stake, users would get remedies in crypto rather than having to fight over at what price point it should convert into fiat. As always, there's a political

angle, too. One of the UK's most senior judges says this kind of step is exactly how Britain can get on the map for crypto. If English law becomes the standard for others to follow, it'll go a big way to realizing Rishi's global hub strategy. In that last line, Emily is of course referring to Rishi Sunak, who recently resigned from Boris Johnson's government and is now trying to become the prime minister himself. Previous breakdown guest and associate professor of philosophy at Northern Illinois University, Craig Wormke also did an overview. He writes, the Law Commission of England and Wales has published a 500-plus page paper about how property rights relate to Bitcoin and other digital assets. It's impressive and a big deal. The commission was created in 1965 by Parliament to help

ensure the law is fair, modern, simple, and cost-effective. The UK government asked the commission for recommendations to help ensure that the law can accommodate Bitcoin and other digital assets, quote, in a way which allows the possibilities of this type of technology to flourish. That's a breath of fresh air. The paper's main claim, we need a third kind of personal property for Bitcoin because it doesn't neatly fit into the two accepted categories. One, things in possession, tangible things. Or two, things in action, things claimed are enforced through legal action like debt. The paper is philosophically rigorous. The argument for this new category seems right to me, and they specify reasonable constraints for when a digital asset qualifies. Now, we don't always

possess the things we own. Think of custody and collateral arrangements. Typically, we say that we own but don't possess them. The problem is that in English law, the concept of possession often seems connected to a thing's tangibility. So the authors also propose a concept of control for digital assets that runs parallel to the concept of possession for physical assets. They then extend these insights to all sorts of issues, including NFTs, custody, and collateral arrangements. I can safely say after having read it that the authors have as good a grasp on digital assets as anyone. I was on the advisory panel, but their expertise quickly surpassed my own. Craig goes on to point out just how many types of people they consulted with, from legal experts

and academics to the Twitterati like Kobe and Snoop Dog and Jameson Lopp. Interestingly, this whole thing actually aligns with some crypto-native legal thinking as well. Preston Byrne wrote, The Law Commission hasn't posted the full report yet, but seeing as Bloomberg has gone to press, I'm pleased to see they agreed with my idea that crypto assets are neither personality nor a choice in action and require a third entirely new category of property, the data object. This third category of property, what the Law Commission calls a data object, in 2018 I referred to as crypto property, property which is defined by the knowledge of the secret required to control it.

Now that the Law Commission has also said that crypto is in fact a new category of property, this means that four years ago I accidentally discovered a new category of property law in a blog post, asking for my tag. So why does this all matter? This is easily the most thorough and well-considered report on the topic of how cryptocurrencies interact with existing legal theory ever written. We tend to take property rights for granted as they're a foundational part of Western society, but it's important to recognize that the legal theories underpinning them developed over centuries of scholarly work and court decisions. This report lays the groundwork for a similar development of how Western societies in the tradition

of English common law think about cryptocurrencies. So far, the crypto community has made due with crude axioms, not your keys, not your coins, or, as Bitcoin Zay puts it, not your keys, not your cheese, as well as code is law. These work to a certain extent where people are able to robustly assert their property rights to hold crypto using the protocols that have developed, but they break down when these systems fail users and a more moral or legal argument over who holds the property rights to crypto tokens is needed. We often see this demonstrated during hacks and smart contract exploits. Some are pretty obviously theft and are dealt with reasonably well under existing fraud and theft type laws, but there can be more gray areas as well. For example, where a smart contract

is executing transactions according to the code, but contrary to the intention, it is useful to have some more robust legal theory to articulate the principles by which disputed ownership should be settled. So all in all, the people who are digging into this report are finding it to be a pretty significant moment that has implications well beyond the UK. But since we are in the UK, that wasn't the only story coming out of that country this week. On July 20th, the UK government introduced the financial services and markets bill to Parliament. The bill is intended to make significant changes to the regulation of the entire financial sector, as well as addressing some issues arising from the UK's exit from the European Union and removing some EU compliance regulation. The most interesting parts of the bill

to us in the crypto world are the parts that set out how crypto regulations will evolve. The first crypto-related item is establishing financial market infrastructure sandboxes to, quote, harness the opportunities of innovative technologies and financial services. The bill's explanatory notes explain that this is intended to allow, quote, testing for a limited period on the efficiency or effectiveness of the carrying on of FMI activities in a particular way. So this is, if not exactly the same, in the same spirit of the U.S. Safe Harbor provisions that have been proposed by SEC Commissioner, Pestor Purse. A second major crypto item is bringing stable coins into the regulatory framework for payment systems. The Financial Conduct Authority or FCA would handle consumer protection and fraud.

The Bank of England would regulate financial stability. And the Treasury would ensure clearing and settlement operates adequately. The intention is to ensure that stable coins are treated as just another means of settlement. Now, one of the things outside of just the specifics that's interesting is how the proposals are framed. Obviously, part of the intention is just taking back control over regulation and rulemaking from the EU and the ECB. But there's also a new language of competition leveling up and growth throughout the document. Specifically, the bill sets out that although the primary role of regulators should be the preservation of financial stability and consumer protection, a new secondary role of encouraging growth is also important.

Now, this is just a bill, it will be debated and revised in Parliament, but it's still the most full-throated articulation of what the UK as a crypto hub might mean. Rishi Sunak, who is the person most responsible for the UK's shift in tone on crypto is one of the final two candidates for leadership of the Tories and taking the place of Boris Johnson as the next UK Prime Minister. So pretty interesting things over the last couple weeks out of the United Kingdom. But it's Saturday. So for now I want to say thanks again to my sponsors, nexo.io, chain aliasis and FTX. And thanks to you guys for listening.

Until tomorrow, be safe and take care of each other. Peace.