Crypto?

Lee Reiners, the executive director of the Global Financial Markets Center at Duke Law School, has a firm line on digital financial services. The former regulator is of the general opinion that the crypto boom of recent memory had more to do with loose Federal Reserve monetary policy than the inherent long-term investment potential of such assets as Dogecoin or CryptoDickButt #666. In fact, he thinks that crypto should be banned.

He may well be right. But what exactly is “crypto” anyway?

As one commenter I saw on Twitter put it — at least I think it was on Twitter, but am subject to internesia — you wouldn’t lump together astrology and astronomy and call them “astro”.

Hence I will undertake to try not use the word “crypto” for these new kinds of digital assets in the future. Instead I will refer more specifically on the one hand to cryptocurrency (or “unstablecoins”) and on the other hand to digital assets of some form that are bearer instruments exchanged without clearing and settlement as “stablecoins" when backed by reserves of fiat currency and something else yet to be determined (we’ll come back to this later) when I mean tokens that are backed by real-world assets.

I will, however, continue to use the word in another context. I am not a lawyer (or IANAL, as the kids say), but my good friend Charles Kerrigan is. And rather a good one at that. He is a partner at the international law firm CMS and wrote a fine article on the word recently. In this, he said that “crypto isn’t a what, it’s a how – a way of doing things”. That is a really good take so from now on, I am only going to use the dread word “crypto” when I mean a way to exchange both fungible and non-fungible tokens directly and in a decentralised manner.

Possession is nine-tenths of the law

Let’s stop talking about crypto and talk about digital assets (tokens) then. Where are they going? We know that the simplistic token maximalist position that if the token is in your wallet then it is yours simply cannot be right. The advocates of these strong digital property rights see computer code as the equivalent of the courts, contracts and correction facilities in the real world. Hence the mantra “code is law” and the idea that the metaverse turns "digital serfs into homesteaders.”

The Law Society of England & Wales, to focus on a key example, has a consultation concerning such matters underway right now. They note that while the law (by which they mean, of course, the law of England and Wales, not the concept of law in general) has to some extent been able to accommodate these new digital assets as objects of property rights, certain aspects of the law now need reform to ensure that digital assets benefit from what the Society terms "consistent legal recognition and protection.”

One thing I learned from reading the consultation, while IANAL, is that there are currently two different kinds of property. The first is “things in possession”, which means broadly speaking assets that are tangible, moveable and visible such as a bicycle or a gold bar. The second is “things in action”, which means property that can only be claimed or enforced through legal action or proceedings, such as debt or shares in a company.

The Law Society rather interestingly proposes to add a third category to allow for what they call new, emergent, and idiosyncratic objects of property rights. I might be tempted to label this category “things in wallets” but they have chosen the more generic “data objects” (rather than, for example, “tokens”.)

The reason that I like the wallet label is that it has connotations of personal control. Indeed, the lawyers say the in the case of these digital objects the factual concept of control (as opposed to the concept of possession) best describes "the relationship between data objects and persons”, which I think is their way of saying “not your keys, not your coins”. I agree with this general point: the owner of the token for a seat at the ball game is the person who controls the private key of the wallet that the token is in.

When it comes to the assets themselves, they say that the law should "recognise and give effect" to the freedom of commercial parties to devise bespoke contractual arrangements. This includes systems in which the holder of a given token is regarded as having legal title to whatever it is that is somehow linked to the token (eg, the seat at the ball game.)

However, being lawyers, that is the beginning rather than the end of the story. They go on to say that holding a token should not necessarily be regarded as a "definitive record of (superior) legal title” to the token. Or, in other words, code is not law and that just because you have the keys that does not make them your coins. And while that may sound like turkeys voting against Thanksgiving, they have a point.

Metamarkets

In parallel to the legal consultation, the British government has just published its new Bill on financial markets. This includes reference to regulating both cryptocurrencies and web3 (including stablecoins) in an attempt to guide their transition into the mainstream. The Bill refers to what it calls "digital settlement assets that can be used for the settlement of payment obligations; can be transferred, stored or traded electronically, and use technology supporting the recording or storage of data (which may include distributed ledger technology)."

I think they mean tokens. So, while I’m not enough of an expert on the Law of England & Wales, the regulation of financial markets or decentralised finance protocols to propose a definitive set of definitions at this point, but I think I can say that:

• John Paul is right: Let us stop talking about “crypto” and talk about cryptocurrencies, tokens and defi;

• Charles is right and we can use “crypto” to describe is a way of working;

• The Law Society is right that code isn’t law;

• The government is right and tokens should be regulated into the mainstream.

If I am right, then we have a platform to build real markets in virtual worlds.

(An edited version of this article was first published on Forbes, 7th September 2022.)

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