Legal Title to Bitcoin (Polish law perspective)

On the need to create a new absolute right

Under Polish civil law, there is currently no absolute right to Bitcoin. The catalog of such rights is closed, and Bitcoin cannot be classified into any of the existing categories. This should not be surprising. Bitcoin is a type of asset that had not existed before 2009. However, there is a need to create a new absolute right: the right to Bitcoin or, more broadly, the right to scarce information.

Gap in the law

Bitcoin is not a tangible object, and therefore, it is not subject to ownership or any other property rights. Nor can it be classified under the category of intangible goods protected by copyright or industrial property rights.

Bitcoin is also not considered money under Polish law. It is not a security, a participation title in joint investment institutions, or a derivative instrument under financial market regulations. The mere necessity of protecting the private key from disclosure does not make Bitcoin a trade secret under the rules on combating unfair competition. Also, Bitcoin is used by non-entrepreneurs who are not protected by trade secret regulations. Claims that it constitutes an asset of its own kind are unsatisfactory from a legal point of view because they do not explain anything.

The civil-law nature of the "right to Bitcoin“ cannot be determined based on the provisions on income tax, anti-money laundering, and counter-terrorism financing regulations that use the category of "virtual currencies." While they acknowledge the undeniable fact that Bitcoin is traded on the market and impose certain tax and regulatory obligations on participants in this trade, they do not specify the civil-law character of the "right to Bitcoin". The same applies to the forthcoming EU regulation on crypto assets (MiCA) and regulation on information on transfers of funds and certain crypto assets. They use the terms "purchase" and "sale" in relation to the so-called crypto assets, which may suggest that provions on the sale agreement should apply to exchanging Bitcoin for other assets. However, these are public law provisions whose aim is to define the regulatory requirements and limitations of economic activity relating to crypto assets. As such, they do not address the civil-law character of those assets. They do not imply that specific private law provisions, including those on ownership, apply to crypto assets.

Therefore, there is a gap in the law. The gap can be explained by the fact that Bitcoin is an entirely new type of proprietary asset. One that had not existed and had even been difficult to imagine before 2009.

Scarce information is a new type of proprietary asset

Bitcoin, like any intangible asset, is information, a collection of bits. Information is, by its nature, easy to duplicate, which has both economic and legal consequences. Goods that can be duplicated by anyone typically do not possess the characteristic of scarcity and, therefore, do not have economic value. In other words, we are not willing to pay for something that is easily accessible and can be duplicated in any number of copies.

The scarcity of information, and thus its economic value, is usually ensured through state intervention. For example, by granting authors a monopoly on the use of their (copyrighted) works of authorship, the law prohibits the replication or use on the market of the information (bits) that make up that work. A (copyrighted) work of authorship is information protected due to a specific way of its expression. Thanks to the monopoly, the supply of such work on the market will be controlled by the author, even after the work has been made public. In a similar manner, the state ensures scarcity of inventions. Inventions are information that consists of novel ideas which are suitable for industrial use. The inventor obtains a monopoly by disclosing their idea to the public in a specified procedure. After meeting certain conditions, the state or a group of states grants the inventor a monopoly to exploit the invention within a specified territory.

Another way to ensure the scarcity of information is to keep it secret. This method is effective when exploiting the information does not require disclosure. However, the exploitation of information without disclosing it is usually difficult or impossible in practice. Here, too, the state comes to the aid by creating a monopoly on so-called know-how or trade secrets.

It is easy to see, therefore, that without a state-guaranteed monopoly, works, inventions, or know-how would be easily accessible and duplicable indefinitely after their disclosure, making them worthless and rendering them ineligible for legal transactions.

Until recently, the above limitations applied to all known types of information. The situation changed on October 31, 2008, with the publication of the Bitcoin Whitepaper by Satoshi Nakamoto. The essence of the discovery is the organisation of a peer-to-peer computer network that guarantees the immutability of its fundamental principles (the so-called consensus rules), including the immutability of the rule that the network will emit a finite number of monetary units according to a specified plan. In short, Satoshi Nakamoto made a series of engineering discoveries, resulting in the creation of a new type of information: information which is inherently scarce. There will be a total of 21 million bitcoins ever created, and there is no practical possibility of changing this rule.

Lack of protection and uncertainty

Since the first Bitcoin transaction, we have been dealing with information that is inherently scarce. Such transactions are considered permissible due to the freedom of contracts. Despite this, there is no absolute legal right in Polish law that protects holders of Bitcoin.

Attempts have been made in the literature to find the basis for such protection in property laws, torts, criminal law, and other. However, those attempts do not take into account the essence of what Bitcoin is and are therefore doomed to failure. For example, proposals to apply provisions on vindication or negatory protection are entirely insufficient in practice. Such protection, by its nature, concerns the tangible object which, in the case of Bitcoin, is only the medium on which the private key is stored. It will not apply to Bitcoin itself, which is an intangible asset (information) recorded in a public ledger and protected by that key. Asserting rights to the medium, even if successful, does not provide protection against the loss of Bitcoin. Buyers of Bitcoin are also not provided with the necessary protection by provisions on torts. They may potentially allow for claiming damages against individuals who come into possession of the private key unlawfully (e.g., steal the medium or hack the buyer's private computer). However, they will not provide protection against individuals who acquire Bitcoin from wrongdoers or gain access to the key without violating the law (e.g., find a lost key).

Similar reservations can also be raised regarding claims for protection of possession or claims for unjust enrichment. The protection they offer is insufficient and not adapted to the specific nature of Bitcoin. In addition, there are difficult issues related to potential co-ownership of Bitcoin, which arises when it is acquired with jointly owned assets, issues related to inheriting Bitcoin, and issues related to the right to Bitcoins in marital relationships.

The Legal Title to Bitcoin?

The situation is ripe for an attempt to clarify the legal status of Bitcoin, particularly to consider the legal protection system for individuals who hold and use Bitcoin in the market. The previously discussed public regulations are not sufficient and should be supplemented with provisions of private law that define Bitcoin's status as a subject of civil-law relations.

Various solutions are possible.

First, one could consider granting Bitcoin the legal status of money (not to confuse with the status of legal tender). In that case, a Bitcoin purchaser would be protected just like the owner of monetary funds. Paying a debt with Bitcoin would be equivalent to paying it with money and would lead to the extinguishment of the debt. From a tax perspective, paying with Bitcoin would not be associated with the risk of generating income.

Second, it is also possible to decide that provisions on ownerwhip, including co-ownership, should apply to Bitcoin with the necessary modifications. Laws on ownership serve as a basic model for many absolute rights, and despite Bitcoin being an intangible asset, it has characteristics that resemble property. In particular, it is durable, countable, divisible and created with the use of energy.

Third, it is possible to consider creating a new absolute right, namely the right to scarce information. Currently, Bitcoin seems to be the only asset that belongs to this category. The supply of other so-called crypto assets remains under the control of their issuers – entities controlling the blockchain. This makes them similar to securities. Bitcoin is the only crypto asset without an issuer, with its issuance genuinely fixed and unchangeable. It cannot be ruled out entirely that in the future, other assets with this characteristic may appear, although there are also opposing views that scarcity in information can only be discovered once.

This new absolute right could be similar to ownership. It should, therefore, provide protection erga omnes (against everyone) through claims analogous to claims for vindication (for surrender) and negatory claims (for restoration to the original state and cessation of violations). Appropriate application of provisions on co-ownership, and even provisions on adverse possession, would be possible. At the same time, the specificity of Bitcoin, including the importance of private keys, the integral system for determining the moment of transactions through block confirmations, and special situations such as blockchain forks and their synchronisation, would need to be taken into account. Issues of this kind would require a detailed examination and thoughtful approach.

To some extent, the lack of civil-law regulation of Bitcoin is due to the natural delay of the law. The law catches up with innovations and is always a step behind. It hasn't helped that Bitcoin’s revolutionary nature is not immediately apparent. It has been easy to overlook it in the sea of much less significant technologies. Most people still don't realise that something has changed forever. However, ignoring Bitcoin will become increasingly difficult as adoption progresses. As it gains importance, individuals, businesses, and even states that understood the significance and irreversibility of this process will gain an advantage over those who lag behind.

Bitcoin is already a significant and widespread phenomenon, deserving the attention of legislators. Legislators should not try to prohibit, restrict, or delay this technology but provide its users with adequate protection and freedom to operate in the market. However, it is not clear whether the Polish or European legislator already understands this.