The Digital Assets project, run through the Commercial Law Centre at Harris Manchester College, has produced an annotated English translation of the judgment of the Tokyo District Court in August 2015 in relation to the insolvency of Mt Gox. It is a highly significant judgment, in that there are still very few judicial pronouncements anywhere in the world directly on the nature of bitcoin as property, nor on the position of clients when a bitcoin exchange becomes insolvent. It is, of course, purely about Japanese law, and, as has been pointed out by several commentators, only a decision of a lower court in Japan. It is open to criticism, and overruling if a similar case is taken to a higher court. Despite this, it is useful as a reference point to those engaging in the debate about the nature of bitcoin and the relationship between clients and bitcoin exchanges. While there are some quite detailed references to it in the literature, there is no English translation of the actual text.

The Digital Assets project commissioned a professional translator, MInako Kohno, to do a literal translation of the Japanese text. This was then edited by members of the project: Professor Megumi Hara, an expert in Japanese property law, Professor Charles Mooney, an expert in the holding of securities through intermediaries, including Japanese law, and Professor Louise Gullifer to produce an annotated text which would be accessible and comprehensible for English speakers. The text is being made freely available on the project website to anyone who would like to use it for research or other purposes. It is not an official translation, and should not be relied upon as a definitive text but instead is prepared in order to assist with the academic debate about the nature of bitcoin as property.

Mt Gox was a Japanese bitcoin exchange which became insolvent after a large number of bitcoin it held (for clients and for itself) were stolen. It filed for civil rehabilitation proceedings in Tokyo on 28th February 2014, and bankruptcy proceedings commenced on 16th April 2014. The exchange held a large number of bitcoin for clients, one of whom brought a lawsuit against the bankrupt exchange and the bankruptcy trustee in respect of 458 bitcoin which he claimed was held for him by Mt Gox. His main argument was that he owned the bitcoin, which therefore should be segregated by the trustee from the estate of the company and transferred to him, under the right of segregation in Article 62 of the Japanese Bankruptcy Act. His secondary claim was for damages, on the grounds that the trustee had committed a tort by failing to transfer the bitcoin to him.

The arguments and the judgment set out in the translation largely consider one question: whether bitcoin can be the object of ownership under Japanese law. Since the answer to this question is negative, then the claimant failed in all his claims (including the claim for damages). The main interest in the judgment, therefore, is in relation to this one issue. Under Japanese law, only a tangible thing can be the object of ‘ownership’ within the Civil Code (Article 85 of the Civil Code). (However, even under Japanese law a claim can be the subject of functional attributes of ownership, such as a right to its benefits and an assignment effective against third parties.) It might, then, seem to be obvious that bitcoin could not be the object of ownership in the Civil Code sense. However, the claimant argued that, first, the electronic record held on the node computers was the bitcoin, which would appear to give it tangibility and, second, it could be the subject of exclusive control, and that the fulfilment of these two criteria resulted in bitcoin being a ‘tangible thing’ which could be the subject of ownership. While the court accepted that these were the two criteria for deciding whether anything was a ‘tangible thing’, it held that bitcoin did not fulfil either.

The argument that there was an electronic record which was the bitcoin itself was rejected. The defendants’ argument that the electronic record that existed was a record of transfers of bitcoin and not the bitcoin itself appears to have been accepted. The court held that the ‘bitcoin balance’ in the bitcoin address is the amount remaining after taking into account all the transactions recorded on the blockchain, and that there was no electronic record representing the bitcoin. This appears to be correct. The bitcoin blockchain is merely a ledger, and what is recorded are just transactions relating to bitcoin.

In English law, we might think of this as analogous to the ledger of transactions involving a bank account. However (in English law though not, technically, in Japanese law) the bank account itself can be owned since it is a debt owed by the bank to the account holder, that is, a chose in action which is classified as intangible property. The ledger is just a record of transactions concerning this chose in action. Bitcoin is definitely not a chose in action. Thus, the bank account analogy does not work, and a different analysis is needed for it to be the object of ownership even in English law.

Perhaps rather surprisingly, the Japanese court also held that bitcoin could not be the subject of exclusive control. This conclusion does not seem to stem from any argument made by the defendants and appears to be the result of the view taken by the court of the operation of transferring bitcoin effected by ‘mining’. The reasoning, which is not entirely clear, seems to be that the involvement of third parties, namely the mining nodes, in the transfer of the bitcoin means that the person who controls the private key does not have exclusive control of the bitcoin. One might have thought that that person, the controller, had exclusive control of the bitcoin provided that no one else had access to the private key. This conclusion has been used to argue that bitcoin should not only be property, but that the rules applicable to tangible property should apply by analogy (rather than the rules applicable to intangible property). It is, of course, open to debate whether the conclusion of the Japanese court, at least on this point, would survive an appeal or would be followed by a court anywhere else in the world.

The conclusion that bitcoin could not be the object of ownership prevented discussion by the court of other, potentially very interesting, issues. There was no judicial discussion of whether, if it were possible for bitcoin to be the object of ownership, the customers had a proprietary claim to the bitcoin or merely a personal claim against the exchange. Nor was there any discussion of, were the claim to be proprietary, whether it was in relation to identified bitcoin or whether it was to a proportionate share of the bitcoin held for customers by the exchange. Interestingly, the claimants argued exactly that point. They said that the way in which bitcoin were held by the exchange meant that clients’ assets were held fungibly, that is, they were commingled in a random way, so that the claimants’ claim was a proportionate one against the bitcoin held by the exchange rather than to bitcoin held in one particular private key. This argument was not addressed by the defendants, nor by the court, who merely held that the claimant had neither ownership of specific bitcoin, nor a right of co-ownership of the bitcoin retained in the bitcoin address managed by the exchange. The question of whether a customer of an exchange has a proprietary interest in cryptocurrency held by the exchange or merely a personal right against the exchange is still a matter of debate in Japan, despite regulatory legislation passed in 2016 (enforced from 1st April, 2017) after the MtGox bankruptcy. This debate will be the subject of another blog from the digital assets project.

While this judgment is clearly not the last word on the subject, either in Japan or more widely, it is an interesting and significant starting point for discussion, and, hopefully, will be of use to all those researching in and thinking about the property aspects of bitcoin. The members of the Digital Assets project will continue to think about the issues raised by bitcoin and all types of digital assets; in particular issues relating to property law, the position of custodians and wider regulation.

Louise Gullifer is a Professor of Commercial Law at the University of Oxford.

Megumi Hara is a Professor of Civil Law at Gakushuin University, Japan.

Charles Mooney is the Charles A. Heimbold, Jr. Professor of Law at University of Pennsylvania Law School.

This post was originally published at the Commercial Law Centre blog.