Are Bitcoin owners protected by the constitution?

Does the constitution protect owning and mining of bitcoin and other cryptocurrencies? It is a tricky question, but the answer is yes. Here’s why.

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The term “Bitcoin” is currently on everyone´s lips, especially in the financial sector. Other cryptocurrencies such as Ripple, Ethereum or Lumen are also widely discussed and traded daily in billions of dollars worldwide – often still unregulated. If many people invest a considerable fortune in cryptocurrencies, the question arises of the constitution´s protection of this cryptocurrencies. Because when the Basic Law for the Federal Republic of Germany was passed in 1949, naturally such a digital development was out of the question. The same of course applies to other constitutions worldwide. Compared to traditional currencies such as the euro or the dollar, there is a lack of legal definition or recognition as a means of payment, which could call into question the applicability of the property guarantee and thus the comprehensive constitutional protection of property. Here, the law of real development lags: some online providers equate the use of the virtual currencies of payment with conventional currencies, to the extent that the parties accept them to the transaction as an alternative contractual and immediate means of payment and for no purpose other than one serve simple means of payment. Nevertheless, the incarnation also exists at the level of access to Bitcoin through the technical means of the users, which could indeed argue for the protection and thus the possibility of opening the protection afforded by the property guarantee.

What is Bitcoin? What are “cryptocurrencies”?

Cryptocurrencies are digital currencies based on blockchain technology. These currencies have different characteristics and can be changed and traded like traditional currencies. The unique thing about cryptocurrencies is that, unlike conventional currencies, they are not controlled by financial institutions and governments. As global currencies, cryptocurrencies are less dependent on the economy and policies of a state and are accessible to everyone. Cryptocurrencies have other advantages: they can be traded 24 hours a day in the absence of official stock exchange, and they can generate significant profits by trading with them because of their volatility. Also, due to the use of blockchain technology, all transactions are recorded and stored. The recipient receives only the required information about the sender, not all the details. The flip side of volatility, on the other hand, is that the value of the cryptocurrency may fall sharply overnight due to sharp price fluctuations. Besides, the increasing use of cryptocurrencies may necessitate regulation. Central benefits of cryptocurrencies could be lost. It should also be remembered that while cryptocurrencies are becoming increasingly popular and their value is increasing, whether or not cryptocurrencies are long-established and valuable remains uncertain.

The legal classification of cryptocurrencies also appears problematic. In any event, the legal means of payment is, under § 14 section 1 of the German Federal Bank Act and Article 128 section 1 sentence 3 of TFEU, only the euro. Another means of payment need not be accepted either privately or by the public. Cryptocurrencies are also no book money. It is such money, which is available on banks´ accounts at the bank customer´s free disposal. A similarity between cryptocurrencies and book money exists in the electronics of both procedures. The difference is that there are no claims against a bank by cryptocurrencies. The same applies to electronic money. It would be in accordance with § 1 section 2 of German Supervision on payment methods Act if there were an electronic claim against an issuer. The typical issuer is the bank.

Whether holders of a cryptocurrency are to be rated as issuers, seems questionable. It would be conceivable to value the users of the same cryptocurrency as a civil law partnership (in German: GbR). This partnership with legal capacity could act as an issuer to the outside world. There is, however, no individual legal intention of the users to join the partnership as a society by using the cryptocurrency and to set the “central issuing point” of the cryptocurrency. The philosophy of blockchain is just the decentralized application. A regulatory authority should not exist. The Federal Financial Supervisory Authority (in German: BaFin) also supports this assessment.

The idea of cryptocurrency as a form of local money excretes also. Regional funds (like the Chiemgauer or the circulation-secured “Freigeld”) are limited in their area of distribution and are issued in the case of “Freigeld”, according to the philosophy of their conceiver, Silvio Gesell, by the state. Cryptocurrencies, on the other hand, are “market money”. They are distributed decentrally by all users. A regional restriction does not exist.

As an interim result, it remains to be noted that cryptocurrencies cannot be qualified as money under the current legal situation (in Germany).

What could cryptocurrencies be then? Due to the financial assets of cryptocurrencies, these could be accepted as “performance in lieu” (analogous to § 364 section 1 of German Civil Code), as an “another” performance than money. Also at this point, the question arises, what is this “another”? Cryptocurrencies are not things within the meaning of § 90 of the German Civil Code, because they lack the embodying. Although computer software and data were already qualified as things when they were stored on data carriers. Such a parallel to cryptocurrencies does not exist, as they exist only virtually and the wallets serve exclusively for the storage of the private and public key. Finally, the protection over the copyright law, since cryptocurrencies are neither computer programs within the meaning of § 69a section 1 of German Copyright Act, – there are no instructions sent to an information processing device – nor they are “personal intellectual creations” according to § 2 section 2 of German Copyright Act, since cryptocurrencies arise over a mathematical procedure.

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The author Dennis Hillemann works as a lawyer in Germany for KPMG. He focuses on the PublicSector. Dennis is fascinated by blockchain and the many possibilities it offers for creating a better future.

Development of the protected object of the property guarantee by Federal Constitutional Court

The Basic Law for the Federal Republic of Germany does not explicitly define what is under the property guarantee (Article 14 of the Basic Law for the Federal Republic of Germany) to be understood. In answering this question, it is necessary to refer to the purpose and function of the property guarantee, taking into account their importance in the overall structure of constitutional law. To this end, the stock of protected legal positions should be preserved against acts of public authority. Strictly speaking, Blockchain and Bitcoin cannot use the classic property guarantee defensive function because the Blockchain database is in the private domain. However, the Federal Constitutional Court (BVerfG) has seen the essential characteristics of the constitutionally protected property in the fact that an asset-law is assigned to the claimant just as exclusive as ownership of a thing for private use and own disposal (BVerfG, Decision of 8.03.1988 – 1 BvR 1092/84). With the development of economic relations, the substantive area of protection of Article 14 of the Basic Law also expanded. In particular, the BVerfG has affirmed the protection of the property guarantee not only for real or other absolute legal positions affecting everyone but also for different legal areas. Thus, the property warranty includes also trademarks and claims.

However, the constitutional protection of the property is not limited to individual property rights. On the contrary, it follows from the stated function of the property guarantee that under its stability in the field of private law all rights under the law that are assigned to the claimant by the legal system are exercised in such a way that he or she is entitled to use the powers conferred upon him for his own benefit. It is not a precondition for protection that the rights can be fully exercised, and in particular that they can be transferred as desired. It is true that the fundamental power of disposal over the property is an essential feature of property (BVerfG, Decision of 12.6.1979 – 1 BvL 19/76). However, legislators are not easily denied the creation of assets with the right of disposal, which in any case cannot always be clearly distinguished from other uses of the law (BVerfG, Judgment of 28.02.1980 – 1 BvL 17/77). There is no real reason to exclude such rights from the protection of the property guarantee. The property guarantee should give the holder of fundamental rights freedom in the area of property law and thus enable the individual to develop and shape his or her responsibility.

Compatibility with the protected object of the property guarantee

Despite the differences to the real currency, the cryptocurrency raises the question of the protection and harmony of the cryptocurrencies or their units with the protected object of the property guarantee. Given the differences discussed, it is first necessary to determine the reference object for constitutional protection and then to examine the compatibility of the reference object with the object of protection of the property guarantee, in particular, based on the development of the protection and the property guarantee by the constitutional court in Germany.

Reference object for constitutional protection

In Bitcoin, the entry in the blockchain, the public or private key, is suitable as a reference object.

The entry in the blockchain is merely a public directory of no economic value, listing addresses derived from public keys. Furthermore, in the absence of the embodiment of a pure data set (list with stored data) no material quality according to § 90 of the German Civil Code be awarded. Here is also the decision of the Regional Court of Konstanz (LG Konstanz, Judgment of 10.05.1996 – 1 S 292/95) to follow, according to which “things” are only physical objects in one of the three possible aggregate states (solid, liquid, gaseous). The grounds for the decision also stated that electronic data – regardless of whether they are only in the working memory or on a data carrier such as a floppy disk / hard disk or similar are stored – consist of electrical voltages and therefore do not fall under the (property law) notion of terms. However, a distinction is made in the decision of the Regional Court of Konstanz that the data as such and the data carrier are to be qualified independently of each other. The data can therefore not be owned but on the data medium. The comparability of the standard data carrier with the virtual directory is difficult to justify because the data carrier has an embodiment.

However, it is possible to link the data and the data carrier if there is an organic unit in the form of a standard program or standard software. The VIII Civil Division of the Federal Court of Justice has expressly affirmed the property of a computer program insofar as it is embodied on a data medium (BGH, Judgment 14.07.1993 – VIII ZR 147/92 (Koblenz). Since the only difference between applications and raw data is that the former contain instructions to the processing machine, such as when and which processing steps to take, one will thus also have to grant the quality of think to data if the data are stored on a data carrier. This view, however, is controversial both in the case law and in the literature. The pure data in the directories at the blockchain are not programs.

Of financial or economic importance are thus only the private keys that allow transfer Bitcoin and assets to other persons.

Comparability of Bitcoin with private law claims

The BVerfG affirms in principle the possible applicability of Article 14 of the Basic Law for private law claims. The legal means of payment, especially the book money or electronic money, is about the concrete or abstract claims against the respective bank.

Due to the freedom of contract, there is the possibility of using Bitcoin as an acceptable alternative means of payment among those involved in the specific transaction. Under the assumption of acceptance by the users of the private network, the bitcoins are also used to compensate for the demands of the users among each other. Against this background, the question arises of the legal nature of the interaction of the decentralized system of users. First, the classification as a civil law company (GbR), which as a form of organization has a partial legal capacity and thus a separate legal personality. However, this raises the question of the social contract and the will to bind the law, because the system is organized in a decentralized manner. The Community Legal Institute (§§ 741 ff. of the German Civil Code) provides another possibility for classification. Logically, the question arises here of detecting the units of virtual currencies as a suitable object according to § 741 of the German Civil Code. The possibility of the enforceability of claims seems all the more critical for the analysis. The private key only opens up the possibility of transferring bitcoins to the other users of the system and is therefore not comparable to the claim.

The comparison ultimately fails because of the possibility of enforcement of claims. The traditional way of calling courts seems impossible in the Blockchain since the interaction of the users of the Blockchain has no separate legal personality, and thus it lacks in the case of judicial enforcement of the possible passive participation. The essence of property protection is freedom and the opportunity to exchange assets and money for each other. The equivalency of property and money property is one of the functional bases of the constitutional property guarantee. However, a general value guarantee of asset-law legal positions cannot be derived from the property guarantee (BVerfG, Decision of 5.02.2002 – 2 BvR 305/93). The exchange value of property rights does not in itself fall within the scope of property rights.

The difference to the claim is made clear, on the one hand, by the restriction of the property guarantee and, on the other, by the fact that the protection of purchasing power, even in the case of the traditional currency, has not yet been decided by courts. This restriction is also affected by the fact that Article 14 of the Basic Law does not protect the market value, but only its basis in the form of the security and the claim securitized therein. The Bitcoin benefits from a potential purchasing power that unfolds in transactions among those involved in the particular transaction. Even in the case of the traditional currency, the question of whether the purchasing power of money as such is covered by the scope of protection of the property guarantee has not yet been decided by courts. Whether and, if so, under what circumstances the range of protection under Article 14 of the Basic Law covers the purchasing power of money, the BVerfG has not decided in the decision on the Greece aid and the euro rescue package (BVerfG, Judgment of 7.09.2011 − 2 BvR 987/10).

Comparability of Bitcoin with the assets

The object of protection is further restricted by the fact that the assets, as the economic power of an individual, are not covered by the object of protection of property. Although it is disputed whether the combined in the hand of a person totality of money or monetary goods, the property protection is subject. It is of particular importance that the constitutional protection of property extends considerably further than the civil property and also extends to non-tangible assets legal positions. The courts refuse to submit the assets as such to the concept of property (BVerfG, Judgment of 8.04.1997 – 1 BvR 48/94). However, the court makes an exception insofar as the money supply obligations have a throttling effect. In a recent decision, the BVerfG leaves open the question of property protection through property rights, but now measures income and trade tax by Article 14 of the Basic Law. In the opinion of the court, the fundamental right of ownership is in any case affected when tax obligations are linked to the existence of the additional purchaser. For example, in the case of commercial gain, this is the increase in assets that can be accounted for, which are protected rights or rights within the scope of the trader, or the employee’s civil rights to pay or other benefits received.

Even against the background of recent constitutional court decisions, there are some arguments in favor of measuring duty duties, at least insofar as they are based on the existence of the newly acquired, in Article 14 of the Basic Law and, ultimately, assets as property according to Article 14 of the Basic Law, however, this connection is also controversial in the literature. Whether this provides a starting point for the bitcoins and basically for the cryptocurrencies, it does not seem unambiguous even given the position of the Federal Government for the regulation of cryptocurrencies. The VAT System Directive (in German: MwStSystRL) explicitly does not contain any rules on the taxation of Bitcoin and other virtual cryptocurrency sales. The Federal Government considers the existing legal rules to tax the turnover with Bitcoin and other virtual cryptocurrencies to be sufficient. The tax assessment of the facts mentioned is discussed with the highest tax authorities of the federal states (in German: Bundesländer). It will also show whether the current legal regulations are sufficient. The discussions are still ongoing. Insofar as courts refer to the possibility of measuring the addressee in terms of Article 14 of the Basic Law, it cannot be transferred to the facts with Bitcoin. The services of the miners are not taxable transactions since the use of the Bitcoin is set equal to the conventional means of payment.

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Comparability of Bitcoin with the share ownership embodied in a share

Each user of the decentralized network receives a key pair as described above. With the private key, he has the possibility of transferring values. The BVerfG affirms the applicability of the protection under Article 14 of the Basic Law for the share ownership embodied in a share. The protection extends to the membership position in a stock corporation, which mediates the ownership of shares. In the context of the statutory provisions and the articles of incorporation, the shareholder is entitled to exercise both executive powers and claims under this law. Is the blockchain network comparable to the corporation? In the grounds of the decision of the BVerfG of 27.4.1999 is stated: “… As the BVerfG stated in the Feldmühle judgment, Article 14 of the Basic Law does not preclude the incorporation of a joint-stock company into a group against the will of minority shareholders, although as a result, it suffers a significant reduction or even loss of its legal status embodied in the shares. Rather, the legislator, for serious public interest reasons, may deem it appropriate to deprive the interests of minority shareholders of the preservation of assets of interests in a free flow of entrepreneurial initiative within the group …” (BVerfG, Decision of 27.04.1999 – 1 BvR 1613 – 94). At the blockchain, the majority of users may hypothetically decide to destroy the node, or this may be due to the situation in the case of manipulation. From the reasons for the decision is that even the possibility of losing an embodied legal position through the decision of the majority of shareholders does not lead to the negation of the protection of the share ownership represented in a share. However, in the case of a corporation, a share constitutes the membership of an embodied share in a shareholder. In the case of blockchain, the keys provide a means of verifying or releasing the desired transaction. The data stored in the network is much more similar to the credit deposited with the bank as the essential constraint that the bank has a centralized management system. Credit and account holder data and, on behalf of the respective account holder, carry out the confirmed transactions based on the abstract receivables, which in turn speaks to Bitcoin for the economic power and thus for the acceptance of the position of the assets.

Conclusion and outlook

With the development of economic relations, the protected object of property rights and thus the constitutional protection of goods has also expanded. It meant that not only embodied objects but also other legal positions were gradually covered by the object of protection of the property guarantee. While the similarities of the private key in the case of Bitcoin and the legal institutions governed by the fundamental right of freedom of ownership exist, the differences in their connection become apparent. With the further development of cryptocurrencies as an alternative means of payment, and especially with the advancement of technology, literature and court decisions will be required. While the possibilities of private law protection of the technology and the units of cryptocurrencies are beginning to exist, jurisprudence will increasingly take on the task of fundamental constitutional protection. Also it is clear that judicial training in the location and development of the legal institutions affiliated with Blockchain-based payment methods is also clearly demanded. In particular, there is a need for more legal certainty and clarity and even for the effective regulation of blockchain-based means of payment.

Attorney and Partner @KPMG with focus on public sector | #blockchain enthusiast #catowner Articles own

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