One of my students, Igor Shleypak, and a commenter on the original post, David Patterson, separately suggested that bitcoins might be a "security" under UCC Article 8, which has separate rules for investment securities. If a bitcoin is a "security," then Article 8 would allow the transferee of a bitcoin to take free of prior security interests against the bitcoin. This is a family blog, so I will not go into the technical details of how precisely this result would obtain under Article 8. All we need discuss here is whether a bitcoin is a "security" such that Article 8 would apply.

Article 9 governs security interests in property, and its usual rules would seem to mean that a security interest that attaches to a bitcoin forever stays with a bitcoin, substantially dimming their prospects as a mainstream medium of exchange. Article 9 has its own, special definition for "money," but that special definition clearly does not apply to bitcoins. For more detail, see the previous post.

Two weeks ago, I wrote a post based on Lynn LoPucki's observation that Article 9 of the Uniform Commercial Code (UCC) might be Bitcoin's Achilles heel. From that experience, I learned that the surest way to get attention for a blog post is to put "Bitcoin" in the title. Thus, I am back.

Before anyone posts a comment resting on the metaphysics of whether the essential characteristics of a bitcoin share the essential characteristics of a security, an important point seems to have been lost in some of the comments to the last post. Keep in mind that the UCC is a statute with its own, (somewhat) precise definitions. The statute's definitions do not have to accord with ordinary English usage. The UCC can say that a "purchaser" includes someone who has loaned money although we do not usually think of a "purchaser" to be the same as a "lender." This is an actual example from the UCC.

UCC Article 8 has a three-part definition for a security but begins by saying a "security" is an "obligation of an issuer . . . or other interest in an an issuer or in property or an enterprise of an issuer." The problem is that there is no "they" in Bitcoin -- there is no issuer. My student, Igor, argued differently:

An issuer is defined by section 8-201 as essentially a "person" that creates a security. Similarly, a "person" is defined, in its most basic form, as any legal or commercial entity. UCC § 1-201(b)(27). The real question then is what entity, if any, has issued the Bitcoins? This is highly problematic considering that Bitcoin is a system that prides itself as not being owned or controlled by anyone . . .

Bitcoins are created through a process called "mining." This process involves numerous individuals lending their computer strength to verify previous Bitcoin transactions. When a series of transactions is verified it becomes a "Block," which is then added to the Block Chain. This process ensures that all previous transactions are verified, that no double trading of a Bitcoin has occurred, and allows for easy tracing of a Bitcoin. The computer system that completes this first is rewarded with new Bitcoins. As a result, this begins to resemble a cooperative, where the workers lend their hardware to the enterprise and are rewarded by receiving shares in the enterprise. These shares could then be sold to outside investors who want a piece of the Bitcoin action. This in turn makes Bitcoin resemble a commercial entity that produces shares of an enterprise that are traded as securities, and more importantly being traded free and clear of any security interests.

Maybe -- although to be fair to Igor he characterizes his points as only an argument that could be made to a court.

Still, I am not entirely persuaded. The most natural reading of a "commercial entity" is a an entitly that has legal status, like a corporation or LLC. The legal nature of the Bitcoin organization is not apparent, but calling it a "commercial entity" probably stretches the UCC meaning beyond its intended use. Even if we decide that Bitcoin the organization can be a person and thereby an issuer for purposes of the UCC, can it be said that a bitcoin is an interest in the "enterprise" of Bitcoin the organization so as to satisfy the UCC definition?

For UCC junkies, what I like best about Igor's argument is that it takes up the UCC's challenge of making some use of the vague addition of a "commercial entity" to the UCC's definition of "person." (For non-UCC junkies, yes, the statute even defines what is a "person.") If statutory drafters use vague language, creative (future) lawyers like Igor will seize on it.

What we are left with then is a creative argument that a court or other legal decision maker could use to rid bitcoins of the UCC problem LoPucki identified. If so, it would hardly be the first time a court stretched the language of a statute to reach a result it deemed necessary. The more straight-forward approach remains convincing a jurisdiction like the Seychelles or the Cayman Islands to simply declare bitcoins legal tender. If that happened, then bitcoins would seem to fall under the clear definition of "money" even for Article 9, and the problems would go away.

Most importantly, if the Seychelles or the Cayman Islands need a consultant to help draft the right statutory language, my email address is to the right. It is definitely the sort of advice that would have to be given in person, probably best done in a resort while enjoying a locally brewed beverage.