Akihiro Shiba is an attorney-at-law qualified in Japan, working at Nishimura & Asahi’s Tokyo office, with expertise in financial regulations and transactions and provides advice on virtual currencies. In this article, he examines what the recent Tokyo District Court ruling means for the status of bitcoin in Japan.
In a lawsuit filed by an individual against the bankruptcy trustee for Mt Gox, formerly the most widely used bitcoin exchange in the world, the Tokyo District Court handed down a judgment on 5th August, 2015, holding that bitcoins are not subject to ownership.
This is probably the first judicial decision in Japan that provides an analysis of the legal nature of bitcoins and the status of a bitcoin depositor in insolvency proceedings.
Six things you should know about the judgment
- It is a district court judgment, without binding effect on anyone other than the parties involved, and can still be appealed. We cannot conclude at this stage that this judgment represents the established view under Japanese law.
- It is an analysis under Japanese law and is basically not applicable in any other country.
- This judgment was in favor of Mt Gox’s bankruptcy trustee, so the plaintiff’s claim for preferential recovery was denied. The judgment will not cause any change in the treatment of Mt Gox creditors.
- There should be further consideration of how to fully protect customers’ bitcoins from an exchange’s insolvency.
- Under Japanese law, the lack of “ownability” of bitcoins does not necessarily mean they are not afforded legal protection.
- Under Japanese law, the lack of “ownability” might be a positive feature of bitcoins as a medium of exchange.
The arguments made in the case
In this lawsuit, the plaintiff claimed delivery of approximately 459 bitcoins against Mt Gox, arguing that:
- Bitcoins can be subject to ownership under the Civil Code of Japan.
- The bitcoins stored in the bitcoin addresses for which Mt Gox held or managed the private key should be regarded as being occupied by Mt Gox but co-owned by all the users, including the plaintiff.
- Therefore, the plaintiff could demand the return of the bitcoins corresponding to its co-ownership interest outside of the bankruptcy proceedings.
The bankruptcy trustee for Mt Gox disputed the claim, refuting the plaintiff’s arguments, including (1) above.
The court ruled in favor of the trustee, arguing that bitcoins cannot be subject to ownership for the following reasons:
a) According to Article 85 of the Civil Code of Japan (which states, “In this Act, ‘thing’ means a corporeal thing.”), an object of ownership must occupy a portion of space such as a liquid, gas, or solid, in contrast with rights (including claims and copyrights) and natural forces (like electricity, heat, and light). In this regard, it is clear that bitcoins do not occupy a portion of space.
b) Furthermore, an object of ownership must be subject to exclusive controllability. In this regard, those who manage a bitcoin address cannot be regarded as controlling the balance of bitcoins in the address exclusively.
The court’s view on what can be subject to ownership is substantially identical to the prevailing view of Japanese civil law scholars. Therefore, I believe that most Japanese lawyers would likely support the conclusion and reasoning in (a) above. (On the other hand, since bitcoins were held not to satisfy requirement (a), I believe that there was no need to make the debatable argument in (b) above.)
Although I agree with the above, it cannot be concluded at this stage that this judgment represents the established view on the legal status of bitcoins in Japan as it is only a district court judgment, without binding effect on anyone other than the parties involved, and can still be appealed.
Furthermore, this judgment only provides an analysis under Japanese law, and there are a variety of rules from country to country regarding what can be subject to ownership or title. Therefore, the court’s view is basically not applicable in any other country.
Impact on Mt Gox creditors
The position of Mt Gox’s bankruptcy trustee on the status of the bitcoin depositors seems to have been as follows:
- They have a contractual right to demand the return of deposited bitcoins, rather than ownership of them.
- Thus, they would be treated as bankruptcy creditors to whom the assets of Mt Gox will be distributed, as with cash depositors or any other creditors, if they filed their claims before the deadline of noon of July 29, 2015 (JST).
Although this position was challenged by the plaintiff, claiming ownership rather than a contractual right, the trustee’s position in (1) above was upheld by the court; accordingly, the plaintiff’s claim for preferential recovery was denied. Therefore, the judgment will not cause any change in the treatment of Mt Gox creditors.
No protection of customers’ bitcoins from insolvency?
Some people may think that, based on the court’s view, bitcoins held in a customer’s account with an exchange will not be fully protected if the exchange becomes insolvent. This is not accurate.
The court’s view on the treatment of bitcoin depositors in Mt Gox’s bankruptcy proceedings would not apply to other cases if the facts in those cases differ from those established in the Mt Gox judgement.
For example, the treatment of such bitcoins may have been different if the private key for the bitcoin address was stored on the exchange’s server but was still controlled and managed by the customer. In any case, there should be further consideration of how to fully protect customers’ bitcoins from an exchange’s insolvency.
No legal protection from offences?
Some people may assume that if bitcoins cannot be owned, bitcoins cannot be legally protected from offenses at all. This is simply not true, however, at least under Japanese law.
For example, Article 709 of the Civil Code of Japan imposes tort liability for damages on a person who has intentionally or negligently infringed “any right or legally protected interest” of another person. I believe that this provision would apply if someone stole your bitcoins.
Similarly, some criminal law provisions prohibit individuals from obtaining, or causing another person to obtain, “an unlawful economic gain” through the methods specified by those provisions.
Tradable without ownership?
Some people may also think that if bitcoins cannot be owned, they cannot be bought or sold validly, nor can they be effectively used as a payment method. This is also incorrect, at least under Japanese law.
If you enter into an agreement by which one party agrees to send a certain amount of bitcoins from his/her bitcoin address to another specific address, it can be a valid and enforceable contract under the principle of freedom of contract, at least under Japanese law.
This is somewhat similar to an electricity supply agreement where the supplier agrees to supply (or sell) electricity to the other party, even though electricity cannot be subject to ownership according to the prevailing theory.
Actually, under Japanese law, the lack of “ownability” might be a positive feature of bitcoins as a medium of exchange.
If there were ownership in bitcoins, when you received bitcoins from another person, you would be exposed to the risk of someone demanding that you return the bitcoins to them, arguing that they are the owner instead of you – possible reasons for this could be, for example, if the bitcoins were stolen from them or if the agreement under which they sold the bitcoins was nullified.
The lack of “ownability” frees bitcoins from those risks.