A custodial exchange holding your Bitcoin in an online wallet legally owns those coins, says Bitcoin creator Dr. Craig S. Wright. It is only obligated to return the true Bitcoin to its customers. Dr. Wright was commenting on claims that a recent California judgment against one of Coinbase (NASDAQ: COIN) customers somehow sets the “not your keys, not your coins” maxim as legal precedent.
Wright has long pointed out that Bitcoin is property and ownership can exist regardless of whether a person “holds the keys” which gives them the ability to spend them.
This difference between technological ability and legal right is important. “Not your keys, not your coins” is a phrase often repeated in the Bitcoin and blockchain world. Basically, it means that ownership of digital assets rests with whoever has the private keys, no matter who else claims them. Regardless of whether you sent your assets to an exchange or they were stolen, they’re no longer your property. The morality and legality of the situation isn’t important because there’s nothing anyone can do about it. Dr. Wright strongly disagrees with this belief, and seeks a legal judgment that establishes that ownership of Bitcoins is the same as any other kind of property.
Then there’s another, secondary question that’s not discussed in this case, but remains relevant: which assets count as forks from Bitcoin, and which is the original? And which asset should a customer who deposited “Bitcoin” receive in return?
About the Coinbase/BTG case
Though now forgotten by most, BTG was a blockchain forked from BTC by third-party developers in October 2017 (a few months after the BTC/BCH split). It was never considered a realistic contender to replace BTC or BCH, but for a few months the asset was popular with speculative traders, reaching an all-time-high of $456 in December 2017 (at a time when most other digital assets were reaching their own peaks).
Coinbase, where Archer kept 350 BTC, announced it would not support BTG on its platform and would not award forked coins to its customers with BTC wallets—a decision that raised some ire at the time, since it essentially denied them the ability to sell off the extra coins for easy profit.
The BTG network was subsequently 51% attacked in 2018 and has suffered similar attacks since, destroying confidence in the asset through double-spends and thefts from exchanges. Amid rumors there were secret ASICs mining on the chain that enabled the attacks, BTG’s price plummeted in early 2018 and has never regained much ground. It currently sits in obscurity at around US$10.80 per unit.
Had Archer gained BTG and sold it around its peak period, he could have pocketed up to $159,600. Even today, his hypothetical BTG stash would be worth around $3,800. For this reason, he filed a suit in San Francisco against Coinbase for breach of contract, negligence, and conversion.
The court found in Coinbase’s favor in August 2020, saying the exchange’s User Agreement does not obligate it to provide its customers with assets forked from the ones they’d initially deposited. Customers’ deposit of “Bitcoin” means they are entitled only to receive that.
Archer had argued that, regardless of Coinbase’s User Agreement, ownership of the BTC remained his, giving him a right to any forked assets. Coinbase countered that it did not have any available means to access the Bitcoin Gold securely. Since its wallets had the private keys to the BTC in question, it would have needed to expend resources to convert the assets to BTG. The court judgement said that since Coinbase had submitted evidence showing it had never taken “affirmative action” to possess any Bitcoin Gold assets, it never had them to turn over to their customers—and thus had not deprived them of such. Ordering Coinbase to do so would have imposed a new absolute tort duty on digital currency exchanges, it read.
A legal opinion
Justin S. Wales, senior counsel with law firm Carlton Fields, offered his opinion on the case on Twitter, saying “Not your keys, not your coins” was now “officially case law” and “now precedent in California.” This would mean lower courts in California would be obligated to judge similar cases the same way, and the judgment could be used persuasively in other similar cases elsewhere.
Wales describes himself as a “Bitcoin obsessive lawyer.” His online biography says he serves as the co-chair of his firm’s Blockchain and Digital Currency Practice, representing “a wide range of blockchain, fintech, and financial services clients on fundraising and regulatory matters, including executing compliant token offerings.”
Dr. Wright disagrees
Dr. Wright took strong issue with Wales’ comments, saying they were “intentionally misleading” and “a sanctionable issue”—and that Wales should be “reported to the bar” for his comments.
Both the case and the treatment of forked assets were not about keys, he said.
“Banks and Coinbase are the same in many ways when you have Bitcoin in a custodial service, the custodial service owns the bitcoin, and you have a debt. So, the method of looking at this is analogous to investing or depositing money in a bank. The bank owns the money, it is the bank’s asset. The bank has a loan and owes you that money. The nature of the case is not about the keys… The truth of the matter is, Coinbase owns the asset. You have a debt only for the amount of the other asset that they hold.
The case was mainly over the “conversion” issue, Wright said, and not over who possessed what keys. Coinbase legally owns its customers’ deposited assets and, like a bank, holds it as a loan for which it must repay as debt to customers.
Moreover, even BTC itself isn’t Bitcoin and legally, exchanges should only be obligated to return BSV to their clients.
“The real issue here is what is the asset? BTC is passing off as Bitcoin. The reality is that Coinbase should only have to give you BSV. So, that’s something that hasn’t been addressed.”
“The junior lawyer reporting this should be reported to the bar. It is enough for sanctions. What he is doing is promoting something using false information. He is reporting a case outside of what it states to drum up business and promote false ideas about bitcoin that have never been mentioned by the court. This action and misleading promotion is at minimum a sanctionable issue in the bar can take action against him. If I had time, it’s something that I would promote and push.”
The fight for exchanges to return Bitcoin SV to their clients instead of BTC for deposited Bitcoins would likely be more contentious than the BTC Gold issue. The BTC community claims BSV is a fork of their coin, whereas BSV asserts that BTC is the fork. However, it’s a matter Dr. Wright and the BSV community would like to see settled in court, so there’s every chance we may see the cases presented at some future time.
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