Where is Bitcoin? (Part II)

See Where is Bitcoin – Part I

Explanatory note: This series of posts –Where is the Bitcoin?– seeks to address the legal impact derived from the decentralization of Bitcoin, given the difficulty of associating the location of bitcoins in a specific territory or jurisdiction.

As we already anticipated in the previous entry, bitcoins do not have a physical location, as can occur with bills and coins, nor are they contained in checking accounts in the same sense in which bank deposits are. Thus, as many will know, bitcoins are mere accounting entries in the so-called chain of blocks or blockchain.

In this entry we are going to explain this problem in a little more depth.

Blockchain vs. Account Entries

As we mentioned in another of our articles (in Spanish), the operation of the blockchain is very similar to the book entry system, which is used, among others, by companies listed on organized markets.  

The book entry system, in contrast to the representation of shares through securities, consists of an accounting record carried out by an issuing entity in a current account belonging to the holder of the securities in question, without the need for a paper medium. Up to this point, there are no major differences with the Bitcoin system.

However, we can highlight a characteristic note that differentiates the aforementioned account annotation system from the system that uses the blockchain. When securities (i.e. shares) represented by book entries are issued – as is the case with shares represented by securities – there is always a issuing entity of said values, something that does not happen in the issuance of bitcoins, where their issuance occurs in a decentralized manner.

Location of the Blockchain

Once the impossibility (at least, from my point of view) of locating the bitcoins for legal purposes has been determined, the next logical step would be to try to determine the location of the blockchain itself.

At this point, I find it necessary to highlight certain properties of the functioning of the blockchain and the bitcoins themselves:

• Bitcoins are issued thanks to a network of “miners” that operates in a decentralized manner.
• The bitcoins do not undergo physical movement, but rather the transactions are recorded in the blockchain, in which the change of ownership of the bitcoins – from one address to another – is noted.
• The blockchain is not hosted on a single server, but is downloaded to each of the nodes – connected to each other – that are part of the Bitcoin network.

On the one hand, companies whose shares are represented by book entries are registered in a certain jurisdiction, so to determine the location of their shares or participations, it is enough for us to go to the jurisdiction in which said company has been registered or registered. However, as we have already anticipated, there is no central issuer of bitcoins and the blockchain is not on a single server located in a single jurisdiction, but rather it is a decentralized registry.

As you can see, we have not yet managed to resolve the problem raised. However, I would like to highlight some approaches that were made a couple of months ago at a meetup held in Madrid about this problem and why – I think – they do not end up solving the problem:

• “Bitcoins must be located for legal purposes where their owner resides.”

This statement seems to solve the problem raised in a large number of cases, but what happens when there are several holders of the same bitcoin wallet, and each of them resides in a different jurisdiction?

• “Bitcoins must be located wherever the person who controls the private keys of a wallet resides.”

To give context to the situation, this statement was made in response to the following question: “If my bitcoins are managed by an exchange that controls the private keys of the wallet – as was the case with the extinct Mt.Gox -, should they be understood to be located where said exchange resides?

As in the previous point, the possible solution proposed only solves certain situations, but not all. In this sense, for those who are unaware, there are multi-signature Bitcoin wallets. The latter means that more than one private key is needed to be able to carry out a transaction with the bitcoins found in a certain wallet. Consequently, if those who have the different private keys of the multi-signature wallets reside in different jurisdictions, we run into the same problem again.

Thus, although the problem posed seems eminently theoretical, it can have consequences from a practical point of view that.

As a preview, we inform you that the third part of this series of posts – Where is Bitcoin? – we will talk about whether Whether or not there is an obligation to declare bitcoins as assets located abroad (Model 720), obligation that exists in Spain since the implementation of the controversial “Tax Amnesty”.

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This article has been written jointly by Antonio Gómez de la Cruz Alcañiz, Lawyer specialized in Civil and Commercial Law and for Alejandro Gómez de la Cruz Alcañiz, Lawyer specializing in cryptocurrency taxation.