The transfer of ownership of Bitcoin

Property, as you probably know, is what jurists call a real right. In Law, we can distinguish between personal and real rights, the latter being those that entail a right over a good, over a thing. That is the case of Bitcoin: the article considers bitcoin through the lens of property rights. Control of a wallet and legal ownership are distinct questions. As I already advanced in another article (in Spanish), although this matter may seem insignificant, particularly to readers unfamiliar with law, the truth is that one should not take it lightly, since the protection that the legal system grants to some and others is different.

In any case, now classified, in my opinion, as a property right, it is time to ask how that right is transmitted. This article, by the way, arises from a discussion about the functioning of the blockchain and the possibility of fitting it into that of the transmission of traditional property, which comes from the Civil Code, coming, in turn, from no less than the 19th century. It happens very often, in fact, that rather than trying to invent a new legal formula for Bitcoin, what is done is adapt it to the existing legal system. And what does our Law tell us regarding property and its related legal transactions?

In our country, and in a few words, for the transfer of ownership of a thing to take place effectively, from one person to another, two requirements must be met, and this is what is known as the theory of title and mode. According to it, the two requirements are, on the one hand, a transfer contract of ownership (which can take various forms: sale, exchange, contribution to a company, etc.) and the so-called “tradition”, through which the transferor fulfills the obligation he has contracted by delivering the thing. 

As I said in the aforementioned article, the property right allows its owner, among other things, to dispose of — and therefore transfer — their bitcoins. In a transaction with bitcoins between two users, according to this theory, each party must prove its right, that is, whoever owns the bitcoins must first prove said title to the other party and then transmit it.

Therefore, in my opinion, whether in an exchange or in a sale of bitcoins, between two users there is a transfer of ownership and, therefore, effective movement of the asset, although not physically, of course. I understand that the display of the public key would be equivalent to qualification, that is, to the exhibition of the title of ownership of the bitcoins, just as it would be the exhibition of a sales contract, an inheritance or even proven possession of an asset that demonstrates that it really is my property. Thus, the Bitcoin address would be, in a bank transfer, the equivalent of the current account code, that is, the IBAN. A digital signature can demonstrate control of the key needed to spend bitcoin without disclosing that private key. It does not by itself establish legal ownership, and an ordinary Bitcoin transaction should not be described as a zero-knowledge proof.

The confirmations that are made in the blockchain, for their part, function as a kind of public registry in which people work who, in a similar way to how a notary would do it – not without great nuances -, are in charge of confirming the operation, checking signatures, spending conditions and the absence of double-spending, to finally carry it out. These people are, in effect, the “miners.” So the record on the blockchain would ultimately function as the mode, just as the delivery of the property itself would be in a sale of movable property or the delivery of the keys to the house in that of real estate. Thus, the registration in the chain would act as the symbolic delivery, just like the keys in the transfer of a property: as there is no possible way to physically deliver it, by hand, it is executed through an instrument that formalizes, that is, symbolizes the delivery itself.

Without any further procedures –other than those derived from the necessary confirmations by the “miners”–, the ownership is transferred and the operation is perfected:

1. The sender prepares a transaction paying the recipient’s address.
2. The wallet signs the transaction using the sender’s private key; that key is not sent to the recipient.
3. The signed transaction is broadcast and validated by the network.
4. Its inclusion in the blockchain and subsequent confirmations record the transfer.

It is true that, in some way, bitcoins never leave the blockchain and, therefore, there are those who may consider that there is no transfer of the asset, neither physical nor virtual. However, the fact that the asset does not leave the chain, in my opinion, does not affect the transmission. The chain would function in the case of Bitcoin as the market (in the most general terms) in the «real», not virtual, world. That is, because I give my property to you, that property does not leave the real estate market. And, in the same way, if I give you my bitcoins, they do not leave the blockchain, the virtual Bitcoin market. Simply, in both cases, I understand, the ownership of the same is changed (moving from one address to another). But the assets remain on the market.

Something similar happens with book entries: the transfer of a company’s shares does not occur through a physical delivery, but only after a change of ownership of those shares in the accounting record. By the way: this method, and not physical share certificates, has long been the most used in listed companies.

As you can see, it is not necessary to invent anything. Not even be original. Two fields as different from each other as Civil Law and virtual currencies come together here and, despite everything, they like each other.