Issue link: https://digital.shearman.com/i/1479657
Ownership Issues (cont.) There is no single prescribed method for transferring cryptoassets. The ability to transfer (or purportedly transfer) will depend on the nature of the cryptoasset and the requirements of its supporting infrastructure. Even the concept of "transferring" cryptoassets can be seen as somewhat imprecise since, as noted in the Law Commission Consultation, transfers of cryptoasset transfers "will typically involve the replacing, modifying, destroying, cancelling, or eliminating of a pre-transfer crypto- token and the resulting and corresponding causal creation of a new, modified or causally-related crypto-token"—i.e., the property changes as a result of the "transfer." However, it is generally accepted that rights to cryptoassets are transferable. For example, a holder of a cryptoasset can transfer it to any other wallet address, in the same way that a person might send money to a specified bank account. The most common means of acquiring and selling cryptoassets is now via cryptocurrency exchanges. The transfer is typically made by modifying the public parameter, or generating a new one, to create a record of the transfer (which includes the details of the transferee). The transferor then authenticates the record by digitally signing with their private key, at which point the asset comes under the control of the transferee, and no further transactions with the asset by the transferor will be accepted by the consensus (those validating the transaction on the public parameter). This type of transfer is known as "on-chain." However, it is also possible to make an "off-chain" transfer, which is not recorded on the ledger but agreed to by two parties, with the transferor or a third party retaining control of the asset. As an asset, it is also possible that beneficial interests may be capable of being held or conveyed without requiring a full transfer in the manner described above, provided evidence of such interest can be established in accordance with normal property and trust principles. The fact that cryptoassets are capable of constituting property does not therefore displace the application of orthodox principles of personal property law and trust law. That the cryptoasset can be transferred in accordance with its own rules in a particular and unique manner does not necessarily mean that the asset's legal or equitable title passes solely in accordance with those rules—who controls the key and whether a transfer was actually made may be part of the evidence but may not be conclusive as a matter of law. If a person is able to demonstrate that they have an equitable interest in the asset, then the holder of the key may be subject to that equitable interest and such interest may, in certain circumstances, be capable of being traced through to subsequent holders (in the same way that interests in other assets, including money, can be). This means that the infrastructure affecting who controls the key and how the asset is transferred is a relevant factor in determining ownership of the asset, but that does not displace other principles of personal property and trust law from applying. Conversely, a person that can show an equitable interest in a cryptoasset will not be able to exercise rights in relation to the cryptoasset unless it is able to exercise control over it (e.g., through the private key). HOW IS OWNERSHIP FULLY TRANSFERRED? Some exchanges (e.g., Coinbase, Binance, etc.) are large enterprises that in many ways mirror common online securities exchanges, such as Hargreaves Lansdown or eToro (indeed, Coinbase is now listed with the New York Stock Exchange). Parties set up trading accounts with the exchange and the exchange holds funds on behalf of customers. Others, such as PancakeSwap, are simply automated market makers, streamlined systems for facilitating peer-to-peer exchange, which in many cases do not even require users to create an account. Parties simply link their wallets to the exchange through a simple prompt in their web browser and confirm the details of the proposed exchange. The exchange then automatically pairs them with a corresponding trade. Cryptoassets & Insolvency 12