“The fact that an OECD (Organization for Economic Cooperation and Development) country recognizes BTC as a ‘fungible’ asset is progress – a wake-up call to banks, institutional investors, regulators that Bitcoin is here to stay,” according to Dan Schatt.
The Nanterre Commercial Court’s February 26 ruling that Bitcoin (BTC) is a fungible and intangible asset has had an impact on the French cryptocommunity and beyond. This may seem surprising, given that it was a lower court decision and, moreover, one that did not declare BTC as currency or fiat money, as some news reports reported, but as a fungible asset like money.
The ruling is “an important milestone for the development of the cryptomarket, particularly in France,” Roman Matkovskyy, an associate professor at the Rennes Business School, told Cointelegraph.
“The characterization of Bitcoin as a financial instrument by the French court could be an important step forward in the legitimation of cryptomarket,” added John Wagster, a lawyer for Frost Brown Todd LLC, in a statement to Cointelegraph, “but the true significance of the ruling will be determined by whether and how it is incorporated into the regulatory regime of France. Wagster added that the French court has moved the first chess piece, and it will be interesting to see how French regulators respond.
Christopher Giancarlo, senior counsel at Willkie Farr & Gallagher LLP and former chairman of the U.S. Commodity Futures Trading Commission, told Cointelegraph that he believes the ruling is likely to have an impact in France and perhaps elsewhere, such as in the EU, he added:
“Generally speaking, from a legal point of view, the way in which an asset is legally defined is the starting point for how it will be regulated”
Consumables and intangibles
Hubert de Vauplane, an attorney with Kramer Levin Naftalis & Frankel LLP, told Cointelegraph that because the court decision stated that Bitcoin is a fungible and intangible asset, “consequently, the Bitcoin loan only requires the borrower to return to the lender Bitcoins of the same type, quality and quantity (in the absence of specific provisions to the contrary in the loan agreement)”.
As a result, the borrower can keep any profits or advantages he or she has earned over the life of the loan. In this case, the French judges confirmed that because a bifurcation leading to the creation of Bitcoin Cash (BCH) occurred during the period of the loan, the borrower is able to keep the BCH received during this time.
The issue of fungibility seems arcane, but goes to the heart of the decision. An asset is fungible if it is exchangeable. A grain of rice or a US dollar can be substituted for one another, whatever its origin, because they are fungible. In comparison, people or works of art or custom-made sailing ships are not interchangeable because they are not fungible.
If the court had ruled that BTC is not fungible, “it would be a disaster for the market,” Vauplane said, particularly for any future BTC lending or credit activity. It would mean that the BTC borrower would have to return to the lender the same assortment of BTCs, that is, with the same addresses, which, of course, is absurd. “This decision seems to be applicable to any other crypto-currency or fungible token”, Vauplane added, concluding that “it is a lower court decision, but a quality legal decision”. It can still be overturned, by an appeal court, for example.
A precedent for crypto space?
However, in the crypt world, institutional recognition is important, even if it comes from a lower level European commercial court. “This ruling in France should further legitimise cryptospace and could encourage greater adoption and entry of new participants even if it does not become law,” Rob Odell, co-chairman and product manager of Salt Lending, told Cointelegraph, adding
“France is the seventh largest economy in the world in terms of GDP, so it is likely to influence other markets, especially the EU, initially. In a market and technology as new and emerging as Bitcoin, regulators around the world are looking at how other countries’ regulators view cryptomontages. Therefore, any decision made by France will be closely watched by regulators around the world”
France is the seventh largest economy in the world in terms of GDP, so it is likely to influence other markets, especially the EU, initially. In a market and technology as new and emerging as Bitcoin, regulators around the world are looking at how other countries’ regulators view cryptocurrencies. Therefore, any decision made by France will be closely watched by regulators around the world
In France, the ruling has created enthusiasm for new business opportunities. According to Matkovskyy, “Bitcoin’s loans now fall under the ‘consumer loan designation’, which means that it is a transfer of the borrowed property to the borrower. […] It will facilitate Bitcoin transactions, including loan and repo transactions, i.e., repurchase agreements, a form of short-term loan. Matkovskyy added:
“It can potentially create new competition among banks and stimulate further development of the Bitcoin market. It is estimated that loans account for 80% of the total value contained in the DeFi. Therefore, it can potentially unlock some part of it.”
Regulators have influence
However, not everyone was prepared to declare this a landmark case. “I wonder where the news is in this court decision,” Michael Reuter, co-chairman of the European Association of Block Chains, told Cointelegraph.
“From my point of view, more than the classification of the unit, the handling of the trade (owner) of Bitcoin and other currencies is of greater importance”
In 2014, the German Federal Financial Supervisory Authority, or BaFin, declared Bitcoin to be a financial instrument in the form of units of account under the German Banking Act, Reuter explained. But in early March 2020, BaFin stopped the operations of a Berlin-based company that allowed consumers to buy and sell crypto-currencies through ATMs. The regulator’s enforcement action was possibly more decisive than any legal definition of BTC.
Regulators can be as important as courts or even legislatures when it comes to determining future cryptoactivities allowed, said Angela Angelovska-Wilson, co-founder and legal director of the Sila Transaction Network.
“The U.S. state of Wyoming passed a bill in 2019 adding further legal clarification on digital assets and crypto-currency to encourage blockchain companies to locate in Wyoming, but this has not yet had a major impact on U.S. federal regulations,” she told Cointelegraph. “It all depends on how much importance a regulator places on a court ruling.
But that doesn’t necessarily mean Nanterre’s ruling is inconsequential. “What the French court ruling could do is pave the way for clearer and more transparent investment rules in relation to Bitcoin itself,” Wagster suggested.
Less impact in the United States?
In the U.S., the legal definition of BTC has basically been established, Giancarlo told Cointelegraph. Since 2015, the CFTC has recognized digital coins as commodities, and the legal definition of Bitcoin as a commodity has been supported in the courts. Therefore, the Nanterre court’s ruling is probably “not that important in the U.S.” at least as far as BTC is concerned. However, the definition of other crypto currencies is less established.
The regulation of crypts in France, like that of the USA, seems to be evolving organically. This approach has the advantage that it is less likely to stifle technological innovation. But it can be confusing. As Carol Goforth, a law professor at the University of Arkansas, told Cointelegraph in August: “The regulatory authority in the U.S. is divided among too many diverse agencies, and they all have their missions and interests to assert.
Three baskets of digital goods
The Crypto-Currency Act of 2020, a bill introduced on March 9, 2020, by U.S. Representative Paul Gosar (R-AZ), for example, classifies digital assets into three categories: crypto-commodity, crypto-currency and crypto-value. Under the proposed legislation, these three categories would be governed, respectively, by the CFTC, the Secretary of the Treasury through the Financial Crimes Enforcement Network and the Securities and Exchange Commission.
“Interestingly, the language of the bill seems to consolidate the status of digital assets like Bitcoin as crypto-commodities rather than cryptom currencies,” as reported by Cointelegraph. By comparison, stablecoins would probably fall into the coin basket.
The U.S. Internal Revenue Service, for its part, considers BTC to be a property and not a coin, Odell said, until 2014. In 2020, for the first time, federal tax forms began asking about the activities of Bitcoins and other taxpayer crypto-currencies:
“Although this mentions crypts as ‘virtual currency,’ it doesn’t change Bitcoin’s status as a currency in the eyes of the IRS,” Odell said, adding that it means the IRS is beginning to regulate crypts, which is good for the crypt industry.
Elsewhere, a Chinese court concluded in July 2019 that Bitcoin should be considered digital property, not a coin. Japan, meanwhile, went the other way, recognizing Bitcoin and other crypts as “money” in 2016.
A wake-up call?
In the end, the actual classification of BTC in the Nanterre court case may be less important than the mere fact that it is being classified. “Bitcoin is already considered a financial instrument by many around the world,” Wagster said, adding:
“Court recognition of a major European economy carries particular weight. The nomenclature used by the court is not important, but the fact that Bitcoin now enters a category of financial instruments that will probably be supervised and regulated by the French government is significant”
In addition, Cred CEO Dan Schatt told Cointelegraph that this decision could have a deeper meaning in the long term:
“The fact that an OECD country recognizes BTC as a ‘fungible’ asset is progress, it is a wake-up call to banks, institutional investors and regulators that Bitcoin is here to stay. The fact that it is actually used as money is less important than the institutional recognition that this will bring, which inevitably leads to an influx of funds for this asset class”