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Available online at www.sciencedirect.com

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Some risks of tokenization and blockchainizaition

of private law

Alexander Savelyev∗
International laboratory on IP and IT law, Higher School of Economics. Moscow, Russia

a r t i c l e i n f o a b s t r a c t

Article history: The paper focuses on the analysis of the problems that may be driven by mass tokenization
Available online xxx of the objects of civil law, i.e. the creation of a digital representation of such objects in the
form of a record in blockchain. This occurs where the value of such objects is transferred
Keywords: subsequently by means of disposal of such tokens, which is a subject of separate rights to it.
Token The paper outlines two core problems, which were inspired by recent legislative activities in
Blockchain Belarus and Russia. The first is a possible displacement of existing legal regimes of objects of
Object of civil law civil rights by the legal regime of the token. Secondly, the problem of definition of the nature
Privacy of rights to tokens arises (in rem versus ad personam) as well as remedies for their violations.
Personal data Provisions of the Belarus Decree “On the development of digital economy” of 21 December
2017 and drafts of the laws on blockchain and ICO, discussed in Russian Parliament and
Government are taken to illustrate these problems.
© 2018 Dr Alexander Savelyev. Published by Elsevier Ltd. All rights reserved.

countries but for any jurisdictions that decide to reproduce

1. Introduction the ideas reflected here. Specifically, special legal regimes that
implement this object into the economy have the potential to
Blockchain has become a buzzword and this technology con-
absorb current legal regimes, such as contractual provisions
tinues to attract attention from business, government and
relating to specific types of contracts, consumer law protec-
lawyers. Sometimes, it is referred to as “the cornerstone of
tion, security laws and other similar regimes. This potential
trust for the digital society in the future”.1 The populariza-
is realised by the essence of this technology: digitalization of
tion of blockchain technology and ongoing attempts to imple-
existing objects of rights and simplification of the process of
ment it in various areas of life has resulted in the emergence
contracting with them. The original subject matter of the con-
of new peculiar objects, such as cryptocurrencies, tokens and
tract is replaced by its digital manifestation: a“token”. This is
smart-contracts, which pose substantial challenges to their le-
designed to facilitate the effectiveness of transactions by min-
gal regulation. These questions have already received cover-
imizing their costs. However, the nature of rights to such ob-
age in multiple legal papers. However, such objects as the “to-
jects remains unclear: are tokens “rights in rem” or “rights ad
ken” deserve extra analysis, due to the recent developments in
personam”? In other words, is a right to a token a right “erga
Belarus and Russian law and its potential impact on the over-
omnes” («against the whole world») or not. Depending on the
all structure of civil law. It may not only be relevant for these

∗
Corresponding author: Senior researcher of International Laboratory on IP and IT law Higher School of Economics, senior legal attorney
of IBM East Europe/Asia Ltd. Russia, 123112, Moscow, Presnenskaya emb., 10, Russia.
E-mail address: [email protected]
1
Helen Partz, CEO Of Ant Financial: Blockchain ‘Is The Cornerstone Of Trust For The Digital Society In The Future’, 27 March 2018. URL: https:
//cointelegraph.com/news/ceo- of- ant- financial- blockchain- is- the- cornerstone- of- trust- for- the- digital- society- in- the- future.

https://doi.org/10.1016/j.clsr.2018.05.010
0267-3649/© 2018 Dr Alexander Savelyev. Published by Elsevier Ltd. All rights reserved.

Please cite this article as: A. Savelyev, Some risks of tokenization and blockchainizaition of private law, Computer Law & Security Review:
The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.010
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answer to this question, available remedies and other aspects • Asset tokens represent assets, such as participation in
of the legal regime will be defined, e.g. bankruptcy and con- physical stock, companies, or earning streams, or an enti-
flict of laws. These issues are at the core of the analysis in this tlement to dividends or interest payments. In terms of their
paper. economic function, these tokens are analogous to equities,
bonds or derivatives.

2. What is token? FINMA also notes that hybrid forms are also possible.4 For
example, Ether is a token used as a fee for smart contracts
The word “token” is of Germanic origin and is generally de- execution in Ethereum public blockchain as a utility token, but
fined as “[a] thing serving as a visible or tangible representa- due to its high liquidity is also used as a payment token.
tion of a fact, quality, feeling, etc.”2 Black’s law dictionary de- Based on the above it is possible generally to define a to-
fines a token quite similarly as a “sign or mark; a tangible ev- ken as a kind of a digital asset, which exists in the blockchain
idence of the existence of a fact” and also as “a coin or other ecosystem, and is bundled with the right to use it.
legal tender” with a potential to denote also a “bill or other
medium of exchange”.3
In certain contexts the term “token” may have a more spe-
cialized meaning, attributed to it by a legal act. For example in 3. Tokenization of objects of civil law
Article 14 of the UK Consumer Act 1974:
The aforementioned definitions of token and their classifica-
[a] credit-token is a card, check, voucher, coupon, stamp, form, tion demonstrate that almost any object of a right can be to-
booklet or other document or thing given to an individual by a kenized and registered in the blockchain. As a result, its sub-
person carrying on a consumer credit business, who undertakes sequent disposal will be performed by means of disposal of
(a) that on the production of it (whether or not some other action its digital “alter-ego” (token). This will be in accordance with
is also required) he will supply cash, goods and services (or any the rules established by the architecture of the blockchain
of them) on credit, or (b) that where, on the production of it to a system at hand and subject to any special legal regimes for
third party (whether or not any other action is also required), the tokens established in a particular jurisdiction. Potential ben-
third party supplies cash, goods and services (or any of them), efits of a special approach to passing the title to such ob-
he will pay the third party for them (whether or not deducting jects include a decrease in transaction costs. This occurs by
any discount or commission), in return for payment to him by the means of automatization of the contracting process by using
individual. smart-contracts, increased security of such transactions and
Thus, the concept of the token, within the context of con- their transparency. Clear titles facilitate trade and minimize
sumer credit arrangements, serves as evidence of an uncon- resource-wasting conflicts. Existing literature on blockchain
ditional right of a consumer to receive a certain performance is full of optimism in this regard. For example, Melanie Swan
from the other party. indicates that blockchain may become a the seamless embed-
Recently the term “token” has become a buzzword, fre- ded economic layer… serving as the technological underlay for pay-
quently used in discussions and publications relating to ments, decentralized exchange, token earning and spending, digital
blockchain and so-called Initial coin offerings (ICO). It serves asset revocation and transfer, and smart contract issuance and exe-
as an important element of the blockchain ecosystem. How- cution.5 William Mougayar argues that decentralized networks
ever, there is still no generally accepted definition of a token enable trading of any digital assets, financial instruments or
in the blockchain context. To some extent, it is driven by the real-world assets, represented in the form of a token.6
fact that the technology is still developing, but mostly it is due However, if all these promises come true, it will lead to a
to the diversity of the various types of tokens. Nevertheless, number of problems with existing regulation of transfers of
there is a certain degree of consensus on the classification of such assets. Tokenization may, at some point, absorb such
tokens. regulation and replace it with a new legal regime applicable to
For example, the Swiss financial regulator FINMA cate- tokens, just as the legal regime of a security replaces the legal
gorises tokens into three types depending on their actual regime of a right embodied in it when it comes to transferring
function: such a right. Moreover, governance of tokens consists not
only of legal regulation, but mostly of code and contractual
terms, formulated in terms of use and other similar contracts
• Payment tokens are synonymous with cryptocurrencies
for adhesion-type agreements. As Bygrave notes “contracts
and have no further functions or links to other develop-
provide the primary legal rules for governing many of the digital
ment projects. Tokens may in some cases only develop the
necessary functionality and become accepted as a means
of payment over time. The most evident examples of such 4
FINMA Guidelines for enquiries regarding the regula-
tokens are Bitcoin and Ether. tory framework for initial coin offerings (ICOs) 16 Febru-
• Utility tokens are tokens which are intended to provide dig- ary 2018. P. 3. URL: https://www.finma.ch/en/news/2018/02/
ital access to an application or service. 20180216- mm- ico- wegleitung/.
5
Melanie Swan, Blockchain: Blueprint for a New Economy. O’Reilly,
2015. P. vii.
2 6
https://en.oxforddictionaries.com/definition/token. William Mougayar. The Business Blockchain: Promise, Practice, and
3
Black’s Law Dictionary. West, 2011. P. 1625. Application of the Next Internet Technology. Wiley, 2016. P. 90.
Please cite this article as: A. Savelyev, Some risks of tokenization and blockchainizaition of private law, Computer Law & Security Review:
The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.010
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environments created by code”.7 Various Terms of Use, End-User The first feature should be interpreted with reference to the
License Agreements, Terms of Service and other similar doc- list of objects of civil law recognized in the Civil Code. In ac-
uments form the basis of the Internet governance contractual cordance with Article 128 of the Civil Code of Belarus [which is
framework and have become an integral part of any Internet quite similar in this regard to the Russian Civil Code], objects
service or website. Such contracts are predominantly used of civil rights include: tangible things, including money and
to manage the services and software usage in accordance securities; other property, including property rights; work and
with providers’ economic interests and to marginalize, if not services; undisclosed information; results of intellectual activ-
lock out, behavior or norms that threaten those interests. ity, including exclusive rights to them (intellectual property);
This results in the emergence of virtual worlds operating as and non-tangible values. Such a list of objects, together with
fiefdoms.8 It means that regulation relating to the transfer of the definition of token, means that almost any object includ-
assets will become more and more private and based on self- ing real-world assets, rights to IP, information, services, etc.
governance, enforced by technological measures in the form can become “tokenized” and their subsequent disposal made
of program code, which operation is backed-up by contract. subject to the special legal regime of the token created by the
Even if such code is be based on an open source develop- Decree.
ment mode, it will still be controlled by a limited number of The second feature distinguishes tokens from other dig-
people represented by the core team, setting the rules and ital assets, such as paperless securities, bank money or elec-
directing development of the project in a rather centralized tronic money. This seems logical since, without this feature, all
manner.9 such digital assets would become tokens. However, the mere
In order not to render the perspectives indicated above too fact that certain technology is used to record the existence
hypothetical, some examples can be offered. of the legal right should not, as a general rule, lead to emer-
Recently, Belarus adopted a presidential decree “On the de- gence of a special legal regime for the management of such
velopment of the digital economy” No. 8 of 21 December 2017 a right. Were it to do so, it would contradict to the principle
(hereinafter - Belarus Decree).10 This Act contains an elabo- of technological neutrality of the law. The mere fact that the
rate set of definitions and legal regimes applicable to various record is reflected in a distributed decentralized system such
aspects of blockchain-based solutions. A token is defined as a as blockchain, should not lead to changes in the legal status of
record in blockchain or other distributed information system, which such a right. This logic is supported by the position of the US
certifies that the owner of such token has a right to a certain object Security Exchange Commission (SEC) regarding the nature of
of civil right or which performs a function of cryptocurrency”. Cryp- ICO which states: replacing a traditional corporate interest recorded
tocurrency in its turn is defined as a “kind of a token, which is used in a central ledger with an enterprise interest recorded through a
in an international turnover as a means of exchange. blockchain entry on a distributed ledger may change the form of the
There are two main features of token, provided in the above transaction, but it does not change the substance.11
definition: At the same time, the circulation of tokens in blockchain-
based technology can create extra public trust in the records
concerning the right owner of the token. This is due to
1) it represents a right to a certain object of civil law; blockchain’s resilience tin preventing tampering with the
2) it exists in blockchain or other similar distributed decen- records. This feature may, in its turn, simplify the legitimiza-
tralized system. tion of the owner’s rights certified by the token, in relation to
third parties and thus provide increased liquidity of the tok-
enized asset. There is an argument, however, that technologi-
cal neutrality of the law may result in some exclusions if the
7
Bygrave Lee, Internet Governance by Contract. Oxford University type of technology applied becomes so disruptive that it fails
Press. 2015. P. 30. to mitigate some elements of risk, previously dealt with by le-
8
Bygrave. Op.Cit. P. 39; Joshua A.T. Fairfield, ‘Anti-Social Contracts:
gal means. The degree of technological impact on mitigation
The Contractual Governance of Virtual World’ (2008) 53 McGill L. J., P.
of legal risks, sufficient to relax the principle of technologi-
427.
9
It is noted that open source projects are hierarchical, with key cal neutrality, requires further research, which is outside the
decisions being made by “product gurus”, such as Linus Torvalds – scope of this paper.
the developer of the core of Linux operating system, one of the The Belarus Decree provides that a token is a type of prop-
most successful open source software projects. Although users erty, on which the owner obtains a separate and independent
have the freedom, in principle, to make any changes they desire right. Thus, if the rights to paperless securities are certified
and to distribute those changes, such freedom is constrained by
in blockchain and they fall within the existing definition
the problem of “forking”. When users propose changes in prod-
ucts based on open source, the change moves up to hierarchy to of a token, the security will transform into a token and
the product guru, who then makes a decision as to the whether the subsequent transactions will be performed with the token
change is worthy of inclusion to the product. If the guru rejects the and not with the security. Such an approach has a number of
change and the user still wants to distribute it, then the user forks
the product and future users will have to choose between canon-
11
ical versions of the product and forked one. See: Douglas Phillips. SEC Statement on Cryptocurrencies and Initial Coin Offerings,
The Software License Unveiled: How Legislation by License Controls Soft- 11 December 2017. URL: https://sec.gov/news/public-statement/
ware Access. Oxford University Press. 2009. P. 158. statement- clayton- 2017- 12- 11; Report of Investigation Pursuant
10
The text of the decree is available on the official website of to Section 21(a) of the Securities Exchange Act of 1934: The DAO
the President of Belarus. URL: http://president.gov.by/ru/official_ (July 25, 2017). URL: https://www.sec.gov/litigation/investreport/
documents_ru/view/dekret- 8- ot- 21- dekabrja- 2017- g- 17716/. 34-81207.pdf.
Please cite this article as: A. Savelyev, Some risks of tokenization and blockchainizaition of private law, Computer Law & Security Review:
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consequences: not only will it influence the subject matter of transaction exchange process, rather than on the relationship
the agreement and applicable rules, but also for accounting building process.14
and tax purposes, the asset at hand will be considered as a Obviously, this scenario is not the only possible outcome,
token, not a security. Currently, Belarus financial regulators but it may become a reality if political decisions are taken to
are developing an accounting framework for tokens.12 exploit blockchain technologies in certain jurisdictions to at-
License rights can serve as another example, illustrating tract investment and startups in high-tech areas, as is done
the risks of tokenization. If non-exclusive rights to use a cer- in Belarus. It remains to be seen, however, how far relevant
tain object of copyright are tokenized and subsequently pro- provisions will be enforced in practice, but the black letter of
vided for by means of disposal of the token, it means that spe- the law does permit the drawing of the conclusions outlined
cial provisions such as copyright are no longer applicable to above.
license agreements. In other words, the list of essential terms
of license agreements, requirements for their formation, and
limitations for their conclusion, will be overridden by the re- 4. The right to token: right erga omnes or
quirements for agreements with tokens. It is also not clear right ad personam?
what kind of remedies will be applicable in the case of in-
fringement of IP objects existing in tokenized form, or how tra- The nature of the right to a token is one of the key elements of
ditional remedies available in copyright or patent law will in- its legal regime, since it defines remedies available, applicable
terrelate with specific token-related remedies, which will ap- provisions in bankruptcy proceedings, applicable connecting
pear at some point to be driven by the specifics of underlying factors in conflicts of laws and other aspects of a legal regime.
blockchain technology. Traditionally, from the period of Roman law, all civil rights
Providing examples illustrates that the emergence of to- were divided into rights in rem and rights ad personam. A
kens, which can become a derivative digital representation of right in rem is available against the world at large, i.e. it is valid
almost any other object existing in analogue or digital form, al- against all persons generally (erga omnes). The right owner
lows absorption of existing legal regimes of those objects with performs his right in rem by his own actions. No assistance
a new one. This leads to the conclusion that tokenization en- from other persons is necessary. Thus, the essence of this right
ables not only achievement of a new level of effectiveness in lies in the negative obligation of all other persons to refrain
the transacting process by means of its standardization, but from interference in the enjoyment of that right. Therefore,
also the ability to bypass “inconvenient” rules and provisions any other person can violate such right.15 Taking into account
by means of tokenization. For example, the Belarus Decree the famous definition of privacy, rights in rem can be desig-
does not permit the exchange of tokens, including cryptocur- nated as a right to be left alone16 or the right to exclude others
rencies on goods or services, only token-token or token-fiat from one’s property.17 The most evident example of the right
money13 types of transactions, performed via specialized op- in rem is the ownership right. Third parties may never see the
erators of crypto-platforms. This restriction is driven by the owner, hear about him, or even know if he has died and been
fear of regulators to admit cryptocurrencies in real economic replaced as owner by some other person. The only relation-
turnover. However, it can be by-passed by tokenizing relevant ship to him is through the property, operating as some kind of
goods or services and making such tokens the subject matter mediator, in the sense that third parties may affect the owner
of subsequent exchange transactions. only by acting towards his property in some way. The right
To a substantial degree, the effectiveness of tokenization holder is represented to them as an “owner” and his identity
will be driven by the increased role of governance by pro- can remain completely obscure. Thus, no particular feature of
gram code and contract, in setting the rules for the circula- an individual needs to be ascertained in order to comply with
tion of objects of civil law in the shape of a token. The conver- the passive obligation of non-interference. The right in rem is
gence of algorithmic governance with pre-defined contractual defined by reference to the existence and location of the thing
terms, both embedded in decentralized infrastructures, can itself and cannot survive the extinction of the thing.
lead to some rather questionable results. Ultimately, it may A right ad personam is available only against a determi-
be a major step for society, regulated mostly by technology. nate person or persons, and corresponds to a duty imposed on
Some researchers have already expressed alarm that the per- determinate individuals. Therefore, only such person or per-
vasiveness of algorithmic governance tends to de-humanize sons can violate it. The rights to claim damages for tort, or
social relations and results in “techno-social engineering of the right to recover a debt from the contractual counterparty
humans”, since digital platforms like blockchain, focus on the are the prime examples. The personality of individuals is rel-
evant for rights ad personam, since these persons are obliged
to perform something actively, e.g. to do something. A right ad

14
Atzori, Marcella and Ulieru, Mihaela, Architecting the eSociety
on Blockchain: A Provocation to Human Nature (June 1, 2017). P. 11
ff. Available at SSRN: https://ssrn.com/abstract=2999715;.
12 15
See: Regulation of the Belarus Ministry of Finance of 6.03.2018 J.E. Penner. The Idea of Property in Law. Oxford University
No. 6 ‘National standard of accounting for tokens”. Press. 2003. P. 23; Belov Vadim, Essays on Property Rights [Ocherki
13
Fiat money is currency that a government has declared to be veschnogo prava]. Moscow, 2017. P. 8 ff.
16
legal tender, but it is not backed by a physical commodity. Most Samuel Warren and Louis Brandeis, The Right to Privacy, 4 Har-
modern paper currencies are fiat currencies; they have no intrinsic vard L.R.,1890, P. 193.
17
value and are based solely on the faith and credit of the economy. Penner. Op. Cit. P. 71.
Please cite this article as: A. Savelyev, Some risks of tokenization and blockchainizaition of private law, Computer Law & Security Review:
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personam is capable of surviving the loss or disappearance of the ultimate dominance of a person over the token circulating
a thing: the destruction of a certain thing that has to be deliv- on a public blockchain, is impossible without the participa-
ered under the contract does not discharge the claim.18 tion of third parties. However, such participation is rather un-
Thus, the question is whether a right to token is a right typical: such participation is regulated, not by an agreement,
in rem or right ad personam? One of the possible answers is but by protocol. Besides, such participation does not lead to
that “it depends” . Specifically, it depends on the type of to- the emergence of any legal rights on the miner’s side to a to-
ken and the nature of the right it certifies. This position seems ken, transfer of which is verified by him. The token, in this
sound if one recalls that there may be one token representing situation, serves as one of the sources of input for complex
a cryptocurrency unit, such as bitcoin, and other token repre- mathematical tasks, which need to be resolved by the miner.
senting the right of an investor to a share in the profits of a Therefore, such miner can still be considered “excluded,” from
company issued with such a token. In the former case, there a legal perspective, from interference in the sphere of the to-
is no obliged person, viz “debtor”, as cryptocurrency units are ken owner’s property right. There is nothing personal in re-
issued and transferred based on algorithms reflected in proto- lations between the owner of a token or cryptocurrency and
cols. In the latter case, there is a determinate person, obliged miners and, as Penner convincingly argues, the more some-
under the token, by the issue of such token. Nevertheless, if thing is impersonal, the more it is property.19
the token becomes one of the core elements of the new digi- Moreover, it is possible to “steal” a token via a hacker’s at-
tal economy and services based on blockchain, there needs to tack. A number of cases have been reported already. One of the
be a unified approach to its legal regime. In order to answer most notorious attacks was the DAO (digital decentralized au-
this question, the key features of the right to a token must be tonomous organization) hack, where the attacker managed to
outlined. transfer more than 3.6 million ETH cryptocurrency units into
First, it is necessary to distinguish the right to a token from his account by exploiting the program code.20 There is also a
the rights certified by it. Two types of relations exist viz. the long history of thefts at cryptocurrency exchanges and wal-
“owner of the token and other third persons” and “the owner lets, dating back to the infamous robbery of Tokyo-based Mt.
of the token and the issuer of the token”. Utility and asset to- Gox in 2014. These examples illustrate that the right to a to-
kens usually have an issuer, who becomes a debtor towards ken can be violated by a third party and support the argument
the owner of the token with regard to the obligations certified that the right to a token is a right in rem.
by it, e.g. to provide a certain online service, a specific share Nonetheless, once one decides that a right to a token can
in the profits of the debtor or other asset. The qualification of be qualified as a kind of right in rem, since it can be violated by
the relation between the issuer of the token and its owner, as a a third party, a very difficult question about the applicability of
right ad personam, does not prevent qualification of the right associated remedies arises. These difficulties result from the
to such token as a right in rem, when it comes to relations with fact that the action of the owner to claim his property implies
third parties. This situation is quite similar to the one operat- that there is a possibility of possession of such an object. As
ing with securities: a person may own a security as an object the old maxim of common law states, “possession is the root
and at the same time have a personal claim to the issuer of of title”.21 Under Russian law, possession is the key element
it. The activities of cryptoexchanges, where the market value of the so-called vindicatio claim, which forms the core type
of such objects is defined and where they can be converted of remedy for the protection of a right in rem: the claim of
in fiat currencies, or exchanged for other types of tokens or the non-possessing owner to the possessing non-owner (Arti-
cryptocurrencies, prove the fact that a token as well as cryp- cle 302 of the Civil Code of the Russian Federation). This rem-
tocurrencies can be objects which are alienable and circulat- edy allows the owner to receive the actual thing back, if he
ing as such. In substance, such activities do not possess sub- has lost control over it for some reason, sometimes even if
stantial differences compared with the activities of traditional the new owner is a bona fide purchaser for value without no-
stock exchanges, where securitized representations of rights tice. The mere notion of possession, understood in Russia as
are circulating, usually treated as objects of property rights. the exercise of exclusive dominion through physical relation
Nevertheless, the disposal of tokens do possess some over a material object, does not fit easily into such intangible
unique features, which are essential in defining the nature of objects as a record in a blockchain register, even if it is associ-
the rights to a token. Only a person who knows the private ated with some kind of property right. The core problem here
key has the opportunity to transfer a token. No consent or is not only in the intangibility itself, but also in the inability
approval from another person is needed for such a transfer, to seize effective control by a third party over such an asset
at least if it is circulating in a public blockchain. However, in as a token, which can be transferred only if the private key
order to make such a transfer effective, assistance or rather, is known. If a certain right or other asset exists in a central-
participation of other persons, is required. So-called miners ized system, the administrator may take action and transfer
are performing activities necessary for verification of transac- it to the other person, based on the decision of the court or
tions in blockchain and reflecting them in new blocks of such other lawful basis. In a decentralized system like blockchain,
transactions. It is not possible to identify in advance the list
of such miners: any person, having the motivation and pos-
19
Penner. Op.Cit. P. 132.
sessing computing power may become a miner. It means that 20
See, e.g. David Siegel. Understanding the DAO At-
tack. 25 June 2016. URL: https://www.coindesk.com/
understanding- dao- hack- journalists/.
18 21
Peter Birks. An Introduction to the Law of Restitution. Oxford. Carol Rose. Possession as the Origin of Property. 52 U. Chi. L.
1985. P. 49-50. Rev. 1985, P. 75.
Please cite this article as: A. Savelyev, Some risks of tokenization and blockchainizaition of private law, Computer Law & Security Review:
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where the token exists, such approach is not an option. If it is Having reached this point, it is worth considering how
not possible to transfer the token without the will or cooper- some jurisdictions try to answer this question. The aforemen-
ation of the person who knows the private key, then it means tioned Belarus Decree explicitly states that the owner of the
that vindication and other types of remedies associated with token has a “proprietary” right to it (Attachment 1 to it). At
possession and its transfer are not feasible. The only possi- the same time, for the purposes of taxation, the transfer of to-
ble decision is a claim for damages, which is a claim ad per- kens is qualified as the assignment of a proprietary right (Ar-
sonam. The presence of a damages claim allows one to say ticle 3.1 (1)). Pragmatic reasoning drives such decisions. When
that there is a right recognized in the law: as the old Roman a new object appears, there are few options available: either
law maxim states - where there is a right, there is a remedy to extend existing legal regimes towards such new objects or
(ubi ius ibi remedium). After all, whether a property-holder to create a new legal regime. Given that such objects depend
can only obtain damages for theft or interference of his prop- on the evolving technology, which perspective is unclear, it is
erty, or whether he can secure the return of the object itself, too risky perhaps to create something new. Therefore, the for-
does not determine whether he is the owner or not.22 mer approach might be preferred. It will be interesting to see
There are some known cases, where the court authorized how the Belarus authorities and the courts handle the many
seizure of bitcoins contained in wallets belonging to a defen- difficulties associated with the specifics of tokens.
dant by transferring the full account balance in each wallet to As for the Russian approach, it is still under development.
a Bitcoin address controlled by state authority.23 Specifically, The Ministry of Finance and the Central Bank of Russia are
it was done in the famous ‘Silk Road’ case and resulted in a both preparing new legislation in this sphere, aimed at clar-
subsequent tender, where such seized bitcoins were sold. Un- ifying the legal regime of ICO, tokens, cryptocurrencies, and
fortunately, available materials on this case do not reveal how smart-contracts.25 It is expected to have these laws adopted
the order of the court was performed, from a technical per- by the end of 2018. Currently, the draft law establishes that
spective. However, if it was done without the cooperation of the rights to tokens and to cryptocurrencies are rights in
the owner of the private key then, based on the decision of the rem. However, no further specific provisions about remedies
court or law enforcement agency, it means that there are pos- or other aspects of the regime of such rights are provided. This
sibilities to transfer tokens existing in decentralized systems, draft law is mostly concerned with public aspects of usage of
such as public blockchains. If so, this is a major breakthrough cryptocurrencies and tokens, such as the status of operators
in bringing this object within the traditional province of law. of cryptocurrency platforms, their obligations and the list of
Based on the above, it is possible to conclude that the right permitted transactions.
to a token possesses some features, which are typical for both Another draft of the law dedicated to tokens seeks to intro-
rights in rem and rights ad personam. At first glance, the loss duce changes in the Civil Code itself.26 It considers the nature
of control over a token, e.g. due to the inability to recall the of tokens as some kind of property right. Such tokens are iden-
password to the wallet, leads to the disappearance of both the tified as “digital rights” and defined as “digital code,” certify-
right certified by it and the right to such a token. Secondly, a ing the right to be an object of civil rights (except for nonma-
right to a token can potentially be violated by any third per- terial values) existing in a decentralized information system.
son, who may steal it from the wallet using hacking or social This is on condition that the owner of the token is familiar
engineering techniques. Therefore, it needs protection against with the description of such object at any time. The transfer
the whole world (erga omnes). Besides, it represents the fact of rights to such objects is performed solely by introduction of
of belonging to certain individually defined assets, to a per- changes to the register existing in such a decentralized infor-
son separable from it, which is typical in relation to property mation system. This draft defines cryptocurrencies as “digital
rights. As Penner puts it, if a relationship is a property relation- money” and as digital code, existing in a decentralized infor-
ship, there must be an owner and there must be something mation system, which does not certify a right to some kind of
owned, and these cannot be the same things. Furthermore, if civil law object, and functions as a means of payment among
one stands in the relationship of owner to a thing, then it must the users of such information system. The same rules for the
be possible for someone else to own it as well.24 transfer of digital money as for digital rights apply.
However, certain features, such as the inability to transfer Both drafts have received substantial criticism from var-
tokens without involvement of certain third parties (“miners”) ious stakeholders, and it is likely that a middle ground ap-
in public blockchains, and the inability to apply the concept proach will ultimately be found. Amendments to the Civil
of “possession” to such intangibles as tokens, with relevant Code will regulate private aspects of tokens/cryptocurrencies,
proprietary remedies, leads to the conclusion that a right to while a special law will cover the public law aspects. In any
a token is of a mixed nature and potentially deserves a sui case, these drafts prove the trend of the law to tokenization,
generis regime. with all the inherent risks as illustrated in this paper.
Meanwhile, the Russian courts and authorities have taken
a position that such an object does not exist in Russia and can-
not be an asset, which can be exchanged for goods or services.
22
Penner. Op. Cit. P. 141. Neither can it be accepted as a payment by legal entities. The
23
US v. Ross William Ulbricht, Sealed Second Post-Complaint
Protective Order. 24 October 2013. URL: https://www.justice.
25
gov/sites/default/files/usao-sdny/legacy/2015/03/25/Second% Draft Federal Law of the Russian Federation “On Digital Finan-
20Post-Complaint%20Protective%20Order%20-%20Silk%20Road. cial Assets” No. 419059-7.
26
pdf. Draft Federal Law of the Russian Federation “On Digital Finan-
24
Penner. Op. Cit. P. 124. cial Assets” No. 424632-7.
Please cite this article as: A. Savelyev, Some risks of tokenization and blockchainizaition of private law, Computer Law & Security Review:
The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.010
JID: CLSR
ARTICLE IN PRESS [m7;May 25, 2018;20:0]
computer law & security review 000 (2018) 1–7 7

Russian commercial (‘arbitrazh’ ) court has decided recently which may include features from other legal regimes, such as
that cryptocurrency should not be included in bankruptcy as- security laws, tangible property rights, and intellectual prop-
sets, since it is not an object of civil rights.27 The official rea- erty rights. There may also be parallels to how, after a period
soning is that such objects as cryptocurrency are not indicated of time, the intellectual property rights regime evolved from
in the list of objects of civil rights provided in the Civil Code traditional property law, when relevant relations became suf-
of the Russian Federation. There is much speculation about ficiently mature.
the motives of the judge here, but one could be linked to frus- The remarks provided in this paper have most definitely
tration about the possible consequences of inclusion of such only scratched the surface of the problems associated with
objects in bankruptcy processes, where no clarity exists as to tokenization of the economy. The judgements expressed here
the nature of the rights to it or to the possible regime of its are those about which reasonable people may wish to differ.
subsequent disposal. However, the author hopes that these thoughts will be of value
The complexities of the issues discussed above, driven by for the ongoing and subsequent discussion of this topic.
the unique nature of tokens and cryptocurrencies, lead to the
conclusion that such objects deserve their own, sui generis le-
gal regime. Nevertheless, it is impossible to provide a detailed Acknowledgement
regulation now, as the technology is still developing and the
scope of its application in real life remains unclear. During This paper was prepared within the framework of the Basic
the transition period, it will be squeezed into existing con- Research Program at the National Research University Higher
cepts and provisions, some of which will be applied directly School of Economics (HSE) and supported within the frame-
and others by means of analogy. However, in the long run, work of a subsidy by the Russian Academic Excellence Project
there are prerequisites for the emergence of rights to tokens, ‘5–100’.

27
Decision of the Commercial court of Moscow No. № А40-
124668/2017. However, it seems likely that the Appellate court may
overrule this decision and take into account the recent legislative
initiatives.
Please cite this article as: A. Savelyev, Some risks of tokenization and blockchainizaition of private law, Computer Law & Security Review:
The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.010