This is a guest post by Professors Neil Gandal (Berglass School of Economics, Tel Aviv University) and Joshua Gans (Rotman School of Management, University of Toronto), advisors to the Orbs project.

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Suppose you take some seeds, plant them in your garden, put some effort in nurturing them and then you produce a vegetable. From an economic standpoint, you have combined some raw materials (seeds and your land) with some labour (your effort) and transformed them into a product (the vegetable). But from a legal standpoint, if you owned the seeds and the land, then you made a decision to ‘destroy’ your property rights (by effectively destroying the seeds and using the land for an activity) and the law then presumes you are the owner of new property (the vegetable). You can then take that new property and perhaps transfer the property rights to someone else or destroy them by consuming the vegetable.

According to David Ellerman (Ellerman.org), economists are used to thinking about the exchange of property rights but the creation and destruction of them less so. When one person owns all of the elements of production, how the process plays out seems obvious. But when one person owns, say, the land and the seeds and another person does the gardening, it is less clear. Who owns the vegetable in this case? The answer is that it depends on what the default laws are and if the two parties have come to some agreement as to what happens. You might think that the answer here is the owner of the land and raw materials owns the vegetable but, in some domains, for instance, the assignment of copyright, it can go the other way. That is, the owner of a picture is the person who pressed the shutter and not the owner of the camera.

We are not going to resolve these issues here but it is useful to note that Bitcoin creates property rights in a way that is pretty unusual. Bitcoins are minted as a reward to mining activity. Such activity requires the use of an asset (a computer) and the consumption of a raw material (energy). If those things are applied within the Bitcoin network, there is a probability that a reward will be generated. Who owns the rewards? As a default, the person who owns the computer. Of course, computers can be rented, so the property right might be assigned to the renter by contract.

But, interestingly, there is no real labour effort involved in the whole activity. This makes Bitcoin mining very different from other activities in the economy. For instance, you can really install a computer to mine bitcoin and think about the expected stream of benefits (in terms of created bitcoins) you might acquire. It is, literally, plug and play. By contrast, in other activities, there is potentially another person involved and so the default assignment of property rights is not so obvious. Therefore, bitcoin represents an interesting edge case.

If the above was not confusing enough, consider this: According to Dave Michels, a Research associate at Queen Mary University of London, in a piece he recently wrote for the Conversation, noted that “Courts in England and Wales are unlikely to identify digital tokens as property, since the law does not recognise possession of intangible items. This means that crypto-currency holdings may not qualify as property at all.”[1]

As he explains, Common Law distinguishes between real property (i.e., land) and personal property. Subcategories of Personal property are “things in possession” (like a $20 bill) and “things in action” (like debts, bank deposits, rights under contract, and intellectual property.)

Clearly, digital coins do not fit in the “things in possession category.” But he argues that digital coins are not “things in action” either, since Bitcoin does not give one a right to anything or against anyone.

Utility tokens, on the other hand, give a right to a product or service from a company. Hence, they likely fall under the “things in action” category.

Perhaps this why Wyoming recently became the first US state to give Bitcoin owners full property rights.[2]  The new law allows Wyoming residents to “own” cryptocurrency tokens without getting rights through third-party storage.

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[1] https://theconversation.com/you-may-not-actually-own-your-bitcoin-legal-expert-107307

[2] See the article by Ether Kim at https://bitcoinist.com/wyoming-bitcoin-full-property-rights/.