When crypto is more like a car than money

What if, unbeknownst to you, a cryptocurrency you bought had at some point been stolen, as so much crypto has been?

Should you surrender it to the owner it was stolen from? 

The ancient legal principle of nemo dat quod non habet — “no one can give what they do not have” — suggests that you should. 

A thief takes physical possession of a stolen good, but they do not take possession of its title. The title — which confers ownership — remains with the person who’s been robbed. 

This is how US law mostly works. However much you pay for a stolen good, you do not become its owner — because no one can give what they do not have.  

The most famous example of this principle is stolen art. In The Monument Men, for example, art looted by the Nazis is tracked down by Allied soldiers, repossessed, and returned to its original owners.

Even if that art had been sold and resold, its title never left the original owner. Repossessing and returning it is simply a recognition of nemo dat.

A more relatable example is cars — twice-stolen ones, especially.

People will sometimes sell a car they’ve stolen, steal it again, and then list it for sale again (on Craigslist, usually).

So what happens if the car is recovered by the police? There are two people who believe they own the car: the person it was stolen from and the person who bought it. 

Because the title never moved, the police will return the car to the person from whom it was stolen.

Unless it was stolen in Louisiana!

Article 524 of the Louisiana Civil Code states that, “The owner of a lost or stolen movable may recover it from a possessor who bought it in good faith at a public auction or from a merchant customarily selling similar things on reimbursing the purchase price.”

In other words, the original owner is entitled to have their property back, but only if they pay for it.

Usually, they’re required to pay whatever price the buyer had paid. But if the new buyer made any improvements — a new set of tires, say — the original owner has to pay for that, too.

(It’s unclear exactly how Louisiana law would deal with a twice-stolen, twice-sold car. Are both good-faith buyers entitled to payment? I’m guessing they might have to wrassle an alligator for it or something.)

This alternate interpretation of ownership is not a quirk of the bayou. Louisiana’s Article 524 is based on Article 2276 of the French Civil Code: “In the case of moveable property, possession is equivalent to title.” 

It’s “finders keepers,” basically, and it applies in most of Europe.

This might be why American heroes like George Clooney and Matt Damon had to steal back those looted paintings. By European law, the original owners might have been required to buy them back.

As unfair as that seems, the French interpretation of ownership has some advantages.

It makes markets more efficient by removing the transaction cost of having to research the ownership of every purchase. It incentivizes owners to protect their stuff more carefully so they’re not stolen in the first place. It helps ensure goods end up with the people who want them most (instead of being hidden away for fear of repossession).

The US alternative of nemo dat has different advantages. If thieves can’t confer ownership, stolen goods are harder to sell, which lowers their price and therefore the incentive to steal them.

Plus, it just makes sense: no one thinks they should have to re-buy their own car.

Civil Code vs. nemo dat is essentially a tradeoff between protecting original owners and protecting good-faith buyers.

There is, however, one thing that both systems agree on: money gets an exception.

If I steal a $100 bill and spend it at a grocery store, the store gets to keep it, no matter what.

The "chain of title" does not apply to cash because, for the economy to function, money must be "negotiable" — freely transferable in a way that gives the recipient full title.

Courts in both the US and Europe disregard the history of who owned money before because they want transactions to be final.

Just like crypto!

If cryptocurrency is a form of money, it makes sense that it, too, would be “negotiable.” Crypto markets wouldn’t function if everyone had to worry about a coin’s chain of title.

This has been enshrined in the social contract of crypto by making ownership a function of possession: not your keys, not your crypto.

In that sense, a blockchain is simply a chain of titles.

Sometimes, though, you can have the keys and not have the crypto — as was the case when the Arbitrum DAO voted to confiscate $70 million of ETH held in an address controlled by North Korean hackers. 

Did that ETH ever belong to North Korea?

Aave founder Stani Kulechov uses a nemo dat argument to argue that it did not: “A thief does not own what they steal,” he said in a statement on recovering funds from the KelpDAO exploit. “These funds belong to the affected users from whom they were stolen, plain and simple.”

But the legal concepts of ownership are not so plain and simple. Each approach comes with tradeoffs. None solves for everything.

Crypto promised finality, for example, which makes markets work. Nemo dat promises justice, which makes common sense.

You can’t have both.

— Byron Gilliam