For the first time in France, and one of the first times in Europe, a court decision characterises the legal nature of a cryptocurrency (bitcoin) and loans on such asset.
On 26 February 2020, France's first instance commercial Court of Nanterre (a city belonging to greater Paris which has jurisdiction over leading French banks and corporates), issued a remarkable ruling involving the characterization of the nature of bitcoin (BTC) under French law. This is, to the best of our knowledge, the first time a French court has provided a legal characterization of a cryptocurrency (in the case at hand, BTC) and of a loan on such asset. Although this – highly publicized – decision should not be interpreted as amounting to case law, notably because it may be appealed and dismissed on appeal and has not been provided by the French supreme court (the Cour de cassation), practitioners are seeking to anticipate and address this type of issue in their documentation (and to review and update it as necessary).
In the case at hand, BitSpread, a fintech company offering investment services in alternative assets, had entered into several BTC loan agreements with the French cryptoassets exchange Paymium between 2014 and 2016. As a result of the hard fork splitting BTC with bitcoin cash (BCH) that took place in August 2017, BitSpread received BCH1,000. A few months later, at the end of the term of the loan agreements, BitSpread returned the original BTC loan amount to Paymium. However, Paymium also demanded the transfer of the BCH.
The court had to determine who the owner of the BCH was, and therefore, had to characterize the BTC. According to the court, BTC are "consumable assets" (i.e. like legal currency), they are "consumed" as soon as they are used, to pay for goods or services or when exchanged for another cryptocurrency or a legal currency, or otherwise. Indeed, because all BTC are based on the same computer protocol and each is regarded as equivalent to any other BTC, the court further determined that all BTC were of the same kind and quality and should therefore be held as fungible – freely exchangeable or replaceable with each other.
As a direct consequence of such qualification, according to the French commercial court, the borrower (BitSpread) became the owner of the borrowed BTC at the time of the transfer date of such BTC because, according to the court, the BTC were "loans on fungible assets" (prêts de consommation), and not "loans for use" (prêt à usage) and title of ownership passed to the borrower as a legal effect of the loan.
The other consequence of such qualification is that, being the owner of the BTC, the borrower was legally entitled to receive and own the proceeds of such assets (i.e. the BCH resulting from the fork).
Further, the agreement between BitSpread and Paymium took place before the effective date of the so called French "Pacte law" (see our comment on such law in issue 18 of FMG) which has created an innovative legal regime governing digital assets such as cryptocurrencies and the provision of services on digital assets in the French financial markets authority (Autorité des marches financiers). Under such law, in the event of a fork (bifurcation), owners of cryptoassets should also become owners of cryptoassets resulting from the fork, unless the written agreement between the parties specifies otherwise. However, this rule seems only to govern the relationships between the owner of cryptoassets and the custodian, and not between a lender of cryptoassets and the borrower, and therefore, the issue remains.
Learn more about the impact of this decision on your business and next steps by contacting the authors.