Jump to content
snowpar

Is using XRP to exchange value legally binding?

Recommended Posts

Question: Is using XRP (or any digital currency with a cryptographic hash function) to exchange value legally binding?

Why I'm curious:

Electronic signatures (e.g. Docusign) have not always been legally binding. The US, the UK, and the European Union all passed similar laws around 1999/2000 establishing a legal framework to treat electronic signatures as equivalent to handwritten signatures. The United Nations published an international framework for cross-border recognition in 2005.

Here is a bit of history on electronic signatures:

  • 1976: Whitfield Diffie and Martin Hellman first described the idea of a digital signature scheme, but they only theorized that such schemes existed
  • 1977: Ronald Rivest, Adi Shamir and Len Adleman invented the RSA algorithm, which could be used to produce a kind of primitive digital signature
  • 1988: Lotus Notes 1.0, which used the RSA algorithm, became the first widely marketed software package to offer digital signatures
  • 1999: The ability to embed digital signatures into documents is added to PDF format
  • 2000: The ESIGN Act makes digital signatures legally binding
  • 2002: SIGNiX is founded and becomes the most broadly used cloud-based digital signature software
  • 2008: The PDF file format becomes an open standard to the International Organization for Standardization (ISO) as ISO 32000. Includes digital signatures as integral part of format.

So you have roughly 10-years from Lotus Notes marketing digital signatures as a product until easily embedded digital signatures can be added to PDF documents. After another few years, everything becomes legally binding. These days, electronic signatures are used almost everywhere, outside of a few things like wills, trusts, divorce documents, etc. 

Without laws changing around the world, you would never have international corporations signing contracts electronically 'hoping' they would be enforceable. When business gets messy, as it always does, you rely on the law to protect your rights. And if the law says no electronic signatures, even if that means I need to jump on a plane to sign a document, I jump on a plane. 

So back to my original question. Does anyone know of existing case law supporting the enforceability of cryptocurrencies being a legally binding financial instrument? What about internationally? 

I'm a huge fan of Ripple and believe in the value proposition of XRP, but I don't see XRP being used by large institutions until it's considered a legally binding transfer of value. You'll likely get a few cutting edge banks to test the waters, but the big guys will wait until laws are passed. 

Regulations and legality are IMO, harder issues to tackle for XRP to succeed than technology improvements or getting banks interested in using XRP. Don't get me wrong, I support XRP, and believe in it's investment merits. This is just one of the risks I see. To be clear, all investments have risks. We're all putting our capital at risk with the belief those risks will eventually subside, and our investment will provide a healthy return.  

I'd love everyone's thoughts on the topic, especially if you're an attorney. If anyone doesn't believe this matters, I'm all ears as well. 

Share this post


Link to post
Share on other sites

?

Companies use digital signatures all the time, for example - the bank (or maybe broker) can demand that every payment order is signed with the digital signature.

In the EU we have a new regulation called eIDAS that deals with digital signatures and their legal status. I'm not deeply familiar with the legal status of digital signatures in the US.

Even if it is not explicitly mentioned somewhere in some act/law, two parties can agree that would use digital signatures instead of handwritten signatures. This "agreement" can be implicit (e.g. by using RCL) and doesn't have to be explicit (explicit contract saying that parties will use digital signatures instead of handwritten signatures).

EDIT:

Why I find your post a little bit confusing? At the beginning you say

Quote

The US, the UK, and the European Union all passed similar laws around 1999/2000 establishing a legal framework to treat electronic signatures as equivalent to handwritten signatures.

 

and then you somehow doubt that digital signatures are legally binding. And then you also talk about case laws which are relevant only in legal systems based on common law (and not in the continental EU, for example).

 

EDIT 2: and then you also talk about "enforceability of cryptocurrencies being a legally binding financial instrument". If a bank owns XRP on RCL, that fact doesn't involve any third party (there's nothing to "enforce"). XRPs are not derivatives or something like that where you have at least two parties.

 

 

 

 

Share this post


Link to post
Share on other sites

To clarify, digital signatures are currently used all the time throughout the world. I do not question that they are legally binding. 

This only happens now because laws have been passed recognizing the validity of a digital signature to carry the same weight as a handwritten signature. Before the relevant laws were passed, digital signatures were not used in practice.

1 hour ago, T8493 said:

Even if it is not explicitly mentioned somewhere in some act/law, two parties can agree that would use digital signatures instead of handwritten signatures. This "agreement" can be implicit (e.g. by using RCL) and doesn't have to be explicit (explicit contract saying that parties will use digital signatures instead of handwritten signatures).

Theoretically speaking, I agree with you. But corporations did not begin to use digital signatures, until laws were passed allowing them to do so. There is too much risk for when something goes wrong, to not have protection under the law. 

I'm questioning if we have a similar situation with the usage of XRP.  New technology, tons of prospects, but we still need some laws passed before full implementation. 

1 hour ago, T8493 said:

EDIT 2: and then you also talk about "enforceability of cryptocurrencies being a legally binding financial instrument". If a bank owns XRP on RCL, that fact doesn't involve any third party (there's nothing to "enforce"). XRPs are not derivatives or something like that where you have at least two parties.

I'm not concerned with a bank owning XRP on the RCL. I'm questioning if Bank A in the UK and Bank B in Mexico both own XRP on RCL, and they enter into a transaction and decide to settle that transaction with XRP, because they both own some and it's easy to settle with, is using XRP legally considered fulfilling the obligations of the agreed upon transaction. I don't think that is currently the case. They can agree on whatever they want, until something goes wrong and they need a court to decide, now laws matter. 

I'm proposing that in order for XRP to be considered legally binding for a transaction, laws need to be passed recognizing it as such. Banks around the world won't just agree with each other to use it because it's easy or cheap. They also need legal assurances that if something goes wrong, a court won't say XRP shouldn't have been used as an exchange of value.

Share this post


Link to post
Share on other sites
4 minutes ago, snowpar said:

I don't think that is currently the case.

 

Why not?

How is this different from a stock broker moving the balance from one account to another on their internal ledger?

 

Share this post


Link to post
Share on other sites
Why not?
How is this different from a stock broker moving the balance from one account to another on their internal ledger?
 


Because that's one entity making a unilateral decision to move value on their own books. Not an agreement between two entities in different countries to transfer value.

Also, everything other than XRP in the system is an IOU. Essentially a legally binding agreement to transfer value at some point in the future. Transferring XRP, is actually transferring that value, not a future promise to do so.

Share this post


Link to post
Share on other sites
11 minutes ago, snowpar said:

Because that's one entity making a unilateral decision to move value on their own books. Not an agreement between two entities in different countries to transfer value.

 

If I buy stocks, this is an agreement between two entities (between me and seller).

I think you're overthinking this.

Generally speaking, two parties can agree that "fulfilling an obligation" can mean anything (unless something that is explicitly stated as illegal by the law). And cryptocurrencies are not even mentioned in most of the laws because laws were usually written before the term "cryptocurrency" was coined.

There are other more realistic legal problems regarding cryptocurrencies. For example, which digital signature schemes are used, GDPR compliance, how to value crypto in balance sheets, how to include crypto in capital requirements, etc.

 

 

 

Share this post


Link to post
Share on other sites
50 minutes ago, T8493 said:

I think you're overthinking this.

.....

There are other more realistic legal problems regarding cryptocurrencies. For example, which digital signature schemes are used, GDPR compliance, how to value crypto in balance sheets, how to include crypto in capital requirements, etc.

Yes, I probably am. However, any investment thesis should include potential risks and evaluation of such risks to aid in the valuation process. I'm poking holes to see what falls out. 

And the legal problems you pose IMO should be included in whatever international legal framework is eventually agreed upon. What cryptographic hash functions are allowed to be used is especially important. 

My point is more that these decisions have not yet been made in many countries, and until they are, I would not expect wide usage of cryptocurrencies to be used commercially. Once the legal framework is in place, usage should spread quickly. 

https://bitconnect.co/bitcoin-information/8/legality-of-bitcoin-cryptocurrency

Share this post


Link to post
Share on other sites

I think I understand your concern. Let me try and clarify...

Company A owe Company B for deliver service X.

This debt between A and B is then settled in XRP (likely linked to a Fiat exchange rate however it does not necessarily need to settle via an IOU but rather directly in equivalent value of XRP?)

Are you suggesting that company B could challenge A that the debt in respect of service X hasn't been fulfilled?








Share this post


Link to post
Share on other sites

I seem to not understand the problem. Everybody participating in RCL puts money into it to get XRP. You can also issue IOUs but when you do this it is your own fault, so whatever. Anyway, everybody has a stake into the network by putting money into it. So there is no counterparty risk. If you screw your business it is yours and not anybodies other's. When you make a transaction the network protocol ensures that the transaction only, and only if both parties fulfill the deal, succeeds. So laws back and forth, the transaction is done and cannot be reversed. If no transaction happened nothing has to be complained about. Easy. 

Share this post


Link to post
Share on other sites
3 minutes ago, dclark247 said:

I think I understand your concern. Let me try and clarify...

Company A owe Company B for deliver service X.

This debt between A and B is then settled in XRP (likely linked to a Fiat exchange rate however it does not necessarily need to settle via an IOU but rather directly in equivalent value of XRP?)

Are you suggesting that company B could challenge A that the debt in respect of service X hasn't been fulfilled?

Thank you for the clarification, this is what I was wondering about. If XRP is not legally recognized, and company B challenges company A on the settlement, my assumption is company B would win in court if this were to happen today. 

I know we're not there yet, but I'm not worried about the next year or two, I'm worried about 5-10 years from now and what additional large hurdles will eventually need to clear for XRP to realize it's full potential.

Share this post


Link to post
Share on other sites
9 minutes ago, snowpar said:

Thank you for the clarification, this is what I was wondering about. If XRP is not legally recognized, and company B challenges company A on the settlement, my assumption is company B would win in court if this were to happen today. 

 

If companies A and B agree on the use of RCL (instead of, e.g. cash), why would this be problematic? Why would this be any different from using e.g. sea shells or gold bars for the settlement?

Many debts are settled without an explicit cash flow (e.g. compensations, but I'm not sure if this word has exactly the same meaning in English).

 

Share this post


Link to post
Share on other sites

If so my understanding would be this...

The service agreement for service X would have included the agreed cost. Whether this be £100, €100, $100, 100 XRP or 100 paper clips.

This is then usually invoiced providing appropriate method of settlement. I.e. Pay this account with this reference etc.

I don't see how it could be argued that the debt wasn't fulfilled if the agreed value was transferred I.e. 100 XRP sent as agreed and invoiced using settlement details provided.

This could of been anything. Paper clips aren't a 'legal' means of value transfer, however they can be used to fulfill a debt obligation for service X if that has been mutually agreed between both parties. That contract is still legally binding.

Although it would be more difficult to prove you had made full payment in paper clips, unlike XRP. Unless of course it was a Paperclip IOU on RCL ;)

However if it was agreed to pay £100. Of course it could be disputed if £100 worth of XRP was sent. Just as if £100 worth of €uro was sent.

Similarly I could see an issue with being paid in USD.polo if the agreement was USD.kraken.

I may not have fully understood your issue but that was my best shot anyways.

Share this post


Link to post
Share on other sites

This is one of the reasons that governance and contractually-agreed rules are critical to getting broad FI adoption of cryptocurrency systems. We've been working on exactly this for some time now.

 

https://www.cryptocoinsnews.com/ripple-big-banks-launch-first-interbank-blockchain-group-global-payments/

https://news.bitcoin.com/ripple-banking-group-blockchain/

Share this post


Link to post
Share on other sites
12 minutes ago, JoelKatz said:

This is one of the reasons that governance and contractually-agreed rules are critical to getting broad FI adoption of cryptocurrency systems. We've been working on exactly this for some time now.

 

https://www.cryptocoinsnews.com/ripple-big-banks-launch-first-interbank-blockchain-group-global-payments/

https://news.bitcoin.com/ripple-banking-group-blockchain/

Looks like the Governance rulebook is being given the "Blessing" in Tokyo later this week. As per Dilip Rao statement at around the 18 minute mark of video link below.

 

Share this post


Link to post
Share on other sites
19 minutes ago, JoelKatz said:

This is one of the reasons that governance and contractually-agreed rules are critical to getting broad FI adoption of cryptocurrency systems. We've been working on exactly this for some time now.

@JoelKatz Thank you for the response. I assumed Ripple was addressing this area, but I was not sure to what extent. I'm glad to see the GPSG increasing it's members and exposure. Contracts and rules that everyone plays by can be a messy area, so addressing these issues upfront is great to see. 

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×
×
  • Create New...