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snowpar

Is using XRP to exchange value legally binding?

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This is a high-quality post and question @snowpar, reminds me of the old XRP chat. I think you're right to point out that the answer is no so obvious. Ultimately rules need to be put in place that clarify what constitutes fulfillment of a payment obligation. With fiat it's obvious but not so with crypto. There has to be a separate contract including the parties involved specifying that delivery of the equivalent amount of crypto constitutes fulfillment of a payment at the minimum. Ultimately, jurisdictional rules would need to be put in place and it looks like Japan is a first mover in this area.

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As a licensed lawyer and  the CEO of an investment banking firm, I once was involved in litigation which concerned whether an electronic signature purporting to be mine was enforceable. My company moved for summary judgment and at the hearing I explained to the judge that I never authorised the electronic signature and that it was effectively a forgey and the judge granted the motion and we won. certainly it helped that I was an attorney in good standing before the local bar and I had known the judge for twenty years.    My view is that electronic signatures per se should be valid unless procured by fraud as was the case where I was involved in litigation. Of course, issues of breach of contract and compliance of the underlying goods or services with the terms of the agreement would more properly be a matter for escrow and third-party validation. In that connection, does.Ripple have the ability to code escrow terms onto xrp or is their other protocol available in the Ripple payment system which allows for some escrow or third-party verification?  if Ripple-XRP does not, can it be used in conjunction with another crypto-currency  with smart contract features, such as ether?

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1 hour ago, snowpar said:

@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. 

They were hesitant to add members initially because with too many people, it's much harder to reach agreement. That they're now adding new members is a very good sign as it indicates that they're no longer concerned about that kind of loss of focus. To me, it's an indication that they're past those initial stages.

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18 hours ago, snowpar said:

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've been consulting a big law firm specialized in national and international finance in close contact with the Canadian gov.

In short, the contract is the binder. If you agree to sell me your car for a barrel of maple syrup, doesn't matter that the syrup is not a "legally binding financial instrument", the contract is. As long as the terms are respected, you can use anything as a financial instrument.

So, if you don't like maple syrup and you want XRPs instead, as long as we agree on a contract, the minute we sign we are "bound" and by receiving my XRPs you have agreed to the value of those XRPs, in this case, the value of your car. If there's a dispute, it'll be about the contract, not specifically related to XRPs.

That's my understanding of what they are telling me right now. It sure looks more complex, but it seems to be back to basic: the contract.

Edited by OlivierA

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I've been consulting a big law firm specialized in national and international finance in close contact with the Canadian gov.
In short, the contract is the binder. If you agree to sell me your car for a barrel of maple syrup, doesn't matter that the syrup is not a "legally binding financial instrument", the contract is. As long as the terms are respected, you can use anything as a financial instrument.
So, if you don't like maple syrup and you want XRPs instead, as long as we agree on a contract, the minute we sign we are "bound" and by receiving my XRPs you have agreed to the value of those XRPs, in this case, the value of your car. If there's a dispute, it'll be about the contract, not specifically related to XRPs.
That's my understanding of what they are telling me right now. It sure looks more complex, but it seems to be back to basic: the contract.

Agreed. Barter transaction rules apply. Fun tidbit, taxes, payable in the Canadian dollars, are still applyed regardless of instrument of settlement and are based on fair market value. So even if you convince someone to trade thier car for 1 XRP you still have to pay dollar taxes on the cars comparable real market value. One of the reasons why these transactions are not more common

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14 hours ago, OlivierA said:

That's my understanding of what they are telling me right now. It sure looks more complex, but it seems to be back to basic: the contract.

Thanks, this all works well as long as terms are stipulated in the contract regarding settlement. Which means decisions need to be made regarding what's allowed. It's not hard to do, but is an unnecessary hurdle if eventually say XRP is being used to settle contracts all over the world.

My hope is legislation is eventually passed recognizing cryptocurrencies (with specific characteristics of course) as legal tender (or some form of such), so settlement terms would not need to specify the allowable cryptocurrency. If this happens, especially on some global scale, that's where you get everyone using them. 

"Huge amounts of debts are created in a day’s worth of business. Negotiating settlement media into each and every contract takes time, so transactors may choose to omit that bit. If so, a subsequent situation may arise in which a debtor arrives to pay a creditor, but the creditor refuses to accept the proffered settlement media, thereby forcing the debtor into unnecessary default. To avoid having court rooms being swamped by frivolous default cases, I could imagine merchant law evolving a list of common media that must always be accepted in the settlement of those debts for which a settlement medium was not already specified. If the marketplace were to accept these laws, then legal tender rules would arise in the same way that VHS beat Beta—they provide a cheap and useful set of standards around which everyone can coordinate their plans and actions."

Source: http://jpkoning.blogspot.com/2013/01/is-legal-tender-imposition-on-free.html

 

Japan passing the Virtual Currency Act is a great first step as virtual currencies are now at least a recognized payment method there. I hope other countries follow suit. 

https://bravenewcoin.com/news/bitcoin-regulation-overhaul-in-japan/

 


For an interesting read regarding what constitutes legal tender:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1292893

What is Legal Tender?
In law, a commercial contract is born when the parties agree on some necessary terms. In a contract to sell goods the quantity is a necessary term. For example, an agreement to “sell apples at the price of one dollar per pound, tomorrow, in my store,” is not a contract and cannot be enforced in court, because the quantity is undetermined. Legislatures worldwide resolved long ago that specifying the medium of payment is not a necessary term. Thus, if the above example is modified by adding the quantity term “ten pounds of apples,” then it is a valid contract, even though the medium of payment (as opposed to the unit of account) is undetermined.

However, this raises a potential problem. A contract has been created, and each side now has an obligation. How should the buyer’s obligation to pay ten dollars be discharged? Actually, almost anything on which the parties mutually agree is acceptable,  be it ten one-dollar bills, a check, peso bills according to some exchange rate, or a watch which the seller estimates as worth at least ten dollars. This is just one aspect of the freedom of contracts, which is a fundamental building block of capitalism. Legislatures have outlawed very few media of payment, such as gold (in post Great Depression legislation), or illegal drugs (which could conflict with the public interest). It does not matter if the agreement regarding the medium of payment is part of the contract, or made separately after the contract is created.

The main goal of contract law is to solve disagreements after a contract is created (for instance, where the terms are vague and give rise to a dispute). Suppose that the buyer in my example, where no medium of payment was specified, offers to pay in a ten dollar bill, but the seller rejects it because he wants pesos. Given that a contract was formed and payment was tendered but rejected, can the seller sue the buyer in court for breach of contract due to this nonpayment? What if the buyer offers one thousand one-cent coins, or a ten-dollar watch?

“Legal tender” is an object that confers a right on the payer. If the buyer in my example offers the correct quantity of anything that has been declared by law to be legal tender, then the seller’s lawsuit fails. The buyer may be asked to deliver the proffered payment to court, which the court would offer to the seller. The buyer is then off the hook, having fully performed his contractual obligation of making payment. On the other hand, any object that is not legal tender will not give the buyer such peace of mind. Judgment will be entered against the buyer for breach of contract if the seller delivered the goods and rejected a proffered payment from the buyer that did not constitute legal tender. For this very practical purpose, every country specifies which objects are considered legal tender for debts that are subject to its contract law. Typically, the government gives this status to currency it issues itself, but this is not necessary.

Since legal tender laws protect buyers, sellers may want to protect themselves from these laws. Usually, it is remarkably easy to do so. Before the necessary details of the contract are finalized (that is, before contract formation), the seller can specify the medium of payment. If the parties agree to a specific medium of payment, then this term will become part of their contract. If that medium of payment is not outlawed by other laws (for example, voided as a matter of public policy, as in the illegal drug example above), then legal tender laws will not apply. If, on the other hand, there is disagreement about the medium of payment, then a contract fails to come into existence. Going back to my example, suppose that before agreeing on the quantity of apples to be delivered, the seller states (e.g., by posting a sign near the cash register) that he must be paid in pesos. If the buyer refuses and this medium of payment is not acceptable to both parties, then a contract is not formed, and nobody has any contractual obligation at all.

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