Libertarian Answer Man: Bitcoin and Fraud

A.:

Dear Mr. Kinsella,

As you have pointed out BTC is not an ownable resource. [See KOL274 | Nobody Owns Bitcoin (PFS 2019)] I had a question about how this pertains to fraud.

Let’s say I buy an apple with BTC but the apple is rotten and the seller knows this. Has the apple seller engaged in fraud and therefore “stolen” my BTC? Since BTC is not ownable then it can’t strictly speaking be stolen right? Does this mean I can’t get my BTC back?

KINSELLA:

the issue of fraud is interesting to be sure but you don’t settle it by loaded questions. Notice you said you had “a question” but you asked least three. Why don’t you try to ask just a single (non-compound) question, and one that does not involve any loaded questions.

A.:

Ok I’m so sorry,

Is the apple seller guilty of fraud?

KINSELLA:

Okay this is not a bad way to start. But you are taking too much for granted.

Let me ask you this: why are you asking? What’s the relevance of whether the Apple seller is guilty of fraud? why are you even asking? I have a feeling you are getting at something else. [For the proper way to understand fraud, and contract, see my “A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability,” in  Legal Foundations of a Free Society, Part III.E.]

A.:

I was trying to figure out how something like this would play out in a free society when fiat finally disappears and we have sound money like BTC.

KINSELLA:

Tell you what, if you want to discuss this for 20 minutes on the phone, happy to do so. It’s too hard to sort this out here and I don’t have time to write a treatise. In short, in a private law society there would be property rights in scarce resources, assigned in accordance with self-ownership, original appropriation, and contract. Implications of this core view is that you would have contract law, about transferring ownership, tort law and criminal law. Fraud would be part of this. All ownership or property rights would be rights to scarce, conflictable resources. There would be no IP at all and that means also that bitcoins cannot be “owned.” If Bitcoin becomes money, then people will use it and they will structure their contracts and arrangements to handle for cases of contract “breach” or fraud and so on. Since fiat and bitcoin are considered property now and we have IP law recognized, the law does not concern itself nor does private legal practice come up with ways to handle things like payment-fraud. We cannot predict how a just legal system of a private property order would look exactly since the state’s interventions prevent and block innovation that would undoubtedly happen under a libertarian legal order.

I can give you some guesses as to what I think would happen in my own narrow view of fraud and contract and property rights, but they are only guesses. I don’t see any problem though or have any reason to think that people would be unable to maneuver around the fact that bitcoin is not an ownable thing.

***
In short: to return to your original query:

“As you have pointed out BTC is not an ownable resource. I had a question about how this pertains to fraud.

Let’s say I buy an apple with BTC but the apple is rotten and the seller knows this. Has the apple seller engaged in fraud and therefore “stolen” my BTC? Since BTC is not ownable then it can’t strictly speaking be stolen right? Does this mean I can’t get my BTC back?”

So let’s say we have a world where BTC are not considered to be ownable things. So when you pay you will take measures if you want a remedy in cases of contract breach or fraud. But keep in mind that most contracts are unsecured. This means if the other party owes you “damages” or some type of payment, there is no way to guarantee this. You have to sue them if necessary or go to arbitration, and even then, the goal is if you win, you get an award and that can only come from their resources–their money, home, wealth, whatever. If someone is bankrupt no legal system can make you whole. They will be unable to pay. That’s why people use insurance, or they get collateral, but sometimes they take risks and realize there may be an unsecured debt or obligation. That’s how life works.

I think it’s possible to envision a scenario where the seller defrauds you so now he has your BTC. When I say you do not own the BTC, what I mean is that you could never get a court order returning it to you since this would have to be a court order against third parties–to unwind their local blockchain copies or whatever–but I am not in principle against an order aimed at the defrauding seller: he could be ordered to transfer the BTC back to you. Of course, this assumes he hasn’t spent it yet. If he hasn’t, then sure, you can force him to transfer it back to you. It’s not because he “owns” it, it’s because this is a reasonable way to make him do some restitution for you, the victim.

A: Thank you for the reply. Very interesting.

Honestly after thinking about this a bit more I don’t think it’s a problem. I don’t know if you agree but I think this is something “physical” BTC can solve. By “physical” I mean a physical piece of paper/plastic with a QR code and/or printed private key redeemable for X amount of BTC. The piece of paper/plastic is a rivalrous resource that can be stolen by trick and therefore normal fraud law would apply.

You can then seek restitution for this theft which would/could include the damages you suffered from the loss of the BTC. I can envision people using this for more important and/or risky contracts.

Do you think this is possibly a legitimate and useful use of “physical” BTC?

KINSELLA: