Monday, November 18, 2013
|John Campbell of the Bank,|
cashier of the Royal Bank of
Scotland, c. 1749. A banknote
can be seen on the table.
While this particular case involved paper banknotes (which arguably are irredeemably flawed) rather than a ‘hard currency’, it still illustrates nicely the rationale behind a decision which impacted a widely used currency at the time. Of primary consideration in this case was how its resolution would affect the usability of the currency (i.e. a facet from which currency largely derives its value).
As we’re probably all aware of by now, CoinValidation’s plan, if successfully implemented, would presumably lead to the blacklisting of some coins based on their past transfer history (e.g. having at some point been sent to/from deep web contraband marketplaces, having been paid as ransom to malware operators like those of CryptoLocker, having been stolen, having been allegedly ‘laundered’, having been associated with scams/ponzis, &c). In effect, this would destroy the fungibility of bitcoins. Some ‘clean’ coins would be easier to spend and transact with, while other ‘less clean’ or downright ‘tainted’ coins would be more difficult to use. Thus we would be left with a difficult-to-navigate and frustrating-to-use system whereby some coins are worth more than others (due to their varying spendability). And this largely defeats the purpose of a currency as a facile medium of exchange in the first place.
The case Hew Crawfurd brought against the Royal Bank of Scotland in 1749 had the potential for similar ramifications.
In 1748, Crawfurd sent two large-denomination banknotes, which he had made marks upon and recorded the serial numbers of, through the mail to an associate. Unfortunately the banknotes were not delivered. After enquiring as to their possible whereabouts with the banks, as well as posting newspaper advertisements, one of the notes eventually turned up rather mysteriously at the Royal Bank, although it wasn’t clear whose hands it had passed through to get there. Based on Crawfurd’s diligent recording and marking of the bills in question, however, there was no question that it was one of the two that were sent. Crawfurd was duly notified of the note’s reappearance.
While Crawfurd was eager to be reimbursed for his loss, his claim put the banks in an unenviable position. After all, they presumably had no knowledge that the banknote now in their possession was ill-begotten. Would it be fair to them to eat the loss? And more importantly, what sort of precedent might this set?
Kenneth Reid writes:
"The Banks’ concern is easily understood. If holders of banknotes were vulnerable to infirmities of title of which they knew nothing, then this would indeed be ‘a barr to the circulation’ of notes and hence a threat to the whole idea of paper money. And even if that position could be resisted—even if bona fide holders took an unblemished title—there was the further difficulty of assessing the holder’s state of knowledge. Crawfurd had marked the banknotes and advertised his loss. Must a holder be taken to know this and to realize its significance? ‘If’, the Banks reasoned, ‘the writing upon notes and advertising the numbers in the Publick Prints should be found sufficient to interpel people from receiving such notes in payment it would be a mean of putting an intire stop to the circulation of notes and of opening a door for frauds by malicious and designing persons’" (emphasis mine)
“The Judges, he wrote, were unanimous ‘that money is not subject to any vitium reale1; and that it cannot be vindicated from the bona fide possessor, however clear the proof [of] the theft may be’. Accordingly, ‘Mr Crawfurd had no claim to the note in question’. Thus was established the rule of bona fide acquisition of money in Scotland. The decision also relieved the Banks of the concern, raised once more during the litigation, that newspaper advertisement might ‘amount to a sufficient Interpellation to all the World’ as to deprive the recipient of good faith.”
1 ‘an inherent taint or defect in a title to property’While the decision they penned rested on carefully crafted legalese, it is nonetheless accepted that other, more pragmatic, considerations undoubtedly influenced the judges’ decision. Reid writes:
“Policy issues, as might be expected, were highly prominent in Lord Strichen’s Report. Trade, it was argued for the Banks, rested on the free circulation of money, and free circulation rested in turn on the reliability of notes and coins. If Crawfurd was able to vindicate the banknote, no merchant could risk taking money in payment ‘without being informed of the whole History of it from the Time that it first issued out of the Bank or the Mint till it came to his Hand, which is so apparently absurd, that it seems hardly to merit a Consideration’. And as banknotes would thus be rendered ‘absolutely useless’, this would ‘in a great Measure deprive the Nation of the Benefit of the Banks, which could hardly subsist without the Circulation of their Notes’. It was in vain for Home to object that, just as people continue to buy goods despite the (slight) risk that they might be stolen and subject to vindication, so they would continue to accept money if the risks were the same. If money could be vindicated, counsel for the Bank of Scotland concluded, ‘no Man could be sure, that one Shilling in his pocket was his own, and both Banks might shut their doors’.”
Of course there were probably many other factors at play here. Although Crawfurd was of some means, it’s likely that the bank was able to afford the very best representation in this case. Moreover, in Reid’s research paper (linked below) he even points out that there was a fairly overt conflict of interest between the banks (the issuers of notes) and the judicial system at that time in Scotland. Reid also points out that there was some Roman jurisprudence (a source for many legal arguments in the case) that would seem to have roundly supported Crawfurd’s case rather than that of the bank.
Regardless of whether one ascribes impartiality to the judges in this case, or even whether or not one thinks the case was correctly decided based on previous jurisprudence, there’s little question that the emerging paper currency system would have been greatly imperiled had the case been decided in favor of Crawfurd.
Putting aside the obvious flaws inherent in paper banknotes, which were widely adopted in Scotland after their issuance first began in 1695, they did enable trade and commerce to occur on a previously unprecedented scale, and with less friction than seen with previous monetary systems (i.e. precious metals). In a society without telecommunications, Internet, and cryptocurrencies, the paper banknotes (although low-tech by modern standards) were nonetheless an innovation in the transfer of value within the country.
We’ll never know exactly what would have happened if the judges, by their decision, had abbreviated the fungibility of banknotes, or ‘the absolute currency of money’ as one Scottish legal scholar put it. But it seems likely that they would have thrown the monetary system into disarray, and interrupted a medium for commerce that many had come to rely upon for their wealth and prosperity. Perhaps this would even have been a major setback to the economic development of the country. Certainly this was one major concern that the judges had to take into consideration.
At the time of the decision, some arguments in favor of the bank notably argued that tracking ‘the whole History’ of a given banknote would be so cumbersome to those transacting as to render the whole currency system useless. Ironically, the electronic and highly traceable nature of bitcoin does somewhat (though nowhere near entirely) mitigate this argument. But perhaps the more relevant question for today’s world is whether it is wise to entrust the adjudication of a given monetary unit’s history to some arbitrary entity. The deciders of whether or not a given unit has a ‘clean’ or ‘tainted’ history are given enormous power. Even the Scots arguing this case back in the 1700s recognized the danger this presented, in that it could lead to “opening a door for frauds by malicious and designing persons”.
Now we find ourselves at a similar crossroads as the Scots did… but instead of an intranational paper currency, there is potentially a decentralized, global value transfer protocol at stake. We must ask ourselves whether altering the monetary framework in order to punish lawbreakers and wrongdoers is something worth jeopardizing the very ‘currency of money’ for.
Luckily, in making this choice, we are not wholly subjected to the caprices of some empaneled judges. Ultimately bitcoin is controlled by the people. Ultimately we can vote with our money, in line with our values.
And while actively determining and participating in what may well be the future of money, I sincerely hope we all look to the lessons of the past for guidance.
For further reading, here is my source for this post: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2260952