Friday, December 22, 2017

Bitcoin and halacha

The Bitcoin cryptocurrency has recently been in the news as its price continues to escalate. I was lucky enough to hear a friend of mine, a religious computer scientist named A., give a shiur on the halachic aspects of Bitcoin. Here is a summary based on my notes.

1. KINYAN

Mishna Bava Metzia 4:1 discusses the case of using money to buy goods. It specifies, using several examples, that the kinyan must be done on the goods and not the money. For example, one may do "meshicha" on a utensil, which transfers ownership of the utensil to one party and the money to the other party. The reverse does not work: doing a "kinyan" on the money does not transfer ownership of the utensil.

(The gemara explains that the law was originally different. On a deoraita level, transactions are in fact done via money rather than goods. However, rabbinic law reversed the procedure. This was done to avoid the situation where the money had been transferred, making the transaction valid, but the goods were still with their original owner. Were the goods to be endangered due to a fire or similar disaster, the possessor of the goods would not exert himself to save them, since they no longer belonged to him. Chazal did not like this possibility, so they changed the law to make the transaction dependent on transfer of goods.)

The upshot of these discussions is that one cannot take for granted that one's commercial activity has automatic halachic validity. If you want your transaction to be halachically valid, you must look closely at how you are performing it. So, for example, waving a lulav bought with a credit card might be halachically problematic. To perform the mitzvah on the first day of Sukkot, the lulav must halachically belong to you, but was the credit card transaction valid? Was it you paying the lulav seller, or the credit card company?

Sometimes this type of question is resolved by government regulation - "dina demalchuta dina". But this is not the case with Bitcoin, where the transactions happen online independent of any government, and generally without any government policy on their validity.

In this case, we might turn to "situmta" ("custom of the merchants") - an accepted commercial practice which halacha recognizes, even though it differs from the Torah's laws of transaction.

The key question regarding bitcoin transactions is: at what point does the transaction go through?

Imagine the case of a dishonest person who has $10 in their bank account, and writes $10 checks to two separate people. One of the checks is cashed, and their bank account goes down to $0. From now on, the second check will bounce rather than go through.

This works because there is a centralized authority - the bank - keeping track of how much money people have. However, no such authority exists regarding Bitcoin. You can send money to two different people, even if you don't have it. After some time, one of the transfers will be "confirmed", and the other is not.

In fact, it's possible for BOTH transactions can be confirmed. This causes the transaction record to "fork", as half the network thinks that one transfer went through, and the other half thinks that the other transaction went through. So there are two, mutually contradictory "histories" held by Bitcoin miners on the internet.

What happens in this situation? When the next transaction occurs, the network's nodes will each choose one of the two histories, generally the more popular one. So one of the two histories will come to dominate the network, while the other becomes less and less prevalent until it disappears. This process occurs at an exponential rate, with one history spreading very quickly. Generally, the rule of thumb is that if your transaction is still recognized as valid after 6 other transactions, it is safe to assume that the Bitcoin network has reached equilibrium, and the entire network recognizes it as valid.

But even after 6, or 50, or any number of transactions you can never know for sure that the transaction is valid. There is still an infinitesimally small chance that it will be rejected in the future. From a halachic perspective, this is the interesting bit - there is no real finality to any transaction, unlike "normal" transactions, where an object is physically transferred at a particular moment. At what point, then, does halacha recognize a Bitcoin transaction as a valid kinyan?

It is hard to come up with an objective answer to this. But perhaps the rule of "situmta" applies - the 6-transaction rule is the accepted practice of Bitcoin "merchants", and therefore halacha accepts it as well.

2. CHALIFIN

In the "chalifin" kinyan, one party takes a object from the other, and that causes the entire kinyan to be valid. For example, if one is trading a donkey for a cow, one can take possession of the donkey, and ownership of the cow will be transferred at the same moment.

There is a rule (Bava Metzia 45b) that "a coin cannot be used for chalifin", because "its imprint may be nullified" ("tzurta avida devetala"). That is to say, a coin is "fiat currency" which derives its value (primarily) from the government stamp of approval rather than from the metal it is made of. So if the government decides no longer to recognize the coin, its value disappears. The gemara considers this to be mutually incompatible with being the object transferred in chalifin.

(Note: the shiur giver referred me to an article by R' Asher Meir on the Gush website, asserting that in the time of mishna the value of a coin equalled the value of the silver in it, while by the gemara's time a coin's value was already mostly by the fiat of the government. I was not able to find the article offhand, but this is interesting historical context.)

What about Bitcoin? Bitcoin is a distributed currency that no government has the power to devalue. So perhaps it is usable for chalifin?

3. RIBIT

The Torah prohibits loaning money with interest.

In addition, the rabbis prohibited lending "seah beseah" (one measure of wheat now, in exchange for one measure of wheat in the future), because the price of wheat changes with time, so the value you return may be greater than the value you borrowed, resembling the payment of a loan with interest. Some amoraim extended this prohibition to lending "zahav bezahav" - gold for gold, at a time when money was typically silver.

The exchange rate of Bitcoin fluctuates very quickly, so it would seem that lending Bitcoin and returning an equal amount of Bitcoin would be problematic.

4. SHMIRAH

For a Bitcoin transaction to take place, one must provide a cryptographic "signature" to ensure they are the owner of the money they are transferring. There is also a concept called "multisignature", by which multiple signatures must be provided before money can be sent. Alternatively, an account can be set up so that the approval of *either* partner, rather than both, is sufficient to send money.

Just like a physical object can be entrusted to another person for guarding, one can imagine Bitcoins being entrusted to multiple people for guarding. If so, the halachic laws of shmirah might would need to be applied in new ways.

5. AVEDAH

In halacha, lost objects must be returned if they have an identifying sign ("siman") that allows them to be returned to the correct owner.

Bitcoin value is accessed by a "private key", a unique randomly generated string of numbers. If you forget the number, your value is lost forever, since with current computing resources it's essentially impossible to regenerate the string.

Since this number is so unique, one could imagine that it is the best type of "siman" imaginable.

However, in the case of "avdah mimenu umikol adam" - when it seems essentially impossible for any person to recover the object, for example if it was washed away by a river - there is no requirement to return the object, even if it has a siman.

Since it is so difficult to recover a lost Bitcoin signature, one might think that it falls in this category, of objects that do not need to be returned if they are somehow found.

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