¶ 201
Overview
Scope of the chapter. This chapter explains the technology on which digital assets rest, at the level of detail a lawyer needs to advise on ownership, custody, transfer, succession, enforcement and regulation. It describes distributed ledgers and the consensus methods that keep them, explains when a transaction becomes final and what happens when a network divides, and then turns to the keys, signatures and addresses through which holders exercise power over assets. It examines seed phrases and wallets, the arrangements by which several persons share control, the smart contracts that issue and administer tokens, and the oracles, bridges and secondary networks that connect one ledger to another. It closes with privacy tools, blockchain tracing and the evidence by which a court decides who controls an address.
Why the technology matters to the law. Most of the legal questions in this treatise turn on a technical fact. Whether a person has control of a controllable electronic record under U.C.C. § 12-105 depends on who can sign a transaction and whether anyone else can do the same. See infra ch. 6. Whether a custodian holds assets as bailee, trustee or debtor depends partly on whether it keeps each customer's assets at separate addresses or pools them. See infra ch. 10. Whether a trustee has discharged the duty to secure trust property depends on how the keys are stored and who knows them. See infra ch. 14. Whether an estate can be administered at all may depend on whether anyone can find a seed phrase. See infra chs. 21–22. Whether a court's turnover order can be enforced depends on whether the judgment debtor is the only person who can move the assets. See infra ch. 24. A lawyer who does not understand the mechanism cannot test a client's account of the facts, draft a provision that works, or examine a witness who claims to have lost the keys.
The level of description. The chapter does not teach cryptography or programming. It describes each mechanism by what it permits a person to do and what it prevents, because those are the facts on which legal consequences turn. Where a technical term has a settled meaning in the industry, the chapter gives it; where the industry uses a term loosely, the chapter states the sense in which the treatise uses it. The vocabulary fixed in Chapter 1 applies throughout. See supra ¶ 180. In particular, "key material" means private keys, seed phrases and key shares, and "control" is reserved for its Article 12 sense unless the text says otherwise.
Technology changes; functions persist. Particular networks, signature schemes and wallet designs change quickly. The functions they perform change slowly. Every public ledger must decide who may add entries and how disagreements are resolved. Every holder must keep secret information that authorizes transfers. Every arrangement for shared control must decide how many participants must act and what happens when one is unavailable. The chapter is organized around those functions so that its analysis remains usable when the particular technologies change. Where a statement depends on the design of a specific network, the chapter says so and identifies the network.
Sources. Technical statements in this chapter rest on the primary specifications where they exist: the Bitcoin white paper, the Bitcoin Improvement Proposals that define seed phrases and hierarchical wallets, and the published documentation of the Ethereum protocol. Accounts of failures and exploits rest on judicial decisions, official reports and charging documents. Charging documents state allegations, and the chapter identifies them as such. Where only industry or press accounts are available, the chapter attributes the statement to its source.
Plan of the chapter. Section ¶ 210 describes ledgers and consensus, and ¶ 220 explains finality, forks and how networks change their rules. Sections ¶ 230 and ¶ 240 address keys, signatures, addresses, seed phrases and wallets. Section ¶ 250 examines shared control. Section ¶ 260 turns to smart contracts, token standards and the administrative powers that many token contracts reserve to their deployers. Section ¶ 270 addresses oracles, bridges and secondary networks. Section ¶ 280 examines privacy tools, tracing and the proof of control. Section ¶ 290 sets out a checklist of technical questions for any engagement.