On the Right to Property, Central Bank Digital Currencies, and Excellent Tyranny

A glimpse into the future

‘Thus no subject of a tyrant could have any property rights against the tyrant.’

-Leo Strauss, On Tyranny

Why don’t we lighten things up around here and talk about financial regulation? I promise it won’t hurt too much, and it will be worth it in the end. The regulation of finance, as we shall see, is at the very sharp end of modern governance, and is therefore a window onto the future which appears to await us - particularly, of course, as regards our money and property.

Let’s begin on the 29th November 2023, when the Administrative Court for England & Wales handed down its judgment in a claim for judicial review brought by Elliott Associates and Jane Street Global Trading against London Metal Exchange and its clearing house, LME Clear. The case is not a straightforward one to explain, so bear with me, but it makes for illuminating reading, and tells us a great deal about the direction in which regulation is heading and the philosophical imperatives that inform it.

The legal issues raised by the case are complex, and therefore I won’t go into them in great depth, but the facts at least are not too complicated. On 8th March 2022 there was a rapid spike in the price of nickel, which is traded on the London Metal Exchange (LME) - the world’s biggest market in base metals futures, options and forwards. In particular, the price for 3M nickel (meaning nickel due for delivery in three months’ time) went up by over 100% in the course of five hours:

There had been a ‘price acceleration’ beginning on March 4th associated with Russia’s invasion of Ukraine and the imposition of sanctions on Russia. This, according to LME’s CEO, was explicable, and therefore not cause for alarm. But the ‘price surge’ on the 8th was something disconnected from the ‘geopolitical or macroeconomic situation or the commonly understood reality in the global physical market supply chain for nickel’ and could not therefore be explained by rational market forces. This meant in the CEO’s view that the market had become ‘disorderly’. In particular, he was worried that the increase in the 3M nickel price would mean that LME Clear, the LME’s clearing house, would have to impose margin calls - meaning requirements for members of LME to deposit funds to cover LME Clear’s credit liabilities - that would put many of them out of trading.

He therefore suspended the nickel market as of 8.15am on that date. But he also took the truly exceptional step of cancelling trades - i.e. nickel-related transactions that had been arranged or even confirmed. The aggregate value of all of these cancelled trades was some $12 billion; Elliott Associates’ lost net profit was estimated at $456 million, and Jane Street’s around $15 million.¹

These, it probably goes without saying, are sums of money that make the large costs of litigation ‘worth a punt’.

The claimants’ case was basically a pincer attack. On the one hand, it was argued that the decision to cancel trades had been unlawful because the CEO of LME’s decision-making had been irrational and had not followed proper procedure. And on the other, it was argued that the decision to cancel trades had deprived the claimants of their right to peaceful enjoyment of property under Article 1 to Protocol 1 (A1P1) of the European Convention on Human Rights, contracts (as nickel trades are) being property for the purposes of that Article.

Both of these arguments had, you might say, moral weight. If nickel futures traders are going to take positions exposing themselves to a short squeeze (which is apparently what caused the spike in prices) then that should probably be their own look out. And the idea that in a free market economy a perfectly good contract, lawfully made, should be set aside by a regulator on the grounds of keeping things ‘orderly’ feels like an anathema.

But the Court - and I think its judgment was more or less impeccably correct as a matter of the application of existing rules - gave none of this much legal weight at all. Cutting a long story short, the rationale is as follows.

First, regarding the decision to cancel trades itself, the Court found that the correct procedure had been followed and that the CEO of LME’s decision-making had not been irrational. In English law, Courts have no power to inquire into the substance of the decision of a public body in terms of its rationality; they only have the power to strike down a decision if it has not followed proper procedure or was unlawfully made.

There is a very narrow exception to this, known to lawyers as ‘Wednesbury unreasonableness’ (after the case of Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223), which is a circumstance in which a decision was ‘so unreasonable that no reasonable authority’ could have made it. But this was not such a circumstance. Under its own Trading Rules, LME states that it may ‘cancel, vary or correct any Agreed Trade or Contract’ if there is a significant price movement during a short period of time. And it has to have such a rule, because it is a ‘Recognised Investment Exchange’ (RIE), meaning an exchange to which has been delegated regulatory functions by the Financial Conduct Authority under the Financial Services and Markets Act 2000. Those regulatory functions are set out by the latest version of the (deep breath) Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges, Clearing Houses and Central Securities Depositories) Regulations 2001 (which itself implements an EU Directive), among other things, and they include the capacity to halt trading and cancel trades on ‘orderly market’ grounds.²

Basically, then, the law says that if you want to be an RIE, you must have certain rules. And one of these has to be that you are able to cancel, vary or correct trades or contracts so as to secure ‘fair and orderly’ trading. (If all this seems to you to be rather complicated and dull, just be thankful I didn’t get into the ins and outs of the Technical Standards (Markets in Financial instruments Directive)(EU Exit)(No 1) Instrument 2019, which is also relevant). The result is what is important here: the law affords a very wide discretion to the people who make the decisions at RIEs to decide when it’s important to cancel trades in the interests of ‘orderliness’. And the Court did not wish to gainsay that discretion by determining the decision had been irrational.

So that was the irrationality issue dealt with, and I think that was probably the correct call: the Court rightly determined that it was not as well placed to assess these things as somebody like the CEO of LME, so it deferred to his judgement. I might not think the rules should exist in the form that they do, but given that they do, the Court was right in deferring to the judgement of ‘boots on the ground’ in regard to how they should be applied.

On to the right to property, then. The European Convention on Human Rights (ECHR) does not have a right to property as originally drafted, but it has an Additional Protocol 1, whose first article contains such a right (often referred to as ‘A1P1’). It reads as follows:

(1) Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
(2) The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

The claimants’ argument here was that they had formed contracts via LME Clear and that, since contracts are possessions (a contract is assignable at law and therefore a person can have a proprietary interest in one), the decision by LME to cancel those contracts was a violation of A1P1. No dice from the Court, though. Here, not all of the trades were held to have made it to the stage of being contracts to begin with, but even for those that were, they had been made on the proviso that they were in accordance with LME rules. And since the claimants had known about the rules and their contents before trading, they couldn’t very well complain about the consequences of the enforcement of those rules later on. They were in other words not suffering any infringement to the peaceful enjoyment of their possessions by being made subject to the order to cancel trades. They were simply being made subject to rules which they had agreed to be subject to. And the rules inarguably say LME can cancel trades when it sees fit to do so in the interests of ‘orderliness’. So that’s that.

The Court therefore found in favour of the defendant, LME, on all grounds and the claimants had to take their losses on the chin. Buy why on earth have I made you read all of this?

The answer to that question has three parts.

First: a few months ago I wrote about trends in modern regulation and how they point towards a future in which law itself will die out or become at best vestigial. This case is in many ways an applied example of this phenomenon. Notice how, in the end, everything boils down to the regulator’s discretion rather than the application of clear rules. While ‘rules’ notionally exist, all they really say is that LME can decide to amend or cancel trades on the basis of its own judgment about what is ‘orderly’. And LME is given license to do this by a chain of delegated authority, going from the EU (which made the original Directive), to the UK government, to the Financial Conduct Authority and down to LME itself as a kind of sub-regulator. The only role for law as such in all of this is in the delegation of authority itself; otherwise the relevant actors have free reign to exercise discretion within broad bounds. And the only role for courts is really to check that the correct procedure is being followed; they will only second-guess the exercise of discretion in extremis.

This is, then, tantamount to subjecting conduct not to rules, but to the discretion of regulators - and thus not really to law at all. As such, it is a microcosm for the dominant regulatory style of our moment.

Second: it seems evident that at some point in the not-too-distant future we will be cajoled and nudged into adopting Central Bank Digital Currencies (in the UK’s case, this will be called the ‘digital pound’) or other ‘stablecoins’. The Bank of England’s ‘digital pound for dummies’ website is a triumph of meretricious dissembling that will fool no-one; all you need to know can be found in these immortal lines:

People are using cash less to pay for things but we know it’s still important for many people. We will keep issuing cash in the UK as long as people want to use it.

So (one hardly needs to even bother reading between the lines), cash is on notice, the War on Cash will intensify, and sooner or later the Bank of England and the government of the day will decide that since fewer and fewer cash payments are being made people no longer ‘want to use’ it and are happy to adopt the digital pound instead. I am willing to bet anybody a digital tenner if this argument is not being explicitly made within ten years’ time. (Probably more like two years.)

And when the digital pound is created, you can bet that it will be regulated in some form that will be in some way analogous to the manner in which trades on LME are regulated. This has been a bit of a technical post, so I won’t go into too much detail on the technicalities here, but part of the reason why LME was able to cancel contracts that had been made after the fact was that such contracts have to be processed, checked and approved by LME Clear essentially in real time. Suffice to say, what is true on the nickel market can be made true in general; if financial regulators can design a system in which nickel traders can agree contracts with one another and yet still have the relevant transactions cancelled after the fact, then regulators are also perfectly capable of designing a system in which transactions carried out through digital pounds can be prevented, cancelled or amended for the likes of you or I. And this will of course be done on the basis of nice sounding ideas like ‘fairness’ or ‘orderliness’ (not to mention ‘consumer protection’, ‘environmental safeguards’, ‘public health’ and so on) - and probably at the discretion of a clearing-house-cum-regulator, which may indeed by governed largely by AI.

Third: they will inevitably do this, and this is where the philosophy comes in.

In On Tyranny, Leo Strauss takes us through a hitherto obscure work by Xenophon, Hiero, concerning advice for tyrants. And Strauss draws our attention in particular to two aspects of tyrannical rule as the ancients understood it. To begin with, he shows us that it was a mistake to identify tyranny with brutality or oppression. The ancients recognised that only a bad tyrant (bad in the sense of incompetent) resorts to those kinds of tactics, because all they achieve is instability and hatred from the population, and likely - in the end - a revolution or coup. A good or excellent tyrant (meaning a skilful one) rules benevolently, and endeavours to make the population love him and consider him to be necessary. That way, he ensures that they stay loyal and are reliant on his largesse, and he retains his position indefinitely.

And, since this is the case, the excellent tyrant needs to eschew two things in particular: his own actions must not be constrained by law, and he must not afford the population a right to property against him.

He must not be constrained by law, because he needs complete flexibility - complete discretion - in order to respond to changing circumstances. The rigidity of rules are no good to him. What he needs - given that his task is to make the people utterly reliant on him - is the ability to be all things to all men, in every circumstance. There can therefore be no prohibitions on the scope of his action. Tyrannical rule is therefore characterised by an indifference or hostility to law as such; where used at all, law is a tool to be deployed vis-à-vis the populace, not a constraint on the ruler.

And in particular there must be no constraint on the ruler in the form of property rights. Since the excellent tyrant seeks above all to make the population reliant upon him, he cannot tolerate their owning possessions which he does not have the ultimate right to dispose of as he sees fit. He must only allow the population to ‘own’ things on sufferance, therefore; what he likes is to beneficently and liberally dole out prizes and rewards, so as to keep everybody onside - not to permit anybody to have an independent source of wealth of any kind. Stated with customary Straussian brusqueness:

‘[T]he best tyrant would consider his fatherland his private property which he would naturally administer according to his own discretion [emphasis added].’

It is notable therefore, to the careful reader of Strauss, that this seems to provide a taster of where we are headed - as the example of Elliott Associates v LME demonstrates. We increasingly seem to be be ruled not by law, but by the discretion of regulators, applying vague standards to decide more or less whatever they think is appropriate in view of nebulous, benevolent goals. The whole idea behind the FCA delegating regulatory authority to RIEs like LME in the name of maintaining ‘fair and orderly’ markets is, transparently, based on reinforcing the message that the regulator is necessary to maintain ‘fairness’ and ‘orderliness’ and without it chaos will ensue. And the zone of discretion is made deliberately wide precisely so that almost everything is on the table short of complete irrationality - since flexibility is so necessary to the exercise of expedient beneficence.

And we also find our property rights to ultimately be, as a lawyer might put it, a ‘thing writ in water’. Let’s go back to the text of A1P1 and highlight two central phrases:

(1) Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
(2) The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

Notice anything about those phrases? Ronald Dworkin, probably the most noted legal philosopher of the 20th century for all that he was (largely deservingly) derided, was wont to point out that if one only has a right to something if it is in the ‘public interest’ to have it, then one does not have a right to it at all. Rights are quintessentially:

trumps over some background justification for political decisions that states a goal for the community as a whole. If someone has [a right], this means that it is for some reason wrong for officials to act in violation of that right, even if they (correctly) believe that the community as a whole would be better off if they did.

The point here is that if one only has a right so long as it is in accordance with the public interest, then that is tantamount to saying one does not have a right at all, because it is entirely contingent on the authorities’ view of what the public interest entails. If they have a plausible-sounding reason why depriving one of one’s property is in the public interest (spoiler alert: they almost always will have such a reason), then they can do so irrespective of one’s ‘rights’, and one’s rights therefore are of no real practical or legal consequence.

This is the position we find ourselves in, then, with respect to A1P1. We have a right to property but only insofar as we can be deprived of our possessions when it is in the public interest. We do not then really have a right to property at all, at least insofar as the ECHR goes, but more a liberty to enjoy peaceful possession of our property on the sufferance of the State. We are on implied notice that as soon as it is in the public interest to deprive us of our property, the State can do so.

The prevailing winds of governance in our age, then, can already be understood to be tyrannical in the philosophical sense. We don’t see the bad sort of tyranny - secret police, arbitrary executions, or torture. But that isn’t what tyranny is really all about. Tyranny is fundamentally, as Strauss shows us, governance in the absence of legal constraint (including the constraint of property rights), and it is perfectly normal that it should function not through brutality but through presenting itself as the be-all and end-all of ‘fairness and orderliness’. In doing so, it is merely exhibiting itself in the ‘good’ or ‘excellent’ sense - aiming for the ideal circumstance, as Xenophon’s Simonides advises Hiero, in which the tyrant no longer himself knows fear, but ‘transfer[s] it to the hearts of others, fearing lest some evil overtake [him].’ It is simply seeking to make the population reliant upon it at all times - reliance of the people on the ruler being the idealised relational postulate of tyrannical rule.

To use the word ‘tyranny’, of course, makes one sound like a swivel-eyed conspiracy theorist, but there is no conspiracy, really - just the inevitable playing out of the consequences of governing in a particular style. Indeed, when a class of governors has lost any real notion of itself as governing in the national interest, all that is really left is personal motives, and these are of course - for reasons that hardly need spelling out - the perfect breeding ground in which the tyrannical ideal of total reliance of the population on government can incubate. If all one has are personal motives, then the logic (that one must make the population reliant upon one so as to maintain one’s position for good) makes perfect and intuitive sense - and no conspiracy is therefore needed. Incentives alone will do the trick.

I promised at the outset of this unforgivably long and, at times, technical post, that these subjects would give us a window onto our future, and it is on this point that we’ll close. To the excellent tyrant, remember, all of the resources of the ‘fatherland’ are his to dispose of as he sees fit on the basis of his discretion. And the concept of the Central Bank Digital Currency (if you will forgive the expression) is therefore like a wet dream, because it allows the tyrant to imagine a situation in which each and every transaction that is entered into by the population is his to track and manage, and in which the money supply itself is his to increase or decrease as he determines to be optimal.

The corollary of course is that we, the hoi polloi, should come to view our money not as our own, but as the product merely of the tyrant’s largesse - a benefit which he bestows upon us, rather than a store of our own wealth. We are of course well along the road to that destination already, but the ‘digital pound’ is really the finishing line. That is why the Bank of England keeps coming out with banal-looking documents saying things like ‘we judge it likely that the digital pound will be needed in the future’ and ‘we are convinced preparatory work is justified’. Do you know a single living, breathing human being who has ever opined to you that they wish there was such a thing as a ‘digital pound’ or that they consider there to be a ‘need’ for one? Of course not. But in the fullness of time, they can be made to rely on its existence, and therefore on the existence of the State which backs it, all the same.

1. Claims were brought by a range of other affected parties, who it seems agreed to stay proceedings to find out the result of this particular litigation and then make a decision whether to proceed with their own claims.

2. Indefensibly, the current version of these Regulations (from December 2020) is not publicly available for free. The government website only has the original 2001 version, which does not contains the relevant provisions concerning the halting of trading. You can find the current version on Westlaw, if you have an account.