Can Buying and Selling Bitcoin Be Money Laundering?

In an earlier post, we looked at whether running a bitcoin exchange can be money laundering. In this post, we take a look at a more recent case with similar facts, but a very different conclusion.

While the entire scope of Richard Petix’s actions aren’t clear from the opinion, he was certainly buying and selling bitcoins. This was a violation of his parole, as he wasn’t supposed to be using a computer without permission, but the federal government wanted to tack on a money laundering charge. Magistrate Judge Scott thought this was an overreach. In the process, he almost certainly opened up a split with the Southern District’s decision in Faiella:

United States v. Petix, No. 15-CR-227A (W.D.N.Y. Dec. 1, 2016) [Link]

Summary: For the purposes of the money laundering statute, Bitcoin is neither “money” nor “funds.” Buying and selling Bitcoin is not money laundering.

Facts:

  • “Between August 2014 and December 2015, Petix engaged in numerous transactions involving the buying and selling of bitcoins. . . . When the agents and probation officers confronted Petix, . . . [t]he open screen of the computer displayed information indicating that Petix had just completed a transaction involving 37 bitcoins with a value, at the time, of approximately $13,000.”

Issues, Holdings, and Discussion:

  1. Does Bitcoin qualify as “money” or “funds” under Section 1960? No:

Taking the two undefined terms in Section 1960 in reverse order, the Supreme Court already has applied the above principles of interpretation to the term “funds.” “The ordinary meaning of `fund[s]’ is `sum[s] of money . . . set aside for a specific purpose.'” Clark v. Rameker, ___ U.S. ___, 134 S. Ct. 2242, 2246 (2014) (ellipsis and brackets in original) (citation omitted). . . .

The ordinary understanding of “funds,” with its reference to “money,” necessarily brings the Court to an assessment of that other term. Legal authorities abound with uses of the term “money.” The Constitution gave Congress the enumerated power “[t]o coin Money, [and to] regulate the Value thereof.” U.S. Const. art. I, § 8, cl. 5. The United States Code, under a subchapter titled “Monetary System,” has a definition of legal tender that covers coins, currency, and notes. 31 U.S.C. § 5103. Another provision of Title 31 refers to “money” and “public money” as something that can be deposited in the United States Treasury. 31 U.S.C. § 3302. A portion of the tax code refers to estate transfers that occur “for a consideration in money or money’s worth.” 26 U.S.C. § 2043. Portions of the judicial code refer to “receiving and paying over money” compared to “disposing of such property,” 28 U.S.C. § 1921(c)(1); and to plural “moneys paid into any court of the United States,” 28 U.S.C. § 2041. Countless other examples exist, written before and after Section 1960, and of course the exact use of the term “money” will vary somewhat across very different statutes and cases.

What all of the above examples have in common, though, is the involvement of a sovereign. Across all of the legal authorities that make some reference to money, and despite new technologies that have emerged over the years within the United States monetary system, there has been a consistent understanding that money is not just any financial instrument or medium of exchange that people can devise on their own. “Money,” in its common use, is some kind of financial instrument or medium of exchange that is assessed value, made uniform, regulated, and protected by sovereign power. See, e.g., David G. Oedel, Why Regulate Cybermoney?, 46 Am. U. L. Rev. 1075, 1077 (1997) (“[I]n the background of most functional definitions are suggestions that money serves as a tool for governments to exercise macroeconomic control and to channel financial commerce along preferred routes.”) (citations omitted).

. . . .

The above context demonstrates that Bitcoin is not “money” as people ordinarily understand that term. Bitcoin operates as a medium of exchange like cash but does not issue from or enjoy the protection of any sovereign; in fact, the whole point of Bitcoin is to escape any entanglement with sovereign governments. Bitcoins themselves are simply computer files generated through a ledger system that operates on block chain technology. See, e.g., Shahla Hazratjee, Bitcoin: The Trade of Digital Signatures, 41 T. Marshall L. Rev. 55, 59 (2015) (“The Bitcoin system operates as a self-regulated online ledger of transactions. These transactions are currently denoted by the change of ownership in Coins. This ledger, also referred to as the `block chain,’ has certain built-in mechanisms that eradicate the risk of double spending or tampering with the master record of all transactions.”). Like marbles, Beanie Babies™, or Pokémon™ trading cards, bitcoins have value exclusively to the extent that people at any given time choose privately to assign them value. No governmental mechanisms assist with valuation or price stabilization, which likely explains why Bitcoin value fluctuates much more than that of the typical government-backed fiat currency. See, e.g., Jennifer R. Bagosy, Controversial Currency: Accepting Bitcoin As Payment for Legal Fees, Orange County Lawyer, June 2014, at 42 (“Bitcoin has other key features that make it very different from other methods of payment. First, the value of Bitcoin is highly volatile. In January 2013, one Bitcoin was worth about $13. By December 4, 2013, the price had skyrocketed to $1,061 per Bitcoin. By April 15, 2014, the value had dropped to $500 per Bitcoin.”) (citation omitted). As for experiences in daily life, ordinary people do not receive salaries in bitcoins, cannot deposit them at their local banks, and cannot use them to pay bills. The Court cannot rule out the possibility that widespread, ordinary use of bitcoins as money could occur someday, but that simply is not the case now[.]

Comments:

  • Petix creates a rift with the S.D.N.Y.’s decision in United States v. Faiella 39 F. Supp. 3d. 544 (2014). To his credit, Magistrate Judge Scott directly confronts this split:

In United States v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014)a.k.a. the “Silk Road case”—the court turned directly to a dictionary to define both “money” and “funds” and then equated an ordinary understanding of those terms with the dictionary definitions. Accord United States v. Budovsky, No. 13CR368 DLC, 2015 WL 5602853 (S.D.N.Y. Sept. 23, 2015); United States v. Murgio, No. 15-CR-769 (AJN), 2016 WL 5107128 (S.D.N.Y. Sept. 19, 2016). Perhaps there were circumstances in that line of Southern District cases that justified a first and exclusive resort to a dictionary. “Dictionary definitions of `money,’ however, are not helpful in determining congressional intent in employing that term in [a criminal statute].” United States v. Jackson, 759 F.2d 342, 344 (4th Cir. 1985). As the Court noted above, there are several problems with a straight dictionary approach. First, a dictionary approach overlooks the numerous times in the United States Constitution and Code when the term “money” consistently has referred to some kind of instrument issued and regulated by a sovereign. Second, the approach does not address the Supreme Court’s determination of the ordinary meaning of the term “funds.” Third, as the Supreme Court noted in Yates, terms in ordinary life do not always line up with dictionary definitions, and ordinary people simply would not think of any private medium of exchange as money. Finally, resorting exclusively to a dictionary does not address the desire, implicit in Section 1960, to keep the United States monetary system away from criminal activity and transactions that support it. The weight of those authorities, experiences, and statutory objectives must be allowed to control here over broad technical definitions that lack context.

  • While Petix does not address it, Faiella‘s broad definition of money may open the door to money laundering charge for all buyers and sellers of bitcoins and, indeed, buyers and sellers of commodities in general. It seems unlikely that Congress intended the money laundering statute to sweep so broadly as to encompass a significant chunk of the economy as a whole. In a future post, I’ll look at money laundering cases beyond the Bitcoin context to try and place both Faiella and Petix in a broader frame.
  • Judge Scott suggests that while bitcoins may not be money at the moment, that could change: “The Court cannot rule out the possibility that widespread, ordinary use of bitcoins as money could occur someday, but that simply is not the case now[.]” Something that is not currently a crime could become a crime with no intervening statute or regulation. That seems troubling.

Do U.S. Courts Have Jurisdiction Over My Bitcoin Business?

Bitcoin is often viewed as a currency that exists beyond governments. There is some truth to that. But so long as humans need to earn money, eat, pay bills, and generally live on the planet, Bitcoin’s libertarian ethos will bump up against government regulation. And businesses need to understand how far those government regulations reach. When Mt. Gox collapsed, depositors found they weren’t able to withdraw their fiat deposits. It eventually came out that Japan’s Mizuho bank had been quietly limiting depositors’ ability to withdraw fiat deposits for months before the collapse. Depositors in the United States sued over this, alleging fraud and tortious interference. Mizuho argued that it wasn’t subject to the jurisdiction of U.S. courts. Judge Feinerman disagreed:

Greene v. Mizuho Bank, Ltd., 169 F. Supp. 3d 855 (N.D. Ill. Mar. 14, 2016) [Link]

Summary: When foreign companies accept funds knowingly and directly accept funds from a U.S. customer, they subject themselves to that U.S. state’s jurisdiction. But a mere relationship with a partner that does business with U.S. customers is not enough.

Facts:

  • “Prior to its collapse and bankruptcy, Mt. Gox was a Bitcoin exchange based in Tokyo, Japan. Doc. 146 at ¶¶ 11, 40. . . . Mt. Gox users could either (1) transfer bitcoins directly into their accounts at Mt. Gox or (2) wire fiat currency (government-issued money, like dollars and euros) to Mizuho Bank, which would deposit the money into a bank account it held on behalf of Mt. Gox. Id. at ¶¶ 14, 23. Mizuho, which is headquartered in Tokyo, earned service fees from processing those wire deposits. Id. at ¶¶ 7, 16. To withdraw fiat currency, a Mt. Gox user would make a request through her account at Mt. Gox, which would send the request, along with the user’s banking details, to Mizuho, which in turn would transfer the requested amount to the user’s bank. Id. at ¶ 24.”
  • “By mid-2013, Mizuho was no longer processing any international wire withdrawals for Mt. Gox, meaning that Mt. Gox users who had wired fiat currency to Mizuho for deposit in Mt. Gox’s bank account could not withdraw their money. Id. at ¶¶ 29, 31. Mizuho’s qualms about handling Mt. Gox’s business did not extend, however, to receiving fiat currency from Mt. Gox users for deposit into the Mt. Gox account. Even as it limited and then barred withdrawals, Mizuho continued to accept deposits from Mt. Gox users, earning revenue from the associated service fees. Id. at ¶¶ 31-32. Mizuho prohibited Mt. Gox from disclosing that the withdrawal difficulties were attributable to Mizuho or that Mizuho wanted to terminate its relationship with Mt. Gox. Id. at ¶¶ 36, 123, 125. Mizuho knew that if Mt. Gox’s members learned of its prohibition on withdrawals of fiat currency from Mt. Gox’s Mizuho account, members would stop making deposits and Mizuho would stop collecting the associated fees. Id. at ¶ 122.”
  • “Lack, a California resident, did not join Mt. Gox until January 22, 2014, about six months after Mizuho had barred all withdrawals from its Mt. Gox account. Id. at ¶ 56.”

Issues, Holdings, and Discussion:

  1. When a foreign business accepts money from a particular customer, knowing that customers is located in a particular U.S. state, is that business subject to U.S. jurisdiction in that state? Yes:
  2. [S]pecific personal jurisdiction is appropriate where (1) the defendant has purposefully directed his activities at the forum state or purposefully availed himself of the privilege of conducting business in that state, and (2) the alleged injury arises out of the defendant’s forum-related activities. . . .

    Lack wired $40,000 in fiat currency directly from his local Wells Fargo branch in California to Mt. Gox’s account at Mizuho; . . . when Mizuho received the wire, it was given Lack’s California address. . . . Mizuho accepted the wire transfer from Lack for deposit into Mt. Gox’s Mizuho account and earned a service fee as a result. Doc. 146 at ¶¶ 16, 57, 110. At the same time, Mizuho purposefully did not disclose — neither to the public at large nor directly to Lack — that by then it had halted withdrawals from its Mt. Gox account. Id. at ¶¶ 28, 31-32, 34-36, 63, 121-125.

    . . . .

    . . . Mizuho knowingly accepted a deposit from a California branch from somebody it knew to be a California resident and placed that deposit into the financial equivalent of a black hole.

    The court has no doubt that Mizuho did not care that Lack resided in California as opposed to, say, Nebraska or North Carolina. That does not change the fact that Mizuho created the necessary relationship with California by accepting Lack’s deposit, knowing that it arrived from a California branch and a California resident, and profiting from the associated fees. . . .

    . . . [B]y entering into a depositary relationship with Mt. Gox, Mizuho certainly had every expectation of accepting wire transfers from Mt. Gox users who wanted to fund their accounts with fiat currency; indeed, accepting those transfers and securing the resulting service fees was no doubt a motivation for Mizuho to enter the Mt. Gox relationship in the first place. Those relationships in turn make it “such that [Mizuho] should reasonably anticipate being haled into court” in the Mt. Gox users’ home jurisdictions.

  3. When a foreign business is not shown to have accepted money from a customer in a particular U.S. state, but partners with another company that has accepted money from that customer, is the foreign business subject to the U.S. state’s jurisdiction? No: “Mizuho’s relationship with Greene, and thus with Illinois, is considerably less involved than its relationship with Lack, and thus with California. Unlike Lack, Greene does not allege that he sent any wire transfers to Mizuho or that Mizuho received any transaction fees from Greene. . . . Mizuho had no transactional contacts with Greene of the type that it had with Lack; in fact, it had no transactional contacts with Greene at all. The alleged harm to Greene is Mizuho’s only contact with Illinois, and that harm is insufficient to establish personal jurisdiction, as ‘mere injury to a forum resident is not a sufficient connection to the forum.'”

Is My Cryptocurrency a Security? (Part 2)

In a previous post, I looked at a paper that concluded cryptocurrency might be a security – and thus regulated by the SEC – but didn’t have to be a security. Trendon Shavers ran the unwisely-named “First Pirate Savings & Trust” (which he later renamed to “Bitcoin Savings and Trust.”) Shavers solicited business partners who provided him with Bitcoins, which he claimed to be selling to local buyers for a profit. When the SEC came calling, he claimed that he was not offering a security. Magistrate Judge Mazzant disagreed:

SEC v. Shavers, No. 4:13-cv-416 (E.D. Tex. Aug. 6, 2013) [Link]

Summary: When a party solicits business partners to supply him with Bitcoin with promises of investment returns, those solicitations are subject to the securities laws and the SEC can regulate them.

Facts:

  • “Beginning in November of 2011, Shavers began advertising that he was in the business of ‘selling Bitcoin to a group of local people’ and offered investors up to 1% interest daily ‘until either you withdraw the funds or my local dealings dry up and I can no longer be profitable’ (Dkt. #3 at 3). During the relevant period, Shavers obtained at least 700,467 Bitcoin in principal investments from BTCST investors, or $4,592,806 in U.S. dollars, based on the daily average price of Bitcoin when the BTCST investors purchased their BTCST investments (Dkt. #3 at 4). The BTCST investors who suffered net losses (compared to investors who received more in withdrawals and purported interest payments than they invested in principal), collectively lost 263,104 Bitcoin in principal, that is $1,834,303 based on the daily average price of Bitcoin when they purchased their BTCST investments, or in excess of $23 million based on currently available Bitcoin exchange rates. Id.”

Issues, Holdings, and Discussion:

  1. When a party solicits business partners to supply him with Bitcoin with promises of investment returns, are those “investment contracts” subject to SEC regulation? Yes, per the three-part test from SEC v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946):
    1. Bitcoin Savings & Trust “investments constitute an investment of money [because] Bitcoin can be used as money . . . [and] can also be exchanged for conventional currencies, such as the U.S. dollar, Euro, Yen, and Yuan.”
    2. Shavers and his investors were engaged in a common enterprise “because the investors here were dependent on Shavers’ expertise in Bitcoin markets and his local connections. In addition, Shavers allegedly promised a substantial return on their investments as a result of his trading and exchanging Bitcoin.”
    3. Shavers’ investors expected profits. “At the outset, Shavers allegedly promised up to 1% interest daily, and at some point during the relevant period the interest promised was at 3.9%.”

Comments:

  • SEC v. Shavers shows that securities regulations do not necessarily depend on which cryptocurrency you’re dealing in. Nor do they depend on whether you are accepting cash or only cryptocurrency investments. Ultimately, they will probably depend on how you are marketing your particular business.

Can Running a Cryptocurrency Exchange Be Money Laundering?

U.S. v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y 2014) holds that, for the purposes of the money laundering statute, Bitcoin is “money” or “funds,” operating an exchange is “transmitting money,” and exchange operators are “money transmitters.” Exchanges must be aware of and comply with money laundering statutes.

One major goal of this site will be to compile and summarize the various cases that come down regarding Bitcoin, Ethereum, and blockchain technology. For a while, I will be mixing past decisions with new decisions.

In Faiella, the defendant tried to set aside a money laundering charge on the grounds that Bitcoin isn’t money. Judge Rakoff wasn’t buying it:

United States v. Faiella, 39 F. Supp. 3d 544 (S.D.N.Y. 2014) [Link]

Summary: For the purposes of the money laundering statute, Bitcoin is “money” or “funds,” operating an exchange is “transmitting money,” and exchange operators are “money transmitters.” Exchanges must be aware of and comply with money laundering statutes.

Facts:

  • “Defendants . . . are charged in connection with their operation of an underground market in the virtual currency ‘Bitcoin’ via the website ‘Silk Road.’ Defendant Faiella is charged with one count of operating an unlicensed money transmitting business in violation of 18 U.S.C. § 1960[.]” (citation omitted)
  • “Faiella moved to dismiss Count One of the Indictment on three grounds: [Listed in Issues]”

Issues, Holdings, and Discussion:

  1. Does Bitcoin qualify as “money” or “funds” under Section 1960? Yes: “‘Money’ in ordinary parlance means ‘something generally accepted as a medium of exchange, a measure of value, or a means of payment.’ . . . Merriam-Webster Online defines ‘funds’ as ‘available money’ or ‘an amount of something that is available for use: a supply of something.’ . . . Bitcoin clearly qualifies as ‘money’ or ‘funds’ under these plain meaning definitions. Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.”
  2. Does operating a Bitcoin exchange constitute “transmitting” money under Section 1960? Yes“Defendant argues that while Section 1960 requires that the defendant sell money transmitting services to others for a profit, see 31 C.F.R. § 1010.100(ff)(5)(1)(2013) (defining ‘money transmission services’ to require transmission of funds to ‘another location or person’), Faiella merely sold Bitcoin as a product in and of itself. But, as set forth in the Criminal Complaint that initiated this case, the Government alleges that Faiella received cash deposits from his customers and then, after exchanging them for Bitcoins, transferred those funds to the customers’ accounts on Silk Road. These were, in essence, transfers to a third-party agent, Silk Road, for Silk Road users did not have full control over the Bitcoins transferred into their accounts. Rather, Silk Road administrators could block or seize user funds.” (citation omitted)
  3. Is Faiella a “money transmitter” under Section 1960? Yes: “The Financial Crimes Enforcement Network (‘FinCEN’) has issued guidance specifically clarifying that virtual currency exchangers constitute ‘money transmitters’ under its regulations.”

Comments:

  • Faiella came down about 5 months after the IRS guidance defining Bitcoin and other cryptocurrencies as property. Surprisingly, Faiella contains no discussion about that guidance. Though not cited in Faiella, Judge Forrest addressed this question directly in the earlier case United States v. Ulbricht, 31 F. Supp. 3d 540 (S.D.N.Y. 2014), where she held that the IRS determination was immaterial:

The defendant argues that because Bitcoins are not monetary instruments, transactions involving Bitcoins cannot form the basis for a money laundering conspiracy. He notes that the IRS has announced that it treats virtual currency as property and not as currency. . . .

[The money laundering statute] captures all movements of “funds” by any means, or monetary instruments. . . . “Funds” are defined as “money, often money for a specific purpose.” See Cambridge Dictionaries Online, http://dictionary.cambridge.org/us/ dictionary/american-english/funds?q= funds (last visited July 3, 2014). “Money” is an object used to buy things.

. . . [T]he only value for Bitcoin lies in its ability to pay for things—it is digital and has no earthly form; it cannot be put on a shelf and looked at or collected in a nice display case. Its form is digital—bits and bytes that together constitute something of value. And they may be bought and sold using legal tender. See How to Use Bitcoin, https://bitcoin.org/en/ getting-started (last visited July 3, 2014). Sellers using Silk Road are not alleged to have given their narcotics and malicious software away for free—they are alleged to have sold them.

The money laundering statute is broad enough to encompass use of Bitcoins in financial transactions. Any other reading would—in light of Bitcoins’ sole raison d’etre—be nonsensical. Congress intended to prevent criminals from finding ways to wash the proceeds of criminal activity by transferring proceeds to other similar or different items that store significant value. . . .

There is no doubt that if a narcotics transaction was paid for in cash, which was later exchanged for gold, and then converted back to cash, that would constitute a money laundering transaction. See, e.g., United States v. Day, 700 F.3d 713, 718 (4th Cir. 2012).

 

Is My Cryptocurrency a Security?

This paper is an interesting and informative guide for determining whether a particular cryptocurrency is a security or not.

What does that mean? Within the United States, the IRS already determined that cryptocurrencies like Bitcoin, Ethereum, etc. are property. In other words, whenever you use cryptocurrency to purchase goods or services, it triggers capital gains tax for the “sale” of the cryptocurrency. But there is a further questionIs my cryptocurrency a security, thereby potentially subjecting me to SEC regulations? This question is mostly but not solely relevant to groups offering a new cryptocurrency, through avenues like an Initial Coin Offering.

That’s what the paper attempts to answer. A warning before I start posting excerpts: While my firm has a lot of experience in securities litigation, securities law is really complicated. Nothing on this blog should be considered legal advice. But please, especially in this area, consult a legal professional if you’re getting remotely close to these issues.

With that said, some excerpt that caught my attention, and my comments:

The US Supreme Court case of SEC v Howey[, 328 U.S. 293 (1946),] established the test for . . . an investment contract. . . . In the context of blockchain tokens, the Howey test can be expressed as three independent elements . . .

1. An investment of money

2. in a common enterprise

3. with an expectation of profits predominantly from the efforts of others.

While it’s too extensive to include here, more interesting is the “risk score” spreadsheet they created for analyzing the Howey test. The spreadsheet includes interesting discussions for risky / less-risky / not risky behaviors related to each element. But then it calculates a “risk score,” determining your overall likelihood to meet the Howey elements. This seems problematic. I’m not aware of any empirical evidence or, more importantly, court decisions, that assign risk percentages to these different behaviors.

Next, they list some “best practices” in token sales:

Principle 1: Publish a detailed white paper

Principle 2: For a presale, commit to a development roadmap

Principle 3: Use an open, public blockchain and publish all code

Principle 4: Use clear, logical and fair pricing in the token sale

Principle 5: Determine the percentage of tokens set aside for the development team

Principle 6: Avoid marketing the token as an investment

The paper explains each principle. From my reading, they can be summed up in one conclusion: Be transparent and honest. But the paper doesn’t really cover what happens when plans inevitably go off track. While it seems obvious, I think the same advice applies: Be transparent and honest. Explain what changed, why it changed, and how it affects the overall plan. I can’t emphasize the honest part enough. The FTC and State Attorneys General understand when plans change due to reality, but they don’t understand when companies “shade” the truth.

The remainder includes a legal analysis by Debevoise Plimpton, who conclude (with caveats) that “appropriately designed Blockchain Tokens would not be deemed to meet the definition of security and, accordingly, that the federal securities laws would not apply to the initial distribution and subsequent trading of such Blockchain Tokens.” But they stress the “appropriately designed” part. They divide the universe into “security Blockchain Token[s]” and “non-security Blockchain Token[s]” based on differing characteristics. They suggest these characteristics indicate each type:

B. We generally believe that a Blockchain Token with one or more of the following rights likely should not meet the definition of security (nonsecurity Blockchain Token):

  1. Rights to program, develop or create features for the system or to “mine” things that are embedded in the system;
  2. Rights to access or license the system;
  3. Rights to charge a toll for such access or license;
  4. Rights to contribute labor or effort to the system;
  5. Rights to use the system and its outputs;
  6. Rights to sell the products of the system; and
  7. Rights to vote on additions to or deletions from the system in terms of features and functionality.

C. We believe that a Blockchain Token with one or more of the following investment interests likely should constitute a security Blockchain Token:

  1. Ownership interest in a legal entity, including a general partnership;
  2. Equity interest;
  3. Share of profits and/or losses, or assets and/or liabilities;
  4. Status as a creditor or lender;
  5. Claim in bankruptcy as equity interest holder or creditor;
  6. Holder of a repayment obligation from the system or the legal entity issuer of the Blockchain Token; and
  7. A feature allowing the holder to convert a non-security Blockchain Token into a Blockchain Token or instrument with one or more investment interests, or granting the holder an option to purchase one or more investment interests.

Two Types of Blockchain Law

Josh Stark, a lawyer in Toronto, wrote this op-ed that mirrors my thoughts about how we should categorize blockchain law:

First, we have questions of application. How does the law apply to blockchain technology? How should it apply?

Included in this category are questions such as whether cryptocurrencies are legal tender, or how to regulate decentralized applications. Here, blockchain technology is a subject of law – something that our laws will have to adapt to, just as they adapted to the Internet, new medical technology, or social media.

Second, there are questions of transformation. How will blockchain technology change the legal system? How will it change the legal services industry? In this category you’ll find topics like how smart legal contracts might be used by businesses, or the potential for decentralized applications to offer services to consumers without a legal entity.

In this instance, blockchains are not simply some new technology to which our laws and regulations must adapt. Rather, they are a tool for the law itself – a new technology that could be usefully applied in legal services. They are part of the more general category of “LegalTech”, alongside artificial intelligence and Big Data.

He notes that the standout question in the “application” category is “How should we classify blockchain tokens?” Are they currency or property? If they are property, are they securities, or something else entirely? He is right that this is the most pressing issue, and needs to be addressed in a consistent manner as soon as possible. (The IRS treats them as property, but has left critical questions unresolved. For example, it is an open question whether a transaction changing Bitcoin to Ethereum or another altcoin is a like-kind exchange or a sale.)

But with the focus on these “big” questions, lawyers (and clients) shouldn’t lose sight of the day-to-day issues, like:

  • What do I do if an adversary is hiding assets in cryptocurrency?
  • How do I write interrogatories or requests for production about cryptocurrency? What questions should I be asking?
  • Should clients (or lawyers) be holding a cryptocurrency reserve? Which one? How much? What are the legal implications?
  • Can my cryptocurrency idea be patented?

These are the types of questions that lawyers and courts will be answering in the next few years (and decades.)

First post

This is my first post on this blog, which will be my humble attempt at educating attorneys and clients on blockchain technology – including Bitcoin, Ethereum, and the many flavors of altcoin – and its legal implications. We are starting to see the first legal repercussions of this new technology, and I look forward to informing others and being informed myself.

As for my background, I am a trial attorney at Quinn Emanuel, one of the foremost litigation firms in the world. I practice in a variety of areas, most with a technology focus, including patent litigation, antitrust, and data security and privacy. While my coding skills are rusty, I have a computer science degree from Penn State, and I still break out the coding suite (or the plain old text editor) to solve problems from time to time. I have a solid background in Perl and PHP, and I’m learning Java and Ruby.

Apologies, but I need to add an obligatory disclaimer: I am a lawyer, but I am not your lawyer (probably.) If you have a legal problem, particularly one revolving around Bitcoin, Ethereum, or other blockchain technologies, feel free to contact me at michaeloconnor@quinnemanuel.com. I can run conflicts, find out if we can help you, and then we can talk. Until my firm confirms that we can represent you, please do NOT send me any confidential information. Opinions by me or others on this blog do not necessarily represent the views of my firm or its clients.