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Across the board, bitcoin requires forceful and aggressive legal
defense, not complicity with governments in crafting policy and
regulations. It's going to get a lot rougher for bitcoin in the months
and years ahead. We have to be prepared.
As Rick Falkvinge, author of Swarmwise, states,
"The copyright monopoly war wasn't the war, it was the tutorial
mission. The Internet generation is using technology to assert its
values and its place in society, the old industrial generation is
pushing back hard against irrelevance. Things are about to get much
worse."
It is a superb analogy. Legal tender is essentially an unearned
copyright privilege over the production of money. It is unlikely to be
easily disrupted.
Only the naive can delude themselves into thinking that governments
will embrace bitcoin in the name of monetary innovation or a modern
techno-transition to the 'Internet of Things'. What government permits
with one hand, it restricts and strangles with the other. Therefore, any
regulatory gains by the bitcoin community are elusive, because they are
designed to appease, while government enforcement actions reveal a
contradictory agenda.
The real battle lies elsewhere, beyond the public policy debate.
There hasn't been a judicial test case for bitcoin legal issues yet,
primarily because at least two candidates that got sufficiently close to
a legal challenge elected to comply with authorities rather than risk
the uncertain outcome of a test case.
On November 27, 2013, Mike Caldwell of Casascius Coins suspended
the operations that made his branded coins the global standard for
physical bitcoin rather than adopt a legal stand. While writing Bitcoin Ideology and Tale of Casascius Coins, I had the opportunity to consult with Caldwell and his attorney personally, so I fully understand their decision.
Also more recently, Las Vegas-based Robocoin capitulated to FinCEN pressure
and started requiring all ATM operators to obtain customer information
in an effort to comply with know-your-customer (KYC) regulations.
In my opinion, this was a missed opportunity to determine the legal
categorization of a bitcoin vending machine and to set solid precedent.
What if bitcoin vending machines dispensed only candy bars with 'paper
wallet' wrappers or soda cans with removable wallet decals?
Recommended bitcoin legal areas for mounting a strong, concerted
defense include: mandatory key disclosure, restrictions on freedom of
transaction, attacks on bitcoin fungibility via blacklisting and
whitelisting, and denying the principle of code as protected speech.
Mandatory key disclosure
Key disclosure laws
may become the single most important government tool in asset seizures
and the war on money laundering. These refer to the ability of the
government to demand that you surrender your private encryption keys
that decrypt your data when charged with a criminal offense. If your
data is currency, such as access control to various amounts of bitcoin
on the blockchain, then you have surrendered your financial transaction
history and potentially the value itself.
Jail time for refusing to comply with mandatory key disclosure hasn’t
occurred in the US yet. But, it’s already happening in jurisdictions
such as the UK, where a 33-year-old man was incarcerated for refusing to turn over his decryption keys and a youth was jailed for not disclosing a 50-character encryption password to authorities.
Key disclosure will become increasingly important in civil assets seizures, since Kim Dotcom's pretrial legal funds would have been safe with bitcoin.
It is very likely that a significant key disclosure case will make it to the US Supreme Court, where it is far from certain that the Fifth Amendment privilege, as it relates to a refusal to decrypt bitcoin assets, will be universally upheld.
Freedom of transaction
In support of an individual's freedom to transact without requiring a license to operate a 'money services business', the Bitcoin Foundation filed an amicus brief
in a Florida state criminal case tied to alleged bitcoin transactions.
In that case, an individual faces one count of being an unauthorized
money transmitter under state law and two counts of money laundering.
The charges against the individual were filed in March 2014 and it is
the first known state criminal case involving the alleged buying and
selling of bitcoin. Another defendant was arrested at the same time
based on similar alleged conduct and has been separately charged. This
Florida case has received wide-spread media attention, such as from Bloomberg.
The foundation’s amicus brief supports the individual defendant’s
motion to dismiss the count charging him with being an unauthorized
money transmitter based on the core position that state prosecutors are
improperly applying Florida statutes regulating 'money services
businesses' to individuals conducting peer-to-peer sales of bitcoin.
This case is a big deal
because it specifically targets high-dollar-value transactions and
prosecutions like these could shut down one of the last remaining
avenues for purchasing bitcoin anonymously.
Denying an individual's freedom to transact violates freedom of
choice in currency, which is similar to an outright ban on bitcoin. In a
ban, government authorities prohibit pricing or use of a currency other
than the nation's 'official' currency, as witnessed in Bolivia, Ecuador, Kyrgyzstan, Bangladesh and Russia.
The ban in Bangladesh extended to even informing or educating others
about bitcoin, prompting the nonprofit and educational Bitcoin
Foundation Bangladesh to suspend operations temporarily.
In a slightly more positive development this month, Russia’s Ministry
of Finance reduced potential fines facing both individual and
institutional bitcoin users who create, issue or promote digital
currencies.
The draft bill, which still seeks to outlaw the use of 'money surrogates' like bitcoin, decreases penalties for
individuals to 50,000 rubles ($1,050) from 60,000 ($1,314). Legal
entities would now face a maximum fine of 500,000 rubles ($10,781) for
this action, down from 1m rubles ($21,563).
Fungibility
Fungibility
refers to the concept that every unit or subunit remains equivalent and
identical to any other unit or subunit. It is the property of a good or
commodity whose individual units are capable of mutual substitution.
Fungibility is a complex issue, because it can be described in economic terms, cryptographic terms and policy-based terms.
Hashcash inventor Adam Back states that cryptographic fungibility is stronger than policy-based fungibility. Cryptocurrency expert Jonathan Levin replies
that there is actually no cryptographic fungibility in bitcoin and that
the best suggestion of this is simultaneous creation and destruction.
Zooko Wilcox-O'Hearn, a computer security specialist, asserts that policy-based fungibility ends at the jurisdictional border.
While bitcoin public addresses do have a traceable history, the
sub-unit components that make up a single bitcoin transaction do not
have unique identifiers,
such as the serial numbers on paper bank notes. Since individual
transactions are able to be broken apart, each component unit can only
be traced realistically to its creating miner. This complicates reliable
ownership and thus provides an element of plausible deniability for the entire infrastructure.
I maintain that the US Marshal Service's first, and now second sale, of seized bitcoin demonstrates
current fungibility at least in the US jurisdiction. Just as the
government doesn't spend confiscated dollars at a discount, they don't
sell 'tainted' bitcoin at a discount and, furthermore, none of the
offered coins are blacklisted or whitelisted. A commercial precedent has
been set.
Varying tax treatments for bitcoin may have an impact on bitcoin fungibility within certain geographic areas, however. Also, read what a landmark legal case from mid-1700s Scotland tells us about monetary fungibility.
As governments attempt to steer bitcoin deployment to small and microtransactions and wholesale payment networks become politicized,
the issue of international fungibility looms large, because large
cross-border and permission-less value transfers may become bitcoin's
sweet spot. Now, that's a sweet spot for a strong legal defense too.
Code as speech
Transmitting a bitcoin message to the network blockchain is the same
as sending an encrypted, private email message and, as such, is
protected under the First Amendment to the US Constitution. This
important principle extends to both the development and usage of the
code.
For the last 24 years, the Electronic Frontier Foundation
(EFF) has been at the forefront of defending civil liberties in the
digital age, championing user privacy and free expression. Activism
director Rainey Reitman's brilliant editorial opposing New York's proposed 'BitLicense' scheme is a powerful declaration of privacy rights.
"Digital currencies such as bitcoin strengthen privacy and are
resistant to censorship. We should consider this a feature, not a bug,"
Reitman said in a statement.
The EFF also defended
MIT student bitcoin developers in a New Jersey court to oppose a
subpoena issued over their prize-winning bitcoin mining program. The
program known as Tidbit was designed to serve as an alternative to
viewing online advertising by allowing website users to help mine
bitcoins for the site they're visiting instead.
In a move that could strengthen bitcoin-related privacy, Senator Rand Paul of Kentucky recently introduced a bill to extend Fourth Amendment protections to include electronic communications.
Also, anticipating potential Fourth Amendment-related challenges, the Bitcoin Foundation's global policy counsel Jim Harper compared New York's BitLicense regulation to an inspection of an entrepreneur's garage:
"The comprehensive financial surveillance that the
'BitLicense' proposal requires at proposed sections 200.12(a)(1) and
200.15 is unwarranted, and the Department has put forth no evidence or
argument that it is calibrated to cost-effectively achieve any public
interest goal. Requiring businesses to maintain detailed surveillance of
their customers anticipating later law enforcement seizure is itself a
constructive seizure, which is unconstitutional under a proper
interpretation of the Fourth Amendment to the US Constitution."
Now, if India had Fourth Amendment protections, egregious office raids,
such as the ones carried out last December against two bitcoin
exchanges, could have been effectively challenged. India may need to
seek out alternative avenues for defense.
The way forward
I am hopeful that with criminal defense and trial attorney Brian Klein
more closely associated with the Bitcoin Foundation, other defense
attorneys will be encouraged to engage with the bitcoin community,
domestically and internationally.
Taking a principled stand in Bangladesh,
for instance, will send a strong message to the entire world. When it
comes to impact litigation, the EFF cannot do it all. We should view
this as an opportunity for bitcoin advocacy groups to grow a backbone.
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