Legal Ramifications of a Truly P2P Exchange (Opinions Wanted!)

[bytemaster]

I have been posting a paper about BitShares an a new P2P exchange and have included a legal interpretation below.  The full paper is 22 pages and is an interesting read, but I decided I would create a thread in this sub-forum to simply discuss the legal ramifications of 'financial instruments' that have no counter-party and no 'contract' associated with them.  
https://docs.google.com/document/d/1RLcjSXWuU9vBJzzqLEXVACSCdn8zXKTTJRN_LfoCjNY/edit#

Note: for better formatting and highlighting you can read the same content below within the actual paper linked above (last couple of pages).

Legal Classification of BitShares and BitShare-derived crypto-assets
Throughout this paper we make reference to short, long, margin, call and put options and other traditional financial terms and instruments, however these are only analogies used to explain the behavior of these new crypto-assets.  Legally these instruments do not meet the definition of a financial asset, instrument, bond, or anything else on the books aside from the most generic term 'asset'.  Before attempting to classify these new crypto-assets lets review the current definitions.

A financial asset is an intangible asset that derives value because of a contractual claim.
Examples:
   Cash or cash equivalent,
   Equity instruments of another entity,
   Contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity.

A financial instrument is defined as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity" according to IAS 32 and 39 (International Accounting Standards Board)

A contract is a voluntary agreement by two or more parties, each of whom intends to create one or more legal obligations between them. A contract is a legally enforceable promise or undertaking that something will or will not occur. Elements of a contract include:
 Offer and acceptance and Meeting of the Minds
 Intention to be Legally Bound
 Consideration

Additionally the parties to a contract must have capacity to contract, its purpose must be lawful, the form must be legal, the intent must be to create a legal relationship, and the parties must consent.

Under European Union Law you must consider the MIFID (Markets in Financial Instruments Directive). This directive defines a regulated market as a multi-lateral system operated and/or managed by a market operator which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly in accordance with the provisions of Title III.

The common denominator behind all existing financial assets and liabilities (including cash) is a contractual obligation. If there are no contractual obligations made by any party to any other party then by definition BitShare derived crypto-assets are not financial instruments. So lets see if we can find anything within BitShares that satisfies all of the requirements of a contract.

1) Bid / Ask Transaction Published to the Block Chain.
A bid or ask is a cryptographically signed transaction by a single, anonymous party. There is no signature by any other party and no obligation to perform. The bid or ask transaction has no legal standing and creates no legal relationships. This bid or ask is processed by a network of anonymous individuals who have no capacity to contract with the anonymous party submitting the bid or ask. In theory, the bid includes payment to anyone who includes the bid in a block and could be considered signed and accepted by the miner. However, once the transaction has been included in a block there is still no outstanding obligation or legal relationship between the two anonymous parties. Furthermore, simply including the transaction in a single block by a single miner does not actually cause the transaction to be executed. It must also be accepted by all other nodes in the network and even if it is accepted there exists no legal relationship or obligation between any two parties.  Furthermore, the result of the accepted transaction is merely an anonymous update to a global shared database and could constitute free speech.

2) Short Sell Transaction Published to the Block Chain
These transactions have all of the properties of a Bid / Ask transaction with the only difference being the type of crypto-asset used as the input to the transaction and the nature of the resulting outputs. It is still signed by a single anonymous party and is never signed by any other party. There is no legal obligation created nor legal relationship between two or more parties.

3) Margin Calls and Covering executed by Miners
No party has a contractual obligation to provide additional margin nor to force covering; however, no party has the ability to prevent their position from being covered either when the majority of the network agrees. As a result there is no obligation of any party to enforce the margin nor legally enforcable consequences if they do not.

4) Contract between Developers and Users
BitShares is a protocol for exchanging information that could be implemented by any number of individuals. The developers release the software open source without warenty or promise of any specific behavior. Users of the software get to choose which version to use and which network to join and therefore are in complete control over how they react to the information they receive from the network.  Users are even free to modify their software at will and therefore any actions or decisions made by the software are entirely an extension of the user’s will and not that of the developers.

5) Exchange Regulations
A centralized Bitcoin / Litecoin exchange run by a market operator can be regulated because upon accepting deposits of the crypto-assets known as Bitcoin or Litecoin, the exchange converts them into a promise to pay financial instrument in the form of an account balance with a particular server.

With BitShares there is no market operator and at no point does any actor in the exchange convert a crypto-asset into a financial instrument for the purposes of bringing together multiple third-parties. The reason for this is that there is no first or second party and no contract between any parties.

6) Distributed Escrow and Arbitration System
To facilitate exchanges with traditional assets and financial instruments, BitShares provides a distributed informal, non-binding, escrow and arbitration system. There are two parties to every non-disputed escrow transaction and three parties in the event of a dispute. There exists an non-binding agreement between the two parties that includes an arbitration clause allowing the defined, but anonymous, 3rd party to decide any disputes at their whim in an entirely non-binding (in a legal sense) way. There does exists a private informal agreement between two parties that is not known to the wider network. The escrow agent never receives funds nor has the ability to send the funds any place but one or both of the parties.

Escrow agents would be subject to any laws, regulations, and licensing requirements applicable to arbitration if the users expect their decision to be legally enforceable. Fortunately, escrow agents and users specifically acknowledge that the no party is under any legal obligation to take any particular action at all and that there is no intent to create a legal relationship.   By specifically stating that at all times no party is held to be legally liable to follow any specific agreement and that there is no intent to create a legal relationship between any two parties, the result is that all parties are acting in an informal, purely voluntary, manner outside the jurisdiction of any court. It would be like agreeing to meet someone at the pub and then failing to show up.

That said, social and market pressures would conspire to motivate all parties to make honest and ethical decisions despite the complete lack of legal obligation to do so.

The only legal question that remains is whether or not an individual trading a crypto-asset for a tangible good or traditional financial-asset (such as cash) in a noncommercial manner could be classified as a money transmitter by any sane regulatory system or court.  FinCIN has already published guidance that indicates that buying and selling non-financial assets with a crypto-currency is not engaging in money transmission nor a money services business. I would argue that as long as there are only two parties, no contracts and no party is operating on behalf of anyone else, there is no money transmission. This would be like claiming someone who exchanged gold for cash on craigslist in a non-commercial manner is a money transmitter.

[Viceroy]

5) Exchange Regulations
A centralized Bitcoin / Litecoin exchange run by a market operator can be regulated because upon accepting deposits of the crypto-assets known as Bitcoin or Litecoin, the exchange converts them into a promise to pay financial instrument in the form of an account balance with a particular server.

With BitShares there is no market operator and at no point does any actor in the exchange convert a crypto-asset into a financial instrument for the purposes of bringing together multiple third-parties. The reason for this is that there is no first or second party and no contract between any parties.

I am not a lawyer but if you could avoid regulation just by being peer-to-peer wouldn't Napster still be around?

[bytemaster]

The issue is whether or not the peers are actually doing anything illegal.   In the case of sharing 'copyrighted' material the act was illegal for other reasons.   In the case of this exchange what is being exchanged is information and not promises or contracts and thus a completely new asset class that (from what I can tell) does not fall under any of the existing regulations because it was never before even conceivable.

[Viceroy]

interesting.  I hope you are correct because it looks to me like there will not be many places to exchange btc soon.

[moni3z]

Napster talked to a centralized server to get a list of files and locations. Now we have magnet links, hence why piratebay is still around

[polarhei]

There is no truly p2p exchange,only transmission.

Money is not truly P2P unless the world leaders agrees something like Euros (available for 18 countries).

[bitrebel]

The US Government is a CRIMINAL Enterprise. Whatever YOU DO, will be ruled ILLEGAL eventually.

You might as well curl up in a ball and waste away.

Or FIGHT and prepare to DIE!

What do you believe in?

[NewLiberty]

With absence of contracting or agreements, what defense do i have from receiving payment from someone and thereafter being accused of theft?

[smoothie]

I'm curious on the technical side of how you fill orders given it is P2P and decentralized, the orderbook is going to have its own "version" as people buy and sell at the exact same time, almost like you will have forks in the trading.

Essentially (from the 30 seconds I've thought about it) your orders that you executed could be UNDONE or set as standing orders if say the consensus of traders on the P2P exchange were to say that person B's trades were executed before yours.

This idea is an interesting one at that. But purely you would be limited to trading crypto coins with one another.

Anytime you introduce Fiat into the situation, a BANK (which has regulators) will be knocking on the door of the bank account owner (i.e. in most cases the exchange owner). Since there is no exchange owner the possibility of using FIAT in a purely P2P exchange is impossible.

Or did I overlook something?

[prophetx]

5) Exchange Regulations
A centralized Bitcoin / Litecoin exchange run by a market operator can be regulated because upon accepting deposits of the crypto-assets known as Bitcoin or Litecoin, the exchange converts them into a promise to pay financial instrument in the form of an account balance with a particular server.

With BitShares there is no market operator and at no point does any actor in the exchange convert a crypto-asset into a financial instrument for the purposes of bringing together multiple third-parties. The reason for this is that there is no first or second party and no contract between any parties.

I am not a lawyer but if you could avoid regulation just by being peer-to-peer wouldn't Napster still be around?

Napster was not true p2p tech

[prophetx]

I'm curious on the technical side of how you fill orders given it is P2P and decentralized, the orderbook is going to have its own "version" as people buy and sell at the exact same time, almost like you will have forks in the trading.

Essentially (from the 30 seconds I've thought about it) your orders that you executed could be UNDONE or set as standing orders if say the consensus of traders on the P2P exchange were to say that person B's trades were executed before yours.

This idea is an interesting one at that. But purely you would be limited to trading crypto coins with one another.

Anytime you introduce Fiat into the situation, a BANK (which has regulators) will be knocking on the door of the bank account owner (i.e. in most cases the exchange owner). Since there is no exchange owner the possibility of using FIAT in a purely P2P exchange is impossible.

Or did I overlook something?

Spot on

[prophetx]

With absence of contracting or agreements, what defense do i have from receiving payment from someone and thereafter being accused of theft?

You don't need a defense beyond the facts, the other party needs to prove that you committed fraud or theft.  As long as you do not misrepresent yourself or hack into their systems to get access to a hot wallet, you are safe.

If I hand a man $100 on the street, I cannot say he stole that money without committing perjury.  Any other conclusion would be absurd.

[bytemaster]

With absence of contracting or agreements, what defense do i have from receiving payment from someone and thereafter being accused of theft?

What defense do you have when you hand someone a tip in a restaurant?  There is no contract or agreements, couldn't you accuse your waiter of theft?

[bytemaster]

I'm curious on the technical side of how you fill orders given it is P2P and decentralized, the orderbook is going to have its own "version" as people buy and sell at the exact same time, almost like you will have forks in the trading.

Essentially (from the 30 seconds I've thought about it) your orders that you executed could be UNDONE or set as standing orders if say the consensus of traders on the P2P exchange were to say that person B's trades were executed before yours.

This idea is an interesting one at that. But purely you would be limited to trading crypto coins with one another.

Anytime you introduce Fiat into the situation, a BANK (which has regulators) will be knocking on the door of the bank account owner (i.e. in most cases the exchange owner). Since there is no exchange owner the possibility of using FIAT in a purely P2P exchange is impossible.

Or did I overlook something?

Spot on

The thing you overlooked is that I have created a crypto-subcurrency trading on the same blockchain that maintains purchasing power with an interest paying dollar bond.   Therefore, you can hold BitDollars without exchange rate risk nor fear of default because there is no 'issuer' and the value of the BitDollars is always backed by 1.5 to 2x their value in BitShares.  The interest rate is 'variable' and thus a BitDollar will fluctuate against actual dollars, but only within a narrow range similar to how the value of Mt.Gox USD fluctuates with supply and demand for USD deposits on the exchange.

The trades between BitDollars and BitShares or BitGold etc are atomic and occur in a deterministic manner in the blockchain.   The only way to 'undo a trade' is to generate a longer block chain and thus requires a 51% attack.  All trades are 'confirmed' within 6 blocks (or about 30 minutes).

   

[NewLiberty]

With absence of contracting or agreements, what defense do i have from receiving payment from someone and thereafter being accused of theft?

What defense do you have when you hand someone a tip in a restaurant?  There is no contract or agreements, couldn't you accuse your waiter of theft?

You could, yes.  And it happens on occasion.
http://pleasantville.patch.com/groups/police-and-fire/p/don-juan-waiter-accused-of-stealing-180k-from-customers
http://ny.eater.com/archives/2011/05/olives_waiter_arrested_for_stealing_91000_in_tips.php
http://www.kptv.com/story/19990977/tualatin-waitress-accused-of-stealing-from-customers
etc...

But this is a bad analogy.
Presumably you will want the exchange to be useful for more than tipping?
Contracts are very useful things.  A way to support them is a feature not a bug.

[bytemaster]

Are you going to accuse someone of stealing your money when *you* initiate the wire transfer?   

There is a crypto-signed statement that states that the transfer was voluntary and non-refundable.  It also states that the sending of the funds does create a legal relationship or liability on the other parties (escrow agent, etc) to perform any action in exchange for receiving your funds.  This should be more than enough to establish the 'intent' of the wire-transfer.

If you are concerned about someone claiming theft then stick to in-person transactions in public places.   

Note:  the bid/ask exchange system does not suffer any of these problems.   You do not make a physical exchange (or wire transfer) for every exchange, but you keep your 'balance' with the exchange like you would with a bank account or Mt. Gox.   With this balance (BitDollars) you could buy / sell goods directly.

[NewLiberty]

Are you going to accuse someone of stealing your money when *you* initiate the wire transfer?   

There is a crypto-signed statement that states that the transfer was voluntary and non-refundable.  It also states that the sending of the funds does create a legal relationship or liability on the other parties (escrow agent, etc) to perform any action in exchange for receiving your funds.  This should be more than enough to establish the 'intent' of the wire-transfer.

Thank you, this explanation helps my understanding.
To the extent that the legal relationship of liability on the other parties is not a contract, recognize that it may not be binding or enforceable.

If you are concerned about someone claiming theft then stick to in-person transactions in public places.   

Please understand, you asked for input to help make this useful.  My comments are offered in that spirit.  I am not attempting to suggest that it not be used and in-person transactions be used instead.  If you would prefer I make no further comment, I will stop now.  A claim of theft is in no way mitigated by in-person transactions, it is mitigated by clearly contracted Ts&Cs of exchange.

Note:  the bid/ask exchange system does not suffer any of these problems.   You do not make a physical exchange (or wire transfer) for every exchange, but you keep your 'balance' with the exchange like you would with a bank account or Mt. Gox.   With this balance (BitDollars) you could buy / sell goods directly.

The problem of anonymity is partially resolved with this offering.  With an exchange, by being anonymous, you sacrifice any ability to make a claim if an authority seizes the exchange.  You will not be able to adequately prove that you are an innocent victim of the seizing authority and have no hope of reclaiming your lost assets (LR customer problem now).
Your proposal also mitigates the threat of seizure by law, but not by force. 

So, if a person does not want anonymity for whatever reason, will it support that?
Further, if you wish to only have counter-party trades with non-anonymous traders, will it support that?
These would be enhancements to existing exchanges which do not have such control.

Consider that some users may want to be provably honest, rather than just avoiding being provably dishonest.

[bytemaster]

I appreciate your input and never intended my statements to be perceived as unappreciative or critical of your feedback.  This issue of 'claimed theft' is one that I am taking seriously.

So the question is does the 'Terms & Conditions' represent a contract or a waiver?   If it does represent a 'contract' sufficient to protect you from accusations of theft, does that contract entirely independent and separate from the asset you would be purchasing?  Are contracts of this nature regulated?

How would seizure by force work?   The only way to seize your BitAssets would be to seize your private keys or brain wallet.  

If a person does not want anonymity they could simply publish their full name and address along with their BitShare address on a forum somewhere.  

There are two aspects to BitShares:

1) The exchange and storage of BitAssets that have value tracking gold/silver/usd without counter party.  This is entirely decentralized, pseudo-anonymous, and secure.

2) The escrow service that allows you to exchange BitUSD for USD.   With this service you must reveal your bank account number for wire-transfer purposes.  In this case the exchange is not 'anonymous' between the two parties, but still private unless one party decided to publish the other parties bank account number.  

In-person for cash is the 'most anonymous' way to trade BitUSD for USD provided the person you are trading with doesn't take down your license plate, run your picture through a database, or ask for Photo ID.  

[NewLiberty]

If a person does not want anonymity they could simply publish their full name and address along with their BitShare address on a forum somewhere.  

If my account takes a loss in a tax period, I may want to claim that loss against other gains.
I wonder if posting my name and address on a forum associated with a bitshare address would be sufficient proof of that ownership?
What stops others from posting similar information on another forum?  Or just copy and paste my information with changes to point it to them?
The goal is to support provable ownership by a unique identity so that it is not only usable by anonymous, yes? (That risks making it a criminal enterprise and invites opposition unnecessarily.)
Users may not take advantage of the identity feature, but it should be available to those that need it.

[NewLiberty]

In-person for cash is the 'most anonymous' way to trade BitUSD for USD provided the person you are trading with doesn't take down your license plate, run your picture through a database, or ask for Photo ID.  

Cash (bills) are serialized so even if it is in the dark and through a mule it is not as anonymous as a pure commodity currency (gold or silver).  They can be tracked at each interaction with a bank.