Hey how do I report this to the SEC anyway? Anyone with experience in this area care to point me in the right direction?
What we have would have to be considered a financial instrument under the law...
Legal Classification of BitShares and BitShare-derived BitAssets
Before offering our opinion on the legal classification of BitAssets we want to remind the reader that we are not lawyers and the following does not constitute legal advice. Please consult a legal professional in your jurisdiction before taking any actions based upon our opinions expressed below.
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 BitAssets. In our opinion these instruments do not meet the legal 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 BitAssets lets review the current definitions.
A
financial asset is an intangible asset that derives value because of a
contractual claim.
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
multilateral 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 BitAssets are not financial instruments. So lets see if we can find anything within BitShares that satisfies all or even most 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 ChainThese transactions have all of the properties of a Bid / Ask transaction with the only difference being the type of BitAsset 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 MinersNo 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 when the majority of the network agrees. As a result there is no obligation of any party to enforce the margin nor legally enforceable consequences if they do not. In fact, no entity is able to enforce the margin and therefore no one to hold liable for failure to act.
4) Contract between Developers and UsersBitShares is a protocol for exchanging information that could be implemented by any number of individuals. The developers release the software open source without warranty 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.
Lastly, the developers of BitShares have only created an accounting system that manages a decentralized database. The value of any particular entry within this database is not under control of the developers.
