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Author Topic: feedback on preliminary draft of legal paper  (Read 9773 times)
reubgr
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April 21, 2011, 04:00:14 PM
 #1

Hi Folks,

I have finished a preliminary draft of my legal paper on bitcoin. Note that it is missing some very important sections that I plan to add later, such as the implications of the e-gold saga for bitcoin, tax laws, banking regulations, etc. I am posting this early draft to get feedback from you guys. Also please note that I am not a lawyer (yet) and I am not giving you or anybody else legal advice in this paper. Furthermore, the few conclusions that I have made may change.

Please feel free to email comments to reuben.grinberg+bitcoin at gmail.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1817857

Best,
Reuben
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Mike Hearn
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April 21, 2011, 06:24:30 PM
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Thanks for writing this paper. I hope we can read the final product. It's very well done and the introduction is both clear and accurate, if perhaps a bit long relative to the legal content. I have only a few comments.

One is that BitCoins are not infinitely divisible. They are divisible to 8 decimal places, which is an awful lot of coins but there will still be a finite quantity in existence by the time the inflation stops.

Another is that, maybe this is normal for legal papers, but putting huge quantities of text into footnotes makes it quite hard to read. Some pages are more than 75% footnote, making it confusing to follow the flow of text. It might be worth putting all the references at the end, or shrinking the font of the footnotes, etc.

The excerpts of interviews with NotHaus and the prosecutor are very interesting. It would be great to read a full transcript of these. It's re-assuring to know that they were actually focussed on counterfeiting rather than the existence of non-dollar currencies per se. The press release the USG issued was quite alarming but it sounds like this may be simply be the work of some over-aggressive reps eager for a bit of drama rather than a real legal opinion, and the real case was much more balanced than it appeared.

I think the classification of BitCoin as a security would be a real stretch. Trying to describe an entire economy as a "shared enterprise" would be an interesting test of how far you could push semantic arguments in court. But it's good to know about this set of arguments.

xf2_org
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April 21, 2011, 06:40:55 PM
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Comments:

1) Great paper!

2) I would mention FinCEN, BitcoinUSA, MSB's and "stored value."  See this post and this article.

taykaypee
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April 21, 2011, 07:28:21 PM
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Thanks for writing this paper. I hope we can read the final product. It's very well done and the introduction is both clear and accurate, if perhaps a bit long relative to the legal content. I have only a few comments.

One is that BitCoins are not infinitely divisible. They are divisible to 8 decimal places, which is an awful lot of coins but there will still be a finite quantity in existence by the time the inflation stops.

Another is that, maybe this is normal for legal papers, but putting huge quantities of text into footnotes makes it quite hard to read. Some pages are more than 75% footnote, making it confusing to follow the flow of text. It might be worth putting all the references at the end, or shrinking the font of the footnotes, etc.

The excerpts of interviews with NotHaus and the prosecutor are very interesting. It would be great to read a full transcript of these. It's re-assuring to know that they were actually focussed on counterfeiting rather than the existence of non-dollar currencies per se. The press release the USG issued was quite alarming but it sounds like this may be simply be the work of some over-aggressive reps eager for a bit of drama rather than a real legal opinion, and the real case was much more balanced than it appeared.

I think the classification of BitCoin as a security would be a real stretch. Trying to describe an entire economy as a "shared enterprise" would be an interesting test of how far you could push semantic arguments in court. But it's good to know about this set of arguments.




I hope you don't mind me citing you in my paper for my legal paper Smiley Though, you do have some errors, as xf2 mentioned. Bitcoins are not a security. Money is not a security, nor is it an investment.
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April 21, 2011, 07:35:22 PM
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Posting to remind myself to read later.

reubgr
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April 21, 2011, 07:36:59 PM
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@[mike]: Thanks for taking the time to read the paper and for your comments!

Regarding divisibility, I have read in the forums that it would be trivial for the software to be changed so that bitcoins are infinitely divisible, although something (the software? the protocol?) currently limits it to 8 decimal places. Since there are no real policy implications (only technical ones, I think) to making them infinitely divisible, I think they are, for practical purposes, infinitely divisible.

Your point regarding the length of footnotes is well taken. I will work on that.

Unfortunately, I conducted the phone interviews with both the AUSA and NotHaus and don't have transcripts. I made handwritten notes which I then transcribed into an rtf file in shorthand. I did the confirm the quotes with the AUSA over email, though.

Regarding the securities, I myself was quite surprised with the conclusion that I reached. I am not a securities law expert, though. My law prof (who teaches securities and other classes) has promised me comments soon and hopefully they will shed light on whether my analysis is good.

@xf2_org: Thanks for reading! You are absolutely right that the MSB and related issues are extremely important (in fact, perhaps the most important issues facing bitcoin). I had planned to cover these in my first draft but realized that I wouldn't have time to do everything and also graduate. My plan is to incorporate that analysis into the next draft.

@taykaypee: Feel free to cite as long as you realize that this is a work-in-progress and my conclusions may change. Currently, I believe the best argument is that bitcoin is a security. I'm sure you know that almost nothing in the law is 100% this way or that. Courts will hear the best arguments from both sides, which include arguments based on the text of statutes; the intent of congress as shown by the text itself, the structure of the statutes, and legislative history; policy arguments; and statutory precedents. Although you are probably right that in general, "money" is usually not a security, bitoin is interesting and unique in a number of ways. It's clear that a large number of people _do_ invest in bitcoin. More importantly, when you are talking about something that is unregulated and there are people who end up getting harmed for some reason, courts are more likely to make liberal interpretations of the securities laws. For example, ponzi schemes didn't really meet the "solely from the efforts of others" requirement of the Howey "investment contract" test, but a court expanded the definition slightly so that ponzi scheme operators could be sued under the securities laws.
Mike Hearn
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April 21, 2011, 08:52:06 PM
 #7

The protocol defines a BitCoin value as an int64, constrained by the following constants:

static const int64 COIN = 100000000;
static const int64 CENT = 1000000;
static const int64 MAX_MONEY = 21000000 * COIN;

As you can see, the maximum representable amount is 21000000 * 100000000 = 2.1*10^15, a very large number to be sure but by no means infinite.

Changing the int64 to something larger would be very difficult. Every single piece of software that speaks the BitCoin protocol would need to be upgraded. If IPv6 is any indication it'd be a extraordinary multi-decade effort, perhaps it'll even never happen. I wouldn't describe it as trivial even today ...

Fortunately, MAX_MONEY is a really huge number. According to Wikipedia the US "base" currency supply (notes and coins) is approximately a trillion dollars. A trillion is 1*10^12. The maximum amount of coins is 2.1 quadrillion BTC. So representing all the printed/minted dollars in the world would be no issue.
reubgr
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April 21, 2011, 09:24:51 PM
 #8

@[mike]: Thanks for the clarification! I'll make the divisibility issue more clear in the next draft.
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April 22, 2011, 12:57:04 AM
 #9


So if the govt. wants to shut-down/regulate bitcoins will they also go after in-game virtual currencies like Linden Dollars, World of Warcraft, Second-Life credits, etc?

Bitcoin is really no different in essence to a virtual game, albeit with an arcane and simplistic rule set.

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April 22, 2011, 02:26:42 AM
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So if the govt. wants to shut-down/regulate bitcoins will they also go after in-game virtual currencies like Linden Dollars, World of Warcraft, Second-Life credits, etc?

Bitcoin is really no different in essence to a virtual game, albeit with an arcane and simplistic rule set.

+1

witcoin.com uses bitcoin as a micropatronage service for sending tiny amounts of bitcoins without fees.

Do we have to send a tax form with every click of the mouse ?

At most it is a donation service. The site never touches US dollars and how can we even know which country the users or their coins come from ?

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April 22, 2011, 06:39:14 AM
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Started reading this and stopped when I got to statement that "Bitcoin is a fiat currency" .... wrong.

It has nothing to do with fiat at all ... look up dictionary definition of fiat, it means "by decree or by order of authority" ... bitoin has not been ordered, or decreed, or authorised as currency by any authority that I know of ... it is in many respects the exact opposite of an authorised currency.

Not a fiat currency, this is wrong. Fix that and I might finish the rest of it.

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April 22, 2011, 09:08:52 AM
 #12

Saying that "software developers ensure Bitcoin's technical and money-supply properties" is inaccurate.

What ensures Bitcoin's properties is not the software, it's the conventions that the community has agreed upon, the protocol if you like.   

The actual software isn't that critical. Bitcoin does not even need an "official" piece of software. It can happiliy function with several independent clients from different developers as long as those clients adhere to the protocol. 

But even developers have very limited power to change the protocol.

At this early stage the protocol is still undergoing minor modifications but at some point it will be set in stone, and require no further "maintenance".

Even though the bootstrapping of Bitcoin did require a conscious design effort, its long term usage may not.  It is no more a "common enterprise" than the social convention that a piece of rare metal is used as a currency.

GPG ID: FA868D77   bitcoin-otc:forever-d
reubgr
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April 22, 2011, 02:19:30 PM
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@moa: If I understand you correctly, you are asking whether, if a government wants to attack bitcoin for some reason, it will also attack virtual world currencies. Is that your question? If it is, I think the answer is generally no but it depends on why the government decides to attack. For example, if it has to do with money laundering issues, then there are probably no implications for Linden Dollars, where the founding company runs the exchange and everything is above board.

While from a technical perspective you are right that bitcoin is like a virtual game, the law looks past technicalities to substance. Linden Dollars and other virtual currencies aren't really meant to be used to buy any and all goods -- just those in-game. Bitcoin, on the other hand, is meant to circulate broadly and to be used to buy real goods. Additionally, whereas Linden (if I recall correctly) has taken steps to restrict illegal activities in second life, such as virtual casinos, no such regulation is happening with bitcoins.

Regarding your second point about the meaning of "fiat," I appreciate your feedback. Yes, the meaning of the word "fiat" is by governmental order. At the same time, "fiat money" has grown to encompass another meaning -- a currency that isn't specie and isn't backed by commodity. See, for example, http://www.merriam-webster.com/dictionary/fiat%20money. I think I made it pretty clear in the paper that even though I referred to it as "fiat" money, I was doing so because it was unbacked by commodity and not because it had the backing of a government. In any case, you might be right that referring to it that way may be confusing and I will consider changing it in the next draft.

@noagendamarket: Thanks for taking the time to read the paper. I'm not really sure how to respond because I'm not sure what you're saying or what conclusions you drew from my paper. I haven't researched and written about tax issues yet. Where certain transactions happen, who runs the business, etc.. are important issues in deciding whether the laws of this government or that government apply. The inability to enforce because of the structure of bitcoin or of a particular business is a separate issue.

@chodpaba: Thanks so much for your very insightful comments. Regarding separate block-chains, I considered writing about that in my paper but I think that is a feature of the software but that separate block-chain wouldn't be _the_ bitcoin currency -- it would be something else (such as namecoin). Those other things are certainly interesting, but don't fit within the subject matter of this paper. Of course, I can be convinced otherwise.

Your point about internationality is very well taken. The paper is very U.S.-centric. I will try to do a better job in the next draft of pointing that out and mentioning the internationality of bitcoin. I may try to touch upon laws or regulations in other countries but I don't have expertise in other countries' laws.

Could you elaborate a bit on your point about enforcement? You are saying that bitcoin being illegal won't affect its use because of its decentralized nature, if I understand you correctly. Yes, but it will affect demand for bitcoin and therefore its value. I'm not sure I understand the comparison to the cryptowars.

Regarding your trust point -- what is the implication? Is it that bitcoin is more resiliant than I've painted it to be? Or are you saying that the legal sections don't discuss the trust point? Or is it something else?

@forever-d: That is a great argument and one that I'm sure bitcoin supporters would use in any argument to the SEC or in court. I think your point that others could easily pick up development of the bitcoin client and continue parallel implementations of the software that would work just as well is a very good one that I'll incorporate into my next draft. At the end of the day, I'm just not sure that I agree with you. Yes, the protocol is in place. However, I still think people rely on and expect continual improvements to the software (and protocol). What if Gavin and the rest of the developers just dropped out -- what would happen to the value of bitcoin? My guess is that it would plummet -- until and unless another group jumped up and took responsibility. And since bitcoin's value depends on some group of people continually improving it, there does seem to be a "common enterprise." It is an extremely close question though.


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April 22, 2011, 02:43:17 PM
 #14

Update:
My Tweet: http://twitter.com/#!/BitcoinBulletin/status/61446925005750272
Recognition: http://twitter.com/#!/dhowell/status/61465184455229440
Got to love Twitter.  </update>

Update 2:
I felt like this effort was more than "Hacker News worthy," so I took the liberty of sharing it.  I also made a comment that linked back to this forum thread, indicating that you had requested feedback.  It's currently on the front page.  Here's the submission link: http://news.ycombinator.com/item?id=2480073 </update>

Thank you, Reuben.

As we get our feet wet in the Bitcoin pool there is a considerable need for legal opinion.

Denise Howell of This Week in Law has expressed interest in covering Bitcoin but has needed a guest familiar with the topic.  It's not uncommon for her to bring on law students, so I would look into it!

Here was our exchange:  
Initial Tweet:  http://twitter.com/#%21/Fencefinder/status/44218519663017984
Her Response: http://twitter.com/#!/dhowell/status/46301866065276930

It seems like you are a qualified guest!  I encourage you to reach out to her.

I look forward to passing along my thoughts once I've finished reading it!

Thanks again.

Edited:  Fixed broken links.  Also, this is her show:  http://www.twit.tv/twil
2nd Edit:  Wow, now the link is fixed, sorry.

www.SpreadtheCoin.com - Free Printable Bitcoin Certificates.  A Transparent Company.

www.BitcoinBulletin.com - Reviews and Interviews.
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April 22, 2011, 02:53:26 PM
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Quote
Your point about internationality is very well taken. The paper is very U.S.-centric. I will try to do a better job in the next draft of pointing that out and mentioning the internationality of bitcoin. I may try to touch upon laws or regulations in other countries but I don't have expertise in other countries' laws.

I, for one, would be interested in translating this paper into Italian, so if it would be less usa-centric that would be great.
I'm not a layer, though, so I can't help in that domain.

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April 22, 2011, 03:05:17 PM
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Started reading this and stopped when I got to statement that "Bitcoin is a fiat currency" .... wrong.

Bitcoin is a fiat currency.

It is a software fiat currency, but a fiat currency nonetheless.

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April 22, 2011, 03:15:01 PM
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Quote
It is a software fiat currency, but a fiat currency nonetheless.
Correct, but conversely to all the usual fiat currencies, bitcoin is not inflatable at will.
And this is not a small difference Smiley

Articoli bitcoin: Il portico dipinto
marcus_of_augustus
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April 22, 2011, 10:34:40 PM
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Started reading this and stopped when I got to statement that "Bitcoin is a fiat currency" .... wrong.

Bitcoin is a fiat currency.

It is a software fiat currency, but a fiat currency nonetheless.



Did you look up in dictionary what the word "fiat" means?

Oxford concise, forget about the other crap.

It is not a fiat currency ... mixing technical terms with colloquialisms used by the uneducated is how the law became the subjective morass of co-opted interests that it is today. Basically there are no objective rulings anymore and you can buy the ruling you need. It is not really a justice system but a legal system ... law of the jungle is not far behind.

Quote
While from a technical perspective you are right that bitcoin is like a virtual game, the law looks past technicalities to substance. Linden Dollars and other virtual currencies aren't really meant to be used to buy any and all goods -- just those in-game. Bitcoin, on the other hand, is meant to circulate broadly and to be used to buy real goods.

I do not recall seeing anywhere what bitcoin is "meant" to do .... it is like claiming that people started using gold nuggets for trade because someone stated they were meant to be used to buy real goods. So, no statement of fact, they can be and can not be used for whatever. Nice try to slip around that one but it has more guts than you think.

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April 22, 2011, 10:51:46 PM
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Regarding the use of the word "fiat"...

People are using the same word to mean two different things.

The first definition, and the one I mean when I use the word, is "money that has value only because of government regulation or law".

The second, and the one that I disagree with, is "money that has value only because people value it".

The second meaning makes no sense to me, as gold does not have intrinsic value, it's only useful as money because I know that I can trade something I have for gold, then trade gold for something I want.
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April 23, 2011, 02:59:43 AM
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The second meaning makes no sense to me, as gold does not have intrinsic value, it's only useful as money because I know that I can trade something I have for gold, then trade gold for something I want.

That's not exactly true. Gold is a good electrical conductor and also does not oxidise, hence why it is used in electronics. It's also a good EM reflector and is hence used in satellites. NASA doesn't launch gold components into space because of its monetary value Tongue

Granted it's overvalued in respect to its intrinsic properties (except its scarcity), but it does have intrinsic value.
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