Sytem to Update Cryptocurrency Technology to Provide for an Appropriate Legal Framework Under International and National Laws.
Author: Jeff Yakulis
Abstract:
This research seeks to solve some of the current deficiencies in cryptocurrency applications and wallets with respect to the current legal and business needs in the marketplace. This is based on current needs of the government, users, and businesses with regards to providing an appropriate legal framework provided within each respective cryptocurrency via usage of their respective blockchains and public ledger systems. The software or application would either initially use public notes or more preferably new wallet applications or an updated version of current wallet applications for each respective cryptocurrency. It also seeks to solve the problem that cryptocurrency is currently facing with regards to be viewing an asset as opposed to a true competitive form of currency by Governments and the onerous regulative restrictions that would come as a result that could ultimately restrict business, usage, and innovation in the cryptocurrencies and the business community as a whole. The solution to the problem is to provide for the usage of Promissory Notes manipulated either via Public notes on the blockchain ledgers or more preferably software application between the Payer and Payee. By doing this it would be possible for the Payer and Payee to have a much bigger voice in the terms, payment period, initial payment amount, and payment schedule of the Promissory Note in return for an asset. These assets could include property, housing, or automobiles but is by no means limited to these particular items. Proper legal consultation would likely be necessary by any potential software developer to appropriately meet the legal requirements for Promissory Notes under the Geneva Convention and laws governing Promissory Notes under National Governments.
Problems with Current Bitcoin System:
Cryptocurrencies have largely taken off due to an enthused user base as well as an energized technical sector. However, authorities, regulators, government officials, and banks have largely been resistant to allowing or providing a framework within the existing structure for cryptocurrencies to be implemented on a larger scale. The U.S. Consumer Financial Protection Bureau called bitcoin the “wild west of finance”. The primary complaint being the currency is not backed by any government or central bank (1). In addition to this complaint other agencies have ruled against the digital currency actually being called a currency. In March of this year the US Internal Revenue Service ruled that cryptocurrencies would be treated as property governed rules that govern stocks tying cryptocurrency prices to unstable central bank fiat and subjected to capital gains taxes (2).
This creates a bureaucratic nightmare amongst users of the cryptocurrency. Though, a public ledger does exist with timestamps on when coins are mined or acquired it puts a huge strain on the users of the coin and subjects by requiring some sort of software application to look at the public ledger of when coins were acquired. Additionally, it would subject users of cryptocurrencies to a less than honest agency as proved in recent times such as the IRS and instead one that tends to favor big banks and government cronyism (7). Other states have moved to regulate bitcoin to the point that it could kill start-up companies and innovation within the system (
. Proposing arduous regulations that users do not have the necessary means to meet and in addition the system lacks the existing framework to fulfill the full requirements of the law. Instead of Washington, State Governments, and the Federal Reserve System supporting alternative competing systems to currency creation and issuance, once again a situation presents itself where these institutions are seen as crushing any form of competition in favor of state run corporatism favoring the biggest banks, high ranking government officials, and the Fortune 500.
It is precisely these strong arm approaches to competition that spurred the creation of cryptocurrency. Two such instances of this strong arm approach was the conviction and jailing of the creator the Liberty Dollar (a gold backed competing currency, which should be fully legal under the U.S. Constitution) (9) and the failure of things like electronic gold (10). The failure of electronic gold was due to the fraud and security risk involved to the user but further it became illegal under the Patriot Act to operate a competing digital currency without a state money transmitter license.
Cryptocurrency sought to solve two inherent flaws. The first was to get around the risk and fraud associated with digital hard backed currencies. The second was to work around the stubborn resistance of the federal and state governments to allow competition to the existing Central Bank system. The result was a decentralized system of active mining nodes with an increasingly difficult algorithm for miners of each node to solve in order to mint new coins. As many different nodes existed, minting new coins into circulation, it got away from a central authority of where the currency was being managed bypassing existing laws by the federal and state governments. In addition, the proof of work and increase in mining difficulty served as a way of preventing fraud and double spending of coins by hackers within the system. The system finally secures itself via active nodes confirming transactions via the network and public ledger system.
While cryptocurrencies have gained traction in the marketplace providing signs of hope for more large scale implementation seen in the adoption by PayPal to allow users to accept bitcoin payments, cryptocurrency being used for donation and tipping purposes online, and electronic retailers like Newegg, Overstock, and Tiger Direct accepting them as form of payment (4, 5, & 6) it has largely been absent from larger scale acquisitions like automobiles, private property, and housing. Though it is not ouside the realm of this research to provide for a framework of payment not forseen by the author as a whole.
This is not to condemn the Governments of the world as a whole for not providing the framework for implementation and purchase of these assets. It is largely not the responsibility of the Government to solve these problems and in addition, cryptocurrency emerged from the free market so, it would make sense for the cryptocurrency community to drive larger scale adoption by offering the framework for implementation of purchase and transfer of these assets. To avoid scenarios of being called the “wild west” of finance though a system is needed to address these concerns via the court system given an appropriate legal framework. It is not to say that government is not entitled to its proverbial cut of the pie via sales tax, but that it is necessary to skirt the problem of being labeled property and the arduous forms of regulation that would follow for users of cryptocurrencies at large.
Instead of large scale ledgers being kept noting gains and losses of when the coin came into existence and was acquired it would provide a much simpler system of taxing the coin via sales tax upon spending of the coin in a much simpler system between buyer and seller where governments are merely an observant third party to private enterprise.
However, it still would not solve the issue that the coin is not legal tender and obviously the purchases would still be subject to property taxes. This burden however, is on governments at large in this case as their inherent unwillingness to accept forms of competing currency under legal tender laws. Though, this is for another time and place, it is the hope of the author that given the framework that cryptocurrencies have constructed and with continued development as well as the ease of the use and inherent security of the network that government could and should follow suit and accept cryptocurrency and competing currencies as acceptable legal tender for taxation purposes.
And there are signs of hope from some governments as it was recently announced that California would be looking at accepting cryptocurrency as a form of payment for tax purposes,but it was gradually ruled against in favor a much more burdensome system on consumers, businesses, and users of cryptocurrency at large in favor of big banks.
Despite the inherent existing problems in the social order of money creation the proposed system seeks to solve the problem of arduous regulation and moving more to a system where cryptocurrency is seen as currency and not property under the current legal framework.
Proposed Solution to Problem:
A legal framework is necessary to extending the usage of cryptocurrency to larger ticket items such as property, automobiles, and housing. To solve the problem a system implementing promissory notes is proposed by the author. A promissory note is a form a payment where the Payer and Payee come to an agreement based on the Payer paying the Payee a determinate sum of money (11). The usage of promissory notes is supported under international law via the Geneva Convention in 1930 (11). There are several requirements for the usage of a promissory note via the Geneva Convention and these include:
• the term "promissory note" inserted in the body of the instrument and expressed in the language employed in drawing up the instrument
• an unconditional promise to pay a determinate sum of money;
• a statement of the time of payment;
• a statement of the place where payment is to be made;
• the name of the person to whom or to whose order payment is to be made;
• a statement of the date and of the place where the promissory note is issued;
• the signature of the person who issues the instrument (maker) (11).
As the reader can see the requirements are quite simple under the Geneva Convention. Looking at one popular cryptocurrency such as the bitcoin framework this should be able to be implemented into the Multibit wallet and blockchain framework between the Payer and Payee. Though, this is not to leave other forms of competing cryptocurrency without a similar framework via their perspective wallet software flavors as the system could easily be implemented by any start up cryptocurrency and their respective network.
The requirements would be simple as both payer and payee would be required to have cryptocurrency wallets easily downloadable online and safe and secure and able to backup. The blockchain architecture already provides for the usage of providing public notes. This could easily serve as the framework for implementing the requirements of a promissory note. However, further development is needed to implement other aspects of the authors proposed idea.
These include things like making payments over time instead of the current system that favors lump sum payments for consumer goods. In addition, it would be advantageous for down payments to be made. However, this would not be a requirement. Dealing in a single Satoshi or 0.00000001 Bitcoins could suffice for the issuance of a promissory note if the payee was willing to accept no down payment from the user. In addition, there exists no framework for late payments but being a legal instrument under international law it would move out of the realm of the Payer and Payee disputes going into a fairly complex system of prosecution with currently no basis under many law jurisdictions and hopefully an improved system.
One current aspect of the system is that it does not seem to be implemented yet in the blockchain framework if the author is correct in the proposed system where the Payee can either reject, accept, or make or send a conditional paymente. What the author envisions is a system where the Payee would be able to look over the terms of the Promissory Note issued by the Payer via the transfer of either 1 Satoshi, a lump sum payment, or a down payment followed by regularly installed payments agreed upon by the Payer and Payee. It is also the hopes of the author that a more integrated system between one Payer and multiple Payees is implemented. This is to speed up business transactions and foster competition between Payees.
The Payer could issue multiple promissory notes for seemingly the same asset. This could include larger items like property, housing, or automobiles. In this case the Payees would have access via the blockchain and public ledger to look at the proposed offers by the prospective Payer. The Payees could then review the proposed offers by the Payer for the asset. They could then choose to issue a counter offer, reject the promissory note outright, or accept the promissory note. All of this should be reviewable by the Payees via a public ledger and public note system. The deal would be finalized when the Payer has come to some form of agreement with one of the Payees. At the end of the mutual agreement an electronic signature and Promissory note attached to one Satoshi by the Payer in exchange for a copy of the Title, Deed, or License copied to a Satoshi sent by the Payee.
This would require the Payees to have access to a new form of transfer in wallet design, the public ledger, and the blockchain. As the author previously stated an option would be necessary for whether the payee could accept, reject, or offer a counter offer via the public note and ledger systems that that respective blockchains of cryptocurrencies provide. If a counter offer was issued it could simply be in the form of a public note where the Satoshi, down payment, or lump sum is sent back to the payer for further review. Though, this may be beyond the current capabilities of the system a simpler system of either rejecting or accepting the offer could and should be implemented into the architecture of cryptocurrencies at large via a simple one on one transaction between Payer and Payee.
On the Payees side of the deal it would be a required via a public note to provide a copy of the title, deed, or license back to the Payer via a public note provided for in the respective blockchain architecture. The Payee then would review the response from the Payee via the public ledger and then could choose to finalize the deal by either accepting or declining the deal and finalizing the deal via an electronic signature to the Promissory note. If a copy of the title, deed, or license was not provided for with a note that it is indeed a copy a response via the public note and ledger system it would provide the Payer with full access under international law to challenge the Payee. The finalized step of the process is a double exchange upon mutual agreement between Payee and Payer using 1 Satoshi on both sides of the deal.
It is the hopes via the implementation of a system such as this to the cryptocurrency architecture at large that it would provide for a framework for moving cryptocurrencies out of the realm of merely assets like stocks or commodities (wild west scenario) and into an area where they are viewed as true currency fully subject to international and national laws via the framework provided for under laws governing Promissory Notes.
Example:
Example 1: The purchase of an automobile
In this particular example we will follow the architecture that would be required by the potential application used to carry the aforementioned improvements to cryptocurrencies as a whole and the transactions that would occur via the blockchain and ledger entries. This examples uses the simple example of purchasing a new automobile from three separate auto dealers (auto dealers A, B, and C). Each auto dealer has a proposed fair market list price of the same new automobile that the Payer in this case has shopped. These are listed in the arbitrary unit of number of cryptocurrency coins in this case they are 50 units from auto dealer A, 52 units from auto dealer B, and finally 51 units from auto dealer C as shown in Table 1.
Table 1: Shows the listed market prices of the same automobile from three separate dealerships.
Looking at Table 2 the Payer in this case has decided to make an offer via a Promissory Note to each of the three dealers hoping one of the dealerships will take his offer. The initial transaction would provide for a conditional transaction from the Payer based on the response of the Payee. In this case the Payer hopes that one of the dealerships will accept his promissory note which is issued on certain date in this case 1/7/2020, which would be time stamped and kept in the public ledger via blockchain. The amount of currency issued here in forms of units would be the smallest possible transaction that could occur via the cryptocurrency. Using bitcoin as example this would be one Satoshi or 0.00000001 Btc.
Table 2: Shows the initial conditional transaction of the Promissory note, units, and timestamp to each of the three auto dealerships.
The initial public note of the Promissory Note could either be written up outlining all the legal requirements as outlined by either international or national laws governing Promissory Notes. Alternatively and more preferably, an application or software addition to existing wallet designs would allow for simple drop down menus provided to the user. These would outline the type of promissory note, amount, term of payments, amount of each payment etc. The author is not an attorney but with proper legal consulting, it is not unforeseeable that software could be designed in such a way where the Payer would actually draw up the terms of Promissory Note to send to each perspective Payee.
The payment could either be over time or in one lump sum payment and would completely depend on the needs of the Payer. Interest could optionally be added by the Payer to account for unforeseen events in the price of the cryptocurrency which, have wildly been regarded as unstable to say the least and some may say chaotic.
However, the author is of the opinion the bubbles, booms, and swings in the price of cryptocurrency is not caused by the inherent instability of cryptocurrencies in general but is a symptom of an unstable monetary system of national governments and central banks that allow for excessive credit to enter the economy causing rampant speculation and gambling in cryptocurrencies. Many cryptocurrencies however, not all, are deflationary in nature an example of this being Dogecoin. Regardless, in a deflationary system prices should actually decline via increasing scarcity of the currency via increasing numbers of users via population growth and increased user base as well as productivity gains via innovation occurring in the public sector. Though, this is a highly idealistic world view given the current economic environment, usury as known in its current form would be completely up to the Payer. If the Payer wishes to add interest to a loan it is completely at his discretion if he thinks it will help him reach his ultimate goal. In this case it would be a copy of the title to the automobile given back to the Payer via a one Satoshi transaction at the end of the process as will be shown later.
In Table 3 the transaction process is passed to the Payee for response. The transaction that would occur would be the one Satoshi initial conditional payment by the Payer for review via the public ledger and blockchain technology by the business, in this case the three auto dealerships, for review by management. In addition to this, via the public ledger and blockchain, the business could see that the Payer has issued the same conditional Promissory Note to two other competing dealerships for the same automobile. In this example Auto dealer A has either made a note via a public note to a written Promissory Note stating that it would require 49 units of the cryptocurrency to accept the transaction. Auto dealer B has decided it cannot compete with the other dealerships price points given its current economic situation or possibly any business situation that the dealership may be facing. Auto dealership C in this case maybe adjust the Promissory note to cost more overall but potentially adjusted the language or more preferably adjusted the terms via software or application to allow for a longer overall payment time but more total overall units of the cryptocurrency being paid by the Payer to the Payee
Table 3: This shows the modification of the terms of Promissory Note by the Payee and sent back to the Payer.
In Table 4 the transaction is in a state of conditional acceptance by auto dealer A and C. The Payer is now has the option given the conditional acceptance to negotiate further with both prospective auto dealers A or C or accept one of their proposed offers. The Payer can then further adjust the promissory note possibly changing time periods or loan payments. They could possibly stagger the note to allow higher initial payments followed by smaller payments over time via the software or application of the perspective cryptocurrency wallet. In this case however, the Payer decides that the deal from auto dealer A best suits his needs. He would rather not risk losing the deal completely than further negotiating on price. In this case he accepts the offer from auto dealer A.
Table 4: This shows the next addition to the ledger where the Payer has accepted the revised outline of the Promissory Note from auto dealer A.
In Table 5 the final transaction is established in which the copy of the car Title is sent via a Satoshi and electronically scanned into the public ledger denoting COPY as another user could not print out the user’s car loan and claim ownership. The transaction would be two parts exchanging one Satoshi on each side of the transaction allowing for the copy of the Title by the Payee and an electronic signature by the Payer. The copy and identity of the user could later be acquired via physical means by the Payer once the terms of the payment have been met. Possibly in this case, the term of the Promissory note was an initial payment of 9 units followed by 5 units every 28 days for the following 8 pay periods. This could either be made manually by the Payer or possibly be provided for by software or application to automatically deduct these payments given the terms of the Promissory Note. This would require considerable development by each of the perspective cryptocurrency wallet applications. Additionally, a new wallet could be developed more geared towards these kinds of transactions. It is not uncommon for a cryptocurrency to have more than one flavor of wallet application and could likely be provided for in the cryptocurrency framework.
Table 5: With the acceptance by the Payer in Table 5 it will require a simultaneous Acceptance by Auto dealer A paying one Satoshi in return with a COPY of the Title of the automobile.
Table 6 just shows that ultimately the transfer occurs in full to auto dealer As given the outlined terms of the Promissory Note. This is just a simple ledger of the transaction but terms payment amounts could be adjusted completely by the Payer and Payee. It is the hopes of the author that this could empower both Payer and Payee to best suit their business needs without the common terms outlined by the bank. Usury could be added by the Payee at the discretion of the Payer given the same software or application and would be completely at the discretion of the consumer and business, in this case, the Payer and the auto dealership.
Table 6: Shows the ledger entries or entries made by the Payer to the winning Payee.
In Figure 1 an outline of the signals and movement of currency is outlined in a simple flow diagram. It should be easier to follow the transaction ledger previously discussed via Tables 1-5 to see the signals. It would require a mutual acceptance signal between two wallets. In addition, it would require proper legal consulting to design a software application that would provide for ease of use by the Payer and Payee as well as provide for all the proposed requirements under the laws governing Promissory Notes via the Geneva Convention.
Figure 1: Shows the signals and transaction amounts occurring on the blockchain.
Looking at the transaction it would start with conditional acceptance given the framework of the Promissory note outlined by the Payer. This would be followed by two conditional acceptance returns of the Satoshi from Payee in this case auto dealers A and C to the Payer. Additionally, the Satoshi with the unsigned promissory note would be returned to the Payer from auto dealer B who has decided to reject the deal outright given the current business and economic environment it is facing. The conditional acceptance from dealers A and C is followed by a conditional acceptance from Payer to auto dealer A’s terms outlined in its counter Promissory Note and signed with an electronic signature. This would then require a mutual positive acceptance by both the Payer and the Payee. The Payer on one end would send one Satoshi of the Promissory note with an electronic signature as required by law. The Payee would then send a COPY of the Title of the automobile via one Satoshi. The mutual acceptance would then require a simultaneous transfer of the Promissory note from the Payer and in return the copy of the Title from the Payee.
This should not eliminate lawyers, but instead offer lawyers much less paperwork and reduce overall burdensome legal fees. Lawyers would still very much have a place in the scope of this architecture but would spend more time in the court room handling disputes between the Payers and Payees as opposed to mountains of regulatory and legal paperwork often currently seen in the legal field. In short, it should greatly reduce work loads of lawyers and speed up prosecution. Additionally, given the inherent security of the blockchain networks and public ledger system existing in the current cryptocurrency framework it should allow lawyers with potential for law firms to develop software applications to more simply do research whether the terms of the Promissory Note have been met via the blockchain ledger and time stamps. This would provide for a more attractive profession to folks who actually believed being attorney was like in the movies.
Conclusion:
This research seeks to solve some of the current deficiencies in cryptocurrency applications and wallets with respect to the current legal and business needs in the marketplace. This is based on current needs of the government, users, and businesses with regards to providing an appropriate legal framework provided within each respective cryptocurrency via usage of their respective blockchains and public ledger systems. The software or application would either initially use public notes or more preferably new wallet applications or an updated version of current wallet applications for each respective cryptocurrency. It also seeks to solve the problem that cryptocurrency is currently facing with regards to be viewing an asset as opposed to a true competitive form of currency by Governments and the onerous regulative restrictions that would come as a result that could ultimately restrict business, usage, and innovation in the cryptocurrencies and the business community as a whole. The solution to the problem is to provide for the usage of Promissory Notes manipulated either via Public notes on the blockchain ledgers or more preferably software application between the Payer and Payee. By doing this it would be possible for the Payer and Payee to have a much bigger voice in the terms, payment period, initial payment amount, and payment schedule of the Promissory Note in return for an asset. These assets could include property, housing, or automobiles but is by no means limited to these particular items. Proper legal consultation would likely be necessary by any potential software developer to appropriately meet the legal requirements for Promissory Notes under the Geneva Convention and laws governing Promissory Notes under National Governments.
References Used:
(1) US Watchdog calls bitcoin the “Wild West” of Finance, Miedema, Reuters, 8/11/2014.
(2) Bitcoin is Property not Currency in Tax System: IRS, Rubin, Bloomberg, 3/25/2014.
(3) How will the IRS Tax Bitcoin? Saunders, Wall Street Journal, 12/20/2013.
(4) PayPal Takes Baby Steps Toward Bitcoin, Partners with Cryptocurrency Processors, Mac, Forbes, 9/23/2014.
(5) Google May Integrate Bitcoins to its Payment System Soon, Kanal, Tech 2, 1/23/2014.
(6) Online Retail Giant Newegg Now Accepts Bitcoin Payment, Cawrey, CoinDesk, 7/1/2014.
(7) IRS Targeting Controversey,
http://en.wikipedia.org/wiki/IRS_targeting_controversy.
(
New York Proposes Bitcoin Regulations, Davidson, Time Money, 7/18/2014.
(9) Prison May be the Next Stop on a Gold Currency Journey, Feuer, New York Times, 10/24/2012.
(10) History of Digital E-Gold,
http://en.wikipedia.org/wiki/E-gold.
(11) On international and National Law Governing Promissory Notes,
http://en.wikipedia.org/wiki/Promissory_note.
(12) Current blockchain capabilities,
https://blockchain.info/wallet/website-faq .
