Friday, July 19, 2013

Bitcoin Foundation’s Legal Defense Fund and Regulatory Outlook

By Brian Cohen
Bitcoin Magazine
Wednesday, July 17, 2013

http://bitcoinmagazine.com/bitcoin-foundations-legal-defense-fund-and-regulatory-outlook/

On July 9th, Jon Matonis accepted the position of Executive Director of the Bitcoin Foundation. Jon Matonis is a tech contributor to Forbes Magazine, editor of The Monetary Future, and also serves on our editorial board at Bitcoin Magazine. Previously Jon was the CEO of Hushmail and Chief Forex Trader at VISA.

How the Bitcoin Foundation will move forward on regulatory and legal issues is of crucial importance to the Bitcoin community. Jon announced a Legal Defense Fund and that it will be structured similarly to that of the Electronic Frontier Foundation.  

The Foundation intends to file amicus curiae Briefs in decisive bitcoin-related legal cases and offer pro bono legal defense. Amicus curiae (Latin: “friend of the court”) briefs are filed with the court by someone who is not a party to the court case. Take a look at EFF’s Legal Cases to see a sample what the Foundation’s amicus brief might look like.   He envisions “building a legal defense dream team…I’m talking about keeping people out of jail and pressing our case in the grey areas.”

The Foundation is only nine months old and the core list of issues are still being ironed out.  However, the first “two phases” of the fund have been established.  Phase I will focus around the Bitcoin exchanges while Phase II will focus on businesses that accept Bitcoin who are feeling indirect pressure to abandon adoption.

The Foundation was recently in the spotlight responding to cease and desist letter from the State of California  Department of Financial Institutions for being a “money transmitter” – an act that is as humorous as requiring chef to first become a certified farmer.  While this cease and desist was directed towards the Foundation, The Legal Defense Fund anticipates engaging the Bitcoin community at large.

In a podcast interview, Adam B. Levine, co-host and Editor in Chief of Let’s Talk Bitcoin!  asked Jon Matonis for specific examples where the Foundation would be proactive in exploiting the Legal Defense Fund.  Contemplated were two recent high profile situations interjecting themselves in Bitcoin legal grey areas (there are no known court actions in this regards): The BitBills Cold Storage Patent and the DEA Bitcoin Seizure.

The Foundation will not be involving itself in asset seizure cases such as the DEA bitcoin seizure.  The BitBills situation is “still under discussion” whether or not it fits within the scope of the Fund; Gavin Andresen, the Chief Scientist and Core Developer of the Bitcoin Foundation is regarded by most as the  progenitor of the cold storage paper wallet technology.

The “defensive intellectual property registration” of the fund might extend to defensively trademarking rights to names and logos.  It would be “broad and sweeping but not an aggressive portfolio.”

There may be good reasons for doing this. In 2011, a New York criminal law attorney attempted to trademark the term “Bitcoin”, and similar incidents in other countries led to Mt. Gox applying for the trademark Bitcoin themselves in a number of jurisdictions as a service to the Bitcoin community to prevent others from doing the same.  Max Keiser also caused a bit of a stir earlier this year when he pondered in The Huffington Post if “A Patent Lawsuit Could Take Down the Bitcoin Exchanges Like MtGox?“  Max Keiser is the former CEO of the Hollywood Stock Exchange (HSX) and inventor of the “Virtual Specialist Technology” now generally known as the “prediction market” business model. The company along with its patents were eventually sold.  The plan was to have a real hollywood futures contract exchange based on box office receipts.  It was initially approved by the CFTC, but was soon banned by the Dodd-Frank Wall Street Reform and Consumer Protection Act through Hollywood lobbying efforts.  Mr. Keiser speculates that the HSX patents could land the Bitcoin exchanges in a legal quagmire.  Shortly thereafter after we learned that the CFTC commissioner Bart Chilton announced on CNBC news state that he is interested in regulating Bitcoin.  He reasoned that if it is “commodity that is used as a derivative” than the CFTC can regulate it. Showmanship?   Maybe.  Regardless, this is the type of legal/regulatory/lobbying environment the Bitcoin Foundation will find itself head to head with.

Jon stated that the Foundation would look at Mt. Gox’s account being seized by Federal authorities at Dwolla regardless of whether Mt. Gox was on the Board or not.  LTB called compliance  a moving target and it was generally agreed that  the “rules get changed on you without you having  enough time to react.”
“rules get changed on you without you having  enough time to react.”
“Doug Jackson of e-gold knows you can have the rules changed on you at any time” cautioned Matonis.  The e-gold case is a good analogy when looking at the regulatory environment.  Wikipedia explains how “e-gold presaged Bitcoin as an alternative internet transaction system that operated completely outside of and independent of the legacy banking system.”    Bitcoin Magazine’s Vitalik Buterin’s recent interview (“Bitcoin at Porcfest Part 3”) with  James M. Ray of Omnipay (and  former exchanger for e-gold) shared James’ experience with the regulatory environment at the time. “Doug Jackson of E-gold tried very very hard, I witnessed it, I was there, to cooperate with the government, he testified in front of Congress and all the various agencies, but he finally got raided anyway.  If they could have raided Bitcoin they already would have, and the meme I’m trying to spread, I would love to see someone like Jeffrey Tucker say it, is that Bitcoin is karma for E-gold…”

Returning to Mt. Gox and the Bitcoin exchanges, Matonis noted the regulator concern of tax evasion vs. war on money laundering and terrorism.  Without putting words in his mouth I think Jon was alluding to is that regulators might be using the potential threat of terrorism as leverage to go after Bitcoin exchanges for tax evasion.

In any case, of all the Bitcoin related stories swirling around the news these days it is curious that the Department of Homeland Security would choose to highlight on July 2nd in its daily news clippings a story by SoftPedia that  the CNN Political Ticker blog was hacked: “July 1, Softpedia – (International) CNN’s Political Ticker hacked, fake Bitcoin operator story published. CNN’s Political Ticker blog was hacked and used to post a fake story about the shutdown of Bitcoin operator Btc-e.com after a user’s third party  publishing platform credentials were compromised.”

Other cases that come to mind are Bitfloor and Bitspend.  Bitspend has stated on its homepage since June 19th that “Bitspend is Unavailable: The TL;DR is that Bitspend has had its accounts frozen by our banks. We cannot operate without access to our funds.” and further provided updates on Reddit.  BitFloor Posted on April 13th that “I am sorry to announce that due to circumstances outside of our control BitFloor must cease all trading operations indefinitely. Unfortunately, our US bank account is scheduled to be closed and we can no longer provide the same level of USD deposits and withdrawals as we have in the past. As such, I have made the decision to halt operations and return all funds.”

“Bitfloor was Bullied” said Matonis.

In the next 30 days, the Foundation is scheduled to submit comments to FinCEN’s guidance and request for industry feedback on rulemaking.  They will have to submit their comments in the next few days on the NPRM or Notice of Proposed Rulemaking for “Imposition of Special Measure against Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern (May 28, 2013).”  Additional information on the Liberty Reserve can be found in the June 6th Federal register.

On regulation, Matonis noted that “The U.S. is taking the lead on being one of the most aggressive jurisdictions towards Bitcoin regulation.”  Further, “The U.S. regulatory crackdown on Bitcoin does not harm Bitcoin or the targeted companies, it harms U.S. citizens.”  Just like U.S. citizens can’t do online gambling or online poker, the rest of the world doesn’t care.”
“The U.S. regulatory crackdown on Bitcoin does not harm Bitcoin or the targeted companies, it harms U.S. citizens.”
One need only look at SatoshiDice.  “SatoshiDice is the most popular Bitcoin betting game in the universe.”  However, attempting to access SatoshiDice from the United States will flag you with the following message: “Beginning tomorrow, Thursday May 16, SatoshiDice.com will close to US players and all US-based IP’s will be blocked from the website…”  SatoshiDice posted the decision to vacate the U.S. market on Reddit on May 15th: “This decision was made on the basis of extensive legal counsel. The best way to limit legal risk for SatoshiDice, and thereby protect its stakeholders, is to block US players.”

Consensus and Education Needed

The groundwork for governmental education will come before advocacy.  “The role of education is paramount and its so far behind the world of Washington when it comes to Bitcoin and virtual currencies in general” said Matonis.

The Foundation has not proactively engaging anyone in a long term relationship for representation in Washington in regards to government affairs.

Moreover, the membership of foundation might not want advocacy for different regulations.  The lobbying effort is an ongoing conversation within the membership and is quite active in the member forum and the main Bitcoin Forum.

Right now the Legal Board on the Bitcoin Forum has more than 6,600 post with about 350 topics.  See you there?

Reprinted with permission.

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