Category: Law

Law Decoded: Independence Day Sees Challenges to Privacy, Property and Security, June 26–July 3

Bitcoin isn’t property under new Russian ruling while authorities in the U.S. and the EU challenge encrypted networks in this week’s Law Decoded.

Every Friday, Law Decoded delivers analysis on the week’s critical stories in the realms of policy, regulation and law.

Editor’s note

The U.S. is preparing for its Independence Day tomorrow. New spikes in positive COVID-19 tests will put a damper on some but not all of the traditional fireworks, cookouts and Martina McBride. On the same day, new changes to the Russian Constitution, including those that may allow Putin to stay in power for another 16 years, take effect. In more light-hearted news, pubs will also reopen in the U.K.

The COVID-19 lockdowns have added new immediacy to the eternal tug-of-war between personal freedoms and common welfare. This week has also seen a rise in legal decisions around the world surrounding encryption and privacy, as well as the government’s relationship to cryptocurrencies as property or zones of privacy. 

Part of the classic appeal of crypto is a means of opting out of traditional government authority. Ownership over Bitcoin is as simple as “not your keys, not your coins”; monetary policy is determined by algorithms that feel no obligation to inject stimulus payments. And yet, how governments choose to treat Bitcoin matters and will continue to matter. Cryptographic independence can only go so far.

Kollen Post, Policy Editor

  

 

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Not your keys, not the Kremlin’s problem

In a major ruling in St. Petersburg, Russia, the Petrogradskiy Court found that it did not have a duty to make thieves return 100 BTC that they had stolen. 

The thieves in question got access to the BTC by impersonating agents of the FSB (the successor agency to the KGB) in order to kidnap the victim until he surrendered over $90,000 in cash, as well as nearly $1 million worth of Bitcoin. 

The perpetrators have been sentenced to hard time and the court returned the victim’s cash, but it looks like the BTC will stay with them. The court’s reasoning was that Bitcoin, lacking legal status in the Russian Federation, does not constitute property. 

In theory, the ruling will only carry weight until the long-delayed Russian crypto law comes into effect, but when that will happen remains anyone’s guess. For the time being, it’s a pretty bold declaration from the state: We will protect your rubles but not your Bitcoin. 

A logical conclusion is that for the time being, it’s not even a crime to steal Bitcoin or other cryptocurrencies in Russia. So, if you are a resident or citizen, be warned and wary. 

Encryption giveth and encryption taketh away

News broke yesterday that an international coalition of European police departments arrested over 800 users of an encrypted chat network who were allegedly selling drugs and weapons via the platform.

It’s the largest arrest of its kind and ties into a global push to give authorities access to encryption. Indeed, one of the many controversies surrounding the public voter over Putin’s changes to the Russian constitution was that the blockchain-based platform’s encryption was weak enough to allow voters and third-parties access. 

Encrypted platforms are often the subject of regulator wrath, with authorities routinely painting encryption as a tool for illicit actors like weapons dealers, child pornographers and terrorists. 

More directly relevant to crypto, a U.S. court recently upheld the right to search Coinbase’s transaction records in a case centered on child pornography, arguing that access to this third-party information is well within the government’s purview. The IRS is likewise searching for a tool to track privacy tokens to make sure they get paid.

It’s obvious that many of these actors are a very nasty brand of criminal. At the same time, many of the protests against police brutality in the U.S. depended on Signal to organize. Telegram, which had faced accusations of facilitating terrorism, managed to get unblocked in the Russian Federation after proving extremely useful in spreading information on COVID-19. So, the question is: How much do you trust the state to be a good actor?

Plaid and private-sector financial data usage

The flip side to the privacy debate often comes from the private sector rather than the government, and that is data harvesting. A new class-action suit filed in California alleges that Plaid, a now-ubiquitous provider of fintech interoparational APIs, has been plumbing and profiting off of user financial data without users ever even knowing the firm’s name. 

California’s data protection act is currently the U.S.’s testbed for what will likely turn into a broader federal law governing data usage by private firms. Many see it as analogous to Europe’s GDPR, except presiding over Silicon Valley. 

While Plaid may not have the same brand recognition as, say, Visa (which bought Plaid for over $5 billion at the beginning of this year), it powers an enormous range of online finance. If the plaintiffs in this new class action get their way, it would set a new standard for fintech in the jurisdiction that effectively runs it globally.

Further reads

Justin Sherman writes on Russia’s decision to unblock Telegram for the Atlantic Council and finds that the block was doomed from the start. 

Recently discussed amendments to Section 230 of the Communications Decency Act will hobble open debate on the internet, says Brookings’s Derek Bambauer. 

Peter Van Valkenburgh of Coin Center summarizes the updates to New York’s BitLicense introduced on its fifth birthday.

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Law Decoded: All Roads Lead to New York, June 19-26

New York, New York runs the show this week as the site of a host of developments and setbacks for crypto.

Every Friday, Law Decoded delivers analysis on the week’s critical stories in the realms of policy, regulation and law. 

Editor’s note

The largest city in the United States and the world’s financial capital for most of the past century, New York City is also used to playing a starring role in the worlds of art, music, literature and film. What with all the attention, the Big Apple sometimes gets a big head. But this week, it’s also earned the spotlight as the stage for a marathon of fintech law dramas.

Given New York City’s status, it’s not uncommon for Americans to be more familiar with the name of its mayor than their own governor. New York’s courts steer the rules for the national and even the global economy. It’s also a coveted market, including for crypto firms that also operate under the if-I-can-make-it-here-I-can-make-it-anywhere philosophy.

Today, we’re taking a look at a botched appointment to New York’s most important court, a case with major implications for future ICOs coming to an end in the same court, and new opportunities for crypto firms looking to set up shop in the city that never sleeps.

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Should I stay or should I go?

Jay Clayton, chairman of the Securities and Exchange Commission and longtime roadblock to cryptocurrency firms looking to operate within the U.S., was at the center of a bizarre scandal involving President Trump, Attorney General William Barr and the court of the Southern District of New York.

Unceremoniously late on Friday night, the Justice Department announced that Geoffrey Berman, the attorney for the SDNY, had tendered his resignation. The same announcement nominated Clayton as Berman’s replacement.

The SDNY includes Manhattan and as such holds huge authority over global finance, including crypto. The Telegram and Bitfinex cases are ongoing there. Under Berman, it is also the court that sent Trump’s old lawyer, Michael Cohen, to jail and is investigating his current lawyer, Rudy Giuliani.

According to Berman, he learned of his own resignation from the same Friday night announcement. Clayton’s status remains uncertain, as Berman’s deputy, Audrey Strauss, has taken the reins and the Senate does not look likely to confirm any nomination of Clayton, which has become heavily politicized.

Clayton was known to be looking to move back home to New York. Reports say that he mentioned interest in Berman’s job at the SDNY while golfing with Trump. Despite the incredible clumsiness of the transition, any potential change at either the SDNY or SEC is a must-watch.

Telegram’s pending judgment

As of yesterday, the case of the SEC v. Telegram is effectively over, barring any radical movements from Judge Kastel. The court is currently reviewing a final judgment that would see Telegram return $1.2 billion to investors in its $1.7 billion ICO — a judgment that the legal teams of the SEC and Telegram drafted jointly.

The case has captivated the crypto community since it began in October. It’s been a flagship case of a failure of a long-standing framework for offering tokens. Telegram’s integrity with regards to user data and information, as well as the app’s famous ability to circumvent government censors, has earned them a fair share of goodwill among the crypto industry. That same integrity, however, deprived the messenger of a clear revenue model, likely setting off the SEC’s alarms during the presale of GRAM tokens.

Telegram’s fight has sparked a whole generation of conversations about the authority of the SEC and how a firm can hold a presale for a token in development. Controversy lingers over the completeness of the TON blockchain at the time of the scheduled token distribution. SEC Commissioner Hester Peirce’s safe harbor proposal for tokens in development is likely to be an intellectual response to the Telegram case, though she has declined to confirm or deny that direct connection.

Part of the crypto industry’s interest in what becomes of Chairman Jay Clayton (see above) is a consistent sense that firms like Telegram have lacked clear guidance. This case will certainly remain a central reference point for future pushes to update securities law.

New York tentatively lowers guard on crypto licensing

As the financial hub of the world’s largest economy, New York regulators get to call shots that many other jurisdictions don’t. For crypto, nothing embodies that more clearly than the Bitlicense, a highly selective authorization from the New York Department of Financial Services.

Since giving the first license to Paxos in May of 2015, the NYDFS has only granted 25 firms Bitlicenses. This week, however, they announced a new strategy, allowing firms to apply for conditional licenses.

How exactly these conditional licenses will play out remains to be seen, but for now, it seems like a helpful probationary period for firms that don’t make the cut. It’s been especially troublesome for firms based outside of the U.S. to get Bitlicenses, possibly due to a sense that it’s tougher to bring them to task for any wrongdoing or missteps. As always, though, there is a tradeoff to such trade barriers.

Analogous to recent moves from the Trump administration to restrict foreign and especially Chinese grad students from coming to the U.S., blocking foreign firms from operating in the most prized of U.S. markets risks cutting the U.S. off from global brainpower and innovation. Not a good bet long-term. The new conditional licenses may be a sign that the NYDFS is thinking along the same lines.

Further reads

The Blockchain Association looks at how regulators may be reinventing the wheel with CBDCs as compared to existing stablecoin technology.

Amid continuing post-mortems on the U.S.’s less-than-ideal aid distribution, Georgetown Law professor Chris Brummer appraises digital dollars as a tool for financial inclusion.

Writing for Coin Center, Andrea O’Sullivan weighs in on the classic debate of how much Bitcoin and other cryptos do or can impact traditional monetary policy.

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Self-Proclaimed Satoshi Claims He’s Autistic, Judge Tosses Out Sanctions Against Craig Wright

Self Proclaimed Satoshi Claims he's Autistic, Judge Tosses Out Sanctions Against Craig WrightThe Kleiman v. Wright case is seemingly headed to trial on July 6, 2020, after Judge Beth Bloom ruled against the Kleiman’s attempt to levy sanctions against Craig Wright, the man who claims to be Satoshi Nakamoto. It seems Wright has claimed that a licensed clinical psychologist diagnosed him with “Autism Spectrum Disorder with high […]

The post Self-Proclaimed Satoshi Claims He’s Autistic, Judge Tosses Out Sanctions Against Craig Wright appeared first on Bitcoin News.

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