This morning, I came across a blog post by Daniel Friedberg from the law firm, Riddell Williams. In the post, he attempts to show how certain laws and regulations could be applied to various actors within the industry, were they to create or facilitate the adoption of a hard fork of the Bitcoin blockchain and software.
I would be interested to know whether Friedberg developed these interpretations while pursuing client work, or if he and his firm are just really into Bitcoin. I have to assume the former, since I am hearing rumors that some of the competing Bitcoin development teams are attempting to use lawyers to stop, or at least chill, the actions of others.
Let me start by saying how horrible of an approach this is. Lawyers are not going to solve Bitcoin consensus issues, they will only make them more expensive. For as long as Bitcoin remains truly decentralized, no one party can be held responsible for anything related to adoption or implementation of new Bitcoin software or forks. That said, I do think there could be liabilities for certain actors, like exchanges, who may fumble the transition to a new Bitcoin, but not in the context Friedberg is concerned with.
I’ll do this in footnote style. Friedberg’s original post is in italics below. All of my responses are in the superscript footnotes throughout. They are also listed in full at the bottom of this post.
Requirement for Creators to Register with FinCEN
The Financial Crimes Enforcement Network (“FinCEN”) … has issued numerous guidance and interpretations of the applicability of regulations implementing the Bank Secrecy Act (“BSA”) to persons creating virtual currencies.
Bitcoin Classic and BitcoinXT (meaning in this case the new resulting currency itself rather than the software ) would likely be considered by FinCEN to be a new convertible virtual currency. FinCEN has made it clear that a creator of such convertible virtual currency, who issues such currency in order to sell those units for either real currency or its equivalent (including presumably an exchange with current bitcoin ), is deemed to be a money transmitter. … The Bitcoin Classic development team is also publicly named. Under this approach, the creators of Bitcoin Classic or BitcoinXT would need to register with FinCEN as a Money Service Business (“MSB”).
Requirement to Include AML Protocols in Bitcoin Classic or BitcoinXT
In addition to the registration requirements, an MSB is required to maintain effective anti-money laundering (AML) programs …
These requirements will require the replacement Bitcoin protocol to maintain the personal identifying information of its users. This can presumably be done through the software code …
The adherence to such requirements will be a large deviation from the current Bitcoin protocol which does not maintain personally identifiable information about its users. The inclusion of such information would make Bitcoin Classic and BitcoinXT much more accepted by financial institutions , but runs counter to the essence of bitcoin. Bitcoin’s creator designed bitcoin to allow peer-to-peer financial exchange without the use of financial intermediaries and all the complexities involved with such intermediaries, such as identifying the users.
Issues for Exchanges and Wallets
… The implementation of a “hard fork” would require exchanges to differentiate between bitcoin and “Bitcoin Classic” or “BitcoinXT” bitcoin, as its customers would inherently have rights to either one or the other. Exchanges could not mix or intermingle the two, as each has its own rights. …
The “hard fork” would hurt the liquidity of bitcoin, and impair exchanges ability to legally operate.
Potential Liability for Miners who Adopt New Protocol
Miners who unilaterally adopt the new replacement software could face liability under either tortious or statutory claims. A tort is a wrongful act or an infringement of a right leading to civil legal liability. A trespass to chattels is a tort whereby a party intentionally interferes with another person’s personal property. To the extent that a recipient of bitcoin expects normal bitcoin but instead receives “Bitcoin Classic” or “BitcoinXT” virtual currency due to the actions of a miner, that recipient could argue that the actions of the miner resulted in a dispossession. To the extent that the market value of the two types of virtual currency differ, damages would be easy to prove.
There are also numerous state statutes prohibiting computer crimes which could be applied to miners who unilaterally convert bitcoin into a new type of virtual currency. Bitcoin users have a business expectation that their Bitcoin transactions will be processed by miners using the established Bitcoin protocol, and miners should be cautious about interfering with this expectation.
The current proposed “hard fork” replacement software seems at first blush to be a reasonable way to solve Bitcoin’s growth issues. However, due to the lack of consensus of applicable Bitcoin network participants, the enactment would create serious legal consequences for the creators of the new replacement software , unless the creators adhere to the rules of MSB registration and compliance. In addition, the “hard fork” would create serious operational issues for exchanges and wallet operators , the risk of liability for participating miners, and unnecessary confusion in the marketplace.
In summary, I believe I have fully refuted all of Friedberg’s perspectives on these matters. It’s sad that the legal world is so behind when it comes to Bitcoin. I have experienced this first hand, and I was reminded again today by Mr. Friedberg.
UPDATE: Someone shared this post with me, from Dan Friedberg three years ago, on behalf of the Bitcoin Foundation. Interesting to see what has and has not changed in today’s version. Also interesting to note the connection to Jon Matonis’ organization. I am putting the full original article in this last footnote for posterity, since I have no faith in their website being up for more than a year from now.