Yesterday, several current and former U.S. officials announced support for a digital version of the U.S. dollar. The prior CFTC Chairman and CIO, J. Christopher Giancarlo and Daniel Gorfine, penned an oped in the Wall Street Journal advocating for a “government-sanctioned” virtual currency — and various alumni of the Federal Reserve and FDIC went on the record with Politico’s Zachary Warmbrodt, calling on the Fed to explore similar proposals. These endorsements represent an early milestone in mainstreaming discussions about a digital dollar, and spur us to offer some guidelines about what should come next.
Support for a digital dollar is generally encouraging, and something that Misha and I have long been urging the U.S. government to prepare for, both in writing and in private conversation. It’s also a marked contrast from when we first began talking with central bankers, who were deeply skeptical (to put it mildly) when we discussed Bitcoin or the prospect of a Central Bank Digital Currency (CBDC). One regulator abroad even called Bitcoin “evil spawn” — as Kanye West might say, “that’s a pretty bad way to start the conversation.” The political backlash to Facebook’s Libra currency proposal, together with some foreboding around a “digital yuan” promoted by China, has shifted the policy dialogue rather quickly. Competition can breed innovation.
In the meantime, here are a few initial guidelines policymakers should consider:
– Start small: Giancarlo and Dorfine are right to suggest a pilot program may be the best way to kick things off. The United States can build upon what worked (and did not work) in other pilot programs at central banks abroad — and also elevate research by officials at Regional Fed Banks, who have begun to explore a Bitcoin monetary “standard” and the prospects of digital currency competition.
– Don’t reinvent the wheel: For all the ups and downs of the cryptocurrency ecosystem, there has been an immense amount of activity that we can all learn from. The Fed does not necessarily need to build everything from scratch — and should not waste billions of dollars and years of development on a bloated private contract, only to yield an inferior version of Bitcoin.
– Support open source protocols: Creating a successful digital dollar is not just about having a killer app — it will also hinge upon the functionality and adoption of the underlying protocols that power the network. In the 1970s, the U.S. Defense Department funded open-architecture networking protocols like TCP/IP that form the backbone of the Internet today. The Internet succeeded because it was open: anyone could participate and launch a website, app, or browser. Similar principles bear with us today.
A digital dollar will not — and should not — develop overnight. But it is good to see some progress in the conversation. As the world flirts with digital money, the dollar should stay ahead of the curve.
What if spending money in the real world was as inconvenient and invasive as spending money online? Imagine a customer at the register of a local corner store:
Customer: I’d like to buy this $1 water.
Merchant: OK, I just need you to type your name, home address, email, and credit card number, all of which I’ll add, without your consent, to your customer profile, where we track every one of your purchases. We’ll tell our partners what you purchased here today (for a fee, of course), send you ads to sell you more things . . .
Merchant: . . . Oh, and we attached a GPS tracker to your coat so we can see what stores you visit next.
Dystopic, huh? Fortunately, in the real world, unlike on the Internet, you have the option of cash, a timeless technology which allows fast, discreet exchange of money for goods and services. Of course “cashless” solutions like credit/debit cards are convenient, too: you can pay by thumbprint/swipe/tap, always make perfect change, and never have to figure out what to do with pennies. But in a digital age, we should have the best of both: the ease and privacy of cash with the convenience of digital payments.1
As Wired Magazine’s Zeynep Tufecki lamented this year: “I want to easily support artists and writers [online] without having to set up an account, create a password, fork over my credit card details, and commit to an ongoing relationship that involves receiving a new piece of spammish email at least once a week.” When we make payments online, she says, “it sucks.”
So how can we make it suck less? Can it be true that small digital payments are impossible or incompatible with the Internet? No way.2 So why aren’t cash transactions under $5, which are abundantly common in the brick-and-mortar world, available via our computers and phones?
One big answer for the lack of digital cash is that the traditional banking system isn’t designed for them. The legacy payment rails, like ACH, are designed for infrequent, large-value, high-fee transfers between big banks (who own these rails, and charge high fees to use them). Similarly, credit cards charge a high base fee for each transaction, plus ~3% of the cost — which makes accepting small-dollar credit purchases unduly expensive.
But a big technological leap happened in the last year: the emergence and growth of a new, open payment technology called the Lightning Network, an alternative rails for fast (faster than credit cards), low-cost, secure digital cash transactions. It’s still early days, but there’s no question the network works. Here’s an example of Lightning in action, buying a recipe for $0.01:
We’ve been working on integrating and experimenting with Lightning for a while now, and we couldn’t be more excited about where digital cash is headed. We see three reasons it’s going to be huge:
One reason is timing: a variety of consumer preferences and market trends are converging in ways that are favorable for digital cash. There is a growing body of evidence that users are increasingly worried about their privacy, fatigued by subscription-only paywalls and targeted advertising, and willing to pay for content and choose products based on how they handle their data. Cash use remains especially popular for individuals under 25. Studies confirmed that we search differently when we know we’re being watched — and it is only logical to assume we buy differently too.3 Businesses are looking for new ways to sell products, expand their user bases, and monetize existing content with alternatives to advertisements. Content creators are clamoring for a way to be compensated directly by fans, as evidenced by the rise of newsletter- and membership-based services like Patreon, Substack, and Medium. In the words of Medium CEO (and Twitter co-founder) Ev Williams, “it’s clear that the broken system is ad-driven media on the internet. It simply doesn’t serve people.”
The second reason is technology. The Internet succeeded because it was open: anyone could launch a website, app, or browser. Similarly, Lightning is designed so anyone can readily send or receive digital cash.4 The legacy banking system is closed — only banks get to send money to and from each other, or only allow transfers within the same network, like on PayPal or Venmo.5 Until recently, there was simply no alternative. But with Lightning, we have a network that is open to everyone. Lightning also makes payments programmable, so as developers dive in, integrating Lightning is leading to all sorts of applications that are just getting started: clearing paywalls as easy as scanning a code, online pay-to-play arcades, you can even instantly feed chickens. The fact that consumers are already getting used to paying by smartphone makes for an easy and exciting transition to digital cash. Here’s Lightning in action, buying a beverage:
The third reason is opportunity: studies have shown that cash payments under $5 accounted for over $1 trillion in consumer spending in the United States alone. If Lightning providers can bring some of those transactions into the digital realm, the revenue opportunity is enormous, and that’s just for handling payments. Much like the early Internet, there is an incredible amount of business that can be built on top of an open network where anyone can participate. We’re not the only ones who think so: legendary computer scientist and former Stanford President John Hennessy, and prominent venture capitalists Mary Meeker and Marc Andreesen have spoken passionately about the massive potential for small payments online, and Twitter co-founder Jack Dorsey invested directly in supporting Lightning development.
To be sure, there is plenty of work ahead. Lightning Network transactions almost all take place using bitcoin, which for now puts it out of most users’ comfort zones.6 And the meteoric success of “free” services such as Facebook, Gmail, and Google Search does suggest that many users are accustomed to paying with their privacy; writers and artists publish plenty of content online for free. At the same time, consumers and creators haven’t really had the option of digital cash before, so we’re in new territory: many of those behaviors could change.
In short, it’s an exciting time for digital cash. If we build and invest deliberately, we can find ourselves on the cusp of a cash comeback that has the potential to revitalize business models and create new ones, support quality content, and protect privacy. Imagine the possibilities for an economy full of seamless, speedy, private, digital cash transactions. We’ll be able to pay, get what we came for, and move on. With Lightning, that’s just getting started.
After nearly two years of litigation, we are pleased to have reached a favorable resolution in a constitutional challenge involving the U.S. Naval Station Guantanamo Bay. Schnapper-Casteras PLLC represents Mr. Richard Kammen, a prominent member of the Indiana Bar, who was appointed to serve as a lead defense counsel in Guantanamo and who faced arrest after he uncovered a concealed microphone in a meeting room for attorneys.
Mr. Kammen’s legal battle involves a troubling and extraordinary set of facts, which underscore how far the system in Guantanamo has strayed from basic principles of justice. In 2017, Mr. Kammen and his colleagues discovered a listening device, hidden in a smoke detector in a room reserved for attorney-client meetings. Mr. Kammen raised this issue and other ethical concerns with U.S. Marine Corps Brigadier General John G. Baker and an outside legal ethics expert. The expert informed Mr. Kammen that, in order to adhere to the rules of professional conduct, he had no choice but to withdraw from his legal duties in Guantanamo. General Baker expressly approved of Mr. Kammen’s withdrawal. However, the military commission official overseeing the matter at the time, Col. Vance Spath, responded by pursuing the lawyers themselves, civilian and military alike. Col. Spath sentenced General Baker to a term of confinement and threatened to have Mr. Kammen and his co-counsel arrested, to force them to continue work in Guantanamo, and/or to bring them to Virginia to hold them in contempt.
In November 2017, Mr. Kammen filed a petition in the Southern District of Indiana against the U.S. Secretary of Defense and military commission officials seeking to prevent his imminent arrest. Following an emergency hearing, the District Court suspended any and all warrants and travel requirements held against Mr. Kammen. Mr. Kammen subsequently amended his petition, advancing claims under the First Amendment, due process under the Fifth and Fourteenth Amendments, and Sixth Amendment. The U.S. Department of Justice, while not disputing most of the facts, argued that a federal court could not hear the case because Mr. Kammen was jurisdictionally equivalent to an alien, non-citizen enemy combatant. Although the Justice Department ultimately acknowledged the existence of the concealed microphone, it sought to downplay it as a “legacy” device. Separately, General Baker and the other civilian lawyers filed lawsuits against the Government (represented by Jenner & Block LLP, and Michel Paradis et al., respectively).
The record is clear: every federal court to have reached the merits on this episode has ruled against the Government. In 2017, the U.S. District Court for the District of Columbia granted General Baker’s habeas petition and vacated his conviction for contempt. In April 2019, the U.S. Court of Appeals for the D.C. Circuit issued a sweeping opinion, tossing out years’ worth of Col. Spath’s military commission rulings in light of revelations that he had engaged in conduct giving rise to the appearance of judicial bias. In its holding, the D.C. Circuit took the remarkable step of praising the conduct of Mr. Kammen and his co-counsel:
“Although a principle so basic to our system of laws should go without saying, we nonetheless feel compelled to restate it plainly here: criminal justice is a shared responsibility. Yet in this case, save for [the] defense counsel, all elements of the military commission system—from the prosecution team to the Justice Department to the CMCR to the judge himself— failed to live up to that responsibility.”
The D.C Circuit opinion effectively nullified Col. Spath’s order that Mr. Kammen return to Guantanamo or else be held in contempt. In May 2019, Mr. Kammen, still living under the specter of being arrested or forced back to Guantanamo, urged the Southern District of Indiana to take judicial notice of the D.C. Circuit’s ruling. In July 2019, the Department of Justice confirmed that it would “not seek further review” of the D.C. Circuit ruling and acknowledged that the decision was dispositive in the Indiana litigation. In August 2019, Mr. Kammen and the Justice Department agreed to resolve the Indiana case by voluntarily dismissing it, a request the District Court granted yesterday.
In light of yesterday’s resolution, Mr. Kammen stated that he felt “vindicated by the result and relieved that his co-counsel no longer have to live under the cloud of uncertainty.” Mr. Kammen added that:
“JP [Schnapper-Casteras] was instrumental in the success we had convincing the military and civilian courts that government misconduct directly required me to be excused as the lawyer for Abdul Rahim al-Nashiri. More importantly, his wise counsel and aggressive litigation, helped persuade the federal judge in Indiana that the government could not have me arrested and forced to represent al-Nashiri when that would have been both illegal and unethical.”
JP Schnapper-Casteras, who represented Mr. Kammen alongside Jessie A. Cook and Robert W. Hammerle, remarked: “In the United States of America, we should extol attorneys for acting ethically — not arrest them.”
Today’s announcement of Facebook’s much-anticipated cryptocurrency, Libra, has already spurred a flurry of commentary about technology and ramifications for the fintech space. But as Facebook publicly unveils its plans for Libra, a new question emerges: is Facebook prepared for the legal challenges to come?
On the face of things, Facebook’s announcement hews close to legal compliance. Their subsidiary is already registered with FinCEN, and their announcement carefully avoids any impression that purchasing Libra will earn users a profit. So, legally speaking, nothing to see here — right? Nope, not so fast. Here are some big, unanswered legal questions on Facebook’s horizon:
First, who will regulate this potentially ground-breaking new “global currency”? In today’s current legal environment, the short answer is just about everyone. In the U.S. alone, the Treasury, SEC, CFTC, IRS and state financial regulators are all already involved in cryptocurrency regulation. Facebook already earned the ire of antitrust groups through its data collection alone; its foray into central banking could be the kicker that finally sets off the Department of Justice’s Antitrust Division to begin more formally exploring the possibility of breaking Facebook up. On the Hill, representatives across the political spectrum have been asking hard questions about Facebook and its currency plans, including a recent bipartisan inquiry from the Senate. The two top lawmakers on the House Financial Services Committee have urged Facebook to testify before Congress about its plans for Libra; Maxine Waters, the ranking Democrat, even called for a moratorium on further Libra development. Other legal questions linger, including about tax implications of Libra-denominated spending, and Facebook’s commitment to enforcing the U.S.’s strict Anti-Money Laundering requirements placed on financial institutions like banks.
Globally, Libra faces an international regulatory landscape that is even more complex. Within hours of Facebook’s announcement, France’s Finance Minister, Bruno La Maire, proclaimed that Libra becoming a sovereign currency should be “out of the question,” that it “can’t and must not happen,” and that it only “increases our determination to regulate the Internet giants.” Jurisdictionally, Facebook headquartered the Libra Association in Geneva, but that hardly settles the question of which countries will try to exert control. In Asia, India’s legislature is considering a bill that would criminalize the purchase and sale of cryptocurrencies, presumably including Libra. China has repeatedly vacillated on digital currencies, banning and unbanning their production and sale. Perhaps Facebook has a grand strategy to employ a phalanx of local counsel to persuade regulators overseas or challenge clampdowns in court where needed. But it is hard to see smooth seas ahead.
Beyond finessing global regulations, Libra will have to contend with United States securities laws, especially surrounding its plans to “stabilize” its currency value. Facebook’s announcement suggests the company plans to “back” Libra with a mix of financial assets in order to stabilize its price. The legal status of so-called “stablecoins” — designed to retain a steady value, as compared to a currency like bitcoin or the Japanese Yen, whose purchasing power appreciates and depreciates — is unclear. The regulatory uncertainty surrounding “stablecoins” played a major part in the dissolution of one of the biggest projects, Basis, which shuttered and refunded approximately $100 million to investors.
More fundamentally, if Facebook succeeds in creating a currency that maintains value — as opposed to the 2% annual decline in purchasing power (inflation target) favored by the world’s central banks, Libra could even represent a source of competition for national currencies. As the Nobel-Prize winning mathematician John Nash mused, monetary policies “are typically of great importance to citizens who have alternative options for where to place their savings.” If Facebook can beat 2% inflation, then some currencies could struggle to compete.
Thus, questions remain: will central bankers (and other political leaders) view Libra as a threat to their monetary sovereignty? Will regulators see stablecoins as a benign mechanism to avoid speculative investment or crashes? Will they view it as a basket of commodities and securities like an ETF? Or will they ask whether stablecoins could constitute a form of market manipulation whereby Libra’s members, who each paid $10 million to participate in the network, intervene to prop up (or deflate) the price whenever they so choose?
Finally, the elephant in the room is not Libra, but Facebook itself. Libra comes out in a difficult and sensitive moment for Facebook, both in terms ofpolitics and popular backlash. More broadly, there is serious skepticism from progressives and conservatives alike about the expanding size and role of “Big Technology.” At the consumer level, there appears to be a groundswell of concern about how companies like Facebook are monetizing and handling years’ worth of private data. Whether Facebook can earn back user trust, at the same time it launches a currency that will invariably require some degree of trust, remains to be seen. Indeed, the “In God We Trust” phrase printed on the U.S. Dollar is more than a motto — nearly one century after the Federal Reserve ended citizens’ abilities to redeem dollars for gold, the phrase symbolizes how trust in the currency’s value is crucial to the money’s acceptance and success. A currency without trust backing its value can quickly become worth no more than the paper (or a cotton-linen blend) on which it is printed.
The big risk for the world’s regulators is not that Libra fails, but that it succeeds. Or, perhaps even more consequential, that Libra succeeds in familiarizing a broad swath of users to digital currencies, who ultimately opt to use an even more permissionless global currency like bitcoin. In the future, regulators considering a clampdown on the cryptocurrency phenomena may find themselves also facing a bitcoin network with no affinity for authority — and longing for simpler or centralized policy landscape that has since been overtaken by events. For now the bottom line is this: between today’s announcement and Libra’s launch in 2020, Facebook’s legal team — and perhaps monetary and financial regulators too — have plenty of work to do.
I am thrilled to announce that Professor Carolyn Shapiro is joining the firm as Of Counsel. As the former Solicitor General of Illinois, a constitutional law scholar, and a former Supreme Court clerk, she shares her tremendous appellate experience and acumen. Moreover, I deeply admire Carolyn’s long-standing commitment to public interest work and all she’s done to stand up for the rule of law in recent years — and consider myself very fortunate to be able to collaborate with her in this new capacity. You can find her full biography here, select publications on SSRN, and her Tweets @cshaplaw.
The Bank of Canada recently published a study on “cryptoassets” that contains a subtle but significant error. In this post I explain what went wrong and why the Bank, which has previously released high-quality scholarship on this topic, should prioritize a more nuanced understanding of the roles that digital money like bitcoin can play in the banking system.
The authors pose the question, “How much electricity would be needed to have all Canadian payments settled on a proof-of-work blockchain?” In the appendix, they calculate that settling every Canadian retail transaction on a bitcoin-like blockchain would entail astronomical energy costs, and conclude: “changes to the bitcoin technology and usage need to be substantial before it could be used as a retail payment method.”
This approach is based on a faulty premise about bitcoin and its blockchain that is emblematic of a broader misconception.
At its essence, the appendix conflates payment with settlement, and then determines that every retail transaction would be settled on the bitcoin blockchain, despite no such requirement at a technological or conceptual level.
Even putting aside the appendix’s use of widely–debunked energy estimates or its dismissal of bitcoin-integrated payment technologies, central banks should be conceptualizing of bitcoin as a money and the bitcoin blockchain as a high-security form of settlement. The bitcoin blockchain is not and was not designed to be a method of payment for every retail transaction in the world.
To analogize this distinction, imagine a payment between parties on an app like Venmo. If Alice keeps $100 in her Venmo account and sends $30 to Bob, the payment is merely numbers moved internally on Venmo servers. Only when either party decides to “cash out” — withdrawing funds from Venmo to their bank account, for dollars — might the transaction be considered settled:
Like Canadian Dollars or Euros or USD, bitcoin-based payments can be made available via Venmo/Cash App, credit cards, checks, ACH, Paypal, and other layered payment systems. In other words, retail payments could retain existing payment infrastructure and still be denominated in bitcoin, and not necessitate settlement to a bitcoin-like blockchain.
We do not even need to address major recent developments in bitcoin payments technology, such as the Lightning Network and other “Layer 2” development,” to understand that no changes to bitcoin’s technology need to take place before it can be used in Canada’s payment landscape. Bitcoin is not VISA or Venmo — it’s closer to money those companies move around.
To be charitable, perhaps the authors intended only to demonstrate what we discuss here: the futility of broadcasting all retail payments on bitcoin’s energy-intensive blockchain. If so, on this we agree. We do not mean to advocate that all Canadian retail payments should be conducted with or denominated in bitcoin. For many reasons, including familiarity, security, and price stability, Canadian customers and retailers may prefer to transact in CAD. Still, the conclusion that “changes to the bitcoin technology” are required is simply not true.
Moreover, the bitcoin blockchain’s proof-of-work electricity consumption is not an accidental byproduct: it is the means by which transactions are made all-but-irreversible a short time after they are added to the ledger and repeatedly confirmed by network consensus. In other words, the electricity and consensus confirmations offer a level of final settlement better-suited for high-value transfers (e.g., between banks) than for retail payments. If the intent here was to highlight the absurdity of using the bitcoin blockchain for retail payments, without acknowledging the utility of its blockchain for high-value settlement between institutions like central banks, then the authors should make that clear. As Hal Finney, the first person to ever receive a bitcoin transaction, predicted in 2010:
“I believe this will be the ultimate fate of Bitcoin, to be the ‘high-powered money’ that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers.”
Bitcoin has a variety of pros and cons, uses and misuses. What it does not have is a centralized research department to create these sorts of reports, nor a communications department to publicize and distill its applications and policy implications for lawmakers and central bankers. Such are the consequences of decentralization.
Still, it would be a shame if policymakers do not realize that the questions here go beyond retail payments, and carry global, potentially historic implications. For example: when nations with their own currencies trade with each other, which money should they use for settlement? Former Federal Reserve Chairman Paul Volcker recently lamented the lack of a “common numeraire” in our international trade system. A numeraire, he describes, would act as the monetary unit in international settlement, and free central banks from reliance on the unpredictable supply of a third nation’s currency, most recently the U.S. dollar.
It is worth considering whether a digital money like bitcoin — with predictable and verifiable supply, as well as Internet-native design tailor-fit for digital banking — could fulfill the role of “numeraire” and establish a “metric unit” for international exchange. If that possibility seems outlandish, fair enough. So too at one point was the possibility of agreement on the mass of the kilogram or the length of the meter, but the measurements enabled trust and coordination, and rapidly became integral for global advancement in science and trade.
The Bank of Canada’s study shows that it is still all too easy to misunderstand what bitcoin is. This is especially true when communications from bankers and bitcoiners alike present strawman caricatures of each other. But this also means that if we are to get serious about the complex and overlapping realms of central banking, retail payments, and digital money, we all ought to be a bit more rigorous and critical. Especially when we read third party research, like this study here, that narrow and misconstrue the discussion of what bitcoin is, and could be.
One of Satoshi Nakamoto’s last known public posts, in 2010, was a warning: “Wikileaks has kicked the hornet’s nest, and the swarm is headed towards us.” At the time, PC World had just published an article describing how bitcoin (then trading for a whopping $0.20) could be used for permissionless donations to Wikileaks, despite any bans by local authorities or payment processors. It is impossible to know Nakamoto’s exact concern, but one thing was clear: how people chose to use the bitcoin protocol he released — including how they would spend the bitcoin “currency” it issued — was out of his hands, even if it meant others could use it to potentially break social norms, business monopolies, and local laws. And if bitcoin payments to Wikileaks (or poker sites) were forbidden, could Nakamoto or bitcoin’s other developers be held personally liable for enabling unlawful activity?
Today, nearly a decade after Nakamoto’s warning, regulators continue to wrestle with waves of permissionless innovation emerging from open-source projects like bitcoin, and to a greater extent, from the Internet itself. A fundamental question remains: should programmers of open-source software — where anyone can build upon, re-release and re-deploy the code — be held responsible if users take the code and violate their local laws or regulations, and if so, where should we draw those lines?
One possible answer comes from a Commissioner of the Commodity Futures Trading Commission (CFTC), Brian Quintenz, who recently published his thoughts on when, in his estimation, the CFTC should (and should not) bring action against open-source developers whose code is used to violate CFTC regulations. As Quintenz put it, “Absent proof that developers intended that the code facilitate conduct that is illegal, the CFTC should not bring a case against them.” He proceeded to list several relevant questions to consider in determining a “developer’s intent,” including whether the developers were promoting, profiting from, or modifying code in order to enhance unlawful activity.
For developers who, like Nakamoto, are designing, building, and launching code, these questions of liability are not merely musings: they affect the likelihood of attracting investment, users, and developer talent.Absent more specific statutes or binding authority from regulators, sometimes public speeches and statements are the best sources of legal guidance available.
With Commissioner Quintenz’s commentary in mind, we wanted to highlight a question we expect to surface in the near future: to what extent should open-source developers of bots or algorithms expect to have some legal responsibility for actions that bots take on behalf of their users? Take, for example, a “trading bot” that enabled a user to plug into a trading platform and buy or sell products or digital tokens based on user-provided parameters (e.g., if it rises to XX, sell it — if it falls to YY, buy it). Could a trading bot developer be held liable if a user in a Treasury-sanctioned country downloaded open-source trading software and, via a VPN, surreptitiously deployed on a US-based exchange to sell bitcoin, violating U.S. sanctions? The short answer is likely no, and here’s why:
Guidelines for Code Design
In his speech, Commissioner Quintenz weighed a related question about software that is “specifically programmed” to violate laws, in this case, “to purposely distort the final settlement price” of a futures contract. His approach is worth highlighting here: “The more a code is narrowly tailored to achieve a particular end, the more it appears as if it was intentionally designed to achieve that end.” In other words, if the bot were knowinglydesigned and intended to manipulate a futures contract (also known as “banging the close”), it would “look a lot like aiding and abetting” of a legal violation — but if it merely allowed a user to make trades at whatever time they wanted, and it is only the user who deploys the software to manipulate a price during a particular interval, the developer should not expect to be held liable.
Additional questions emerge for developers of software that users could operate in ways that transgress Securities and Exchange Commission (SEC) rules, but for those developers, similar principles should apply. For example, if a a developer releases software knowingly and purposefully to enable users in the United States to manipulate trading markets, then the developer might be held liable for contributing to the forbidden action. Recent charges against a software developer involved in designing custom software that enabled sophisticated spoofing of futures markets confirms as much. If, on the other hand, the developer merely releases an open-source trading software — essentially exchange-agnostic, asset-agnostic, leaving the decision entirely up to the user as to which assets to trade, consistent with the laws of the users’ own jurisdiction — then the developer has a compelling case that they should not be held responsible for actions taken (or modifications made) by end-users of their own volition.
Users, Use Care
For users themselves, similar guidelines should apply. On the one hand, if users deploy software to knowingly engage in unlawful activity, they should expect to be held responsible. On the other hand, the risk associated with other types of software use is less clear. For example, imagine a group of card-game enthusiasts who utilize an algorithm to help them trade Magic: The Gathering cards online, an activity that (as far as they know) is legal within their jurisdictions. If their regulators in the future clarify that online trading of Magic cards is somehow outlawed, the group members might expect that any future trades of these cards will incur legal risk, but are less likely to be held liable for previous trades of these cards, since they did not then knowingly engage in impermissible activity. As a best practice, users should take care to check the requirements of their local jurisdiction and adjust their activities accordingly, regardless of the actual functionality of the open-source software before them. As a matter of policy, the onus here should fall on the users, not on open-source developers, since developers would be hard-pressed to monitor, limit, and/or tailor access to their code to meet the evolving jurisdiction-specific needs of each user.
For the time being, Quintenz’s recent focus on a software developer’s intent is a sensible rule of thumb for open source projects of all stripes, including in the context of bots and digital assets. Put differently, developers of OpenOffice should not be held liable if someone uses it to draft a ransom note; on the other hand, a developer clearly designing for illicit use, like releasing a tool called “OpenPassportForger,” would have a comparatively harder time arguing he or she did not intend it to be used to break the law. Even with these broad principles in mind, other market- and jurisdiction-specific rules can still apply in certain circumstances. For example, SEC regulations regarding algorithmic trading strategies conceivably apply to algorithms that trade securities (like stock in eBay and Amazon), while not applying to algorithms that help sellers arbitrage prices between eBay and Amazon platforms, since the products are not securities subject to SEC jurisdiction.
And until the day comes that bots are sentient enough to consult their own lawyers, developers and users of sophisticated automated software should — when in doubt — consult attorneys* of their own.
[*] Disclaimer: Consistent with the terms and conditions of this site and blog, this post is not and should not be treated as legal advice.
This season’s steep decline in the price of bitcoin and other digital assets has rekindled a fierce debate about their role in the global economy: opponents lambast them as a Ponzi scheme about-to-collapse and proponents promise they will replace government currencies entirely. The reality is that, at least in the short term, both extremes are highly unlikely, and policymakers, especially central bankers, are charting a course in between that recognizes that some form of digital money is here to stay. Notably absent from many of these discussions, however, is the biggest Central Bank in the world: the Federal Reserve.
After a year when bitcoin’s price dropped over 75%, this might seem to be a counterintuitive moment for these conversations — but they are already subtly starting. Just the other day, the Governor of the Bank of England, Mark Carney, expressed a remarkable openness towards digital money. “It is still early days for cryptoassets,” Carney explained, and despite their present shortcomings, they are “throwing down the gauntlet to the existing payment systems” to improve services. Last month too, the Managing Director of the International Monetary Fund, Christine Lagarde, made the case for central banks to explore, adopt, and issue digital currencies, because a “new wind is blowing” “and we are all in the process of adapting.”
Carney and Lagarde’s middle-ground approach stands in stark contrast with caustic criticism from some of their colleagues: two days after her speech, a member of the European Central Bank vilified bitcoin as “evil spawn of the financial crisis” and previously, an official at the Bank for International Settlements deplored it as “a combination of a bubble, a Ponzi scheme and an environmental disaster.”
Such categorical dismissals are belied by the growing recognition that digital money like bitcoin may offer a variety of advantages, including in terms of security, transferability, transparency, and inflation resistance. As Lagarde suggested, central banks could choose to issue their own digital currencies that compete with bitcoin in terms of monetary policy, payment privacy, or other features.
Although it may appear premature to imagine central banks managing a digital money alongside traditional reserve assets, the possibility is real enough for central banks to take it seriously, and several are. A major survey released last week reported that some 70% of central banks are engaged in work around digital currencies, and half have moved onto “hands on” proof-of-concept activities and other research. The Bank of Canada also quietly published a research paper examining how central banks might operate under a “bitcoin standard” similar to the gold standard of the late 19th century. The paper explained that a bitcoin standard would not mean the end of government money or central banks — but that backing national currencies with bitcoin reserves could offer several major benefits over current international monetary standards, due to the stability presented by bitcoin’s algorithmically-fixed inflation rate. The European Central Bank, Bank of Japan, and Reserve Bank of India are closely studying digital money as well.
Similarly, the U.S. Federal Reserve should formally explore the potential impact of digital money on U.S. economic interests. Although the current and prior Fed Chairs have been publicly tepid on the subject area thus far, Fed branches are engaging more straightforwardly. The other week, the Federal Reserve’s St. Louis branch suggested that a cryptocurrency might “eliminate” the core tension for the the U.S. dollar: being asked to function both as a stable global reserve currency while also meeting domestic needs (known as the Triffin dilemma). As a New York Times op-ed recently noted, the U.S. dollar’s position as the world’s reserve currency gives the United States a unique opportunity to lead — or stand to lose if other countries leave it behind.
The bottom line is that categorically dismissing bitcoin and other digital assets as irrelevant or “evil” for central banking purposes is increasingly out of step with the trends and tools at hand, not to mention widespread appetite for a potentially faster, fairer financial system. (Why does sending a check take 4 business days to clear, again?). The U.S. Federal Reserve should join its counterparts and start preparing its financial infrastructure for a fast-approaching new reality: where nation-backed moneys compete and co-exist alongside digital moneys settled with distributed ledgers, electricity, and math-driven consensus.
Here is where we will be periodically sharing articles and links, mostly about frontier technologies, new and emerging areas of law, and the Supreme Court. Feel free to let us know what you think in the comments or on Twitter (@jpscasteras; @MishaGuttentag). Please forgive our lawyerly disclaimers — the gist is that the content in this blog is just commentary and does not constitute legal advice nor create an attorney-client relationship.