Topic: legal aspects of decentralized capital markets (Read 7048 times)

Open Transactions has been useful for a long time.

You might as well say that MPEx is not useful, and for the same reason: Joe Sixpack finds it more complicated than PayPal.

-MarkM-

Well, how much of a bounty is there for making open transactions useful versus the number of developers willing to touch it.

LOL. So many tech companies looked completely invincible at their peak, earning billions and billions for their shareholders, only to fade into non-existence later...


You cannot take open source technology for yourself, you can either develop or use it.


That's kinda ironic, have you looked up who is currently sponsoring p2p exchange development?

(For the record, I'm not currently working for anybody and I, in fact, had to refuse some offers.)


Well, the main point is that issuers and shareholders do not depend on a particular exchange platform, they cannot be held as a hostage.

(I'm posting this now because tech sorta kinda works. I mean, we need to fix a couple of problems and make it more robust and friendly, but basically people can create assets and exchange them securely without depending on anyone. (OK, transport is kinda centralized now, but it's a tiny issue.))

Past performance, future performance, it's right there on any slip from pretty much any financial institution. But great to have you aboard.

Heh. I was exchanging emails with Satoshi on Bitcoin back in the spring of 2009, and was a part of this forum since late 2010. So I think it's fair to say I'm sticking around.

This constant "cut up what the other person said, insert prejudice, deliver as if fresh" process is starting to bore. MPEx is one of the few businesses in BTC making a profit, publishing monthly reports, all that jazz. And as Inaba found out recently to his shock & surprise, it's also the highest valued BTC business, at least for now.


This may be true. On the other hand, BTC experience to date shows that nobody is more inclined to do something than those who aren't intellectually capable to actually do it. Take Kludge the Citizen Banker as a fine example of this amusing property of the stupid.


Ideology and money don't mix well together. You'll have to be a lot more intellectually flexible if you actually plan to stick around.

Well, I don't know much about MPEX except that it's some kind of exchange that is run from Romania, and that it apparently has a (full time?) PR person. So I'll take your word for it that it made no money yet.

The idea that lots of people are bad investors and thus might need protection from a nanny state is clearly true - today. But that's because the nature of our currencies forces everyone to become an investor whether they like it or not. If you force everyone to engage in something that is a skilled job, with no training and limited opportunities, you end up with a lot of mal-investment. Hardly a surprise.

I'd hope that in future taking part in P2P bond markets would be common for everyone ... for small amounts of value. People putting their entire life savings into such markets like they do today (via intermediate funds) should be unnecessary.

You may be right. On the other hand you may be wrong: information and value are different things. There's a right of free speech, because dissemination of information is valuable. There's not a corresponding right of free use of others' property. This may seem to suggest the web analogy is essentially flawed: what's good for handling information isn't necessarily good for tracking value.


To reuse a figure of speech, your respect for people's skills is charming. It is also completely unwarranted by experience so far; check the sales rankings of "music" these days for instance.


Mr. P could have created an integrated thing and instead preferred to make the exchange only and empower others to take on a variety of different roles. You may or may not be aware of this, but on the strength of the record so far he doesn't appear to act on a profit motivation as much as in an empowering of Bitcoin motivation. This, obviously, to be established by any observer for himself.


Entity X's plan cannot be the actions of entity Y now can it? So no, it's not either really or otherwise a plan. It's a point of fact.

Hmm, I thought MPOE-PR was some alter-ego of the owner of MPEx. Guess not

I think Alex is right that the web is a better analogy. Back in the 90s when the web was competing against companies like AOL, a common criticism was that the web was full of crap and it was difficult to find good stuff amongst all the noise, whereas networks like AOL or CompuServe only made their internal content systems available to (essentially) well known brands or in house content. This turned out to be a problem of technology rather than concept. The rise of accurate search engines and aggregator sites made it easier to find the gold amongst the dreck without walled gardens.

P2P markets would be no different in that respect. It's not like you'd just view a long flat table of undifferentiated investments. It'd make sense to have some integration with the web, actually. People would be able to debate, recommend, link to different assets.


Your respect for your bosses skill is charming, but almost by definition a P2P market is not going to be a profitable ongoing concern for its creator. I think it'd have to be created either by a dedicated volunteer like Bitcoin itself was, or through an assurance contract. So perhaps Mr Popescu could create it but chooses not to because he figures a centralized exchange is more profitable for him, which would be correct.

With regards to MPEX not being visited by regulators yet, is that really your long term plan?

Use your pretty head for thinking once in your life. The rich are never afraid, of anything. Literally, anything. If MP thought there's even a vague chance p2p markets had utility he'd be doing it. It makes absolutely no sense to malign something useful when you can in fact simply take it as your own (which yes, he can/could do). The problem here is that the something isn't useful, not that MP can't sell 1% of S.MPOE to buy the entire thing.

P2p markets will become interesting if/when governments around the world actually start prosecuting people for Bitcoin, provided that if that actually happens Bitcoin still retains some utility/value. Even at that point, they'll still work as a p2p implementation of centralized markets.

Other than that, this isn't news to anyone informed, it's been said before. Learn to love irc, it's where Bitcoin actually happens.

LOL. I didn't expect anything different from MPOE-PR, and it is probably a good thing that you're commenting on p2p markets (it's a sign that you're afraid of them, which means...)

But I think you do not understand how it is supposed to work.

We can decouple asset ownership tracking from exchanges from listings/ratings.

Which means you can create more centralized solutions on top of low level p2p market infrastructure. Say, you can create MPOE-P2P which would be exactly like MPEx except that it would accept ECDSA signatures instead of PGP signatures.

So p2p markets are simply more flexible: they can mimic and interoperate with centralized solutions, but they also offer a number of interesting options.


If you want a shitty analogy, p2p market is more like WWW: you can get both textbook and wikipedia content over HTTP. It can handle both. Choice is up to you. Students often use wikipedia in addition to their textbooks.


Of all people, you're the most informed about how they will work. LOL.


How much does Mircea pay you for your writing, Hannah? Reminds me of Matt Taibbi a bit. But try even more vitriol next time.


Right, if somebody makes such listing p2p market will just collapse. Because if you add one bit of information per ticker (shoddy/non-shoddy) it would somehow ruin everything.


You forget that technology, in theory, would allow you to invest in each of these million of securities. Perhaps some 3rd party rating agency will provide trustworthiness score for each issuer. Just use trustworthiness as weight when you buy them.

When you liquidate, you'll get good deals on some of these bonds and shitty deals on other ones. This, likely, averages to something sensible.

So it is statistically liquid. Not in the same way as one big security, but quite likely it would be acceptable.


Only if you assume linear utility function. Don't forget that people send a lot of money to Satoshi Dice, this means that for real people utility function is very different from what you think it is.

Intelligent and informed points with the exception quoted.

It's not self evident to any "us" that includes MPEx. Peer-to-peer markets are, as far as we can see, pure nonsense. Much in the same way wikipedia does not work as a textbook for training highly specialized professionals (surgeons, lawyers what have you) and much in the same way a public library where anyone can be the librarian will soon enough turn into a collection of comic books and pulp it is unreasonable to expect anything useful to show up on a p2p market.

Peer to peer markets will work exactly for what and exactly how GLBSE has shown them to work (a centralized market run by undistinguished members of the general public being indistinguishable from a peer to peer market in any practical sense): a collection of the useless, the dysfunctional and the pointless taking turns to become fashionable, thus copied, thus reinforced by "social proof", presided upon by many idiots of which some are useful and a handful are outright con artists, generating an ever increasing quantity of drama per BTC.

There's a reason lemon laws have to be introduced in any market where the costs of discovery are high and the actual value per unit variable: buyers are willing to offer "average" prices, sellers knowing this will never list anything of above average value, as a result the average spirals down. There's always going to be need for a place where the above average can be listed, and that's the end of the p2p market as a serious venue.

P2p works well for money because money is fungible. It's a good idea, much like flight is a good idea: for some applications. Not at all for anything and everything under the sun.


A market of one billion dollars obtained through adding together one million different "securities" with markets averaging one thousand each is neither large nor liquid. It is painfully fragmented and utterly illiquid. Because, again, fungibility matters.

(Yes, you may be able to collateralize some of that smoldering crap into tranched CDOs or other derivatives and thus capture some real liquidity. The recent adventure of the US financials in this field should be informative.)


It makes no difference if you're investing a lot or a little money. This is a completely imagined distinction, a bad buy is a bad buy at any size.

ID verification is pointless. For one, enforcement is expensive even with IDs. For the other, IDs are easily falsified (to the level where p2p-ers can't distinguish them from bona fide IDs). It's shocking to see this cargo cult understanding of investment being perpetuated when a cursory read of this very forum would immediately cure anyone of it.

Finally, most hedge funds do in fact disclose what they do with the money. It's true that they often fail, and it's true that they often fail to stick with what they said. Nevertheless, the hedge fund is not going away. The bank may be, either extinguished or altered into a marginal role by Bitcoin. The hedge fund however stands to be enhanced.


It would appear your experience with bureaucrats differs significantly from mine (and ours). I've never heard of careers being built on innovation, taking risks and going against consensus in a bureaucracy, but maybe they do it differently where you are.


Actually, the reasonable avenue to breaking unwarranted assumptions of locality for Internet businesses is to domicile in a locale that fails to recognize such claims and stick to that. This is one of those points which will probably have to be etched into everyone's skin at the point of a sword: no, the US Congress doesn't have nor should it have any teeth outside of the US, even if it may feel this isn't right or fair.


MPOE/MPEx is market-valued at around 600k BTC atm, and has been over 100k BTC for most of the current year. No knock. Will keep you posted.


This may possibly be of interest to you: http://polimedia.us/trilema/2012/the-mpex-rota/

(Also re your signature: you're at the very least the third Bitcoin ratings "agency". The previous two notable ones, Peter Lambert and Patrick Harnett turned out to be scammers. Just FYI. And on that note, please see here.)

Some regulators understand Bitcoin very well and they know that it is not possible to regulate the bitcoin protocol or shut down the system. That does not mean that nothing within the Bitcoin system is subject to regulation. If you are a professional securities issuer you will stay a professional securities issuer when your securities are denominated in BTC.

The question for regulators will always be in what scale you are issuing or buying securities. A p2p loan  will be ok in most cases but if you are raising 100.000 BTC for your company publicly the SEC/FSA/BAFIN will knock on your door soon.

(btw, thanks Mike for the great speech on contracts and external state, couldn't be in London but saw it on Youtube)


Arbitration would be the best way:

1. You won't need a national court
2. Arbitration courts can have there own rules adjusted to Bitcoin
3. the "New York Convention" on the Recognition and Enforcement of Foreign Arbitral Awards is in the most cases internationally better recognized than national courts because this UN Convention has been ratified by 145 countries
http://en.wikipedia.org/wiki/Convention_on_the_Recognition_and_Enforcement_of_Foreign_Arbitral_Awards
4. Every legal entity can run an arbitration court
It's zero cost and only some paper work to form your own Swiss Verein (used by global law firms, maybe the best legal structure for arbitration)
http://en.wikipedia.org/wiki/Swiss_Verein
5. Arbitration will never be subject to financial regulation

We are trying to combine a 2 out of 3 escrow transaction with arbitration. We are using Shamir's Secret Sharing algorithm to encrypt a newly generated private key and only store one of the secret's shares. (when m-of-n escrow transactions are fully implemented we won't need this any more)

It is also a big regulatory advantage, it is more secure and it reduces counterparty risk if you do not involve a "trust" or "escrow company" that holds customers funds but leave an encrypted code at an Arbitration court that does not have control over the funds in the escrow account.

Arbitration courts with a secret share of a private key can enforce there decisions directly by issuing their share to one of the parties.

I think the primary difference is one of cost. Offshore companies aren't really a "hack" though they may appear that way to the press and politicians. Closing those loopholes usually has serious implications around undermining national sovereignty, not that it's stopping the US from trying.

So can you find a legal hack that would be costly or impossible to really close, for every case? I doubt it. And if you do, it likely does indeed make the system less centralized, which then undermines the argument for regulatory changes to make them feasible.

I'm not convinced that "bizarre legal hacks" cannot work. Shell corporations, offshore companies and trusts also can be seen as "bizarre legal hacks", but they are widely used and are quite legal.

For example, it is quite obvious when offshore trust is used to pay less taxes, but still it isn't illegal to do it even when intent is crystal clear. E.g. this: http://www.bloomberg.com/news/2012-09-27/romney-i-dig-it-trust-gives-heirs-triple-benefit.html

So, well, why not use same kind of hacks which financial industry uses now for decentralized markets too?

For example, something like this: http://en.wikipedia.org/wiki/Orphan_structure

Use of offshore trust can effectively decouple questions of crypto-ownership (which can be handled in jurisdiction which will recognize crypto-ownership as legitimate) from questions of company operations (it will still be subject of local laws).

Offshore financial centres will likely be much more friendly to new technology and new concepts than more financially conservative countries

So apparently it would be cool to find some solution for small issuers which would work for them until regulations are updated, since we have chicken-and-egg kind of a problem here, it seems.

One of possible solutions is to use intermediaries. P2P microcredit is already an established concept and there are numerous organizations which work with it, e.g. Kiva, Zopa, Prosper etc.

So perhaps it can work exactly like that (on issuer's side), except that creditors will be identified via blockchain rather than via some centralized database.

Use of decentralized market on investor's side is likely strictly superior in all aspects compared to centralized solution. In worst case it can function exactly like centralized solution.

But there are numerous advantages: it is more transparent, investor is able to sell bond at any time if there are buyers, and it largely sidesteps all regulations on investor's side to same extent as they are sidestepped by Bitcoin.

Of course, an argument can be made that it is not decentralized if middle man is used. But:

• Some solution is probably better than no solution at all; at least partially it will be decentralized.
• If there will be many intermediaries which will work with same decentralized market and there is competition among them, then we can say it is fully decentralized market.
  After all, some kind of underwriting is probably necessary even with a completely decentralized solution since you cannot really trust people on the internet.

Thanks Alex. This is an important topic to discuss. So I apologize for the long post.

I don't think it's worth pursuing bizarre legal hacks for a couple of reasons. One is that regulators and the courts would simply ignore what you've done there and assert you are still a securities issuer. That kind of flexibility to avoid loopholes is both the power and the danger of law.

But the primary reason is that it avoids the "day of reckoning", so to speak. To us it's self evident that decentralized peer-to-peer markets based on strong cryptography are superior to existing markets. They are more efficient. They are more trustworthy. They are international. They will probably have lower fees (or zero fees). However these things are not self evident to regulators or lawmakers who have poor understanding of technology, and often have even weaker understanding of the problems we're trying to solve with it. What's worse, if you are a regulator it's very easy to see ideas like this as:

• A threat to their job security
• A middle finger to their authority

The only long term stable solution is to engage with lawmakers and win them around to our way of thinking based on arguments and reason. Their fears must be placated. There's nothing inherently shady or wrong about wanting to be able to have bank-free finance and I'm sure they can be made to understand that.

The biggest problems are that existing regulations were written with what I call the assumption of bigness and the assumption of locality.

The assumption of locality is obvious enough - rules are often written in such a way that if you "offer service X to residents of area Y you must be regulated by area Y". This sort of thing makes sense for businesses that can't operate without significant footprint on the ground. They make no sense at all for businesses that can be run entirely on the internet. This is a problem governments have been grappling with for years and you can often see it crop up in discussions of tax policy, i.e. some company will be painted by governments or the media as "tax dodgers" when in reality they are just not being taxed as a fully local company would be.

The assumption of bigness is rampant in financial regulation. Put simply, it is the assumption that anything financial in nature will be done by large companies and thus requiring them to be a little bit larger is no big deal. This flatly contradicts the world we are used to, in which innovation happens in peoples bedrooms and gets large only after a proof of concept takes off. Bedroom innovation is standard in the internet business - Facebook, YouTube and Google all got started this way. It is almost unheard of in the financial industry. Where the two worlds collide pain often follows.

Here are some examples where the assumption of bigness is hard-coded into the existing rules:

• The fees for being a regulated business are often insanely high, it can cost several million dollars to be a licensed Money Services Business in the USA because every single state has its own regulator and each one charges fees. The reason is that in a neat dodge to keep the costs of the regulator off the government books, they are funded via the fees levied on the regulated entities. Because regulators effectively have a monopoly the fees end up huge, excluding any smaller players. Fees of thousands of dollars are seen as being a bargain!
• The EU has this "e-money" concept. Fortunately Bitcoin isn't e-money because it doesn't represent a claim on an issuer (there is no issuer). If you did want to experiment with issuing your own currencies though, you used to have to post a 1 million euro bond. The theory was it'd protect consumers if your business went belly up. It appears they since fixed this, thank goodness.
• Many regulations require you to have at least two people in your company.
• The blood of a regulator is paperwork, and every single new rule introduced tends to add more. At some point the complexity of the paperwork combined with often draconian sentences for failure to complete it properly makes  anything other than hiring professional paperwork-fillers impractical.

Regulators are not blind to these problems. Often they are painfully aware that they are paper-pushing bureaucrats, much despised by those they regulate. And they often mean well, they are just juggling conflicting priorities and get stuck in the middle. It's not much fun to be a regulator!

For instance, notice I said before that the EU e-money directive used to require posting a huge bond. They got rid of that requirement for what they call small e-money issuers. If you have less than 5M euro of e-money outstanding you now "just" have to register with them and fill out the paperwork. So it's definitely an improvement.

One of the most insulting things you can call a regulator is disproportionate. If you immerse yourself in the world of financial regulation you'll see regulators talk all the time about proportionality. Any accusation that regulations are disproportionate will be taken seriously because obviously any idiot can write draconian rules, the "skill" of regulation (if you want to call it that) is in achieving your aims with minimal impact on legitimate business. In the AML world the key buzzword is "risk based approach". The risk based approach is due to recognition that AML laws as written are fundamentally unworkable (they originate with the US Congress, what did you expect?). It's just not feasible for everyone to investigate everyone elses business at every transaction, so regulators tell regulated entities to - put plainly - be reasonable about it. This can either be a blessing or a curse depending on your perspective, the penalties for missing money laundering are eye-watering and don't have much leeway for saying "it didn't seem risky at the time". One of many problems with AML regulations.

OK, so to bring this around to regulation of distributed bond markets.

I think this is one of those areas that suffers from a first-mover problem. Based on a plain reading of the regulations (in the UK at least), you would need to register with the FSA if you wanted to issue a bond whether it was P2P or not, regardless of size. This incurs fees of several thousand pounds The assumption of bigness is very deep here, the idea of micro-bonds doesn't seem to have been considered at all.

But. There is no particular reason why securities regulations could not have the same kind of thresholding on them that AML and e-money regulations have. In the UK they don't seem to, perhaps because they believe there is no reason why you would ever want to issue a bond if you are not a very large business or government. But that could be easily rectified by the regulators. In that case, if a bond issuer were to have outstanding bonds of (for example) less than million pounds, they would not need to register with the regulators and buyers of this debt would be bound only by "caveat emptor".

The problem is that it's tough to pitch such rule changes to regulators when micro-bonds do not exist. This is the same issue crowdfunding has had in the USA where Kickstarter was, based on some interpretations of the law, illegal for its entire existence up to the JOBS Act. In the end nobody prosecuted them and the law was changed to make what they're doing explicitly OK ...... but unfortunately, only for the centralized case like Kickstarter. Law makers once again included the assumption of bigness.

I think adding thresholds to securities laws would be a win-win solution for everyone:

• From an issuers perspective, it'd make it feasible to raise money for things like buying a car without needing to get banks involved, and without needing to fill out complicated paperwork and follow complicated rules. Person to person lending and even lending for small businesses can proceed unhampered.
• From a buyers perspective, it means there's now a large and liquid debt market for small bonds. But large debt issues would still fall under the regulations and have their basic information sanity checked. In practice nobody should invest a lot of money into an entity that hasn't been through ID verification and which does not explain what they're going to do with the money   (hedge funds are an exception to this common sense rule, but they're the result of regulatory loopholes and a broken financial system, they probably wouldn't exist in a world that used only Bitcoin). Now one can argue that the private sector can meet the same requirements better, and I'd have a lot of sympathy for that, but one step at a time ....
• From a regulators perspective, this doesn't reduce the scope of their power because it simply opens up a market that didn't previously exist. It's also a career-making chance to show initiative and write proportionate regulation that supports innovative financial developments, this kind of thing is gold to people who may otherwise have a hard time building their personal reputation or case for promotions.

The other modification we'd need is some exemption for securities offered over the internet, ie, removal of the assumption of locality. It doesn't really make sense that if you want to sell a bond over the internet you have to register with every regulator in the world, and there's no reliable way to restrict purchasers to particular localities. Unfortunately by it's very nature the assumption of locality can't be removed in just one place. A foreign regulator can believe you broke their laws even if the local one doesn't.

The question is, during the grey-area time when people are using P2P software to issue small bonds but not registering with the regulators, what happens? Do people get hurt before the rules get updated? I don't know the answer to these questions. I'm not concerned about the people issuing large amounts of debt on P2P markets because they can and should follow the existing regulations anyway.

You are raising some interesting questions. Have you pointed you enquiring mind towards similar issues raised by the Open Transactions software?

https://github.com/FellowTraveler/Open-Transactions/wiki

Would be interested on any thoughts specific to that model. A federation of servers acting as notaries for transactions for 'ethereal' issuers and clients.

Here's some schematics to give a broader overview of possibilities (note these may change as rapidly as the technology, e.g. bitcoin mulit-sig, n-of-m voting pool auditing issuers)

Architecture Overview:


Fully Anonymous Cash TX:


Pseudo-Anonymous Accounts TX:

Well, yes. You can't have both. If you want legal liability you must comply with regulations.
For me the beauty of this kind of system is that legally binded assets and other crypto assets (based only on trust) can share the same system.
I can represent a tab with my friend while Exxon represents huge oil contracts or whatever.

Perhaps a better way to do this...

Problem: we want to make a negotiable instrument ownership of which is identified cryptographically, but it might be legally problematic:
1. we don't know whether court system will recognize cryptographically signed transfers of ownership among anonymous parties
2. it might be illegal to make such instrument because it is seen as security, which is subject to regulations

Possible solution: disguise this negotiable instrument as simple non-negotiable person-to-person loan. (Which likely is legal.)

Imagine a contract where one party's name and signature is left blank, but it is signed with other party. Whoever has access to this contract physically can write his name and signature and effectively becomes a payee.

To do this, we'll make contract with two or three parts which are signed independently. First part will describe issuer's identity and general terms of payment. Second part will describe creditor's identity. Third part will be a letter from creditor which will say that he wants his money back.

First and second parts are signed with issuer's digital signature. However, it is a lie: issuer will reveal his private key to a 3rd party, which would act as a notary.

Notary will receive a request from creditor, check whether it is valid and then he'll fill second part of contract with creditor's information and will sign it with issuer's private key.

But a first part of contract will state that both parts are signed by issuer personally at the same time so they form a whole valid contract.

So how will we prevent abuse from notary's side? Contract will also include a clause that to claim money payee will have to identify himself via a certain chain-of-digital signatures scheme. So that's how we connect decentralized market crypto scheme with a world of two-party contracts.

E.g. "I'm John Smith. Please pay me to this bank account: xxx. My digital signature: yyy. A chain of digital signatures which confirms this request: zzz."

Contract can explain that this weird chain-of-signatures is requires to prevent identity theft or something like that. It's even partially true...

Additionally this scheme can be enhanced with mandatory arbitration clause in contract. The reason for this is that it's likely easier to find a tech savvy arbitrator who will understand how to verify a chain of digital signatures which controls ownership then it is to find a competent court. Arbitrator will simply say that he have verified all this digital mumbo jumbo and court will recognize it.

Additionally, this would guard issuer from potential abuse from notary as such attempts will be filtered out by arbitrator.