Topic: Legal Ramifications of a Truly P2P Exchange (Opinions Wanted!) - page 2. (Read 2393 times)
The issue is whether or not the peers are actually doing anything illegal. In the case of sharing 'copyrighted' material the act was illegal for other reasons. In the case of this exchange what is being exchanged is information and not promises or contracts and thus a completely new asset class that (from what I can tell) does not fall under any of the existing regulations because it was never before even conceivable.
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5) Exchange Regulations
A centralized Bitcoin / Litecoin exchange run by a market operator can be regulated because upon accepting deposits of the crypto-assets known as Bitcoin or Litecoin, the exchange converts them into a promise to pay financial instrument in the form of an account balance with a particular server.
With BitShares there is no market operator and at no point does any actor in the exchange convert a crypto-asset into a financial instrument for the purposes of bringing together multiple third-parties. The reason for this is that there is no first or second party and no contract between any parties.
A centralized Bitcoin / Litecoin exchange run by a market operator can be regulated because upon accepting deposits of the crypto-assets known as Bitcoin or Litecoin, the exchange converts them into a promise to pay financial instrument in the form of an account balance with a particular server.
With BitShares there is no market operator and at no point does any actor in the exchange convert a crypto-asset into a financial instrument for the purposes of bringing together multiple third-parties. The reason for this is that there is no first or second party and no contract between any parties.
I am not a lawyer but if you could avoid regulation just by being peer-to-peer wouldn't Napster still be around?
I have been posting a paper about BitShares an a new P2P exchange and have included a legal interpretation below. The full paper is 22 pages and is an interesting read, but I decided I would create a thread in this sub-forum to simply discuss the legal ramifications of 'financial instruments' that have no counter-party and no 'contract' associated with them.
https://docs.google.com/document/d/1RLcjSXWuU9vBJzzqLEXVACSCdn8zXKTTJRN_LfoCjNY/edit#
Note: for better formatting and highlighting you can read the same content below within the actual paper linked above (last couple of pages).
Legal Classification of BitShares and BitShare-derived crypto-assets
Throughout this paper we make reference to short, long, margin, call and put options and other traditional financial terms and instruments, however these are only analogies used to explain the behavior of these new crypto-assets. Legally these instruments do not meet the definition of a financial asset, instrument, bond, or anything else on the books aside from the most generic term 'asset'. Before attempting to classify these new crypto-assets lets review the current definitions.
A financial asset is an intangible asset that derives value because of a contractual claim.
Examples:
Cash or cash equivalent,
Equity instruments of another entity,
Contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity.
A financial instrument is defined as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity" according to IAS 32 and 39 (International Accounting Standards Board)
A contract is a voluntary agreement by two or more parties, each of whom intends to create one or more legal obligations between them. A contract is a legally enforceable promise or undertaking that something will or will not occur. Elements of a contract include:
Offer and acceptance and Meeting of the Minds
Intention to be Legally Bound
Consideration
Additionally the parties to a contract must have capacity to contract, its purpose must be lawful, the form must be legal, the intent must be to create a legal relationship, and the parties must consent.
Under European Union Law you must consider the MIFID (Markets in Financial Instruments Directive). This directive defines a regulated market as a multi-lateral system operated and/or managed by a market operator which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly in accordance with the provisions of Title III.
The common denominator behind all existing financial assets and liabilities (including cash) is a contractual obligation. If there are no contractual obligations made by any party to any other party then by definition BitShare derived crypto-assets are not financial instruments. So lets see if we can find anything within BitShares that satisfies all of the requirements of a contract.
1) Bid / Ask Transaction Published to the Block Chain.
A bid or ask is a cryptographically signed transaction by a single, anonymous party. There is no signature by any other party and no obligation to perform. The bid or ask transaction has no legal standing and creates no legal relationships. This bid or ask is processed by a network of anonymous individuals who have no capacity to contract with the anonymous party submitting the bid or ask. In theory, the bid includes payment to anyone who includes the bid in a block and could be considered signed and accepted by the miner. However, once the transaction has been included in a block there is still no outstanding obligation or legal relationship between the two anonymous parties. Furthermore, simply including the transaction in a single block by a single miner does not actually cause the transaction to be executed. It must also be accepted by all other nodes in the network and even if it is accepted there exists no legal relationship or obligation between any two parties. Furthermore, the result of the accepted transaction is merely an anonymous update to a global shared database and could constitute free speech.
2) Short Sell Transaction Published to the Block Chain
These transactions have all of the properties of a Bid / Ask transaction with the only difference being the type of crypto-asset used as the input to the transaction and the nature of the resulting outputs. It is still signed by a single anonymous party and is never signed by any other party. There is no legal obligation created nor legal relationship between two or more parties.
3) Margin Calls and Covering executed by Miners
No party has a contractual obligation to provide additional margin nor to force covering; however, no party has the ability to prevent their position from being covered either when the majority of the network agrees. As a result there is no obligation of any party to enforce the margin nor legally enforcable consequences if they do not.
4) Contract between Developers and Users
BitShares is a protocol for exchanging information that could be implemented by any number of individuals. The developers release the software open source without warenty or promise of any specific behavior. Users of the software get to choose which version to use and which network to join and therefore are in complete control over how they react to the information they receive from the network. Users are even free to modify their software at will and therefore any actions or decisions made by the software are entirely an extension of the user’s will and not that of the developers.
5) Exchange Regulations
A centralized Bitcoin / Litecoin exchange run by a market operator can be regulated because upon accepting deposits of the crypto-assets known as Bitcoin or Litecoin, the exchange converts them into a promise to pay financial instrument in the form of an account balance with a particular server.
With BitShares there is no market operator and at no point does any actor in the exchange convert a crypto-asset into a financial instrument for the purposes of bringing together multiple third-parties. The reason for this is that there is no first or second party and no contract between any parties.
6) Distributed Escrow and Arbitration System
To facilitate exchanges with traditional assets and financial instruments, BitShares provides a distributed informal, non-binding, escrow and arbitration system. There are two parties to every non-disputed escrow transaction and three parties in the event of a dispute. There exists an non-binding agreement between the two parties that includes an arbitration clause allowing the defined, but anonymous, 3rd party to decide any disputes at their whim in an entirely non-binding (in a legal sense) way. There does exists a private informal agreement between two parties that is not known to the wider network. The escrow agent never receives funds nor has the ability to send the funds any place but one or both of the parties.
Escrow agents would be subject to any laws, regulations, and licensing requirements applicable to arbitration if the users expect their decision to be legally enforceable. Fortunately, escrow agents and users specifically acknowledge that the no party is under any legal obligation to take any particular action at all and that there is no intent to create a legal relationship. By specifically stating that at all times no party is held to be legally liable to follow any specific agreement and that there is no intent to create a legal relationship between any two parties, the result is that all parties are acting in an informal, purely voluntary, manner outside the jurisdiction of any court. It would be like agreeing to meet someone at the pub and then failing to show up.
That said, social and market pressures would conspire to motivate all parties to make honest and ethical decisions despite the complete lack of legal obligation to do so.
The only legal question that remains is whether or not an individual trading a crypto-asset for a tangible good or traditional financial-asset (such as cash) in a noncommercial manner could be classified as a money transmitter by any sane regulatory system or court. FinCIN has already published guidance that indicates that buying and selling non-financial assets with a crypto-currency is not engaging in money transmission nor a money services business. I would argue that as long as there are only two parties, no contracts and no party is operating on behalf of anyone else, there is no money transmission. This would be like claiming someone who exchanged gold for cash on craigslist in a non-commercial manner is a money transmitter.
https://docs.google.com/document/d/1RLcjSXWuU9vBJzzqLEXVACSCdn8zXKTTJRN_LfoCjNY/edit#
Note: for better formatting and highlighting you can read the same content below within the actual paper linked above (last couple of pages).
Legal Classification of BitShares and BitShare-derived crypto-assets
Throughout this paper we make reference to short, long, margin, call and put options and other traditional financial terms and instruments, however these are only analogies used to explain the behavior of these new crypto-assets. Legally these instruments do not meet the definition of a financial asset, instrument, bond, or anything else on the books aside from the most generic term 'asset'. Before attempting to classify these new crypto-assets lets review the current definitions.
A financial asset is an intangible asset that derives value because of a contractual claim.
Examples:
Cash or cash equivalent,
Equity instruments of another entity,
Contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity.
A financial instrument is defined as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity" according to IAS 32 and 39 (International Accounting Standards Board)
A contract is a voluntary agreement by two or more parties, each of whom intends to create one or more legal obligations between them. A contract is a legally enforceable promise or undertaking that something will or will not occur. Elements of a contract include:
Offer and acceptance and Meeting of the Minds
Intention to be Legally Bound
Consideration
Additionally the parties to a contract must have capacity to contract, its purpose must be lawful, the form must be legal, the intent must be to create a legal relationship, and the parties must consent.
Under European Union Law you must consider the MIFID (Markets in Financial Instruments Directive). This directive defines a regulated market as a multi-lateral system operated and/or managed by a market operator which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments - in the system and in accordance with its non-discretionary rules - in a way that results in a contract in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly in accordance with the provisions of Title III.
The common denominator behind all existing financial assets and liabilities (including cash) is a contractual obligation. If there are no contractual obligations made by any party to any other party then by definition BitShare derived crypto-assets are not financial instruments. So lets see if we can find anything within BitShares that satisfies all of the requirements of a contract.
1) Bid / Ask Transaction Published to the Block Chain.
A bid or ask is a cryptographically signed transaction by a single, anonymous party. There is no signature by any other party and no obligation to perform. The bid or ask transaction has no legal standing and creates no legal relationships. This bid or ask is processed by a network of anonymous individuals who have no capacity to contract with the anonymous party submitting the bid or ask. In theory, the bid includes payment to anyone who includes the bid in a block and could be considered signed and accepted by the miner. However, once the transaction has been included in a block there is still no outstanding obligation or legal relationship between the two anonymous parties. Furthermore, simply including the transaction in a single block by a single miner does not actually cause the transaction to be executed. It must also be accepted by all other nodes in the network and even if it is accepted there exists no legal relationship or obligation between any two parties. Furthermore, the result of the accepted transaction is merely an anonymous update to a global shared database and could constitute free speech.
2) Short Sell Transaction Published to the Block Chain
These transactions have all of the properties of a Bid / Ask transaction with the only difference being the type of crypto-asset used as the input to the transaction and the nature of the resulting outputs. It is still signed by a single anonymous party and is never signed by any other party. There is no legal obligation created nor legal relationship between two or more parties.
3) Margin Calls and Covering executed by Miners
No party has a contractual obligation to provide additional margin nor to force covering; however, no party has the ability to prevent their position from being covered either when the majority of the network agrees. As a result there is no obligation of any party to enforce the margin nor legally enforcable consequences if they do not.
4) Contract between Developers and Users
BitShares is a protocol for exchanging information that could be implemented by any number of individuals. The developers release the software open source without warenty or promise of any specific behavior. Users of the software get to choose which version to use and which network to join and therefore are in complete control over how they react to the information they receive from the network. Users are even free to modify their software at will and therefore any actions or decisions made by the software are entirely an extension of the user’s will and not that of the developers.
5) Exchange Regulations
A centralized Bitcoin / Litecoin exchange run by a market operator can be regulated because upon accepting deposits of the crypto-assets known as Bitcoin or Litecoin, the exchange converts them into a promise to pay financial instrument in the form of an account balance with a particular server.
With BitShares there is no market operator and at no point does any actor in the exchange convert a crypto-asset into a financial instrument for the purposes of bringing together multiple third-parties. The reason for this is that there is no first or second party and no contract between any parties.
6) Distributed Escrow and Arbitration System
To facilitate exchanges with traditional assets and financial instruments, BitShares provides a distributed informal, non-binding, escrow and arbitration system. There are two parties to every non-disputed escrow transaction and three parties in the event of a dispute. There exists an non-binding agreement between the two parties that includes an arbitration clause allowing the defined, but anonymous, 3rd party to decide any disputes at their whim in an entirely non-binding (in a legal sense) way. There does exists a private informal agreement between two parties that is not known to the wider network. The escrow agent never receives funds nor has the ability to send the funds any place but one or both of the parties.
Escrow agents would be subject to any laws, regulations, and licensing requirements applicable to arbitration if the users expect their decision to be legally enforceable. Fortunately, escrow agents and users specifically acknowledge that the no party is under any legal obligation to take any particular action at all and that there is no intent to create a legal relationship. By specifically stating that at all times no party is held to be legally liable to follow any specific agreement and that there is no intent to create a legal relationship between any two parties, the result is that all parties are acting in an informal, purely voluntary, manner outside the jurisdiction of any court. It would be like agreeing to meet someone at the pub and then failing to show up.
That said, social and market pressures would conspire to motivate all parties to make honest and ethical decisions despite the complete lack of legal obligation to do so.
The only legal question that remains is whether or not an individual trading a crypto-asset for a tangible good or traditional financial-asset (such as cash) in a noncommercial manner could be classified as a money transmitter by any sane regulatory system or court. FinCIN has already published guidance that indicates that buying and selling non-financial assets with a crypto-currency is not engaging in money transmission nor a money services business. I would argue that as long as there are only two parties, no contracts and no party is operating on behalf of anyone else, there is no money transmission. This would be like claiming someone who exchanged gold for cash on craigslist in a non-commercial manner is a money transmitter.
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