BlockChain Law, ICOs & Legal Issues Regarding Bitcoin & Cryptocurrencies
Following the trail that money leaves often leads to the capture and conviction of criminals. This not only applies to financial crimes, but to all crimes where money changes hands. It is why prosecutors and police often look at financial records, credit card receipts and bank statements for evidence to track and prove money's provenance and destination.
That is why federal, state and local governments have put in place legal restrictions prohibiting financial transactions from occurring in secret. Banking laws require tax identification or Social Security numbers, IRS form 1099s are required in many business-related payments, and many cash transactions and accounts are subject to additional official reporting requirements (e.g., IRS forms 8300 and 4789).
Statutes criminalizing money laundering, failure to file currency transaction reports and tax evasion provide law enforcement tools to convict even when it cannot pin other substantive crimes such as drug dealing, murder and robbery on a suspect.
Numerous laws focused on financial transactions have been enacted around the world to enable law enforcement to investigate, prosecute and convict fraudsters, drug dealers, terrorists and organized crime figures.
That is why bitcoin evokes illegality in the eyes of governments and law enforcement. Bitcoin and similar "crypto currencies" facilitate conducting financial transactions anonymously, by occurring outside traditional payment channels.
We can define modern money (currency in metal or paper physical form) as an efficient payment mechanism compared with the barter of goods and services. It can also be an effective and a convenient store of value, based on the presumption of widespread acceptance for payment now and in the future, and a predictable confidence in its value vis-à-vis the goods and services expected to be purchased at a future time.
Currency, nowadays, is mostly moved and stored electronically while always being fully interchangeable between electronic and physical forms. When electronic, a currency is also a ledger system, recording all payment flows and wealth stocks within the system. The system actually consists of government-sanctioned and regulated banks and monetary authorities, using centralized infrastructure (e.g., account databases and payment systems).
Cash in physical form meets the first two of the above definitions, but due to its physicality and potential for anonymity, it does not always or automatically fulfill the "ledger" definition. This is because cash transactions may go unrecorded, and often do. So a monetary authority will know and have recorded in its ledgers how much physical cash and coin is in circulation, but will have incomplete records regarding who has it or what transactions have transpired unless it is deposited into banks or recorded in other ways.
The value of U.S. currency is no longer backed by precious metals. Rather, it is backed by the stability and strength of the U.S. economy. The value of a dollar is based on what can be exchanged for it. Ultimately, currency has value because society agrees it is worth something. It must be issued in limited supply so that it maintains value. The government is in charge of issuing currency, so restrictions are required to ensure against unrestricted printing of dollars.
If anyone could simply print a dollar, there would be no value to the currency. If dollars were printed by the government without any accounting, there would be no way of knowing how much was being distributed to the masses. Essentially, this ledger system of currency requires trust and confidence in governments that issue currency and in the banks that hold, protect and distribute it.
This is known as a centralized system, meaning that the ledgers are in one place, whether that is at the mint, the treasury or the bank. Trust in the government is essential to give value to the currency. Trust in banks to distribute money upon demand is also essential. Obviously, banks do not give back the exact same dollar that is deposited by an account holder, so currency must all have established values, which are set forth by the ledger system.
Before electronic banking, physical passbooks were provided to account holders to document deposits and withdrawals. The passbook was each account holder's evidence of what the bank's internal ledger reflected. When currency is transacted now with electronic banking, a digital ledger is updated to document deposits and withdrawals. The bank's ledger provides evidence of what should be in the account.
Those ledgers are what investigators are looking for to follow the money. Just as a box of cash found in the attic of a suspected dealer's home may be used as evidence of illegal drug sales, currency ledgers also can provide law enforcement with similar evidence. Ledgers can prove that payments were withdrawn from an account of a suspect or deposited into the account of a suspect as payment for the suspected illegal activity.
From the issuance of currency to daily transactions, everything is recorded on ledgers that can be used as evidence. Narcotics detectives copy down serial numbers on the bills used when doing a buy-bust operation to show that the dealer was in possession of the same $20 bill that the informant used to buy cocaine minutes before the take-down. Those serial numbers are based on the U.S. Treasury's ledger system.
Importantly, bitcoin and other cryptocurrencies are also based on recording transactions in a ledger. The technology behind Bitcoin is called "blockchain." However, blockchain technology is not centralized. Unlike with banks and governments, there is no one place where the blockchain ledger is kept.
Instead, blockchain is coded information that is contained on thousands of computers acting as "nodes" around the world. Each computer possesses the identical blockchain. There is no central server maintaining the blockchain so no central server at any one bank can be hacked to change the information contained on the blockchain.
When a transaction occurs, a block is formed reflecting that transaction. If A sends B $20 in bitcoin, this transaction among others will be recorded on a block that is formed. It does not become part of the chain immediately. That new proposed block containing transactions (ledger information) is broadcast to the other nodes and if there is consensus among all nodes containing that blockchain that the information concerning the transaction is legitimate, the block becomes part of the chain and payee B receives the $20 of bitcoin. [iii]
Of course, all of this happens in cyberspace so there is nothing physically presented or accepted. However, the parties to the transaction accept the validity of the information read on a computer screen. That is because of trust formed vis-a-vis that consensus among thousands of nodes participating in the blockchain that must occur before a block can be accepted.
Importantly, no accepted block can be changed, hence, the concept of a block being immutable. That provides the security. A public blockchain like bitcoin's also provides transparency so anyone can see all transactions that have transpired. In this manner, a bitcoin's transaction history can be followed through the chain to see where it has been held, but the identities of who is holding the bitcoin are not revealed in the system.
In that respect, the information concerning the occurrence of a transaction may be transparent, but the individual participants are anonymous because the system uses strings of numbers, letters and symbols instead of names and other identifying information. That means that unless someone wants to be identified, there is little chance of identifying a particular person to any given transaction. [iv] This is why law enforcement communities are so concerned about bitcoin.
In that respect, if A wants to pay B to steal a car, A could use a computer to send a string of letters, numbers and symbols identifying an amount of bitcoin to be sent. That information in computer code is sent electronically over the internet to a digital address, much like an email is sent. That address is also identified by a series of letters, numbers and symbols. When the bitcoin is sent, a block is formed containing the data of that transaction.
Thousands of nodes then communicate to verify the data. [v] Upon verification, the block containing that information becomes part of the chain and the transaction is completed. Thereafter, B will see the amount of bitcoin sent by A in his or her account on a computer screen.
That is why some believe that bitcoin was designed for illegal activity. Bitcoin can and, in some instances, does provide an effective way to engage in illegal financial transactions anonymously, if that is the user's intent.
Bitcoin is thriving despite law enforcement concerns. The cryptocurrency community is using this new technology to create businesses that use and promote the use of blockchain technology. The image of criminality is being replaced by the reality of the secure transaction that does not require the same type of expensive protections that banking and other financial activities necessitate.
Other legal problems are to be expected as more people engage in this new method of conducting financial transactions. Hackers and high-tech criminals have already figured out ways to defraud and steal bitcoin.
Law enforcement officers may now have a hard time following the money because the money is in the form of a string of numbers, letters and symbols. They also might not be able to easily hack their way into people's cryptoaccounts to discover who they are and what they are doing. However, there is no doubt that given time, law enforcement will figure out how to investigate crimes in blockchain-based systems despite the problems that the anonymity of the cryptocurrency world presents.
Moreover, government agencies are realizing that people are profiting legally from the blockchain-based cryptocurrency marketplace. In fact, the IRS expects those who are trading in cryptocurrencies to file and pay taxes on the profits realized. Federal, state and local governments are also trying to figure out how to define and regulate the cryptocurrency market.
For these reasons, the criminality associated with bitcoin in the early days may be a thing of the past. However, there are still plenty of criminal investigations that concern the use of, the transactions and the brokering of Bitcoin and other cryptocurrencies. Mitch Stone has studied this new technology and the currency created by it. He understands how it was developed and how it works. He is prepared to breakdown any government investigation and ensure that his clients are not subjected to prosecutions and harsh consequences. His knowledge and experience help protect those who are involved in this cutting edge new technology.
About Mitchell A. Stone
Attorney Mitch Stone is board-certified in criminal trial law. He practices white-collar criminal defense in federal and state courts. He is the principal lawyer at Mitchell A. Stone, P.A., located in Jacksonville, Florida. He can be contacted at (904) 263-5005 or by using our secure online contact form.