How a Criminal Defense Attorney Thinks About Crypto Currency

You are all in for a very special treat today. On the heels of last week’s guest post, in which the Unassuming Banker looked at crypto from a traditional IB’s view, I’ve got a new guest post from a friend of mine who is about to give you a perspective on the nascent asset class you’ve not read before. 

Aaron Goldsmith is a top criminal defense attorney and commercial lawyer who has appeared in federal and state court in some major cases over the years. Recently, he’s been fielding all sorts of questions about Bitcoin and crypto currency, and it’s a burgeoning eco-system in which people are going to need representation. This has led Aaron to jot down some thoughts I’ve posted below. If you are involved in any facet of the crypto business right now, Aaron Goldsmith may just be the guy you want in your corner. 

I hope you get as much out of this as I have. – JB

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NOTHING BELOW SHOULD BE CONSTRUED AS LEGAL ADVICE.  THERE IS NO ATTORNEY-CLIENT RELATIONSHIP BETWEEN ME AND ANY OF YOU.  OH BTW, I AM NOT AN ACCOUNTANT, CPA OR TAX ADVISOR SO NONE OF THIS SHOULD BE TAKEN AS TAX ADVICE EITHER.

The legal brilliance of blockchain technology is similar to the US Constitutional Convention.  The framers were smart enough to realize that they could not predict applications of the law to societal advances so they needed to build in flexibility.  Blockchain has immutable security with seemingly unfettered transactional applications that have yet to be predicted.

Let me preface by disclaiming that I am not a traditional securities attorney. Most of my practice is Federal criminal defense (white collar being a significant portion therein) and commercial litigation. So my discussion of crypto is trying to translate the experiences of when my white collar (and sometimes blue collar clients) have done things poorly in the past, into this emerging dimension.

One of the primary legal issues for crypto is that it is not just one thing. Bitcoin started as a means of internet transactional value, and in its current bull market has morphed into a “stored value” asset; with its forked sibling now trying to be the token. Filecoin seems to be the pre-eminent token for storage; Litecoin is emerging to fill the crypto-transactional schism and Ethereum may be the best bet at creating an entirely self-sufficient marketplace.  None of this is new to any of you…nor is it new to anyone at FinCEN, CFTC, the SEC in general, or lawyers in certain States’ Attorneys General offices.

If crypto is not really just one thing, and is designed to work within internet/dark web networks across geo-political borders, then what are the rules? (Here is where a bunch of hipsters and doomsday preppers yell “There are none, man!”) Sorry. They’re wrong.

Each nation state has its own security laws that crypto owners have probably been violating to various degrees. I am only going to discuss US laws generally.

INDIVIDUALS:

This part is easy.

IF YOU ARE OPERATING IN THE UNDERWORLD and exchanging cryptocurrency for illicit goods or services, stop.  Eventually you will get caught doing whatever it is you are doing and the flighty notion of un-traceability for those transactions is in its final descent.  Law enforcement agencies are getting good at following 1s and 0s.  Also, paying for your legal fees will start a long and inevitable chain that winds back to you, and most good defense attorneys are not going to accept BTC or ETH as a retainer….yet.

IF YOU ARE A WOULD-BE INVESTOR, be hyper vigilant.

Despite the 1s and 0s, remember this stuff is all bearer-centric, so we are seeing a rash of thefts akin to knife-point ATM robberies.

For more sophisticated crimes, no one is re-inventing the wheel in crypto fraud.  A pump and dump is the same premise on ink and paper as it is with magic tokens in the technological ether.  Arguably, it is much easier to perpetrate in crypto than it is otherwise.

The whole notion of crypto’s value is perception. Its beauty (scarcity or utility) is in the eyes of its beholders. The need to solicit and exaggerate its value, for most coins and tokens, is a self-fulfilling prophesy at this stage of the game.  With the bull market and media attention it is all too easy to take your next paycheck and give it to a group promising 10x – 100x returns, only to find out weeks later that it collapsed or disbursed and dissolved.

On the flipside of the coin (pun intended 🙁 ) I imagine we will see some good defenses in SEC and criminal proceedings hinging on intent of the group, DAO or individual broker/dealers. After all, bad ideas do not equal bad intent and bad intent is a necessary element of wire fraud under 18 USC 1343 et seq.* These are where I believe some great test cases will start emerging in the Second and Ninth Circuit Courts of Appeals.  The accused better have savvy attorneys and be open to hiring crypto experts to prevail over Judges and SEC admins who are going to try to fit crypto into a neat box of long accepted norms.

IF YOU ALREADY OWN, the IRS deemed cryptocurrency to be an “asset.”* So all of you Coin/Token holders should have been taking meticulous notes about how much of BTC or ETH you bought, when you bought it and for how much.   If you haven’t, and Treasury finds out you own or sold, they (and their Barney* friends) are going to ask.  Under the asset class moniker, anyone selling their crypto position is subject to short or long term capital gains taxes under the erstwhile advice of their accountants.

IF YOU ARE CREATING A CRYPTOCURRENCY EXCHANGE/APP:

You have to register with the SEC under the Exchange Act* and with the banking departments of individual states and territories….have fun explaining what you want to do to those guys.

IF YOU ARE A GROUP, OR DAO TRYING TO START-UP OR DO AN “ICO:”

Can we all just agree to call them start-ups please?  (Here’s where a bunch of you yell that I am a simpleton…and probably deservedly so.)  Here is yet another reason why crypto being more than just one thing makes life more difficult.

Lawyers, which also means the SEC,  FINRA ALJs and District Court Judges, love to find the lowest common denominator.  Every ramification and application that you can think of currently has an analog/tangible analogy that Assistant United States Attorneys and Judges are going to call your thing instead of the digital ideal eqivalent….get used to it.  The SEC has already been trying compare DAOs to stock classes in corporations.  This is why I compared blockchain to the Consitution at the beginning.  The secure foundation with foresight of flexibility is great for the market but tough for law enforcement until we start seeing more practical realizations of crypto for legilslators and law enforcement to adjust to.

This is also why the term “ICO” is a poor moniker and doing crypto a disservice.  It makes main street investors, the SEC and law enforcement think DAOs and crypto offerings are like stocks in a company.  They aren’t.  While there will undoubtedly be a few examples akin to a corporation with an IPO, I don’t think we will see those until the applications materialize.  For now, they are much more akin to crowdfunding and Venture Capital.  These start-ups are soliciting a large group of people to own an interest in something that is intangible, untested and has not even started operating, in exchange for a proportionate or defined interest in its eventual, hopefully positively perceived value.

So should regulators apply the rules of an IPO?  I believe that in most instances they should not.  Rather, we should be looking at Venture Capital and crowdfunding rules under Dodd-Frank* and JOBS.*

Everything boils down to a case-by-case examination relative to scale.  Smaller is probably better all around.  However, even esoteric crypto start-ups are generating perceived market caps well in excess of what JOBS envisioned only a few years ago.  I argue that we (as lawyers, engineers, executives and financeers) should apply the rules of VC to most cases of crypto start-ups.

If you keep it small and raise healthy but modest capital, lets give three cheers for JOBS as we fly under the relative radar. But even JOBS has its own arbitrary designations for unaccredited investors and thresholds that pale in comparison with recent activity. So, given the scale of recent excitement, we are more likely to find oursleves in the feifdom of Dodd-Frank.

Another wishful hypothetical is, “What if we started small and didn’t do much diligence and now we find ourselves having raised tens of millions of dollars?” I don’t know but you better pump the brakes a bit and start trying to catch up with due diligence and KYC post haste.

By-the-way, universally applicable to ALL crypto start-ups, regardless of scale, are KYC, suspicious activity reporting and anti-money laundering statutes.

I will also caution that a start-up’s White Paper really needs to be lengthy, thoughtful, technically detailed and dry.  Any hint of a “Black Friday” circular will have the SEC shut you down under Dodd-Frank, the Securities Act and everything in between, faster than my 6th grader changes group chatting apps. Hence, the SEC suspension of The Crypto Company, citing concerns over the accuracy of representations leading to 2700x increase and adequacy of reporting holder positions.

Those are my novice thoughts and opinions on legality and compliance of cryptocurrency, which will likely be obsolete in six to twelve months.  The good news/bad news for a rapidly expanding industry is that where there is a lack of bad faith there is an abundance a room for defenses, leniency and forgiveness.

Thanks to The Reformed Broker for inviting me to express my 2cents (in USD).

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If you want to talk to Aaron or learn more about his practice, hit the links below…

LinkedIn:

Law Office of Aaron M. Goldsmith, PC

Twitter:

@PrimeTimeLawNow

Web:

PrimeTimeLawNow.com