Welcome back to the second installment of Not Legal Advice, my new newsletter-thing I publish every week where I discuss three (3) items of interest from the prior week in crypto or crypto-adjacent technology law.
Because it’s happened twice, now, it’s a tradition. Traditions are warm and fuzzy and wholesome. So gather ’round the fireside, little marmot friends, and let’s have a conversation about what happened last week, and why it’s relevant going forward:
- France won’t tax shitcoin trades (also they are going to ban Libra from Europe)
- A company called “Staked” creates the “Robo Advisor for Yield,” or as I like to call it, the “Risk Mega Enhancer”
- The Second Circuit Court of Appeals finds that Section 230 of the Communications Decency Act is, indeed, as broad as its detractors claim
1) France won’t tax shitcoin trades (also they’re going to ban Libra)
According to official pronouncements from the French economic ministry:
- Cryptocurrency transactions aren’t going to be subject to VAT.
- Cryptocurrency trading activity won’t give rise to a tax charge until the crypto is traded out into fiat.
Three things limit what I can say about the French rules.
First, my French is not very good.
Second, I’m not a French avocat, which in French means both “male lawyer” and “avocado.”
Third, even in the two countries (America and England) where I am an avocado, I am not a tax avocado.
It suffices to say that France’s treatment of cryptocurrency trading income and gains differs from the tax treatment in England and the U.S. The English guidance makes it clear that trading gains are either income or capital gains, depending on whether the so-called badges of trade are present. In practice, HMRC guidance tells us that it is likely that capital gains tax would apply:
Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. If it is considered to be trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business.
and what constitutes a chargeable asset for Capital Gains Tax purposes?
Cryptoassets are digital and therefore intangible, but count as a ‘chargeable asset’ for Capital Gains Tax if they’re both… capable of being owned… [and] have a value that can be realised.
And what events give rise to the charge?
Individuals need to calculate their gain or loss when they dispose of their cryptoassets to find out whether they need to pay Capital Gains Tax. A ‘disposal’ is a broad concept and includes… selling cryptoassets for money[;] exchanging cryptoassets for a different type of cryptoasset[;] using cryptoassets to pay for goods or services [; and] giving away cryptoassets to another person[.]”
What about in the U.S.?
The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability…
…For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.
It’s obviously more complicated than that, but you get the general gist. Speak to a tax avocado if you have further questions.
Oh, and Americans, one of the great things about being American is that the warm, loving embrace of the United States is always with you wherever you may be on this or any other world – as all the dual-nationals I know joke, “we keep the U.S. passport as it means we have a seat on the last helicopter out.” Yes, that’s how much Americans with EU passports trust European voters.
The price you pay for that privilege is that America always taxes you on your worldwide income wheresoever you may be. So don’t think that you can move to France, offload all that premined Ether you’ve been sitting on for years into BTC and avoid the tax hit. Speak to a skeptical and conservative American tax avocado first.
Also, good on France for saying it won’t permit Libra to operate in Europe, as currently proposed.
2) Robo Adviser For Risk
The only thing I like less than DeFi is a DeFi bro.
Lately a number of offerings have sprung up offering staggering, double-digit rates of interest for cryptocurrency holders who are willing to commit their savings to crypto-first lending institutions who then claim they have profitable lending businesses on the other end of the transaction. In a low- to negative-interest-rate environment, everyone everywhere is trying to figure out where they can find yield and, accordingly, where they can make money.
The hope, the dream, is that crypto has magically solved this, has found its killer app, in the form of high yield interest-bearing accounts. From Balaji:
No offense, but I don’t buy it.
First, a number of these businesses – and there are more than one – will turn out to be Ponzi schemes. We don’t know which ones, but they’re out there.
Second, there is no such thing as a free lunch:
Third, there are those who argue that risk is not the driver of high rates and that some other black magic is at work. Let us examine this argument from the perspective of a borrower, who for present purposes we shall call Bob.
The ballad of Bob the Borrower
Sally Saver deposits 100 ETH with Lily Lender, who promises Sally Saver a 5% rate of interest on her deposit. Lily Lender now needs to get that 5%, plus enough to cover her expenses, from somewhere.
Ordinarily, that means that Lily Lender needs to make a loan to Borrower Bob at a rate of interest greater than 5%. You can’t run a lending business at a loss forever to gain marketshare and adoption unless you’re burning through venture funds to do so, as some of these businesses appear to be doing. BlockFi, e.g., has made it abundantly clear that it is taking a tech-company approach to developing a lending business:
We are OK with losing money for a while. If it was purely formulaic we probably wouldn’t have enough control to make sure it’s attractive enough to a large amount of people to hit our customer acquisition targets.
I don’t have an issue with that strategy, as long as the ledger balances out and BlockFi has enough spare VC firepower to satisfy its obligations. But we should not mistake this development, which is likely being mirrored by BlockFi’s competitors, for a fundamental change in the nature of risk. The risk hasn’t disappeared, it has simply been transferred onto the companies themselves, and they are paying for it in the form of a subsidy.
Subsidies, of course, have this pesky little problem that they eventually run out. When this happens, the risk that has been buried by them rears its head and begins to manifest itself in pricing. The likely result will be that the rates offered to savers will go down, and cost of funds will go up, and there will be a liquidity crunch among those who relied on them.
Speaking of which, who does rely on these liquidity facilities? Nobody really knows; it is this writer’s observation that crypto lending companies are extremely opaque about their lending operations, no doubt to gain an edge.
With interest rates at historic lows, however, we can probably guess that the people who are willing to pay north of 10% to borrow DAI are doing so either (a) because they have an interest in seeing Dai or related financial products succeed and are willing to absorb enormous losses to create the appearance of a thriving market, (b) cannot obtain financing from literally any other source, or (c) in the case of over-collateralized loan protocol products like Dai, are seeking to obscure the source of their cryptocurrency wealth and are willing to absorb enormous losses to do so (by defaulting on the loan).
However, the fact remains: for every crypto loan product in existence, Bob the Borrower’s payments must be equal to or greater than Sally Saver’s returns in order for the product to be viable in the long term.
Back to our regularly scheduled programming…
“Staked Automates the Best DeFi Returns With Launch of Robo Advisor,” trumpets CoinDesk. Staked has built a product…
Staked’s new Robo Advisor for Yield (RAY) service, which launches today, automates the process of finding high-yielding opportunities. Normally, investors have had to watch constantly and reallocate quickly to catch an enhanced DeFi return. Now they can set a smart contract to do the monitoring and allocating for them.
“This product is targeted to people who hold eth or dai and want to earn yield on it,” CEO Tim Ogilvie told CoinDesk in an interview. “If you hold ETH, you can earn more ETH. If you hold DAI, you can earn more DAI.”…
With RAY, investors can put their assets (ETH, USDC or DAI) into an asset-specific pool and the smart contract will automatically invest all or part of that pool into contracts with the best yield at any given time. For now, it will invest only on the money market Compound and with the derivatives protocols DYDX and BZX. But Staked is vetting additional smart contracts for safety and reliability.
“We’re not necessarily saying we are going to beat the market. We’re just saying you’ll get the best of what a savvy watcher would get in the market,” Ogilvie said.
“The vision we are building toward is the same level of sophistication the fixed income markets have in traditional finance,” he added.
I’m not going to lie, this is pretty cool, and offerings like it remind me of, e.g., crowdsourced or robo-offerings from companies like Betterment or eToro that have done very well.
But the reason I don’t like DeFi bros claiming they reinvented structured finance, as alluded to in my tweet above, is because I am a child of the Global Financial Crisis… and indeed I spent the first half of my career, in the throes of that crisis, working in structured finance. The great lesson of the crisis was that you cannot engineer risk out of transactions, you can only obscure it: this is the first law of conservation of risk, or as my friend Palley put it years ago, “The First Law of Lawmodynamics.”
The first law of thermodynamics says energy “cannot be created or destroyed. It can, however, be transferred from one location to another and converted to and from other forms of energy.” Maybe the same is so of liability and damages. You can’t destroy or avoid either by building a better mousetrap. You can only move it, or (arguably) move the consequences of that liability elsewhere.
There’s risk somewhere in crypto, waiting to get out. A combination of regulatory intervention and Ethereum going the way of MySpace are possible avenues. As the subprime crisis showed, even the most professional, Ivy League-educated, well-dressed “Savvy Watchers” won’t see it until it’s too late and everyone is running for the exits.
Don’t make the mistake of thinking that Staked – or any other DeFi company – is providing you with guaranteed risk-adjusted returns. They’re not, and anyone who thinks they are, had better steel themselves for a very unpleasant surprise.
.@staked_us claims to be allocating assets efficiently with their new robo-advisor.— brock🍠 (@brockjelmore) September 14, 2019
They aren’t. The consistently are underperforming their @compound benchmark because they just look for highest rates and move their entire allocation there
Also no way to withdraw from their ui pic.twitter.com/7pb9ON4sd6
3) The Second Circuit Court of Appeals finds that Section 230 of the Communications Decency Act is, indeed, as broad as its detractors claim
This is more of a law nerd thing, so if you’re just here for the crypto, switch off.
Politicians hate Section 230 of the Communications Decency Act, 47 U.S. Code § 230, particularly Missouri Senator Josh Hawley. Who writes:
“With Section 230, tech companies get a sweetheart deal that no other industry enjoys: complete exemption from traditional publisher liability in exchange for providing a forum free of political censorship,” said Senator Hawley. “Unfortunately, and unsurprisingly, big tech has failed to hold up its end of the bargain.
That statement is half right. Section 230 grants a broad immunity from publisher liability for online platforms that engage in traditional publisher-like activities with regard to user-generated content. They do not have any obligation to provide that forum free from censorship; indeed, Section 230 expressly permits tech companies to engage in censorship more or less free from consequences.
Section 230 gives us two rules that are largely responsible for America’s success in building a thriving Internet economy. I explore Section 230 in detail here, but for present purposes it suffices to note that it essentially promulgates two legal rules:
- Platforms and users are not liable for content on their platforms that has been created by someone else (Section 230(c)(1)).
- If a web app moderates any content off of their platform, i.e. it deletes it, and anyone sues them for doing so, the person suing the web app is going to lose (the Section 230(c)(2)).
The case is Force v. Facebook. Force brought
an action for damages against Facebook pursuant to the Antiterrorism Act (“ATA”) and related claims for having knowingly provided material support and resources to HAMAS, a notorious terrorist organization that has engaged in and continues to commit terror attacks, including the terrorist attacks that killed 29-year-old Taylor Force, 16-year-old Yaakov Naftali Fraenkel, three-month-old Chaya Zissel Braun, and 76-year-old Richard Lakin, and injured Menachem Mendel Rivkin, and the families of these terror victims.
The plaintiffs alleged:
HAMAS has recognized the tremendous utility and value of Facebook as a tool to facilitate this terrorist group’s ability to communicate, recruit members, plan and carry out attacks, and strike fear in its enemies. For years, HAMAS, its leaders, spokesmen, and members have openly maintained and used official Facebook accounts with little or no interference. Despite receiving numerous complaints and widespread media and other attention for providing its online social media platform and communications services to HAMAS, Facebook has continued to provide these resources and services to HAMAS and its affiliates.
Facebook has knowingly provided material support and resources to HAMAS in the form of Facebook’s online social network platform and communication services.
The plaintiffs provided numerous examples of anti-semitic Hamas propaganda on Facebook over a period of years in their extensive, 61-page complaint, which I will not republish here. Each plaintiff sought not less than $1 billion in damages plus attorneys’ fees.
The problem the plaintiffs faced in bringing this action is that Section 230 of the Communications Decency Act was standing in their way. Recalling the literal text of Section 230:
No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.
the burden was on the plaintiffs to demonstrate why Facebook should be treated as the publisher or speaker of Hamas’ content. The parties stipulated to the fact that Facebook was a “provider… of an interactive computer service.” The plaintiffs thus disputed:
- whether Facebook were “acting as the protected publisher of information” under Section 230(c)(1), i.e., it was providing some other infrastructure function that was not intended to be captured by Section 230(c)(1); and/or
- “whether the challenged information is provided by Hamas, or by Facebook itself,” because if Facebook is an information content provider, even in some small part (see Section 230(f)(3)), the Section 230 immunity falls away.
Facebook as protected publisher of information
At minimum, the Section 230(1) immunity is thought to apply to standard categories of speech torts such as harassment or defamation. It provides American Internet companies with a near-total defense from those claims. This is in contradistinction to the European jurisdictions such as, e.g., England, and Section 5(3) of that country’s Defamation Act 2013.
How does this work in practice? Well, let’s go back to our friend Bob Borrower from Item 2 and introduce a new character, Dan Defamer, Speech Villain Extraordinaire. Let’s also assume, arguendo, that everything that comes out of the mouth of Dan Defamer, Speech Villain Extraordinaire, isn’t protected speech according to the First Amendment.
If Dan Defamer says of Bob the Borrower, in a newspaper article, “Bob Borrower is a no-good scalliwag who does not pay his debts,” Bob the Borrower may sue Dan Defamer and the newspaper for publishing the lie (whether he will win is another matter). If, however, Dan Defamer logs on to Twitter and repeats the lie there, in the plain and ordinary meaning of the term “publisher” Twitter is a publisher as much as the newspaper is. However, it is generally understood that Twitter is not, under U.S. law, treated as the publisher of the statement and therefore is not liable for its content. Twitter is not even under a legal obligation to remove it. Dan Defamer is the speaker and it is he who is liable for the consequences of the speech.
The question presented in Force is a slightly different one, though. Rather than challenging Section 230 for speech which is itself tortious, it attempts to attack Section 230 collaterally by alleging that Facebook’s provision of an online platform, which Hamas the terrorist group then accessed, meant that Facebook itself played a role in facilitating terrorism and, accordingly, was liable to pay damages to the plaintiffs under a specific federal law which provides that victims of terrorism can seek compensation from companies that commit, or aid, abet or conspire to commit, international terrorism:
By providing its online social network platform and communications services to HAMAS, Facebook violated federal prohibitions on providing material support or resources for acts of international terrorism (18 U.S.C. § 2339A), providing material support or resources for designated foreign terrorist organizations (18 U.S.C. § 2339B), and financing acts of international terrorism (18 U.S.C. § 2339C), and committed acts of international terrorism as defined by 18 U.S.C. § 2331. Accordingly, Facebook is liable pursuant to 18 U.S.C. § 2333 and other claims to the Plaintiffs, who were injured by reason of an act of international terrorism. (Emphasis mine.)
…By participating in the commission of violations of 18 U.S.C. § 2339A that have caused the Plaintiffs to be injured in his or her person, business or property, Facebook is liable pursuant to 18 U.S.C. § 2333 for any and all damages that Plaintiffs have sustained as a result of such injuries
The relevant statute, 18 U.S.C. § 2333, reads:
Any national of the United States injured in his or her person property, or business by reason of an act of international terrorism, or his or her estate, survivors, or heirs, may sue therefor in any appropriate district court of the United States and shall recover threefold the damages he or she sustains and the cost of the suit, including attorney’s fees.
In an action under subsection (a)… for an injury arising from an act of international terrorism committed, planned, or authorized by a [designated foreign terrorist organization, i.e. Hamas]… liability may be asserted as to any person who aids and abets, by knowingly providing substantial assistance, or who conspires with the person who committed such an act of international terrorism.
But the Court rejected the plaintiffs’ reasoning, stating that:
…it is well established that Section 230(c)(1) applies not only to defamation claims, where publication is an explicit element, but also to claims where “the duty that the plaintiff alleges the defendant violated derives from the defendant’s status or conduct as a publisher or speaker.” LeadClick, 838 F.3d at 175 (quoting Barnes v. Yahoo!, Inc., 570 F.3d 1096, 1102 (9th Cir. 2009))
Put another way, even though there is a statute which prohibits providing material support to terrorism, Facebook’s status as a publisher of user-generated content means that it benefits from Section 230’s immunity from being treated as the publisher or speaker of content provided by another information content provider. Facebook wasn’t helping Hamas produce content. Accordingly Facebook could not be found liable for hosting it.
Facebook as information content provider
If Section 230’s immunity applies to liability purportedly arising under 18 U.S.C. § 2333, the next logical step for the plaintiffs – and the argument they raised – was to try to disapply the immunity by arguing that Facebook actually helped to produce Hamas’ content.
This is sort of like a situation we’ve often seen in the Star Trek movies (in particular Star Trek II: The Wrath of Khan and Star Trek: Generations). You don’t have to blast your way through the shields if you can trick the enemy into dropping them.
In Section 230 terms, “dropping the shields” means Facebook would be doing the talking or making other affirmative and material acts that “develop” the content in issue. The plaintiffs contended:
Facebook provided “to HAMAS use of Facebook’s data centers, computer servers, storage and communication equipment, as well as a highly-developed and sophisticated algorithm that facilitates HAMAS’s ability to reach and engage an audience it could not otherwise reach as effectively,”
Which the court understood to mean:
Plaintiffs contend that Facebook’s algorithms “develop” Hamas’s content by directing such content to users who are most interested in Hamas and its terrorist activities… we have recognized that a defendant will not be considered to have developed third‐party content unless the defendant directly and “materially” contributed to what made the content itself “unlawful.”
But the court was not convinced that this was the case.
Pointing to the Ninth Circuit’s decision in Kimzey v Yelp! Inc., the court points out that the “‘material contribution test… ‘draws the line at the crucial distinction between, on the one hand, taking actions… to… display… actionable content and, on the other hand, responsibility for what makes the displayed content [itself] illegal or actionable.”
Accordingly, the court held that Facebook, in this instance, was not materially contributing to Hamas’ content; “arranging and distributing third‐party information,” the majority opined, “inherently forms ‘connections’ and ‘matches’ among speakers, content, and viewers of content, whether in interactive internet forums or in more traditional media. That is an essential result of publishing.” i.e., Facebook was staying in its lane as an interactive computer service provider.
The court concluded:
Accepting plaintiffs’ argument would eviscerate Section 230(c)(1); a defendant interactive computer service would be ineligible for Section 230(c)(1) immunity by virtue of simply organizing and displaying content exclusively provided by third parties,”
and further that
Plaintiffs’ “matchmaking” argument would also deny immunity for the editorial decisions regarding third‐party content that interactive computer services have made since the early days of the Internet [under Section 230(c)(2)].
Litigants have made many attempts, through many different means, to try to hold interactive computer service providers engaged in the publishing of third-party content but not creating that content liable as if they were a publisher.
Section 230 means what it says. The court points out that courts have properly “invoked the prophylaxis of section 230(c)(1) in connection with a wide variety of causes of action, including housing discrimination, negligence, and securities fraud and cyberstalking.” And now, the Second Circuit has affirmed that this includes liability under terrorism statutes as well.
Moment of zen
Glad to know ConsenSys reads this blog. Will have to feature them more often!