Not Legal Advice, 7 October 2019: US-UK forced decryption; Bitfinex publishes bizarro blog post; Eos slapped on wrist; NYT publishes atrocious free speech op-ed

Welcome back to this week’s edition of Not Legal Advice!

This week:

  1. Even though the reported U.S.- UK data sharing agreement will be silent on the encryption question, will it nonetheless result in forced decryption of American communications by British law enforcement as result of British domestic law?
  2. PayPal pulls out of Libra.
  3. Bitfinex thinks it is about to get sued; management pulls out tinfoil hats, publishes bizarro blog post.
  4. Eos gets slapped on the wrist by the SEC.
  5. NYT publishes atrocious op-ed on free speech, gets the law totally wrong; author rightly pilloried.

Let’s get started!

1) Will the reported U.S.- UK data sharing agreement result in forced decryption of American communications by British law enforcement?

Not much to say here except to check out this blog post, which was a follow-up to this blog post.

2) PayPal pulls out of Libra.

Facebook’s cryptocurrency project is running into some major headwinds, with one of the most sophisticated payments partners, PayPal – of which Libra chief David Marcus used to be CEO – pulling out on Friday.

The WSJ reports:

The San Jose-based payments company “made the decision to forgo further participation” in the Libra Association, the group backing the libra cryptocurrency, a spokesman said in an email. PayPal remains supportive of libra’s mission and will continue to discuss how to work together in the future, the spokesman said.

PayPal’s announcement comes days after [the WSJ reported that Visa Inc., Mastercard, Inc., and other financial partners that had agreed to back libra are reconsidering their involvement following a backlash from U.S. and European government officials.

Are we surprised? As I put it on Tweeter:

Not much more to add.

3) Bitfinex thinks it is about to get sued; management goes full-on tinfoil hat, publishes bizarro blog post.

Long-suffering cryptocurrency exchange Bitfinex published a blog post today titled “Bitfinex Anticipates Meritless and Mercenary Lawsuit Based on Bogus Study.”

From their blog, as well as a near word-for-word copy on Tether’s blog:

Bitfinex is aware of an unpublished and non-peer reviewed paper falsely positing that Tether issuances are responsible for manipulating the cryptocurrency market. Bitfinex vigorously disputes the findings and conclusions claimed by that source, which rely on flawed assumptions, incomplete and cherry-picked data, and faulty methodology.

We fully expect mercenary lawyers to use this deeply flawed paper to solicit plaintiffs for an opportunistic lawsuit, which may have been the true motive of the paper all along. In fact, we would not be surprised if just such a lawsuit will be filed imminently. In advance of any filing, we want to make clear our position that any claims based on these insinuations are meritless, reckless and a shameless attempt at a money grab. Accordingly, Bitfinex will vigorously defend itself in any such action…

…These baseless accusations are an attempt to undermine the growth and success of the entire digital token community, of which Bitfinex and Tether are key parts. It is an attack on the work and dedication of not just Bitfinex’s stakeholders, but thousands of our colleagues, too…

…All Tether tokens are fully backed by reserves and are issued and traded on Bitfinex pursuant to market demand, and not for the purpose of controlling the pricing of crypto assets. It is irresponsible to suggest that Tether or Bitfinex enable illicit activity due to the efficiency, liquidity and wide-scale applicability of Tether’s products within the cryptocurrency ecosystem.

“Mercenary lawyers.” What is this, the A-Team?

The upshot is that someone thinks they can make a market manipulation case against Bitfinex/Tether and they’re trying to get out in front of it. If I had to guess, a settlement offer expired yesterday and Bitfinex is expecting to be sued shortly and served shortly thereafter.

It’s not the PR strategy I would have counseled them to follow; although “the lady doth protest too much, methinks” is not a rule of evidence, it is one of public perception, and responding to perceived legal slights is often the sort of thing where the Streisand Effect should always be kept in mind, and often, less is more.

As for the rest, well, considering Bitfinex is under investigation by the Attorney General of New York, that by its own admission $850 million of its funds were seized in a federal seizure of an allegedly unlawful offshore banking and money laundering operation, the loss of which is alleged to have been covered by Bitfinex loaning itself Tether’s funds, there’s a lot to unpack in the blog post that I won’t get into here.

But that’s just “conspiracy fud,” folks. Don’t worry about it.

Market manipulation is of course a serious charge and Bitfinex and Tether are of course innocent until proven guilty (and not liable until shown liable on preponderance of the evidence), but don’t let anyone – even Adam Back – convince you that you should stop being skeptical of anyone’s claims in this industry.

4) Eos slapped on the wrist by the SEC.

Eos, for those of you who were living under a rock in 2017, is a huge, ICO-funded blockchain project which claims to have sold more than $4 billion – that’s billion with a “B” – in its Eos tokens in a token sale to, among others, US investors, in a year-long rolling Initial Coin Offering in 2017-18.

Eos was allowed to pay a $25 million (with an “M”) dollar fine, received a bad actor disqualification waiver from the Commission, and then was permitted to walk away with no further action from the SEC. On the same day, coin scheme SIA paid penalties and disgorgement of approximately $225,000 on a $120,000 token sale.

Put another way, Sia paid a penalty worth 187% of the original raise. Eos paid 0.06%.

When we consider how other small schemes like Protostarr, Airfox and Paragon have also received comparatively harsh treatment from the SEC, with the schemes being shut down completely prior to launch (Protostarr) or subject to penalties plus a requirement to register the securities being imposed (Airfox and Paragon) or subject penalties and disgorgement in excess of the amount of the original raise (Sia), the cryptocurrency world predictably exploded with howls of outrage, exacerbated by the fact that many of Eos’ ringleaders have been involved in other ICO schemes as well.

The inimitable Nic Carter referred to the SEC-imposed penalty as “shockingly weak.” Entrepreneurs are predictably unhappy at the perception of an uneven playing field where the worst offenders appear to get lenient treatment.

My thoughts are as follows.

First, I have a hunch this isn’t the last we’ll be hearing about Eos.

Second, Eos had very good lawyers.

Third, This is not a ‘green light’ to other companies to begin printing tokens in the U.S. with abandon. Any entrepreneur considering doing so is more likely to share the fate of Paragon or Protostarr, or worse, than of EOS. Obey the law.

Fourth, entry into this settlement will make it difficult for EOS to argue that what it did in 2017 wasn’t an offer and sale of securities in subsequent litigation, even though, as my friend Palley points out over at The Block, “[i]t’s not an Article III judicial proceeding; it’s an order entered in an Article I administrative proceeding.” Which there may be a bit of in the future, considering demand for Eos appears to be tepid.

Finally, I don’t understand how Eos is still listed on U.S. exchanges. The EOS coin’s life may be correctly understood as occurring in two phases: the first, during the ICO, as an ERC-20 on the Ethereum blockchain, and the second, as a mainnet token on the Eos blockchain. I fail to see that under circumstances where the SEC considered the ERC-20 as a security, the Eos mainnet token – which serves no useful function but as a money-substitute and for financial speculation – should not be.

Exchanges are of course free to take a view on this (indeed, a recent rating report from a nascent rating agency, the “Crypto Rating Council,” made up of… you guessed it, all the exchanges, rated Eos a “3.5” on its “is it a security?” scale, when 0 equals definitely not a security and 5 equals a security, on the same day that the SEC found that Eos’ presale coins were securities), but I tend to take a cautious view. De gustibus non est disputandum, I guess?

5) NYT publishes atrocious op-ed on free speech, gets the law completely wrong; author justifiably pilloried.

Advocates of limiting free speech are some of the sloppiest thinkers around:

To which I replied:

Marantz’s thesis is as follows, as printed in the New York Times:

The founders of Facebook and Twitter and 4chan and Reddit — along with the consumers obsessed with these products, and the investors who stood to profit from them — tried to pretend that the noxious speech prevalent on those platforms wouldn’t metastasize into physical violence…

…No one believes that anymore.

I absolutely believe it. People were violent before Twitter and Reddit. The problem with Marantz and his ilk is that they conflate legal speech they don’t like with illegal speech which is already banned in order to try to argue that the speech they don’t like, which they are now required to confront given that everyone everywhere has the ability to publish globally for free, should be treated in the same way as unlawful speech.

In a nation of laws, speech doesn’t cause violence, just like guns don’t cause violence. Extremely high time preference individuals with no self control or various flavors of delusion cause violence. Normal people usually do not, no matter what they read or hear.

Or what caliber of firearm is on their hip.

Everyone knows that if you break the rules, you go to jail. For normal folks that is incentive enough to not break the rules. For extremely high time preference individuals, it isn’t, and they wind up in jail. Banning categories of speech because a small number of high time preference individuals express violent ideas and also commit violence is like trying to solve illegal electric scooter riding on sidewalks by banning sidewalks.

It’s ludicrous. If the threat of imprisonment is not enough to prevent someone from violating every norm of civilized conduct, it does not logically follow that the solution to uncivilized conduct is to regulate the thoughts and words of civilized people. We should either increase the penalties for unlawful conduct, or (preferably) start addressing deficiencies in education and career prospects that result in young people having criminally high time preferences to begin with.

What the pro-censorship crowd doesn’t tell you – likely because they are not formally schooled and therefore are not aware – is that things like threats and unlawful harassment already have legal remedies. Threats are illegal; if someone threatens you on the Internet, you can and should contact the FBI. Harassment is actionable; if someone harasses you on the Internet you can and should sue them, and if you don’t know who they are, sue them on a John Doe basis and subpoena the platform for their identity.

American free speech rules don’t protect threats and harassment. This includes coordinated doxing campaigns (see Gersh v. Anglin, 353 F. Supp. 3d 958 (D. Mont., 2018)). Our rules do protect trolling, offensive memes, and offensive beliefs. These should not be confused with threats or harassment because they’re not threats or harassment.

“Speech is/causes violence” is a dumb meme. Protected speech can, at worst, offend. It doesn’t cause violence. Nobody I know in law or in law enforcement – i.e., people who are at the coalface when it comes to issues of speech and violence – actually believes it does. Sticks and stones won’t break your bones. A post on 8Chan which advocates an offensive or even evil idea is incapable of killing anyone. In fact, a post on 8Chan which merely advocates an idea is incapable of doing so much as putting a scratch on anyone.

More likely than anything, a post on one of these platforms is likely to flag the presence of a dangerous individual to law enforcement, who can then take appropriate action to make our communities safe.

Commentators like Marantz who have never seen a search warrant before should have taken the time to make themselves aware of how these things actually work. However, he and his fellow travelers, more often than not, haven’t done their due diligence. This much is evidenced by the fact that the Marantz op-ed contains multiple glaring mistakes, including e.g., per this correction:

An earlier version of this article misidentified the law containing a provision providing safe haven to social media platforms. It is the Communications Decency Act, not the Digital Millennium Copyright Act.

Mother of God. For an essay that’s apparently drawn from an upcoming book that purports to be a meaningful contribution to the conversation about free speech in America, this isn’t some minor error. This is a howler. 

There are absolutely zero similarities between 17 U.S. Code § 512 and 47 U.S. Code § 230. They were passed in two different Congresses. They are contained in two very-far-apart and unrelated chapters of the U.S. Code. They deal with completely different subject matter. To confuse them is to reveal that you haven’t actually read the statute, because there’s no way anyone who speaks English as a native language could ever get these provisions mixed up.

Then there are the remaining, uncorrected errors:

What if, instead of talking about memes, we’d been talking about guns? What if I’d invoked the ubiquity of combat weapons in civilian life and the absence of background checks, and he’d responded with a shrug? Nothing to be done. Ever heard of the Second Amendment?

First, virtually all firearms, including Grandpa’s .308 for deer hunting, were, at one point in our history, suitable for combat. Even the Ruger 10-22, which, being a .22, is regarded as a good “first rifle” for kids to learn the basics of firearms handling, has present-day military applications. The same is true of practically any device which is designed to concentrate a lot of kinetic energy on a small area with precision at a distance, including a compound bow or a slingshot. That’s why they’re called “weapons.”

Second, most gun purchases are accompanied by a background check. This is due to the provisions of the Brady Act, 18 U.S. Code § 922(t)(1), which requires a check to be performed for all commercial firearms purchases and interstate transfers/transfers from federal firearms licensees. Millions of background checks are performed by the federal government each and every month.

Using “free speech” as a cop-out is just as intellectually dishonest and just as morally bankrupt. For one thing, the First Amendment doesn’t apply to private companies. Even the most creative reader of the Constitution will not find a provision guaranteeing Richard Spencer a Twitter account.

Um, wrong. They will find a provision guaranteeing Twitter the right to provide anyone with a Twitter account, together with Section 230 of the Communications Decency Act (not the Digital Millennium Copyright Act) which furthermore renders Twitter immune from liability for very nearly anything their users post, even where the user is a designated foreign terrorist organization (see the recent decision of the Second Circuit in Force v. Facebook).

Some sane conclusions about an abysmal take

To sum up, people who call for the First Amendment to be repealed, including ones who get very prominently placed op-eds in nationally-distributed papers of record, (a) don’t understand the law, (b) in any discussion about law reform, are uniquely unqualified to participate in the discussion and (c) are usually complaining about conduct which is already sanctionable if the victim of the conduct is willing to get off his or her duff and sue, or (d) are complaining about constraining the speech of people they disagree with, who are usually, lazily, referred to as “Nazis,” including by Marantz (see tweet at top of this section).

As it turns out, most if not all of the people so called are not, in fact, Nazis. For example:

About President George W. Bush, billionaire Democratic contributor George Soros said, “(He displays the) supremacist ideology of Nazi Germany,” and that his administration used rhetoric that echoes his childhood in occupied Hungary. “When I hear Bush say, ‘You’re either with us or against us,'” Soros said, “it reminds me of the Germans.” He also said: “The (George W.) Bush administration and the Nazi and communist regimes all engaged in the politics of fear. … Indeed, the Bush administration has been able to improve on the techniques used by the Nazi and communist propaganda machines.”

Seriously? George “painting on his ranch quietly minding his own business” Bush? Even if he were (and for avoidance of doubt he is not), it would not matter, because in America, even the literal Nazis have speech rights, per the Supreme Court of the United States. See National Socialist Party of America v. Village of Skokie, 432 U.S. 43 (1977). As Justice Alito put it in (the unanimous, 9-0 decision in) Matal v. Tam,

[The idea that the government may restrict] speech expressing ideas that offend … strikes at the heart of the First Amendment. Speech that demeans on the basis of race, ethnicity, gender, religion, age, disability, or any other similar ground is hateful; but the proudest boast of our free speech jurisprudence is that we protect the freedom to express “the thought that we hate.”

Even people who espouse ideas we hate have rights.

Law reform isn’t an emotional discussion, it’s a technical one that benefits from professional knowledge and level heads. In an increasingly rancorous political environment, let’s try to keep it that way.

Finally, here’s your weekly moment of marmot, brought to you courtesy of the Pixabay licence.

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