Not Legal Advice 11/9/19 – Dai hits $100 million; Crime doesn’t pay; FBI Director Wray speaks to Congress

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

Once again, I’ve been remiss in typing up my weekly newsletter on a weekly basis due to travel – one of the downsides of solo practice is that one has no minions to dispatch to the far sides of the world – and this time, to San Francisco, where I did a panel with the inimitable Josh Stein of next-gen digital securities firm Harbor, among others, at SF Blockchain Week. Well done to the organizers for putting on a great conference.

This week’s a short one, as there really hasn’t been a whole lot in the last 14 days that I’ve found particularly interesting:

  • Dai hits $100 million in outstanding CDP contracts; crypto bros still don’t understand risk
  • Crime doesn’t pay: an update on the Brian Haney arrest
  • FBI Director Christopher Wray talks crypto to Congress.

1) Dai hits $100 million in outstanding CDP contracts; crypto bros still don’t understand risk

The Block reports:

The number of outstanding Dai has reached the protocol’s built-in “debt ceiling” of 100 million— an all-time-high for the nearly two-year-old stablecoin project. CDP 15336 minted the Dai that boosted the outstanding supply to its limit.

MakerDAO, the issuance platform behind Dai, had an original Dai debt ceiling of 50 million, which was raised to 100 million in July 2018. The MakerDAO team and community members plan to execute a governance vote this Friday to raise the debt ceiling by an additional 10-20 million.

Yes, a “decentralized stablecoin protocol” has “governance votes.” I’m not sure either.

The Block continues:

Early last week, the Maker Foundation announced that it will be rebranding its Collateralized Debt Position (CDP) in preparation for its November 2019 Multi-Collateral Dai (MCD) release. The new user interface of the Maker Protocol after the release of MCD will label CDPs as “Vault.”

What is “Dai,” I hear you ask? Dai is a so-called “stablecoin,” a cryptographic token which is designed to always hold a peg to a fixed, external unit of account – in Dai’s case, the U.S. dollar.

Dai accomplishes this, we are told, through a series of smart contracts on the Ethereum blockchain which issue the Dai coins and lock up an amount of Ether in excess of the Dai as collateral to back the “loan” which has been issued. This was known as a “collateralized debt position” but, perhaps because the organizers of the scheme have some dim awareness of the regulatory consequences of issuing securities which are backed by collateral pools and making them available for public sale, the Dai people are now changing the terminology of these smart contracts to “vaults.”

CDPs/Vaults expire in one of two ways. First, someone can pay back the Dai debt plus interest, which the scheme promoters misleadingly refer to as a “stability fee,” at which point the CDP dies and the locked Ether in collateral is returned. “Stability fees” can only be paid in MKR, another shitcoin which was issued by the original scheme organizers. In the alternative, if e.g. the value of the collateral pool is impaired, the CDP may be liquidated and the collateral used to repurchase Dai from the marketplace to ensure all Dai are backed by a quantity of Ether with a dollar value that is greater than or equal to the dollar value of all Dai in circulation.

How this works is a little complicated, but the team over at Reserve summarizes it well:

The process by which this happens is somewhat complicated. It involves two different on-chain auctions that try to raise enough capital to make the CDP debt free. To fully understand the process, you may have to spend some time thinking it through after reading it. If you don’t fully get it, don’t sweat it: full understanding is not necessary for following the rest of the analysis.

Here is how it works: first, a “debt auction” tries to repay the CDP’s debt through MKR dilution. The debt auction buys Dai, paying with newly minted MKR. The Dai is burned, to cancel the CDP’s outstanding Dai debt. The purpose of the debt auction is to ensure that the debt is repaid even if there is insufficient collateral in the CDP to repay the debt.

Simultaneously, a “collateral auction” buys MKR with the CDP’s collateral. The collateral auction sells enough collateral to cover the debt, accumulated interest (called the “stability fee”) and a liquidation fee. In Single-Collateral Dai, the liquidation fee is 13% of the collateral in the CDP — that is, they take 13% of the user’s locked up collateral capital when a user’s CDP gets auto-liquidated. The smart contract finally returns the remaining collateral to the CDP holder and burns all purchased MKR.

This is all, ultimately, just a complicated and extremely long winded procedure to repackage exposure to Ether in such a way as to drive demand for the MKR token. It is really only useful if you either (a) have a bunch of Ether and want to lever up and go long on more Ether or (b) you want to use a smart contract to obfuscate the source of your funds, which is something you really should not do.

The entire system is vulnerable to adverse movements in both ecosystems. As Dai is now expanding with “multi-collateral Dai” which is backed by many different kinds of coins, soon it will be vulnerable to adverse movements among a range of different cryptocurrencies.

The risk has not gone away. It has merely changed form. DeFi Bros have difficulty understanding this. e.g.

Current mood:

Long have I had suspicions about whether Dai is for real. My skepticism about the scheme before it launched was reinforced when the loss of one bot on one sketchy overseas exchange operated by an unnamed “third party market maker” resulted in the Dai dollar peg not just breaking, but shattering, until the bot was restored. Put another way, the brilliance of the Dai stablecoin system – at least back then – wasn’t the reason Dai held its dollar peg. A bot was.

And this isn’t me saying this. It’s the founder of MakerDAO, Rune Christensen.

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Put another way: back in 2018, the volume on busiest market in Dai by far, on a $1 million trading day, dropped to $300 when a single bot went down.

DeFi Bros struggle to understand why this is also problematic.

“In reality Dai remained stable on all other exchanges” is a worthless argument in that context. The context being that we just discovered that a huge chunk of the market was not bona fide trading. If most of the volume of the coin can be traded by one bot, were we wrong to trust the numbers before the bot was discovered? What reason do I have to trust the numbers now? What reason is there to trust the rest of that volume on other exchanges? How do I know they’re legit?

I’m not saying here that the MakerDAO team knows anything about these bot operations. Far from it. Indeed, Rune refers to a “third party market making bot.” A third party with whom I should greatly like to speak who, apparently, never decided to reveal him or herself to the world.

I don’t know who operated the bot. I also don’t know how the bot operator communicated this information about bots on Bibox (the exchange) to the wider world. I don’t know why they were spending all that time wash trading on Bibox or what they stood to gain from it. I don’t know why the wider crypto community and stablecoin bros alike were not the least bit distressed by this event. All I know is that it happened, and I have never seen an explanation for why the scheme should have worked when that bot was up yet it broke catastrophically when that bot was down, as occurred in January of 2018. In the last two years, journalists haven’t followed up.

What I do know is that there’s no magic or innovation in wash trading around a fixed price point to make a market look real, on the off chance that is indeed what’s going on.

Charts of derivatives that are repackaged exposures to Ether should look like they are repackaged exposure to Ether. Dai does not. In the eyes of a dispassionate observer this should raise questions about market integrity. When Dai first broke its peg in early 2018, daily trading volume was around $1 million and the total market cap was around $3 million. Now, daily trading volume has reached highs of up to $50 million. All of which is to say that to the extent that bot training wheels first put in place back in the day are still in place, those training wheels are being asked to hold up an increasingly large rider and will be placed under greater degree of stress.

I stand by my prediction, first made in 2017, that Dai will eventually implode. But for the bots, after it fell on its face in 2018 it would have stayed down, just like previous collateralized stablecoin schemes such as BitUSD and NuBits, both of which failed (in BitUSD’s case, it failed after five days). The bigger the scheme becomes, the more difficult it will be for Dai’s training wheels providers – mysterious figures in the shadows, operating bots that generate volume for fun and profit – to hold back adverse market movements.

If we learned anything about risk-obfuscating schemes from the global financial crisis, we know this: the bigger they get, the harder they fall.

2) Crime doesn’t pay: Silk Road trafficker pleads guilty

Breaking the law is bad and dumb. Breaking the law with cryptocurrency is exceedingly dumb. Hugh Brian Haney was arrested in July of 2019 in relation to Silk Road activity dating back to 2012; this week he pleaded guilty to two charges and now faces a maximum of 30 years in prison.

3) FBI Director Christopher Wray talks crypto to Congress.

Which brings us to our next news item. An interesting fusion of the crypto-means-cryptography universe and the crypto-means-cryptocurrency universe happened in Congress this week. As reported in CoinDesk:

Wray noted encryption is touching every aspect of emerging tech such as instant communications:

“Whether its cryptocurrency, whether it’s default encryption on devices and messaging platforms; we are moving as a country and world in a direction where if we don’t get our act together money, people, communication, evidence, facts, all the bread and butter for all of us to do our work will be essentially walled off from the men and women we represent.”

First, to clear something up: most cryptocurrencies DO NOT encrypt communications. Bitcoin is chief among these crypto-critters-that-don’t-encrypt-transactional-data. Bitcoin really only shields one bit of data – the private keys of the users – from government surveillance. But it doesn’t stop the government from tracking what different keyholders do and how funds on the Bitcoin blockchain move around.

Some privacy coins, such as Monero or ZCash, do encrypt transactional information. Opinions as to which method of encryption is superior and e.g. the merits of ZCash doing a weird international math druid ritual to generate the coin’s SNARK public parameters are legion and do not bear repeating here. What does bear repeating here is that it would be very foolish to presume that these encryption methods will be secure forever.

Second, we should be cautious before we throw encryption out the window. Crypto that can be defeated by the FBI can be defeated by anyone (which isn’t a dig at the FBI, it’s just reality – Fort Knox wouldn’t be safe if it had a secret, unguarded, publicly-accessible back-door, and neither is code under the same circumstances).

I have yet to watch the entire hearing (and will likely do so tomorrow) but from this little, brief tidbit, what’s interesting from my point of view is how cryptocurrency and cryptography are starting to crop up in the same breath. And, unlike the 2010s where the interesting tech was about sharing cat pictures, virtually all of the interesting tech I can think of operates in this weird zone of enabling dissenters, since platforms like Twitter and Facebook are essentially tools of the hard-left anti-Trump #resistance establishment now.

As my friend and Israeli secret agent Maya Zehavi observed:

And I added:

What a time to be alive.

Here’s a picture of some marmots, licensed under the Pixabay license.

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Not Legal Advice, 27 October 2019: Long-suffering Bitfinex plays the victim card, The Hinman Test is Dead, and Mr. Zuckerberg goes to Washington

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

Last week I didn’t write Not Legal Advice because I spent the week traveling to see clients and attend the Satoshi Sidetable and Free State Blockchain events hosted by Bruce Fenton and Chainstone Labs in Portsmouth, NH.

The conference was awesome, so thank you Bruce & team for the invitation to speak. Well worth the trip and I highly recommend it next year.

If you don’t know Bruce, you should make a point of getting to know him. Immediately.

Anyway. After a thoroughly high-energy week traipsing around the northeastern U.S. in my truck, I decided to spend my Sunday walking around in the trees and enjoying the crisp New England autumn, rather than sitting behind my computer.

I have no such excuses this week, however, so we are right back to it:

  1. Bitfinex claims it’s a victim
  2. Is the Hinman Test dead?
  3. Mr. Zuckerberg goes to Washington

1. Long-suffering Bitfinex plays the victim card

Poor Bitfinex.

First, in 2017, it gets subpoenaed by the CFTC. Then, in 2018, it’s reported that they’re under investigation by the DOJ. Then, also in 2018, major ringleaders at their (alleged) banker, Crypto Capital Corp (“CCC”), gets indicted by the feds and $800 million of Bitfinex money entrusted to CCC – without so much as a written contract, if the reports are true – gets seized. Then, in 2019, they are placed under investigation by the State of New York. Later in 2019 they got sued for $1.2 Trillion.

Then, this week, the President of CCC is arrested in Poland on money laundering charges… and the Polish prosecutors didn’t have very nice things to say about Bitfinex, apparently. CoinDesk reports:

Polish authorities claim that Molina Lee is wanted in Poland for laundering up to 1.5 billion zloty or about $390 million “from illegal sources,” according to the Polish report.

Authorities wrote that Molina Lee’s crimes included “laundering dirty money for Columbian drug cartels using a cryptocurrency exchange.”

Polish prosecutors claim that Crypto Capital held accounts in Bank Spółdzielczy in the town of Skierniewice and that Molina Lee and Bitfinex laundered illegal proceeds through the country.

Bitfinex didn’t take that allegation lying down, and responded:

In a statement released Friday, Bitfinex said it will “make its position clear” to U.S. and Polish authorities and will continue to pursue the funds that Crypto Capital lost. According to the statement, Crypto Capital had misrepresented its “integrity, banking expertise, robust compliance programme and financial licences” to Bitfinex.

Molina Lee is wanted in Poland for laundering up to 1.5 billion zloty (about $390 million) “from illegal sources,” according to reports in Polish newspaper W Polityce. Bitfinex denied rumors that it had played any part in the payment processor’s money laundering.

“We cannot speak about Crypto Capital’s other clients, but any suggestion that Crypto Capital laundered drug proceeds or any other illicit funds at the behest of Bitfinex or its customers is categorically false,” wrote Bitfinex general counsel Stuart Hoegner.

Poor Bitfinex!

The company is innocent until proven guilty, obviously, as this is America, but I think we can agree that the long-suffering Bitcoin exchange has had a rough ride. Quite the fall from grace for what was once the largest Bitcoin exchange, by volume, in the entire world.

2. Is the Hinman Test dead?

Ethereum is undoubtedly responsible for more legal confusion in the U.S. crypto-markets than any other project of its kind. The confusion began after Division of Corporate Finance Director William Hinman announced his so-called “sufficiently decentralized” test, or “Hinman Test,” in June of 2018, in this policy speech. It goes as follows:

Applying the disclosure regime of the federal securities laws to the offer and resale of Bitcoin would seem to add little value. And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions. And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value. Over time, there may be other sufficiently decentralized (emphasis added) networks and systems where regulating the tokens or coins that function on them as securities may not be required. And of course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.

I would like to emphasize that the analysis of whether something is a security is not static and does not strictly inhere to the instrument.

This was followed by pronouncements by SEC Chairman Jay Clayton in early 2019 to that effect. The SEC’s commentary was followed by additional statements in early October by CFTC Chairman Heath Tarbert that Ethereum was in fact a commodity and not a security, but at some later date a code fork could result in the coin becoming a security once again. He said:

“It stands to reason that similar assets should be treated similarly. If the underlying asset, the original digital asset, hasn’t been determined to be a security and is therefore a commodity, most likely the forked asset will be the same. Unless the fork itself raises some securities law issues under that classic Howey Test.”

To wit: Ethereum started its life as a securities offering and then became “sufficiently decentralized” in such a way that it lost its character as a security and became something else, but at some future date due to some future forking activity (*cough* proof of stake *cough*) the system might become a security again.

Mind you, when someone dares to point out that Ethereum should have been treated first and foremost as a security, what invariably happens – every single time – is that a number of legal eagles crawl out of the woodwork to point out that anything is capable of being treated as a commodity, including securities.

This is, of course, legally correct. But it’s not practically correct. Practically, someone re-launching Ethereum from scratch, line for line, with the same marketing, same documentation, and same code, will discover that the resulting product would undoubtedly be treated as a security, as I wrote in my blog post two weeks ago titled “If Ethereum were launched today, it would be a security.” Which I haven’t really heard any practitioner disagree with. Meaning the SEC would and should get involved in regulating the asset before the CFTC has even gotten out of bed.

Where the SEC claims that Ethereum transactions started as securities transactions but are no longer securities transactions, because transmogrification, I find no precedent anywhere in American law that supports the proposition that a security can become a non-security, much less then move back afterwards.

For this reason, I have  arrived, fairly recently, at a theory about the Hinman Test for securities transmogrification. My theory is that, since every system that has attempted to raise the Hinman Test as a defense (Kik and Telegram in particular) has been savagely rebuffed (sued) by the SEC, that the Hinman Test does not in fact exist, it is fiction, and that the most plausible explanation for the absence of enforcement action against Ethereum is that extremely aggressive lobbying by Silicon Valley venture firms convinced the SEC that Ethereum wasn’t a security despite the fact that it is, and it’s too late now for the SEC to turn back. Even though it should.

In a new development, the theory that the Hinman Test does not actually exist has been backed up by statements from the heads of the federal regulatory agencies themselves. Thanks to Nic Carter for asking this very insightful question:

Generally speaking, if a law isn’t written down in statute or isn’t found as a rule in the C.F.R., and there’s no precedent for it anywhere else, it doesn’t exist. SEC v. W.J. Howey, Co., a Supreme Court precedent, is the rule in this instance. That rule doesn’t permit for transmogrification. It asks one question, whether the thing in issue is a

a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits… from the efforts of the promoter or a third party

and if the answer to that question is in the affirmative, it provides no means by which a scheme can somehow turn back over the passage of time, enabled by regulatory forbearance, and erase its prior status because somehow the investment scheme becomes… too successful? Such a conception of the Howey Test defeats the Howey Test’s entire purpose, which is to restrain these schemes and ensure the term “investment contract” in the Securities Act is capable of eternally constituting “a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Howey, 328 U.S. 293 (1946). The purpose of Howey is to capture those schemes, not to allow them to wriggle away.

In the absence of  legislation from Congress, a contrary rule shouldn’t be adopted by federal regulatory agencies that are generally tasked with enforcing the law, not writing it.

The classification of Ethereum as a “used-to-be-a-security, transmogrified-into-a-commodity, and could one-day-be-a-security-again critter” is absurd. It makes no sense. It does not comport with existing law. It’s a lot of intellectual hoop jumping which could be very easily resolved by simply admitting that the federal regulatory apparatus made a mistake with Ethereum and doesn’t want to burn thousands of Ether investors, including large venture funds, in whose hands these Ether unregistered securities may be found.

Is it time to declare the Hinman Test dead? I think so. Question is, will the SEC correct course on Ethereum, which, due to the bloat and the fact that it is mostly run on nodes managed by one company, and its suspect premine, is likely one of the most centralized cryptocurrencies in existence? Especially since it is likely to only become more so if the promised migration to proof of stake/”Ethereum 2.0″ proceeds?

ADDENDUM, 28 OCTOBER 2019

A colleague points out:

Someone at DC Fintech week noted that in 2013 the SEC released a 21(a) report – like the Report on The DAO – for Eurex Deutschland, which offered security index futures. Security index futures are subject to SEC or CFTC jurisdiction depending on how many securities are in the index. Originally, the underlying was a broad-based securities index (based on various thresholds) – a commodity, subject to CFTC jurisdiction. It registered with CFTC. But over time, the underlying changed to a narrow index (after it crossed one of the thresholds) – which is considered a security, subject to SEC jurisdiction. It did not, however, register with the SEC, which the SEC says was unlawful. Like The DAO, however, the SEC chose not to impose penalties.

I see what you’re saying. Like it’s not a Howey analysis. It’s a mechanical thing – their index went from 5 securities <50% to 5 securities > 50%[,] in line with voluntary SEC/CFTC administrative guidance that created a bright line not present in the case law. That’s very different from a Howey investment contract turning into a non-investment contract by operation of invisible qualitative factors no one can really measure, in a real-world fact pattern, decided by a court.

Basically. And even if we were to look at this from a quantitative standpoint, 72 million Eth were issued in the pre-mine and 108,334,927 Eth are in existence today – meaning that the “security” component of the coin (the premined bit) is still 66% of the overall supply.

3. Mr. Zuckerberg goes to Washington

I’m so sick of hearing about Libra. As I said to Peter McCormack on his podcast:

The thing that really bothered me about the Libra whitepaper was that they think we’re stupid, they think we’re dumb, they think we were born yesterday… but in fact they’re the neophytes, they’re the newbies, they just showed up, and this is our house.

Facebook’s public statements on this project have all been long obfuscation and short substance, so I won’t waste your time with a detailed breakdown – all you need to know is that the company continues to not give straight answers about privacy, data protection, and regulatory treatment that anyone who has operated in cryptoland for more than a year will be familiar with and expect concrete responses to particular questions. Which the members of the House of Representatives were unable to ask, since (with the notable exception of Rep. Warren Davidson) it appears that every other member of the House Financial Services Committee can’t tell the difference between a blockchain and a chimichanga.

The live Q&A added little to the written testimony. Essentially, Zuck showed up in Washington and told the Congressmen that his company is woke af, meets diversity quotas, was there on a charitable mission to bank the unbanked, and if the Congress didn’t get out of his way, that American financial innovation would be leapfrogged by China. As his lieutenant David Marcus tweeted:

What I think Facebook doesn’t understand is that China never deplatformed anyone any American has read or listened to, or moderated any of their social media posts for political reasons. Facebook has.

The American populace doesn’t like it, doesn’t trust it, and isn’t going to be goaded into making it easy for a Swiss-incorporated for-profit “non-profit” to operate on American soil that gives Facebook unlimited access to our financial data whilst allowing Facebook to not actually go through the onerous regulatory process of operating a financial institution.

Buy Bitcoin.

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Not Legal Advice, 10/13/19 – Ethereum has a good week; Facebook has a bad week; Bitfinex has a worse week; Telegram has a terrible, horrible, no good, very bad week

Welcome back to Not Legal Advice, my weekly crypto and crypto-adjacent technology law newsletter-blog-series-thing! Subscribe via e-mail, WordPress, or RSS at the bottom of my homepage.

This week:

  1. SEC, CFTC and FinCEN remind everyone that money laundering is bad.
  2. Ethereum has a good week.
  3. Facebook has a bad week (Libra on the ropes, with withdrawals by Mastercard, Visa, eBay and Stripe adding to last week’s departure of PayPal).
  4. Bitfinex has a worse week (getting sued for $1.2 Trillion (with a T)).
  5. Telegram has a terrible, horrible, no good, very bad week (gets sued by the SEC in federal court).

1) SEC, CFTC and FinCEN remind everyone that money laundering with cryptocurrency is bad

Read their joint statement here.

I doubt that Jay Clayton, Heath Tarbert and Kenneth Blanco (head honchos of the SEC, CFTC, and FinCEN, respectively) would issue a statement just because they were hanging out drinking beer one afternoon and said, “hey, you know what would be cool? An announcement. That’s nearly as fun as interagency softball.”

What seems more likely is that this statement is framing a narrative that will be relevant for future enforcement. Keep your eyes open for what comes next.

2) Ethereum has a good week

The CFTC’s comments that Ethereum is to be treated as a commodity seemingly confirm that, despite robust securities enforcement by the SEC against Telegram, Eos, Sia, Paragon, and dozens of other projects, Ethereum is getting a free pass.

Read my write up where I argue that if Ethereum were launched today, it would be a security.

3) Facebook has a bad week (Libra on the ropes, with withdrawals by Mastercard, Visa, eBay and Stripe adding to last week’s departure of PayPal)

This was inevitable. As I wrote back when Libra broke cover in July:

If Facebook raised an army, this would be only slightly more hostile to the people of the United States than what is currently proposed. Big Tech doesn’t share American values and doesn’t care about American users. It doesn’t care about the unbanked. It cares about money. It cares about building defensive moats, i.e., monopolies. And Libra – the tech industry monopolization of global finance – is a phenomenal way to get both free money (the token represents, after all, an interest-free loan from Libra’s users) and a very deep, wide moat, not just for Facebook, but also for every other major category leader/tech monopolist on the planet.

After tumultuous Congressional hearings, regulatory pressure from the Europeans, the straw that appears to have broken the camel’s back was a letter from two U.S. Senators, Sherrod Brown (D-OH) and Brian Schatz (D-HI), to a number of payments infrastructure companies advising them that teaming up with Facebook would not be in their interests.

Sen. Brown of course has been a vocal opponent of Facebook’s forays into crypto from the start:

Here’s an excerpt from the 1.25-page letter the two senators sent to the CEOs of Mastercard, Visa, and Stripe. Salient passages include:

Facebook is currently struggling to tackle massive issues, such as privacy violations, disinformation, election interference, discrimination and fraud, and it has not demonstrated an ability to bring those failures under control. You should be concerned that any weaknesses in Facebook’s risk management systems will become weaknesses in your systems…

Your companies should be extremely cautious about moving ahead with a project that will foreseeably fuel the growth in global criminal activity.

Yikes. In other words, “Facebook is sailing into some rough seas. You sure you want to get into bed with that?”

The letter then concluded:

Facebook appears to want the benefits of engaging in financial activities without the responsibility of being regulated as a financial services company. Facebook is attempting to accomplish that objective by shifting the risks and the need to design new compliance regimes on to regulated members of the Libra Association like your companies. If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related payment activities, but on all payment activities.

This is government-ese for “check yourself before you wreck yourself.”

Visa, Mastercard, and Stripe promptly withdrew from the consortium on the 10th of October, as did eBay, joining PayPal, which withdrew the previous week.

Although as your correspondent put it on October 4th:

4) Bitfinex has a worse week (gets sued for more than $1 Trillion).

Bitfinex has been sued for $1.2 trillion (that’s “trillion” with a T) dollars in a lawsuit that alleges the company engineered the multibillion dollar 2017-18 cryptocurrency bubble and crash by printing fake Tether dollars. Read my write up.

5) Telegram has a terrible, horrible, no good, very bad week (gets sued by the SEC in federal court).

(With apologies to Judith Viorst.)

Telegram is a popular encrypted messaging app, not just among crypto-nerds, but among people everywhere. It is used by well north of 300 million DAUs (daily active users) who

  • are looking to encrypt their communications and think they’re too cool for WhatsApp, but
  • don’t know that they should be using Signal or Keybase.

In late 2017/early 2018, as Telegram blew past the 200 million DAU mark, the company decided to raise money in an ICO, or initial coin offering. The offering raised an astounding $1.7 billion (with a B) for a pre-product, pre-revenue blockchain system known as the “Telegram Open Network,” to have the ticker symbol “TON,” with tokens known as “Grams.”

Silicon Valley’s most storied investment firms practically fell over themselves to participate.

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LOL, rekt. From the Financial Times

The hiccup: in the TON investment documents, Telegram promised to launch the network by 31 October 2019 or, failing which, Telegram investors would have the option to recoup their investment, less expenses.

Telegram was, understandably, in a hurry to get the network live and the tokens issued before the end of this month (as it is, as of this writing, the 12th of October). Unfortunately for Telegram, on October 11th, the Securities and Exchange Commission filed an emergency action and obtained a temporary restraining order against Telegram preventing them from doing so, all but assuring that the company will fail to meet the deadline – and ensuring protracted litigation will interfere with the launch of the network for some time to come.

The structure of the offering was that (a) Telegram would pre-sell $1.7 billion of Grams to investors under Regulation D and S exemptions to registration (b) Telegram would retain $billions of dollars worth of Grams for itself and (c) after launching the network, those investors and Telegram itself would flood the U.S. markets with tokens.

The issue with this is that (a) apparently Telegram didn’t adhere to the strict requirements of Regulation D during the sale, (b) the SEC considered that not only the investment agreements to purchase Grams but also the Gram tokens themselves would constitute investment contracts, and (c) that Telegram was making efforts to sell, and planned to sell, these tokens direct into the U.S. markets through U.S. platforms e.g. Coinbase Pro et al.

And apparently Telegram then refused to accept service of a subpoena the SEC served on it overseas.

So the SEC sued Telegram and slapped it with a temporary restraining order ordering Telegram to appear in the New York federal district court on October 24th to explain itself.

Points to note? Despite what the SEC paints as a pretty open-and-shut case, Telegram’s counsel is Skadden, Arps, which is a little strange seeing as – to the extent Skadden advised on the original deal, as reported in the New York Times – one would think a firm as expensive as Skadden might have seen this coming or, at the very least, wouldn’t have advised Telegram to evade service of a subpoena. It’s of course impossible to know what was said behind closed doors, but now that I and others are starting to look at the Telegram sale more closely that’s one of the first questions that crossed my mind.

Equally, Skadden may be expected to mount a robust defense now that its client has been sued.

Furthermore, this paints the US as a thoroughly hostile environment for ICOs, despite the SEC’s repeated insistence on not enforcing against Ethereum in the past or the recent 60 basis point slap on the wrist given to the $4 billion Eos ICO. The overwhelming theme of the recent SEC enforcement, including Telegram, means that the best move for an ICO issuer not using the Regulation A+ issuance pathway trailblazed by Blockstack may be to avoid the United States entirely.

Obviously your mileage may vary and this column is called Not Legal Advice for a reason, but if there’s a takeaway point from this it’s to expect ICO activity in the U.S. to diminish going forward rather than increase.

This also calls into question the exchanges’ listing decisions to date, noting that the so-called Crypto Ratings Council classified both Eos and Grams as not being securities. Meaning that their ratings of anything that isn’t Bitcoin or Ethereum are, so far, 0-2.

And expect more enforcement.

And with that out of the way, time for your weekly Moment of Marmot:

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Land shark

Leibowitz et al. v. iFinex et al.: Fear and Loathing on the Blockchain

This is a cross-post. An earlier draft of this post was first published as a guest post in The Block on Tuesday, 8 October 2019. 

Leibowitz et al. v. iFinex et al., case 1:19-cv-09236, U.S. District Court, S.D.N.Y. [PDF]

TL;DR

  • Whether facts are true or not isn’t necessarily relevant for purposes of an initial motion to dismiss in the new Bitfinex class action
  • The strategy here may be to require the defendants to deny the claims, to answer and provide discovery, using a political tactic Hunter S. Thompson describes in his classic Fear and Loathing on the Campaign Trail
  • Each of the factual allegations in the complaint will need to be denied and refuted if an expected motion to dismiss isn’t granted, and the standards will be different than in state or federal regulatory enforcement proceedings

LONG VERSION:

There’s a passage in Hunter S. Thompson’s Fear & Loathing on the Campaign Trail where Thompson describes then-congressional candidate (and later U.S. President) Lyndon Johnson using a tactic Thompson referred to as “one of the oldest and most effective tricks in politics” to deep-six a competitor in a close race.

“The race was close and Johnson was getting worried,” Thompson writes, so Johnson “told his campaign manager to start a massive rumor campaign about his opponent’s life-long habit of enjoying carnal knowledge of his own barnyard sows.”

“‘Christ, we can’t get away calling him a pig-fucker,’ the campaign manager protested. ‘Nobody’s going to believe a thing like that.'”

“‘I know,’ Johnson replied. ‘But let’s make the sonofabitch deny it.'”

I was reminded of this passage when I read the filings in Leibowitz et al. v. iFinex Inc., et al., the new case against Bitfinex, Tether, and others filed by Roche Freedman LLP which alleges, among other things, that Bitfinex has engaged in massive market manipulation and was primarily responsible for the cryptocurrency bubble. This is not, mind you, because I think that the plaintiffs’ claims are (or are not) meritorious; one must be careful, at the early stages of any litigation, to not arrive at premature conclusions on the subject or the probable outcome based on one’s own biases, conjecture or rumor.

Rather, it strikes me that this tactic – make the sonofabitch deny it – is, for the purposes of cryptocurrency observers, traders, and others, the one relevant aspect of this litigation, at an early stage, which is actionable, by which I mean a data point around which one may make plans, measure risks, and direct one’s attention to future developments.

The claims made by the plaintiffs are spectacular. The plaintiffs allege unlawful market manipulation, principal-agent liability for market manipulation, aiding and abetting market manipulation, unlawful competition contrary to the Sherman Act, racketeering constituted by, among other things, operating an unlicensed money transmitting business, money laundering, and bank and wire fraud. Also named as co-defendants are Bitfinex senior executives and entities and persons implicated in the Department of Justice investigation into Crypto Capital Corp, an alleged international money laundering scheme which appears to have been truly immense in size.

Whether these claims are true or not is a matter for a New York jury to decide. What matters from our perspective, here and now, is (a) whether the claims are pleaded well enough to survive dismissal and (b) how disclosures made in this case will shed light on Bitfinex/Tether’s operations, and other investigations of those operations, as the discovery process progresses.

Now that the complaint has been filed, assuming it will be properly served on all defendants, the next step in this litigation is for Bitfinex et al. to either file an answer or immediately file a motion to dismiss. In particular, we should look for Bitfinex et al. to challenge these pleadings under FRCP Rule 12(b)(6) (as this case was filed in federal court), failure to state a claim upon which relief can be granted, as “a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atlantic v. Twombly, 550 U.S. 544 (2007). In other words, you gotta provide some factual specificity, particularly when fraud is alleged (FRCP Rule 9(b)).

Plaintiffs have set out extensive background information in order to jump the hurdle of Rule 12(b)(6)

It is highly likely that Bitfinex et al. will challenge these pleadings under Rule 12(b)(6). Perhaps anticipating this, the allegations set out in the (95-page) complaint are given together with an unusually thorough factual background. They tell the story of the entire 2017-18 cryptocurrency bubble and collapse through the lens of a keen-eyed detective who needs to get the court from zero to pro on all things cryptocurrency in a matter of pages.

This is done expertly. After setting out a high-level, attention-grabbing summary that explains that “Tether’s mass issuance of USDT created the largest bubble in human history” and that “[i]n a brash display of lawlessness, Tether and Bitfinex continue to defraud the market,” the complaint details Bitfinex’s operations and structure, Tether, and the history of Tether’s representations that it is constantly backed by U.S. dollars.

The complaint then digs into ancient Bitcoin history to explain how the cryptocurrency markets are uniquely susceptible to manipulation “[underscoring how control over an exchange and the opportunity to make trades with non-existent money allowed a single individual to dramatically influence cryptocurrency prices,” before embarking on a detailed treatment of how “Bitfinex and Tether [allegedly] leveraged USDT and their control of the Bitfinex exchange to inflate one of the largest bubbles in history.”

The complaint continues by exploring Bitfinex/Tether’s issues with access to the banking system, pointing out that while “access to the U.S. financial system was an essential component” of the scheme, “conventional banks began shutting Tether and Bitfinex accounts down for money laundering and other compliance issues and “Tether and Bitfinex [allegedly] became even more enmeshed with Crypto Capital,” a firm which has been shut down by the U.S. Department of Justice, and allegedly began “a complicated shell game of money laundering” despite the fact that “[s]tatements made by Bitfinex and Tether in that lawsuit underscore just how essential U.S. correspondent access was to their operations, and how losing it should have stopped their ability to operate and issue USDT.”

“Bitfinex and Tether were so desperate to access the U.S. financial system and U.S. dollars,” the plaintiffs allege, “that they were directing funds to Crypto Capital despite its clear connection to money laundering, account seizures, and an inability to move funds out.” Despite these banking issues, the plaintiffs further allege that “[i]n the short span of less than one month after Bitfinex and Tether closed the door to potential new market entrants, Tether issued more than 1 billion new USDT, all of which was supposed to be backed by U.S. dollars in bank accounts the Tether refused to disclose or audit.”

The complaint continues by providing the Court with notice of the ongoing investigation into Bitfinex’s operations by the Attorney General of the State of New York, in relation to which the plaintiffs further allege that disclosures arising in that investigation, “[I]f were was (sic) any doubt before, it’s now absolutely clear that Tether no longer has cash reserves to back USDT at a 1:1 ratio.”

As a result of the facts laid out, the plaintiffs allege that Bitfinex is civilly liable to them for losses suffered in the cryptocurrency markets as a result of Bitfinex’s “Bank Fraud[,] Money Laundering[,] Monetary Transactions Derived from Specified Unlawful Activities[,] Operating an Unlicensed Money Transmitting Business[,] and Wire Fraud[.]”

Legally relevant conclusions

So what do we take away from this?

To start, it is entirely possible that these allegations are untrue and Bitfinex and co. are veritable paragons of compliance and moral virtue. In the alternative, it’s possible that every word of the complaint is true.

We just don’t know.

What we do know is that the Bitfinex operation is under investigation from several angles and this new one is yet another straw on the proverbial camel’s back. From my review of the pleadings, it seems to me that the plaintiffs’ claims are backed by a sufficient factual basis that they will survive a 12(b)(6) motion to dismiss.

After that, who knows: it may settle, it may go to trial, it may get dropped. For now, however, I think this action is going to get over the first hurdle without too much difficulty.

The case cannot be ignored by Bitfinex; seeing as the plaintiffs allege an astonishing $1.4 trillion in damages, defaulting should be financially catastrophic.

Being a civil case, protections Bitfinex might be able to rely on in other contexts, such as the Fourth Amendment in any criminal action, arguing that the Martin Act doesn’t confer jurisdiction over Bitfinex’s activities, or arguing that an administrative subpoena served on it by the New York Attorney General is overbroad, won’t apply here. Discovery has the potential to be broader and deeper than Bitfinex has shown, to date, that it is comfortable with. The burden of proof is lower, too, than it would be with a criminal case (balance of probabilities rather than beyond a reasonable doubt).

Put another way, this is a very different ball game than what Bitfinex et al. have been playing to date. We may expect Bitfinex et al. to fight the case. But the case puts Bitfinex et al. on the spot: they have to have some basis to deny the factual allegations and the plaintiffs need only prove, on a preponderance of the evidence, that their allegations are true. The discovery process will go some way to revealing whether rumors of manipulation, money laundering and fraud are true, and the short-term future of the cryptocurrency markets may be greatly affected by the outcome of the exercise, and of this litigation more generally.

The thing for everyone to do, then, is watch this case. Very closely.

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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