A US lawyer looks at the risks of hard forks

Bitcoin is a peer-to-peer electronic cash system designed to allow online payments from one party to another without going through a financial institution. More than $100 million worth of Bitcoin transactions are now made every day. Some development teams are now advocating to change Bitcoin's consensus protocol through a so-called "hard fork" to replace the existing Bitcoin platform. One group calls their alternative software "Bitcoin Classic" while another calls their alternative software "Bitcoin XT."

Hard forks are inherently non-backwards compatible and require network participants to adopt new software. If not all participants take the same action, the Bitcoin network will have more than one set of consensus rules, which will cause Bitcoin users to follow different accounts (i.e., blockchains). Alternative software will create a new virtual currency and result in inconsistent transaction records. "Hard forks" are not the same as "software forks" of open source projects, which are a copy of existing software.

If either Bitcoin Classic or BitcoinXT is implemented, their creators may face serious legal consequences and criminal liability. Satoshi Nakamoto, the creator of Bitcoin, has always remained anonymous and therefore not under the control of law enforcement agencies. Surprisingly, the creators of Bitcoin Classic and BitcoinXT are not only publicly identified, but many of them live in the United States.

Require creators to register with FinCEN

The Financial Crimes Enforcement Network (FinCEN) is the U.S. Treasury Department’s agency responsible for combating domestic and international money laundering, terrorist financing, and other financial crimes. FinCEN has issued a number of guidance and interpretations regarding the applicability of the Bank Secrecy Act to persons who create virtual currencies.

Bitcoin Classic and BitcoinXT (the new currency, not the software) will likely be treated by FinCEN as a new convertible virtual currency. FinCEN has made it clear that creators of convertible virtual currencies who sell them in exchange for real money or its equivalent (including exchanging existing bitcoins) will be treated as money transmitters. On the BitcoinXT webpage, the names of the developers who have control over the currency are listed, and the name of the Bitcoin Classic development team is also public. Under this approach, the creators of Bitcoin Classic and BitcoinXT will need to register with FinCEN as money service providers. Failure to register can result in up to five years in prison, as well as civil penalties. This does not include state penalties, as some states also regulate creators of virtual currencies.

Request to add anti-money laundering protocol to Bitcoin Classic or BitcoinXT

In addition to the registration requirement, money service providers must also maintain effective anti-money laundering programs and record and report suspicious activities. In order to do this, money service providers must know who their customers are.

These requirements would require the new Bitcoin protocol to retain the personally identifiable information of its users. This could be done through software code in a similar way to current Bitcoin exchanges.

The current Bitcoin protocol does not have the personal identity information of users. Implementing such a requirement would significantly change the Bitcoin protocol. Bitcoin Classic and BitcoinXT with this information may be more accepted by financial institutions, but it would go against the essence of Bitcoin. The design of Bitcoin itself allows users to conduct financial transactions without going through financial intermediaries and complex procedures such as identifying users.

Impact on exchanges and wallets

Bitcoin exchanges not only create a platform for buying and selling Bitcoin, but also act as wallet service providers, keeping Bitcoin for customers. The implementation of the hard fork requires exchanges to distinguish between the original Bitcoin and Bitcoin Classic or BitcoinXT Bitcoin, because customers may have interests in different types of Bitcoin. Exchanges cannot mix the two types of Bitcoin because each type represents a different interest. In addition, the market price of each type of Bitcoin may be different, complicating the decision-making of investors and users.

A hard fork will hurt Bitcoin’s liquidity and undermine exchanges’ ability to operate legally. There is no doubt that Bitcoin’s market price will be significantly affected. The market impact of a hard fork is completely unpredictable.

Potential Liability for Miners Adopting New Protocols

Miners who unilaterally adopt new alternative software may face legal liability for tort or statutory claims. A tort is a wrongful act or violation of rights that results in civil liability. Trespassing on another's personal property by intentionally interfering with it is a tort. If someone expects to receive regular Bitcoins but receives Bitcoin Classic or BitcoinXT as a result of the miner's actions, the recipient can say that the miner's actions have deprived him of the money. If the market value of the two virtual currencies is different, damages will be easy to prove.

There are also computer crime laws in many states that could apply to miners who unilaterally convert bitcoins into new virtual currencies. Bitcoin users expect their transactions to be processed by miners through the established bitcoin protocol, and miners should be cautious if they want to interfere with this expectation.

in conclusion

The currently proposed hard fork software appears at first glance to be a reasonable solution to Bitcoin's economic growth problem. However, due to the lack of consensus among Bitcoin network participants, its implementation would have serious legal consequences for its creators unless the creators abide by the Money Service Provider Registration and Rules. In addition, the hard fork would cause serious operational problems for exchanges and wallet operators, create liability risks for participating miners, and bring unnecessary market disruption.

Author: Daniel Friedberg is a principal at Riddell Williams PS LLP in Seattle. Daniel specializes in representing fintech businesses, including virtual currency creators, wallets, blockchain companies, miners, and exchanges, as well as peer-to-peer lenders, crowdfunding, payment companies, and data security companies. Daniel is a Bitcoin advocate and holder.

Original article: http://www.riddellwilliams.com/blog/articles/post/hard-fork-conspiracy-treacherous

Translator's note: The author is an American lawyer and the articles reflect American legal views. The translator has not received legal training and cannot confirm the accuracy of the views in the article. If you have any questions, please consult your legal representative.