Hard Fork May Cause Legal Problems to Miners and Developers, Lawyer Says

News and Analysis

With the commonly acknowledged lack of general consensus in the notorious block size debate, the community may eventually face unexpected legal problems in case a hard fork is implemented, according to Daniel Friedberg, head of an American law company Riddell Williams PS.

In his recent post he outlined the issues that may arise in the consequence of a hard fork.

“If either the Bitcoin Classic or the BitcoinXT plan (or both) goes forward, the creators of the replacement software could face serious legal consequences and potentially criminal liability for their actions,” Daniel Friedberg wrote.

In case bitcoin experiences a hard fork, the post describes, the resulting currency will be legally different from the initial Bitcoin, as it would incorporate different code. However, while Bitcoin in its current state may be an unpleasant thing for financial regulators like FinCEN, there’s no one they can hold liable for issuance thereof, as the creator of Bitcoin succeeded in remaining anonymous. On the contrary, the names of possible originators of the hard fork in question are commonly known.

Friedberg clarified that a hard fork does not necessarily require registration with FinCEN and compliance with its regulations. The issue mostly covers the cases when the new currency’s creators may be considered administrators thereof as they exercise control over the currency. However, in case of Bitcoin Classic, the lawyer believes, this is exactly the case.

“FinCEN has made it clear that a creator of such convertible virtual currency, who issues such currency in order to sell those units for either real currency or its equivalent (including presumably an exchange with current bitcoin), is deemed to be a money transmitter. In the case of BitcoinXT, a website names the specific developers who have final say over the currency. The Bitcoin Classic development team is also publicly named. Under this approach, the creators of Bitcoin Classic or BitcoinXT would need to register with FinCEN as a Money Service Business (“MSB”). Failure to register can result in imprisonment of not more than 5 years, as well as civil penalties,” the post reads.

The regulations essentially incorporate AML and KYC policies, which are very unlikely to be adopted, as the move may potentially scare the lion’s share of any cryptocurrency company’s clientele.

Friedberg goes on to say that, apart from arising of liability before financial regulators, a hard fork may also cause legal problems to miners. In particular, the forking may surprisingly constitute a tort, i.e. a wrongful act or an infringement of a right leading to civil legal liability, as Friedberg defines it himself.

“A trespass to chattels is a tort whereby a party intentionally interferes with another person’s personal property. To the extent that a recipient of bitcoin expects normal bitcoin but instead receives “Bitcoin Classic” or “BitcoinXT” virtual currency due to the actions of a miner, that recipient could argue that the actions of the miner resulted in a dispossession. To the extent that the market value of the two types of virtual currency differ, damages would be easy to prove,” Friedberg describes the issue.

In addition, several computer crime laws may become applicable to miners who unilaterally convert classic Bitcoin to Bitcoin Classic. Bitcoin users have a business expectation that their Bitcoin transactions will be processed by miners using the established Bitcoin protocol, Friedberg says and calls miners to be extremely cautious in that case. Failure to do so may result in numerous legal charges, he believes.

Market consequences of a hard fork may also be adverse to the resulting currency. Speaking about two different Bitcoins after the fork, Friedberg noted:

“Exchanges could not mix or intermingle the two, as each has its own rights. In addition, the market price of each coin would likely differ, complicating the decision-making of investors and users.”

The community, however, was generally dismissive about Friedberg’s concerns related to possible confusion as a result of the fork.

“Anyone who knows what they are doing and uses an updated wallet will clearly know the difference between coins in both forks. This is like saying that someone might sue you for giving them USD when they expected Canadian dollars,” said redditor klondike_barz.

However, some community members that the post may have arised an important question worth further discussion.

“An exchange backing a larger block fork that winds up on the losing side would be dead-to-rights guilty of outright fraud for selling fake coins,” said another reddit user, jphamlore.

“There have been threats that such a fork could be attacked by double-spending and rendered worthless,” he added.

Whether or not Friedberg’s warnings are justified remains to be seen. However, developers of any currency emerging as a result of Bitcoin’s hard forking, may seek to avoid any possible personal legal troubles, and register as money service businesses. The question of possible contradiction between old and new Bitcoin is also far from being definitely resolved.

What is clear however, is that in any case Bitcoin is about to step out of the grey legal zone.

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