Law on The Block: Bitcoin wages and more

Each week I'll be writing a longish piece for Genesis subscribers focusing on crypto and law related topics. Sometimes I'll focus on a single thing. Sometimes there's so much going on in the brain of Palley that I'll have to cover a couple of things to clear my mind. The past week fell into the latter category.   

Requisite disclaimer – these are my opinions only, aren’t legal advice, aren’t authorized by any past, present or future employer or client. And I might change mind. I contain multitudes.

Wage Payment in Bitcoin

Some ideas, no matter how boneheaded, seem to be unable to die. One that I've seen repeated a couple of times the last few weeks is that paying employees in cryptocurrency is a nifty idea whose time has come. Whelp, maybe not so much. While you might think it's a cool idea to pay employees in Bitcoin or other cryptocurrency, be prepared to deal with federal and state law regarding wage payment. The Fair Labor Standards Act ("FLSA") is a federal law that governs "wage" payment. According to the Department of Labor, which oversees FLSA enforcement, the law "require[s] payments of the prescribed wages, including overtime compensation, in cash or negotiable instrument payable at par." 29 CFR s 531.27(a). This is consistent with applicable state law across the U.S. 

While both the federal and state statutes have exemptions for certain classes of workers, the general rule -- at least in the U.S. -- is that wages have to be paid in dollars.  According to my friend Steve Middlebrook, a payments lawyer at the Womble Carlyle firm in Atlanta, "In no state in the US is it legal to pay employees their wages in virtual currency." For a more detailed discussion of this, a nice post from the folks at Proskauer give a little bit more gilding to the topic. While it may -- and this is a big may and certainly not legal advice -- be possible to offer crypto as an added benefit to employees, it doesn't seem like there is a lot of ambiguity about the propriety of wage payment in anything other than dollars. In short, the default rule is that it's a hard no.

I have been told that several companies in the blockchain space, including at least one U.S. exchange, pay wages in crypto. "Steve," I can hear you say, "If X does it surely you're not saying that they are breaking the law!" While I am not privy to any of those particular details I can tell you that the argument that e'ryone is doing it is compelling as heck (not really). In short, if that is your justification for doing something that looks pretty much like a no, I'd suggest you talk to your general counsel before moving forward with your plan to pay people in $GUP.

Paying Lawyers in Crypto; Palley Tokens

All of this talk of wages made me think about the current status of the law regarding paying lawyers in Bitcoin (or other cryptocurrency.) The practice of law is regulated by individual states in the United States. I hoped there would be some recent updates here but so far, there hasn't been a ton of bar commentary on the topic and I don't frankly see that much has changed in the last two years.

The first and as far as I can tell only formal guidance on the topic came from the Nebraska State Bar in 2017. The opinion says in a nutshell that a lawyer can accept digital currencies like bitcoin for legal services if (1) disclosures are made regarding volatility, (2) the digital currency is converted to U.S. currency on receipt and (3) the client's account is credited on receipt. You have to do KYC and receipt from third parties can't interfere with the lawyer's independent relationship with the client. I mean you can pay a lawyer in ham or herring so this kinda makes sense, right?

Also, a lawyer can hold crypto in trust (in Nebraska) "so long as the attorney holds the units of such currencies separate from the lawyer's property, kept with commercially reasonable safeguards and records are kept by the lawyer of the property so held for five (5) years after termination of the relationship." You can't put it in an attorney trust account. Also, whether this is a good idea for most lawyers to do is a completely separate issue.

While other states don't appear to have opinions on the topic yet, bar counsel from Virginia co-authored a piece in June 2018  that discusses the Nebraska opinion and doesn't seem to say it's a complete ethical no-go. It also cites an interesting piece by legal ethicist Ronald Rotunda who criticizes the Nebraska opinion's position that you have to convert the crypto when you receive it, instead of simply crediting the client's account for the spot price value in fiat. That does seem like a silly hoop given the fact that you can immediately re-purchase bitcoin with dollars. That said, lawyers are a conservative bunch and a more restrictive approach may be more attractive to many. An outfit like bitpay makes this approach easy enough for bitcoin, and also relieves the average law firm of having to train an accounting department in the niceties of private key management.

What about lawyers creating their own assets for payment of legal services? Could I create a Palley Token that would provide prepaid legal services? Given two recent no action letters involving tokens that provide pre-paid services and some prior no action authority on pre-paid legal services, this could work. (There’s a nice summary of the TurnKey Jet letter from the National Law Review in April, here, by the way). Whether or not someone would want to buy Palley Tokens instead of paying in dollars or bitcoin or guppies -- that I don't know. However, some experimentation for so called "legal engineering services" (which I am told are not NOT legal services) is going on in the space.  

This is basically a personalized token that allows you to pay in advance for Ross to provide you with legal engineering consulting services. So pre-paid tokenized consulting services. It's lovely and intuitive UI and the creation of a contract using your phone and metamask is neat. Good product design to be sure but ... 

A small personal nit, first: did I mention that I loathe the term legal engineering? The term suggests that you're getting legal and engineering services where the intent is probably actually to provide neither. Marketing hooey if you ask me, but that is a sermon for another day’s column.

Second, and more meaningful: while I love disruptive innovation as much as the next Bart or Betty, I confess to being slightly puzzled by the benefit of everyone creating their own decentralized personalize script for prepayment of services. It seems like an additional step, and one that makes services acquisition more complicated. Also, if you can't trade the trade the scrip on a secondary market -- which is one of the factors that goes into deciding whether the thing is a security -- what is the unique selling point of prepaid Palley services tokens? You get a discount by buying in bulk in advance? Hmmmn. I mean, great for me I guess, but not sure I see the compelling customer benefit, at least for legal services.  

Still, Ross is a smart fella and the design is compelling enough that the project is worth watching, even if you probably are never going to be paying for Palley's time using Palley Tokens.  

Moar CFTC Spoofing

I have been on a bit of a regulatory tear lately -- it's the hot D.C. summer, maybe, which keeps me inside in the air-conditioning -- and keeping a close eye on the doings at the SEC and CFTC. So my heart practically skipped a beat when I saw that there was a new spoofing case for your weekly enjoyment.

The practice of "spoofing" in trading involves bidding or offering with the intent to cancel before trade execution. Doing so in connection with futures trading violates Commodity Exchange Act ("CEA"), over which the U.S. Commodity Trading Commission ("CFTC") has enforcement jurisdiction. As I noted in an essay last week, the CFTC views Bitcoin and other virtual currencies as commodities and under Dodd Frank its jurisdiction was extended to include margin trading. Anyway, if you're keeping up with the laws applicable to Bitcoin trading you spend a fair amount of time reading things that deal with commodities generally speaking. 

What caught my eye about this particular consent order is the fact that spoofing and other manipulative trading practices are reported to have been prevalent of many exchanges available to U.S. customers. The facts in this case aren't that complicated. The Respondent was a trader who had been registered as a floor broker with CFTC since 1994. During the period of time in question, he:            

"manually placed orders in the E-mini S&P 500 and E mini Nasdaq 100 futures markets with the intent to cancel the orders before their execution. Typically, while Cox had one or more smaller bids or offers resting in a futures market ("Genuine Orders"), he placed relatively large bids or offers on the opposite side of the same market, which he intended to cancel before execution ("Spoof Orders"). Cox placed the Spoof Orders to induce other market participants to fill his Genuine Orders on the opposite side of the market. Typically, once the Genuine Orders were filled, Cox cancelled the Spoof Orders. Cox repeated this trading pattern multiple times during the Relevant Period, primarily in the E-mini S&P 500 market and occasionally in the E-mini Nasdaq 100 market."

It happens that this violates section 4c(a)(5)(C) of the CEA. The CFTC figured out what this fella was doing, and he settled for a $150,000 civil monetary penalty and a three-month trading bar. You can find a link to the CFTC's press release and the Order here.

Bitcoin Res Judicata

There's an interesting intellectual/philosophical debate about whether or not personal qualities of an artist are relevant to the quality of their art. Yeah, Ezra Pound collaborated with the Italian fascists during World War II. But his translation of the Seafarer is still magnificent. Do we hold his politics against his art? Does the poem's creator even matter? Or does it stand alone?  

I tend to be more of an "art stands alone" guy, and that view extends to Bitcoin. I don't particularly care who created it and am skeptical that litigation that concerns its creation has much to do with the ultimate utility of the stuff. Still, the litigation surround it is interesting and raises some curious procedural questions. One that I have been noodling since last week involves the impact of an English court's decision in a libel case brought by Craig Wright against Roger Ver. The bottom line in the case is that the Court concluded that Wright didn't demonstrate "that England and Wales is clearly the most appropriate place to bring his action for defamation over the publications complained of. In consequence, the Court has no jurisdiction to hear and determine the action." So as a result the case was dismissed (or as they quaintly say in England "struck out").  

In deciding to dismiss the case, the Court reasoned that Wright had shown no evidence of damage to his reputation in the UK from being called a fraud. In short, the Court said that evidence about reputation harm was "weak, lacks evidence and ... is almost entirely speculative. There is no objective evidence of any harm to reputation in England and Wales. The Claimant has failed completely to address whether and to what extent the publications complained of have harmed his reputation in other jurisdictions."

Now, a hoary old legal principle recognized in the United States and U.K. is the doctrine of res judicata, sometimes also known as issue or claim preclusion. Think of it as a one bite of the apple rule -- if you litigate an issue once and lose, you don't get to litigate it again. Anyway, definitely another domino down in the who is the real Satoshi story.  Whether or not it makes a whit of difference to the future of Bitcoin is another story altogether.

As a related aside, the Kleiman v. Wright litigation in Florida seems to be waddling towards ... something. If you've been following the case, you'll recall that the proceedings got sidetracked into what was in effect a mini-trial on whether or not Wright should be found in contempt. A two-day evidentiary hearing was conducted last month and finished yesterday. According to the Court's docket, final arguments on the contempt motion have been scheduled for Aug. 26 in federal court in West Palm Beach.  

Exchange Liability 

I wondered out loud on Twitter the other day why exactly certain exchanges are listing tokens that some might think are potentially unregistered securities. Are they so unworried about the potential exposure that they just don't care? My friend Drew Hinkes points out that's probably not such a great idea, as the consequences of being an unregistered broker-dealer who sells unregistered securities can be business ending, and worse. For some reading on the topic, I commend your attention to the consent order entered in the Token Lot enforcement action.

It could be that exchanges are so flush with cash and opinion letters that they are just willing to take the risk.  They may also think that as time passes and certain assets become widely traded and socialized that the enforcement risk will drop. I for one am skeptical but, hey, I am just a simple country lawyer after all. Then again, the Eth model does suggest that it's possible to list something that might actually have started out as a security and ultimately do so without getting smacked too hard.  So, maybe that is the precedent people are taking.

Postscript -- I thought that I might be providing a summary of Kik’s answer in the SEC lawsuit in today’s column but as I am wrapping this up it has not been filed yet. I believe that’s gonna drop today and when it does you will read it about and all of the apparently 120+ pages of protestations of innocence right here on The Block.

And that's my docket for this week, folks. See you in court!