CCC: Cryptocurrency Course slide set

## [Bitcoin International legality](https://en.wikipedia.org/wiki/Legality_of_cryptocurrency_by_country_or_territory)

[![](https://upload.wikimedia.org/wikipedia/commons/7/7e/Legal_status_of_bitcoin.svg)](https://commons.wikimedia.org/wiki/File:Legal_status_of_bitcoin.svg)

Legal tender 
  Permissive (legal to use bitcoin) 
  Contentious (some legal restrictions on usage of bitcoin)

Contentious (interpretation of old laws, but bitcoin is not prohibited directly) 
  Hostile (full or partial prohibition) 
  No data

</div>

## Legal Tender Country
- <img src="images/flags/elsalvador.svg" class="flag"> El Salvador 
 - Their other official currency is the US dollar
 - No control over monetary policy!
 - The gov't bought a lot of Bitcoin at it's peak, and has since lost much value
 - The IMF has urged them to reverse course
- <img src="images/flags/car.svg" class="flag"> Central African Republic 
 - Their other official currency is the CFA franc
 - Adopted April 2022, but un-adopted in April 2023
- Malaysia is considering it

## US Policy
- 2013: US Treasury classifies Bitcoin as a "virtual currency"
  - Other cryptocurrencies are classified similarly
  - This is treated as "property" for tax purposes
- 2018: cryptocurrency business that do a "substantial" amount of business in the US must:
  - Register with the US Treasury as a money services business
  - Design and enforce an anti-money laundering program
  - Keep records on customers ([KYC](applications.html#/kyc)) and report them back

## Recent US Policy
- March 9, 2022: [Biden signs order on cryptocurrency as its use explodes](https://abcnews.go.com/Politics/wireStory/biden-signing-order-cryptocurrency-explodes-83336765)
  - The order "urges the Federal Reserve to explore whether the central bank should jump in and create its own digital currency"
  - Also urges federal agencies to "study the impact of cryptocurrency on financial stability and national security"
- Some feel that this is the first step toward the US gov't enacting restrictions on cryptocurrency
  - Although it would be hard to stop it at this point (but not impossible)
  - And, in the current polarized political climate, is anything likely to get done on this front?

## More US Policy
- In 2021, 17 states passed laws regarding cryptocurrency regulation
- On Feb 17, 2022, the US Justice Department named Eun Young Choi as the first "director of a National Cryptocurrency Enforcement Team to aid in identification of and dealing with misuse of cryptocurrencies and other digital assets"
  - [Justice department announcement](https://www.justice.gov/opa/pr/justice-department-announces-first-director-national-cryptocurrency-enforcement-team)

## US Tax Status
- Cryptocurrency is considered property
  - As per [IRS Notice 2014-21](https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21)
  - This means it's subject to capital gains tax, like stocks and equities
- Capital gains primer:
  - If you own it less than 1 year, you pay your normal tax rate on any gains
  - If you own it for more than 1 year, you pay only 15% on it
- I'm not an accountant, so get another opinion before you depend on this advice

## Tax implications
- The IRS will ask this question on the IRS for 1040 ([source](https://stanfieldodell.com/irs-to-update-virtual-currency-question-for-2021/)):
  - "At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?"
  - 2021 version: "At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in virtual currency?"
- This is why we aren't making you buy any cryptocurrency for this course
- The "fake" cryptocurrency that you mine and trade in this course does not qualify as a 'yes' for that question...
  - ... as there is no "financial interest" with it since it has zero market value

## Good uses of Cryptocurrency
- Allows anybody to move funds; no need for an expensive bank account
- Avoid the banking monopolies
- Allows for anonymity online
- It's such a cool technology!

## Bad uses of Cryptocurrency
- It's used for money laundering
- It's used to avoid paying taxes
- Putin has used it to avoid sanctions on Russia due to the invasion of Ukraine
- It's used to enable trading of evil things online
  - Drugs, weapons, revenge porn, videos of child rape & murder, and worse
  - (Tor is in a similar category)
- PoW coins have a negative environmental impact

## How to decide if it's ethical to use?
- There are no clear guidelines for how to balance these things
- We see four frameworks to help us make these decisions
  - Virtue Ethics
  - Consequentialist Ethics
  - Utilitarian Ethics
  - Deontological ethics

## Virtue Ethics
- Rather than right or wrong...
  - Or good actions and bad actions...
- ...this focuses on what a virtuous person would do
- So what would a 'morally excellent person' do?
  - Examples: habit of moderation, virtue of prudence, practical wisdom, etc.
- This is a *thought experiment* to be considered

## Virtue Ethics
- How does this help?
- Three ways:
  - Help us understand if we have a moral and ethical obligation, and if so, then to who
  - Help us determine which (moral and ethical) standards to follow
  - Helps us cultivate practical wisdom and good judgment

## Virtue Ethics
- These can be culturally relative
- Consider a benign example of this cultural relativity:
  - Aristotle proposed nine important virtues: wisdom, prudence, justice, fortitude, courage, liberality, magnificence, magnanimity, and temperance
  - A modern ethicist proposed four: ambition/humility, love, courage, and honesty

## Virtue Ethics
- These can be culturally relative
- Consider a non-benign example of this cultural relativity:
  - Sexism or racism: in the past, this was accepted as an accepted part of society
    - Think of societies where slavery exists, or women are second-class citizens
    - They exist today!  They are not all in the past!

## Consequentialist Ethics
- Consider what the consequences of our actions will be
  - Also called [Consequentialism](https://en.wikipedia.org/wiki/Consequentialism)
- "[A morally right action is one that will produce a good outcome or consequence](https://en.wikipedia.org/wiki/Consequentialism)"
- Do the ends justify the means?
  - An extreme interpretation of Consequentialism
  - Like how terrorism is an extreme interpretation of religion

## Utilitarian ethics
- Consider what the 'greatest good' is
  - Here, 'good' is happiness, pleasure, or absence of pain (emotional, physical, etc.)
- Many utilitarians believe that a society that maximizes individual rights and justice leads to the greatest common good (in the long run)

## Utilitarian ethics
- Gross National Happiness: a real-world application of Utilitarian ethics
- A philosophy that guides the government of [Bhutan](https://en.wikipedia.org/wiki/Gross_National_Happiness)
> [Gross National Happiness is] an index which is used to measure the collective happiness and well-being of a population

- [Wikipedia](https://en.wikipedia.org/wiki/Gross_National_Happiness)

## Utilitarian ethics
- Would an action that hurt one person but helped society be valid ethically?
  - Consider eminent domain seizure of property to build a highway
- What if it were a great injustice to an individual?
  - All these frameworks can be abused in the extreme

## Deontological ethics
- A rule-based or principle-based system
  - Some set of rules or principles inform us of our moral obligations
- Examples:
  - The ten commandments of the Abrahamic religions
  - A set of (secular) laws in a modern society
  - The idea of universal human rights
  - Kant's Categorical imperative
    - Only act in a way that everybody else should act

## Deontological ethics
- But what if the laws are immoral?
  - Again, consider societies where slavery or sexism exists
    - Or other forms of discrimination

## Abuses of ethical frameworks
- All these frameworks can be abused in the extreme
  - Virtue ethics: can be culturally relative
  - Consequentialist ethics: do the ends justify the means?
  - Utilitarian ethics: sacrifice one individual's rights for the good of the many
  - Deontological ethics: what if the laws are immoral?

## How to proceed
- Consider whether the concept is "ethical" using multiple frameworks
  - An abuse of one framework is likely not permissible in another framework

## One commonly held opinion
- Many consider use of cryptocurrency to be ethical if:
  - You are not using for "evil" purposes
  - You are following applicable (and reasonable) laws
  - You are paying your fair share of taxes on any gains
- Some further state that only non-PoW coins are ethical
  - Due to the environmental impact of PoW coins

## Nebraska lawyer payments
- Nebraska's state supreme court issued [Ethics Advisory Opinion for Lawyers No. 17-03](https://supremecourt.nebraska.gov/sites/default/files/ethics-opinions/Lawyer/17-03.pdf) which states:
  - Receiving cryptocurrency for payment is acceptable if:
    - It's immediately converted to cash (or equivalent)
      - Prevents volatility from affecting payment amount
    - The client is notified of such
    - The client's account is credited at the time of payment

## California lawyer payments
- [That opinion](https://calawyers.org/solo-small-firm/ethics-of-cryptocurrency-new-rules-new-money-new-issues/) is similar to, and based on, Nebraska's
- But what if it's as an advance payment?
  - And then it goes up or down in value?
  - The California opinion has a bit more wiggle-room on these issues
- DIfference in opinion about whether it's "funds" or "property"
  - The courts have split on this

## Virginia and UVA policies
- We saw this before, in the [legal issues section](introduction.html#/legal) of the [course introduction slide set](introduction.html#/)
- We'll go over it quickly
  - These slides are included here for completeness

## Disclaimer

I am not a lawyer.  But I have discussed this with UVA's lawyers.  However, they are lawyers for me (as a UVA employee) but not for you (as a UVA student).

## Mining legality
- Can you mine cryptocurrency at UVA?
- Consider Virginia statute [6.2-1901](https://law.lis.virginia.gov/vacode/6.2-1901):

> No person shall engage in the business of selling money orders or engage in the business of money transmission, whether or not the person has a location in the Commonwealth, unless the person obtains from the Commission a license issued pursuant to this chapter.

## Mining legality
- Virginia statute [6.2-1901](https://law.lis.virginia.gov/vacode/6.2-1901) requires:
  - You get a license if you are in the *business* of money transmission
- Bug if mining is not your business, then you are not directly targetted by that statute
- Thus, so far, mining is fine in the state of Virginia.  But...

## UVA's acceptable use
- UVA has an [acceptable use policy](https://security.virginia.edu/acceptable-use) -- and policy [PRM-011](https://uvapolicy.virginia.edu/policy/PRM-011):

<blockquote style="width:85%">
Students are allowed reasonable use of University equipment when it is related to scholarship, research, and public service, and/or approved extracurricular activities. Such use requires approval of the appropriate equipment supervisor, provided the University incurs no unreasonable costs for materials, supplies, maintenance, and/or repairs.
</blockquote>

## UVA's acceptable use
- This means you can NOT mine cryptocurrency that:
  - Uses UVA equipment
    - Either server-based machines or a loaned notebook
  - Uses UVA electricity
    - This means you are not allowed to mine in your dorm room, even on your own machine

## Legal permission
- But... how to teach cryptocurrency without mining?
- This course has received legal permission from UVA's general counsel to mine cryptocurrency, as long as ALL of the following are true:
  - The mining resource use is "reasonable" and necessary in pursuit of the academic goals of this course
  - The cryptocurrency mined has zero market value (a "fake" cryptocurrency)
    - This implies that it cannot be traded for any other "real" cryptocurrency (meaning one with a monetary value)

## Further permissions
- ITS and InfoSec have also approved the use of "fake" cryptocurrency in this course, as long as...
  - Any mining that you do must ONLY use mining software or libraries that I approve
    - The reason is that there is a LOT of malware distributed through shady mining software
  - Any software linked to from an assignment for this course, or provided on the VirtualBox image, is thus considered approved for your use

## Can (should?) you mine cryptocurrency on your own?
- Not on UVA equipment or on grounds!
  - ITS scans for this, and can revoke your computing access if they catch you
- If you do it on your own off grounds...
  - Be sure to understand the tax implications involved

## Money Laundering

> The process of moving larges amounts of illegally gained money into "legitimate" sources

It's "cleaning" or "laundering" the money

## Money Laundering example
- I buy a house for $500k
- A "friend" who owes me (illegally gained) money buys it from me for $1 million
- I have legitimately sold the house for $1 million
  - And legitimately gained $500k

## Money Laundering example
- I run a mostly-cash business
  - Casino, bar, restaurant, etc.
- I also have an illegal side hustle
  - Drug dealing, extortion, etc.
- Every day I add some of the illegally gained money to the *till* (proceeds) of the legitimate business
  - The business acts as a "front" for my side hustle
- This is the reason that organized crime tends to have cash-only side businesses

## Cryptocurrency Tumblers

>  a service that mixes potentially identifiable or "tainted" cryptocurrency funds with others, so as to obscure the trail back to the fund's original source (Wikipedia)

- Funds are lumped together, with many assets moving through the tumbler at the same time; thus, hard to trace!
- Example: tornado.cash (apparently now defunct); see a [Medium article on it](https://medium.com/coinmonks/what-is-tornado-cash-and-why-was-it-blocked-5c95102c92b5) and the [Wikipedia page](https://en.wikipedia.org/wiki/Tornado_Cash))
- Example: blender.io (apparently also now defunct); see the [Wikipedia article about it](https://en.wikipedia.org/wiki/Blender.io)

## Money Laundering with Cryptocurrency
- Alice owes Bob lots of money
- Option 1: she purchases lots of cryptocurrency to send to Bob
 - Perhaps she sends it through a [cryptocurrency tumbler](https://en.wikipedia.org/wiki/Cryptocurrency_tumbler)
 - Perhaps she uses a more anonymous cryptocurrency such as [![firo logo](../slides/images/logos/firo-coin-symbol.svg)](https://coinmarketcap.com/currencies/firo/) FIRO or [![zec logo](../slides/images/logos/zec-coin-symbol.svg)](https://coinmarketcap.com/currencies/zcash/) ZEC (Zcash)
- Option 2: Bob creates a NFT that Alice buys for many millions of dollars
 - See? NFTs have a use! Just not a legal one.

## Money Laundering Statistics
- In 2021, $8.6 billion was laundered via cryptocurrency ([source](https://www.bbc.com/news/technology-60072195))
- A small group of purpose-built exchanges are used to send and receive such money
  - This makes them hard to track and investigate
  - These exchanges moved 47% of this $8.6 billion figure

## Insider Trading
> the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company (Wikipedia)

It's very illegal in the US

## Coinbase and Insider Trading
- April 11, 2022: Coinbase [lists coins they are "looking into" listing](https://www.coinbase.com/blog/increasing-transparency-for-new-asset-listings-on-coinbase?gi=7b4deca8457b)
  - The price of those coins subsequently skyrocketed
- April 12, 2022: "Cobie" on Twitter shows that somebody bought 500 million such coins
  - The tweet is protected, but an article about it is [here](https://coincodecap.com/someone-bought-millions-of-tokens-before-coinbase-listing-announcement-post)
- Whodunnit?  Nobody knows
  - In fact, Coinbase is alleged to have bought a lot of these coins
  - They [then changed their rules](https://coinmarketcap.com/alexandria/article/coinbase-changes-coin-listings-policy-after-trader-bought-tokens-before-announcement) about this process
- Is this illegal?
  - Probably, but there is not much regulation here!
  - The US Gov't (SDNY) [filed charges in July 2022](https://web3isgoinggreat.com/?id=researchers-estimate-that-an-insider-trader-profited-from-1025-of-new-crypto-listings-at-coinbase)

## More insider trading
- [Former OpenSea executive arrested, charged with money laundering](https://web3isgoinggreat.com/?id=former-opensea-executive-arrested-charged-with-money-laundering) (June 1, 2022)
- [Representative Madison Cawthorn belatedly reports up to $950,000 in crypto trades, long past the STOCK Act deadline](https://web3isgoinggreat.com/?id=representative-madison-cawthorn-belatedly-reports-up-to-950000-in-crypto-trades-long-past-the-stock-act-deadline) (June 8, 2022)
- [SEC reportedly begins probe into insider trading at crypto exchanges](https://web3isgoinggreat.com/?id=sec-reportedly-begins-probe-into-insider-trading-at-crypto-exchanges) (June 14, 2022)
- The list goes ever on and on...