The Weight of Crypto Lawyers – Cointelegraph Magazine

Each month our panel of Crypto Lawyers looks at the legal implications of some of the thorniest issues facing the industry in different jurisdictions around the world.

US authorities recently indicted 18 individuals for allegedly rigging the cryptocurrency market following an FBI investigation, creating a signal for law enforcement agents to lure market makers into the illegal money laundering business.

The case has sparked a debate over the application of traditional financial laws, such as anti-market manipulation regulations, in the cryptocurrency industry. The case also raises copyright concerns, with allegations that the FBI may have misused open source code for the operation.

Meanwhile, technologies such as autonomous AI agents now play a role in managing crypto wallets, and questions of accountability in crypto transactions and tokens are becoming more complex: who is ultimately responsible?

Magazine spoke to a group of legal experts to learn more: Catherine Smirnova, founder of Digital & Analog Partners in Europe, Joshua Chu, co-chairman of the Hong Kong Web3 Association from Asia, and Charlene Ho, managing partner of Rica Law, from the United States.

The discussion has been edited for clarity and brevity.

Magazine: The United States Department of Justice indicted 18 individuals and entities suspected of market manipulation and money laundering. How is laundering legally defined and applied to the crypto industry?

Smirnova: Meaning [of wash trading] It is more or less the same across different markets, be it US, UK or EU. It's not just the crypto markets, it's the financial markets. Transactions involving simultaneous buying and selling of the same security to create misleading market activity or create the false impression that this asset is in high demand.

It is completely illegal in every single legal system, and – surprise, surprise – there is no exception to crypto assets. This is a securities market, and yes, white collar crimes are illegal. Even if the asset is a crypto asset, it is still a crime.

Chu: In Hong Kong, there are mechanisms to prevent people from committing market manipulation such as securities. We have these provisions under Section 53, set out in the Anti-Money Laundering Act, which allows regulators to punish people for recklessly promoting or inducing people to buy fictitious assets. The wording of that Act is copied from the Securities Act.

If you know that a particular product is unfairly priced at a certain price, but you are taking certain steps to promote it and encourage others to follow suit with that particular purchase, this, in itself, may result in a lawsuit.

I have always been an advocate that you don't need new laws to regulate new technologies because the existing laws are more than enough to cover most crimes. Fraud will always be fraud. [and] Market manipulation will always be market manipulation.

Magazine: The FBI created its own token to lure market regulators and launder traders in this operation. Alleges that the public discussions on X violated copyright laws. So, did the FBI violate the MIT license and therefore have copyright infringement?

Ho: The FBI failed to properly include the text of the open source license and the feature obtained from MIT's open source license, which I would say is more of an oversight than a copyright infringement. Copyright infringement is the loss of legal rights to use the code.

The MIT license is generally very permissive. It essentially grants anyone who obtains a copy of this software and associated documentation a license to deal with the software without restriction. The only condition is that the copyright notice and this license notice must be included in all copies and substantial portions of the Software.

Thus, X's user, the FBI, took this MIT-licensed software, but failed to place the copyright notice on their work to associate the exact code snippets that the FBI used with the MIT license.

Magazine: Could failure to include attribution under the MIT license constitute copyright infringement?

Ho: If we're super sticklers about it, you might argue, yes it's a violation because their failure to meet this condition means they never had this license in the first place. But if there was a proper challenge in court, perhaps the purpose of the license would be seen to have been met. Failure to copy this proprietary notice does not negate the overall intent that this MIT License is broadly designed to give people broad rights to use the software.

I take a little issue with this X user saying it's a breach, but clearly, the FBI is not adept at using open source software to start their torture operations.

Magazine: US authorities and regulatory agencies have been increasingly active on crypto factories, with the industry itself begging for regulatory transparency.

So, why aren't more companies attracted to the EU, where regulatory transparency is being developed through the Markets in Crypto-Assets (MiCA) regulatory framework?

Smirnova: Europe is in a mess right now because we still don't understand how to continue our regulatory approach to new markets.

Mario Draghi, an advisor to the European Commission, presented his report on the EU's competitiveness in the digital world. He says our approach to regulation doesn't work. The EU tries to make life easier with the ex ante approach, meaning preventive regulation before a breach occurs.

It gives quite the opposite effect. It's easy to be in a growing market without specific rules for tech startups. I completely agree with Joshua here that new technologies often don't need new regulation because markets are inherently still the same.

The gray area is still better for beginners.

Ho: There have been many lawsuits brought against the SEC, in practical terms, to prevent enforcement actions from being enacted. In the US, laws must come from the legislature, Congress, not the executive agency, under Article One of the Constitution. An executive agency does not have the power to make laws; It is an extension of the office of the President.

This is why many companies such as Coinbase, Consensys and others have sued the SEC. [SEC Chair Gary] Gensler's agency exceeded their authority. I suspect there will be changes in the way the SEC operates if a certain person in power is to be more pro-crypto.

Magazine: AI agents can now own cryptocurrency wallets. How do authorities view the burden of responsibility for independent agents with financial resources?

Smirnova: We're entering an area of ​​uncertainty because we honestly don't have a clear view of AI accountability yet. And when we talk about AI plus crypto, it gets really crazy.

Regarding liability, I believe that the owner of this AI agent may be liable for transactions with illegal actors, illegal purposes or illegal assets. Although independent, the owner has a duty to supervise the agent. This is what the civil law system in the EU says.

Ho: In the United States, AI liability is also not very clear. In the US, we do not have an equivalent EU artificial data law at the federal level. We have a few states that have implemented legislation at the state level, but that's only one so far: Colorado. There are many laws that are very narrow in their scope, such as how to use AI in employment, but the EU's AI law — such a breadth of governance never exists at the federal level in the US.

Therefore, it is difficult to determine whether the crypto agent is liable. And then because of the decentralized nature of crypto, how much chain of accountability do you have to go down? It will be interesting to see how it works.

Regulators will struggle to figure out how to put parameters around these AI agents, especially if they have their own wallets and can conduct transactions independently. That's pretty crazy.

Chu: AI agents, at the end of the day, are driven by user input. And that user, of course, bears the liability. It is fairly clear that the service provider has recorded exactly who the end user is. That's a whole different zone. And that really needs regulations because that goes to KYC.

Now, of course, if you're saying that it's really ambiguous as to who's responsible, I'd say no because it's pretty well defined in the user terms and conditions. You can't just use the AI ​​agent deployed by Coinbase. You have to go through Coinbase. Thus, the terms and conditions form the first layer of contract that owns the risk.

John Yun

Yohan Yun is a multimedia journalist who has been reporting on blockchain since 2017. He has contributed as an editor to crypto media outlet Forkast and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.