Bench & Bar

SEP 2018

The Bench & Bar magazine is published to provide members of the KBA with information that will increase their knowledge of the law, improve the practice of law, and assist in improving the quality of legal services for the citizenry.

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Page 17 of 67

| SEPTEMBER/OCTOBER 2018 16 to call trading in it "dementia." 15 As John McCauley notes, Ernst & Young research indicates that "valuation is often based on a 'fear of missing out' instead of " any measureable value. 16 Nevertheless, people do keep trading, and believing. Cameron Winklevoss has been quoted as predicting that Bitcoin "will some day take the place of gold as a store of value." 17 He explains: We believe bitcoin disrupts gold. We think it's a better gold if you look at the properties of money…. Bitcoin is actually fixed in supply so it's better than scare… it's more portable… it's more durable. It sort of equals a better gold across the board. Nevertheless, the core issues of value and volatility are inherent and are key challenges in dealing with any cryptocurrency. is volatility is the making of a fiduciary's heart attack. Even accessing the assets may be challenging, as in misplaced access keys or theft as happened with Mt. Gox. Exchanges are beginning to look at protections for their clients, but that is a market that is not well-developed; the Gemini exchange, for example, has FDIC insurance for cash deposits but that insurance will not protect a deposit once it is converted to digital cryptocurrency. WHO REGULATES? In a recent case from the Eastern District of New York, Judge Jack B. Weinstein gives a comprehensive overview of the issues and chal- lenges of the regulation of cryptocurrencies. 18 is is a murky area indeed, without clear legal guidance for client and counsel. Judge Weinstein's discussion covers the gamut of possible regulation for virtual currency, including the idea of "no regulation," 19 but we are already beyond that. e remaining alternatives he discusses include: • "Partial regulation through criminal law prosecutions of Ponzi-like schemes… or civil suits based on allegations of fraud." • Regulation as a commodity by the CFTC. • Regulation as a security by the SEC. • Regulation by the Treasury Department Financial En- forcement Network ("FinCEN"). • Self-policing by private exchanges. • Taxation by the IRS. • Regulations by state legislatures. 20 What we are already seeing is a combination of all of the above. 21 Mike Orcutt notes this piecemeal approach could be an omen of worse things to come, particularly from individual states that do not understand or coordinate what they are doing. 22 Legislatures abhor a vacuum. Orcutt suggests that state legislation meant to encour- age the use of the block chain technology could end up hurting it instead as different states develop different and inconsistent laws. He notes that as Arizona and Tennessee have been the first states to pass such legislation, their statutes are different; if this trend expands to other states, it will become even more costly for the implementation of these technologies. All of the regulatory uncertainty affects, in turn, the value and vol- atility issues discussed above. CNBC reported on August 9, 2018, that the price of Bitcoin "fell about 6 percent on [August 8] after the U.S. Securities and Exchange Commission delayed a decision on a proposed Bitcoin exchange-traded fund." 23 With this background on the problems of both valuation and reg- ulation, we turn to some of the practical impact cryptocurrency is already having on the practice of law. CRYPTOCURRENCIES IN DIVORCE CASES If nothing else, cryptocurrencies have been recognized as giving divorcing couples something new to fight about. 24 Robert Hackett, writing on the impact for divorces in the United Kingdom, details the greater potential for hiding assets, especially off-line on portable storage media. Problems include: • specialty tools and services necessary to trace cryptocur- rencies, which may include digital forensics specialists; • valuation problems, especially with highly volatile cryp- tocurrencies, with a possible solution being simply the distribution of the cryptocurrency itself rather than a fiat currency conversion; • decentralized ledgers making court orders against asset holders impractical, and • the impact of future regulation. Traditional methods of tracking assets may still be effective, such as bank transfers to cryptocurrency exchanges. Even where obfusca- tion techniques are used, if enough money is at stake, the case may justify retaining someone with the skills to track those transactions. CRYPTOCURRENCIES IN PROBATE MATTERS What could go wrong? Well, the very nature of the "crypto" currency creates some special concerns. Jonathan Bick notes that the lack of statutory or case law guidance in probate matters suggests more aggressive estate planning given the inherently secret nature of cryptocurrencies. 25 A risk is that neither the client nor the estate attorney has the experience in dealing with properly drafting and protecting such assets. e old adage that "you can't take it with you" may mean that if the security control of the crypto keys for cryptocurrencies is lost with the holder's passing, then nobody gets to take it. Bick says that cryptocurrency assets must be protected in a public court proceeding by preventing disclosure of the keys to avoid making heirs the target of malicious attacks to steal the assets. Features: CRYPTOCURRENCY (2) REGULATION (3) PRACTICE OF LAW

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