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<!doctype html>
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<title>CCC: Cryptocurrency Course slide set</title>
<meta name="description" content="A set of slides for a course on Cryptocurrency">
<meta name="author" content="Aaron Bloomfield">
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# CS 4501
### Cryptocurrency
<p class='titlep'> </p>
<div class="titlesmall"><p>
<a href="http://www.cs.virginia.edu/~asb">Aaron Bloomfield</a> ([email protected])<br>
<a href="http://github.com/aaronbloomfield/ccc">@github</a> | <a href="index.html">↑</a> | <a href="?print-pdf"><img class="print" width="20" src="../slides/images/print-icon.png" style="top:0px;vertical-align:middle"></a>
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<p class='titlep'> </p>
## Ethics, Legality, and Policy
</textarea></section>
<section data-markdown><textarea>
# Contents
[Policy](#/policy)
[Ethics](#/ethics)
[Legality (UVA-specific)](#/legalityuva)
[Legality (General)](#/legality)
</textarea></section>
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<section id="policy" data-markdown class="center"><textarea>
# Policy
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## [Bitcoin International legality](https://en.wikipedia.org/wiki/Legality_of_cryptocurrency_by_country_or_territory)
[](https://commons.wikimedia.org/wiki/File:Legal_status_of_bitcoin.svg)
<div style="font-size:small; display:inline-block; line-height:1">
<span class="legend-color" style="background-color:#ff9900; color:black; width:20px; display:inline-block"> </span> <b style="font-size:large">Legal tender</b><span style="width:50px;display:inline-block"> </span>
<span class="legend-color" style="background-color:#33cc66; color:black; width:20px; display:inline-block"> </span> <b style="font-size:large">Permissive</b> (legal to use bitcoin)<span style="width:50px;display:inline-block"> </span>
<span class="legend-color" style="background-color:#ffd629; color:black; width:20px; display:inline-block"> </span> <b style="font-size:large">Contentious</b> (some legal restrictions on usage of bitcoin)
<span class="legend-color" style="background-color:#ec6dd5; color:black; width:20px; display:inline-block"> </span> <b style="font-size:large">Contentious</b> (interpretation of old laws, but bitcoin is not prohibited directly)<span style="width:50px;display:inline-block"> </span>
<span class="legend-color" style="background-color:#ff3333; color:black; width:20px; display:inline-block"> </span> <b style="font-size:large">Hostile</b> (full or partial prohibition)<span style="width:50px;display:inline-block"> </span>
<span class="legend-color" style="background-color:#b9b9b9; color:black; width:20px; display:inline-block"> </span> <b style="font-size:large">No data</b>
</div>
## Legal Tender Country
- <img src="images/flags/elsalvador.svg" class="flag"> El Salvador <br clear='all'>
- 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 <br clear='all'>
- 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
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<section id="ethics" data-markdown class="center"><textarea>
# Ethics
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<section data-markdown data-separator="^\n\n\n"><textarea>
## 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
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<section id="legalityuva" data-markdown class="center"><textarea>
# Legality (UVA-specific)
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## 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%">
<p>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.</p>
</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
## 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
## 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
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<section id="legality" data-markdown class="center"><textarea>
# Legality (General)
<img src="../slides/images/logos/firo-coin-symbol.svg" class="cclogosubtitle">
<img src="../slides/images/logos/zec-coin-symbol.svg" class="cclogosubtitle">
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## 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)
<!-- .slide: class="cclogo-slide" -->
## 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<br>[](https://coinmarketcap.com/currencies/firo/) FIRO or [](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...
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