TFTC: A Bitcoin Podcast - #352: Freedom of speech in the digital age with Preston Byrne

Episode Date: August 15, 2022

Join Marty as he sits down with Preston Byrne to discuss the Tornado Cash sanctions taking place, whether a precedent was just set for developers and what freedom of speech is in the digital age. Follow Preston on Twitter Learn more about Preston Shoutout to our sponsors: Unchained Capital Braiins HodlHodl Upstream Data CrowdHealth TFTC Merch is Available: Shop Now Join the TFTC Movement: Main YT Channel Clips YT Channel Website Twitter Instagram Follow Marty Bent: Twitter Newsletter Podcast

what is up freaks it's your boy marty here to introduce this rip of tftc don't know the number off the top of my head i think it's like 351 or something um 352 maybe sat down with preston burn resident uh legal not counsel he's not my lawyer when we want to get a legal perspective on the things going on in the world of bitcoin we tap pressed on the shoulder and say hey the hell's going on talked a lot about the tornado cash um debacle that's going on right now uh and the nature of bitcoin as property very interesting things going on over in england in terms of defining bitcoin as a as a new type of property so this was a fascinating conversation i think you guys are gonna enjoy it it was brought

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Go to joincrowdhealth.com slash TFTC. Join me and my family in the Bitcoin. Enjoy this, Red Freaks. is the victor i mean that's part of the bull case for bitcoin if you're not paying attention you probably should be probably should be probably should be mr burn uh you're still not my lawyer right not yet no i mean i could be if you wanted to i'm reassuringly expensive um but uh but you know that's yeah up to you i'm i'm always here when you need me well thank you uh i need you Not for personal law advice, but I think everything that's going on this week in the world of cryptocurrency, particularly as it pertains to Tornado Cash, is very interesting.

And getting a legal perspective on everything that's going on is something that the audience is probably looking for. So, yeah, Tornado Cash, an open source smart contract on Ethereum that allows people transacting on the Ethereum blockchain with many different tokens to attain some semblance of privacy, was sanctioned by the U.S. Treasury. The GitHub page of the project was pulled. A developer was arrested this morning, and there are a bunch of people wondering, is this a major attack on privacy, on open source software, on freedom in the digital age? How are you reading everything that's going on with Tornado Cash? I mean, this is really a story about, and like no disrespect to Ethereum, they showed up later than Bitcoin did. So this is really a story of a community. that was not within uh you know the crosshairs of law enforcement falling within the crosshairs

of law enforcement for the first time and being surprised um so you know tornado cash is a is a is an ethereum mixer right um and what it does is it allows people to spend ether to a particular contract address in the ethereum blockchain um they get a hash which proves how much uh you know you know, how much Ether they put in when they do that, and then they can call that contract and withdraw an equivalent amount of Ether, less fees, you know, at a later time. You know, the problem with that vis-a-vis Bitcoin, right, is that Ethereum uses a completely different transaction model than Bitcoin does. Chiefly, it uses something called the account-based model, where basically each address has a balance associated with it, rather than Bitcoin,

which uses the UTXO model, which is where you can trace every transaction input back to the Coinbase transaction on the chain once it originated. So basically, from a legal standpoint, when you look at that, we call that commingling, right? It's when you take some bad assets, tainted assets, and you pool them together with good assets, untainted assets. And so apparently, allegedly, a lot of the Tornado Cash's systems assets derive from places like Iran and North Korea, which are very, very heavily sanctioned, sanctioned up the wazoo, one might say. And so as a consequence, the Tornado Cash contract was sanctioned by the Treasury. And with the consequence, basically, the contract is rendered unusable for any lawful use

by an American citizen or anyone who wants to do business with anyone who does business with American citizens. So it's a new approach to normally if you had a Bitcoin mixer, right, that would be a centralized service because Bitcoin smart contracts don't really do what Ethereum smart contracts do just by nature of their design. So it's not the kind of thing where you would have all that logic living on-chain. So what you did is you had people who ran the services off-chain and they took a fee for providing those services. And people who do that tend to get arrested and they tend to go to prison for operating an unlicensed money transmitting business and money laundering. So Ethereum, I think people think it's a little

bit different because I said, well, we pushed that functionality out onto the chain. So therefore, we've got nothing more to do with it. It's not our problem. The issue with that is that with any decentralized inverted commas or quotation marks for Americans and Canadians, with any decentralized service, there are always going to be centralized pieces, right? There's always something there's some nexus with the real world that uh because people can't resist the temptation to mess with it so in tornado cash's case there was a discord server right there were governance proposals there was a token there was all of this stuff around it where people were interacting and talking to the protocol and that's where you get into trouble right so it's if you're let's say

let's run a couple hypotheticals for just for the sake of example so let's say bobby you know let's let's call him Dave. Developer Dave writes the Tornado Cache code. It's a couple of years ago, right? And he publishes it to his GitHub account. And excuse me, my phone just went off. So he publishes that code to his GitHub account and just leaves it there, right? In the United States, there's no liability for that. You can publish whatever code you want. It's protected by the First Amendment. And so we see a lot of people complaining, right? That, oh my God, there are First Amendment issues here. Yes, there are First Amendment issues here. If liability is sought to be imposed with respect to the publishing of code on GitHub. So then developer Dave says, okay, well,

I'm going to go and I'm going to go publish this code on the internet. I'm going to go push it to Ethereum. And when he does that, right, at the moment, it's just an experiment, right? Let's say, he says, this is a way I can go push this. Weary weather, at that initial moment, he's actually committed a crime, right? Because he's not money laundering. He's not conspiring to launder money. He's not doing anything to promote money laundering. He's just saying, I want this contract to live on chain. You can make an argument that there's some criminal liability there, maybe, but you can go either way. It depends on the facts. Now, let's fast forward three years, right? And you've got something like Tornado Cash, where it's laundering $10 billion of Ether a year

through the contract, much of it coming from places like North Korea. and you've been notified by treasury that the account is sanctioned and you're still running a discord server and managing governance proposals for it you got a problem right like there's there's no escaping that you know that the u.s government has issues with this you know or should know that money laundering is taking place using it and that notwithstanding you're still attempting to manage the contract and you're attempting right to facilitate further violations of our money laundering laws and our sanctions rules at this point. So once you have all of that, this stage of the game where you've got huge sums of money being laundered through these things, yes, the

system is decentralized. It lives on a blockchain somewhere. However, your conduct in relation to that system, if there's something which is that much of a live wire, you've got to really ask yourself, what am I doing trying to promote this thing? Because we have rules around criminal conspiracies, we have rules around aiding and abetting, or liquidity providers for this system who are providing vast pools of liquidity, and they're getting paid in tokens as a result. This is the kind of stuff that can give rise to significant criminal liability. And so yeah, that's kind of where we are. So the Ethereum community is discovering this for the first time today. And they're very surprised because people said, well, no, it's decentralized,

that lives on the chain. It's like, okay, fine. Yeah, it did live on the chain, but you guys are interacting with it. And there are rules around sanctions and money laundering, which apply here that you guys just aren't paying a whole lot of attention to. So that's the story with Tornado Cash. It's an Ethereum mixer that they thought was decentralized, that lived on the blockchain, but there's a whole bunch of not particularly decentralized things which happen in the periphery of that smart contract. And that appears to be where the government is starting to sink its teeth in. And so was this action by the treasury to sanction essentially a smart contract in Tornado Cash? Is that a precedent that was just a sanctioning code instead of an individual

or a company? I mean, they're sanctioning an entity, right? That's the theory. And I've seen some, I'm not an expert on sanctions by any stretch of the imagination, but I've seen some people say, well, they're sanctioning code. From a commercial law standpoint, that's one argument you could make. Another argument you can make is you could say, listen, they're sanctioning an entity. That entity is some type of unincorporated association made up or partnership, general partnership of the participants in the tornado cash system. And so what they're sanctioning really is them, right? And all of the assets which are being managed by that system. So Tornado Cash has, you know, it's ordinary users. It has people who liquidity mine by providing

pools of liquidity, which are anonymity mine, right? Which allows people to, it creates more inputs to obfuscate the origin of, or rather the destination of funds and origin of funds that have gone into the contract. So that kind of activity, you could argue, right, that it's a general partnership. I think that would be what I would argue if I had to. So it's not really that the code is being sanctioned, the business is being sanctioned, right? The Tornado Cash enterprise is being sanctioned. Yeah, that's some of the rumblings I've heard on Twitter. I mean, it's only been a couple hours since the announcement of the Tornado Cash developer being arrested in the Netherlands. Many are speculating that, oh, he's getting

arrested for writing the code that enabled the smart contract but others are saying hey it's probably not that he just simply wrote the code and pushed it live but there is a fee associated for coordinating these actions and since he's getting paid or the people involved in tornado cash are getting paid via fees for coordinating that is sort of the smoking gun that is allowing them to go after them and arrest them well i mean so the i don't know what he was i know he was arrested in the netherlands i don't know what he was arrested under it might be for example under a domestic violation of dutch law uh it might be under a violation of u.s law and they're going to seek to extradite him to the united states so um let's see we're going to just pull up aipa here

which is not something that speedy gonzalez says but is in fact the emergency powers economic powers act that uh that sorry that's a bad joke but it's the emergency economic powers act which allows the president to sanction stuff so if we look at 50 u.s code 1705 it says so let's assume tornado cash gets sanctioned right um section you know survey it shall be unlawful for a person to violate attempt to violate conspire to violate or cause a violation of any license order regulation or prohibition issued under this chapter and a person who willfully commits willfully attempts to commit or willfully conspires to commit or aids in the bets in the commission of such an unlawful act upon conviction shall be fined not more than a million bucks or imprisoned for not

more than 20 years or both right so like when sanctions are involved like it's all hands on deck like you really got to steer very very far away from doing business with north korea or iran right or russia when russia is sanctioned under a right so so like there's a crime there are other crimes right that may have been committed so for the most obvious one is that there's money laundering right and so people who operate uh or who assist in the uh provision of of a money laundering service um can either be liable as if my recollection is correct they can be reliable they can be held liable as principals because the statute memory serves says that a person who operates all or part of an unlicensed money transmitting business is potentially liable.

I think it's 18 U.S. 1960. Let's see if we can find that. Yeah. Boom. All right. Cool. So I've memorized all my statutes on the fly. Your podcast listeners know that this particular guest knows what he's talking about. So 18 U.S. 1960, whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business shall be fined in accordance with this title or prison, not more than five years. So conducts, controls, manages, supervises, directs, or owns. That's pretty broad, right? And so supervises, manages, conducts, like, think about it. Like if you're sitting there managing governance proposals to update a protocol that facilitates unlicensed money laundering, yes, or unlicensed money

transmission and money laundering, guess what? You've just tripped that particular wire on the unlicensed money transmitting statute. So that's something which might happen. They may also have a conspiracy to commit money laundering charge if they were knowingly doing this stuff, knowing that money laundering were taking place. So this is the kind of stuff, these are the kind of rules that govern how we transact with one another. In Bitcoin land, we will really only see centralized services getting tripped by these rules because Bitcoin doesn't have the functionality, right? By design, this is not like a shortfall.

This is a feature, not a bug. Bitcoin doesn't have the functionality that Ethereum has with regard to certain DeFi contracts. So Ethereum said, well, we pushed it all under the chain, except they didn't push it all under the chain, right? It would be one thing if the smart contract just lived there and nobody talked to it ever again. They have governance protocols. They have a side token.

They had a discord. They had a medium. So all of that stuff, right, is promoting the use of this unlawful thing or unlawful in the United States thing. And that's probably where they're going to sink their hooks in, in terms of assessing and charging these developers with criminal liability. and so you mentioned in the past centralized bitcoin mixers where you have a very uh off you have an off-chain process where somebody sends bitcoin to this third party then they send you

somebody else's bitcoin uh to help break your uh history on chain they've been uh taken down and their operators arrested and i guess that's a lingering question in many people's minds now what about these uh these coin join implementations like whirlpool or wasabi is there since there's coordinators involved with uh those technologies could something like the sanctions have been levied on tornado cash be brought to to those coin joint services yeah to be blunt yes um and in addition to that you don't really you don't need the sanctions rule to bring criminal charges against someone for assisting in the operation of a money laundering business. Tornado Cash just happened to be, you know, it's currently the hottest service in the

world. And by hot, you know, I don't mean like hot as in cool, I mean hot as in heat, right? So like, you really, like the heat is on and anyone having anything to do with Tornado Cash right now should probably lawyer up my two cents. But basically, Tornado Cash was clearly the biggest problem of all of those services. And so it attracted the most attention. And that's the one that they're focusing on. But in principle, yes, if you're operating or facilitating money laundering and anonymizing on transactions, regardless of the chain, regardless of the method, you are taking other people, you are transacting with people who have broken the law or are laundering the proceeds of crime

and you are facilitating those transactions, then you've got something to worry about. Heavy shit. Well, I guess this gets into the whole concept of money laundering. A lot of people would point to money laundering and say it's really an opaque type of action or the definition of money laundering is very opaque.

It's not, it all stems from the Bank Secrecy Act, which many people would argue is a huge infringement on individual privacy at the end of the day. And it seems that using money laundering, the Bank Secrecy Act to levy sanctions and shut down these services is hurting overall privacy at the end of the day when 99% of people on the planet aren't committing crimes and they simply want to attain privacy on these blockchains? Is money laundering an actual crime that deserves thrusting all these privacy prohibiting laws on individuals globally? Yes. There are a lot of people who say money laundering is a victimless crime or it's a crime which is harmless and this and that. Money

laundering has a specific definition. It's very clear as to what it is. Money laundering is transacting with the proceeds of crime in order to either violate the law or conceal the origin of the funds in question. So proceeds of crime are required. So for actual money laundering, I have very little to zero sympathy for people who carry it out. If you are laundering money, it means you've broken the law somewhere else along the chain. There's a difference between that, however, and saying that privacy should be banned. I think privacy is good. I think financial privacy is important. And people are currently rinsing me on Twitter because I dared to speak about Ether in a negative way this morning or Tornado Cash and say, well, maybe

it wasn't such a good idea to use this thing to launder money. And they're like, well, don't you care about financial privacy? Yeah, I do care about financial privacy. But do you need to commingle your money with the North Koreans to get it? No. These are crypto systems. Come up with better crypto that allows people to transact with one another secretly in such a way that they don't transact with the North Koreans. In this instance, what's happening with Tornado Cash is that there is a smart contract which sits on a giant pool of liquidity. People mix all their liquidity together, and then they withdraw. And they have a withdrawal receipt, which is a hash, which basically allows them to pull the funds out, less fees, and that goes into their wallet.

But those fees originated from a variety of different sources, including unlawful ones, which means that when you use it, you're facilitating the unlawful use of that facility by bad actors like North Korea. People are like, well, it's North Korea. It's a hermit kingdom. It's not so bad. North Korea sucks. It's the worst country ever. They enslave people and murder them in labor camps all over the country. There's no freedom of any description. They starve people routinely. They develop nuclear weapons, threaten their neighbors. There's nothing redeeming about North Korea. If it were a liberal democracy that was getting bullied by the United States, that would be one thing. It's not. It's a Stalinist dictatorship that is

absolutely brutal to everyone in it and has no right to exist in its current form. It has a right to exist as a liberal democracy, which hopefully one day it will be. So from that standpoint, if you're using something like Tornado Cash, you are facilitating that. There are methods out there. I'm not by any means an expert in that particular area of cryptography, but there are people working on types of proofs and types of transactions and types of blockchains that conceal the nature of a transaction without requiring people to transact with bad people. But a mixer is a very specific thing. It's saying, listen, we're going to use this address on the blockchain or this service on the blockchain where you're

going to put money in and you're going to take different money out, but it's going to be in equivalent amounts, right? So come up with some cryptography that allows people to transact with one another privately, some type of homomorphic encryption where people don't have to reveal their public keys to the world and they only have to reveal them to each other, right? Come up with that. And I don't have any issue with that, right? But if you're talking about a mixing service as being the final answer here. I just don't think that it's not viable. It's going to be regulated forever. There's no chance that it's ever not going to be regulated. And ultimately, you're facilitating bad actors every time that you use it, right? So there's a difference between a bad

actor using a protocol and you doing a transaction with a bad actor. And I think that's a meaningful distinction that people aren't clear enough about. Yeah. Well, with Tornado Cash specifically, So I'm sure you saw that there was some Joker-like character just started spamming all the dot coms directly from the Tornado Cash contract. Brian Armstrong, Shaquille O'Neal, Jimmy Fallon, one of the Paul brothers. What does that mean for those individuals who now have Ether linked to Tornado Cash in their wallets? I think they need to apply to OFAC for a license to access the money in their wallets.

So if this were on Bitcoin, what I would do is I would exclude the UTXOs from the wallet and say, you know, we've excluded these UTXOs from the wallet and therefore we're not going to transact with them. Right. So that is straightforward. And it's not straightforward to do for your average user, but it's something which can be done. Right. There would be a transaction output going to that address. you could wall off those outputs and just never touch them. With Ethereum, you can't because it's an account-based model. So once the balance is credited to your account, your funds and the funds which are subject to the sanctions have been commingled. So essentially, the point one, if these guys, in practice, I suspect the compliance is going to be pretty low.

But formally, I think they probably have transacted with Tornado Cash. And I think as such, they need to go report to ofac the balances in their wallet which are attributable to that uh and uh and in order to access it i suspect they need a license how many people actually do that i don't know but that's that's tbd it's it's but like this is how strict sanction stuff is um so that that's my hunch yeah uh hairy time it's a mess but like but like the you know i i posted on Twitter the other day. I posted some really, like, I posted some stuff that's making me really unpopular this week, which is a sign that either you're over the target or that you need to spend more time outside. You know, I'm not sure which one it is. But so I said on Twitter earlier in

the week when Tornado Cash first got taken down, I said, listen, what happens if someone starts withdrawing to, you know, the .eth crowd and starts putting stuff in their wallets? Like, they're going to have a regulatory problem. And sure enough, that's what people did. So I suspect what will wind up happening is that wallets will eventually have some type of, there'll be like a smart contract based wallet, where the wallet has the ability to reject an incoming transaction. And this wouldn't be blockchain level censorship, it would basically just be like an escrow contract on the Ethereum blockchain, right? So some wallet will have a smart contract associated with it, and you'll say, listen, this address follows the logic of this wallet, meaning that I'm not going to accept any inbound transfers from just anybody, but rather I'm going to have to provide a little bit of data on-chain to indicate that I consent to the inbound transfer. So I think that that will probably wind up happening in future. And it'll probably wind up happening on layer two rather than layer one. But that's my hunch, right, is that people are going to need to, are frankly going to need to block people from depositing sanctioned funds in their wallets. Like that's a feature which has to happen. So that's, or they'll wind up running decentralized custodians, which would be bad. So people were like, oh, you don't like decentralization.

I was like, no, it's not that I don't like decentralization. It's just that like, this is clearly exactly what's going to happen now that the sanction, you know, these sanctions have been put in place. Someone's going to challenge the sanctions or engage in civil disobedience by trolling everyone influential in crypto by depositing sanctioned funds in their wallet. And that's exactly what happened. So it's, yeah, it's a challenge. And I think there are design challenges around privacy and there are design challenges around, you know, regulatory compliant software design, right?

So, like, how do you build software that doesn't expose your users to liability, you know, from the feds? Like, how do you design around it? And you can and it can be done, but you have to think about the problem. And, you know, at the moment on Twitter, people aren't thinking about the problem, right? What they're doing is they're freaking out about the problem and they're jumping on top of anybody who says, hey, hold on a second. Maybe you should have designed something a little bit differently rather than – there's no introspection. People are just pissed off that the government got up in their grill, and it's just not a particularly productive way to do business or to structure legal affairs. Yeah.

No, it is. I mean, because that seems like a slippery slope. First, it's, hey, let's write wallet software that rejects transactions coming from sanctioned addresses or projects, smart contracts on-chain. But then it's, if you can do that, what's to stop them from saying, all right, since we have this account-based model, we can see how everybody's transacting. We've noticed that developer Dave has bought too much meat this week. And so if he's trying to pay you for food or something like that, you have to reject his transaction because his carbon allowance is over for the week. Yeah, I think if people are using Bitcoin to buy their weekly groceries, we live in a very different world than the one we live in now. So I suspect that if it gets to that point, the state probably isn't in the same condition that it is now.

And likely, in fact, as law enforcement capabilities have deteriorated considerably. So that's just my hunch. I mean, talking to Bitcoin people about what the future trajectory is, if we're all using Bitcoin to buy our weekly purchases, get our daily bread and that kind of stuff, I suspect that we live in a very different world from a regulatory standpoint than the one we live in now. Is that the world you want to live in? I don't know.

I have no idea what the unintended consequences of the monster that we're currently in the process of creating are. They may be good, they may be bad, they may be neither. And thinking will render it good or bad in the eyes of the beholder. But we're on the path. And I think probably in our lifetimes, we're going to see the end result. But I don't know what that end result will be. If I did, uh, you know, I, I would have, uh, I would have bought more ether right back in 2014 when it was nice and cheap and been on an Island in Tahiti, you know, sitting there shit posting about tornado cash and how awful it is that the U S government, uh, you know, has, has cracked down on it instead of sitting here as I do a working man and

an analyst who understands the issues, uh, and has to, has to earn his salary by actually, you know, working and practicing law. So, I think, which I honestly, as between like being a really pretty crypto literate corporate lawyer and being an Ether millionaire, I'll take a lawyer any day. If I'm going to be a crypto millionaire, like make it Bitcoin or something else, but not Ethereum this week is pretty cringe. So, I'm glad I'm not part of that chorus. You're not excited for the merge? The merge is coming. Yeah, the merge.

I'm sure it's coming. It's been coming for four years now, and I'm sure it will happen on schedule and on time exactly as proposed. Vitalik came out this morning and said September 15th. They set the difficulty limit, and it's going to happen on September 15th. That's really decentralized. Who knew code could be so specific? Right. Anyway.

But yeah, I mean, we live in a weird world. it's interesting to see it's actually better like as you know as a lawyer to be in this world seeing where they say that when you've got competition right if you're running a startup and you've got competitors it's a validation of your thesis whereas if no one's competing with you you have a problem because maybe you're not over the target like they're starting to regulate this stuff it's everywhere right crypto is everywhere and it's growing very very quickly i think they're probably behind the curve in terms of understanding how big it is and how you know how much they've got to actually regulate so from from the standpoint of a crypto user and sort of crypto

you know i don't know i guess i've been around now for seven or eight years in crypto maybe a little longer um so it's nice to see because it means we've made it like the powers are paying attention to it which means it's it's big right and so that that to me is is actually kind of oddly reassuring uh because it tells me that uh you know the the thing which i've decided to dedicate my life to in terms of my professional life at least uh was is going somewhere right in 2014 2015 2016 that was not clear right it was not by no means clear that this was going to happen back then and now it's so big that it's clear that it's not going to stop Yeah. The timing of the momentum that Bitcoin is gaining right now in parallel with the disdain for the state, particularly the federal government, is very interesting.

I mean, you mentioned if we're transacting in Bitcoin to buy our groceries on a day-to-day basis, the regulatory environment has significantly changed. The state has become significantly weaker. And it does seem like since the beginning of COVID with the lockdowns and the reaction, particularly from individual states to the federal government's actions, that there is a bit of a growing friction between the federal government and its citizens of the United States and more particularly like individual states. In the last week alone, we've had the Inflation Reduction Act passed, which is spinning up an army of 87,000 IRS agents. You've had a lot of states push back against that. Attorney General Missouri wrote a letter to the federal government yesterday, I believe, really. Unconcealed carry. I saw that.

So basically, the FBI was going to go inspect concealed carry records at local county sheriff's offices, and he told them to go pound sand, which is interesting. Yeah. In Florida, you have, after the Mar-a-Lago debacle, who knows what's going on there exactly, but you do have state representatives in Florida saying that the legislator should meet and basically ban federal agents from coming in the state and doing anything to arrest Floridians. And so is the administrative state, the federal government here in the United States, do you think it's peaked in terms of its power and influence over American citizens? It seems like we're living through this inflection point and day by day people are becoming more dismayed by the state of the federal government and its infringement on our individual civil liberties. I don't think, I mean, a government which is reviled and which causes many people to feel dismayed can nonetheless acquire considerably more power than our government currently holds, right? That is something we know from the experiences of Nazi Germany, the Soviet Union, North Korea, the Chinese Communist Party, et cetera, right? So the US government is not,

it still has some constitutional limitations. It does occupy a disproportionately large slice of GDP in terms of the amount of resources it commands, closing it on 50%. When we were growing up, it was closer to 30. 100 years ago, it was closer to five. So the amount of resources that the US government controls and commands is huge. What's interesting to me is that the method, the mode of the US government seems to be like 1960s, 70s, 80s, bureaucratic state, no computers, no tech, lots of people. Much of the job that the US government does could be done by an organization that's much smaller and much more nimble and much more technologically driven. What we tend to see in the evolution of complex societies is that they

increase in complexity until the burden of the complexity becomes too large, at which point they break down into simpler constituent components, right, which can manage themselves much more effectively and efficiently with the resources, that's Joseph Tainter's thesis, is basically that complexity combined with stress is what brings down complex societies and empires. We are currently, it seems, at the limits of the complexity that the American system can manage. The people who run the country think very simplistically. They're unable to manage systems like the constitutional system without offending vast numbers of people on the other side. And that's true with every single branch of the government, right? So Congress and the

Supreme Court can't figure out a way to keep everybody happy about abortion. One side wants to totally crush the other. On that debate, one institution is controlled by one side, one institution is controlled by the other side. So I think we're living through a period where the difference, and we're seeing that in the way that representatives vote. So if you look at how, you know, the level of crossover between the two parties, it's considerably less than it was 50 or 60 years ago, right? So 50 or 60 years ago, you could get a super majority in both houses to vote on a bunch of different stuff. You could break vetoes. Now you can't. So I don't know what is causing that. I'm sure the historians will have lots of explanations. Part of it might

be driven by social media. Part of it is driven by a lack of socialization. And a lot of it, I'm sure is just not explainable because we're living through it and unable to see, you know, we don't have the perspective, right. To look at the situation from the outside and we're not armed with all the facts because there are things we just don't know that will only be knowable after they've happened. So I think that, yeah, we're probably, the state can get more powerful. I think that every, I think that a lot of what it's been doing since COVID has just been missteps.

They've been self-inflicted mistakes, which, you know, for whatever reason, our bureaucratic class, um, doesn't have the same mindset that our parents did and our grandparents did. And so what they're doing is they're offending vast numbers of Americans with what they assumed were routine government actions. And like, I, I spent, I split my time between Connecticut and DC, right? So when I'm in DC, like people are just like, if you go and talk to people from the other side, let's say on the dating app or something like that, there's really very little understanding on how people, how reasonable people can't disagree on matters of national politics, which if you think about it from the perspective

of, you know, being one of 340 million Americans is insane, right? Like the issues, if you think about, I don't know about you, but thinking personally for me, the amount my life has changed as a result of one party or the other being in power has been almost nil. I mean, you can count it in basis points in terms of the financial consequences. So really, the only thing that's really being broadcast out of Washington is the feels, right? And as a sort of like day-to-day operating procedure, or like, let's say, even if I live

in Connecticut and I pay taxes in Connecticut, it's a high-tax state, the delta is not that big compared to a zero-tax state like New Hampshire. But the feelings that are elicited by politicians on either side to describe and exacerbate those differences is huge. So for some reason, people aren't thinking rationally about these kinds of decisions and meeting halfway and saying, well, you want to increase taxes 400 basis points. I want to cut them 200 basis points. Why don't we increase them 150 or something like that? There's no ability to see compromise. There's no ability to do horse trading. people are very stuck in their ways. And that applies from the very top of the government

all the way down. And you look at the COVID response, same thing. Tony Fauci was incapable of being honest with the American people about the whole situation. And if he had been, I would have been 100% behind him if he just said, listen, there's a lot we don't know. At the moment, our best guess is that you should wear masks and you should probably get vaccinated. And that's my hunch. I'm not sure. We really strongly encourage you to do that. And we're not going to mandate it. Instead, what they did is they came out with this line of shit about you must do this and this does work and it's going to prevent transmission. And if you don't do it, you're a bad person or you're a bad citizen and blah, blah, blah, blah. So the propaganda was extreme. The propaganda was very quickly proven wrong. And the wrongness of the propaganda was very rapidly disseminated on social media, which led to a distrust in the institutions. absolute own goal. There is, there is absolutely no reason why the government had to do this to itself. There's absolutely no reason why they couldn't have just shot straight with the

American people and said, listen, like, here's what, here's what we know. Here's what we don't know. Here's a very diplomatic response, giving you some recommendations about how to handle it. They couldn't resist. They couldn't, they couldn't control themselves. They just said, you know what we're going to do? We're going to take the emergency. We're going to run with it. and hopefully everyone will take it. And now we're starting to see the backlash on that. The CDC basically just posted a statement yesterday saying all of the stuff that if you posted it on Twitter a year ago would have you labeled a black job conspiracy theorist and banned from the platform. It turned around and said, well, you know, the people who aren't sick

don't need to be quarantined. And, you know, you don't need to be vaccinated. It's strongly advised. You don't have to wear masks indoors and blah, blah, blah, blah. So like, you know, Anyone who is living through the cultural hysteria of the last two years is sitting there, we're tearing our hair out, being like, great, like, why couldn't you have done this to start? What was so bad about charting a course down the middle that wouldn't have made a faction happy, right, but wouldn't have offended the other side either, right? You could have just gone down the middle, taken it on the chin, accepted a little humility

and said, listen, there's stuff we don't know. We're not omnipotent and, you know, we're not omniscient. And they just couldn't help themselves. So I think there's some failing somewhere at some point of the American experience of becoming an adult. It might be at the universities, which I'm not sure, but they're not teaching people how to communicate effectively. They're not teaching them how to think well. And that's coming out now in the bureaucracies, which are unable to function in a way that builds consensus. Yeah. I mean, you couple the COVID mandates, whether it be lockdowns, vaccination, which are proving to be goals that are, I mean, the vaccine stuff, I think the backlash was undeniable that it's not as safe and effective as originally marketed is going to be massive. And I think that'll begin to come this fall. And you couple that with inflation. Inflation was transitory last year. And now we've had, before this month, we had consecutive 40-year highs for about six or

seven months. Same government is forcing us into a terrible situation from an energy policy perspective where we're becoming less energy secure. And so when you combine all these things, COVID, inflation, energy policy, I find it hard to believe that we look back in two years and people haven't completely lost confidence in the federal government's ability to actually manage this country. And sorry for the honking horn in the back.

Yeah, what was that? Did they finally get you? Is that the FBI party van setting off the alarm outside your house? Yeah, I'm pretty sure they're posted up in this house right behind me. i actually used to do that in high school i used to park my class uh excuse me park my car right outside of my uh seventh period latin class and my teacher was a was a hardo and i had a middle class i just set off my car alarm and let it go for like five minutes and watch him stew it might actually be mr docherty getting back at me for for torturing him that's pretty that's pretty funny um yeah but you know the other thing is the the great thing

about bitcoin and you know as this conversation started talking about you know what happens if what world do we live in if people are buying their groceries in bitcoin right what does that world look like one thing that bitcoin does that nothing else does is it executes right and it just continues executing you can trust that the execution is going to happen the same way the issuance schedule is going to happen the same way. What I find interesting is that we're starting to see technologies that perform other functions. And I know this is sacrilege to some Bitcoiners, but we're starting to see tech that performs other functions and manages to have a monetary incentive mechanism, which allows for those technologies to be provided on a decentralized

basis. So one which famously blew up was Axie Infinity, which turned out to be a Ponzi scheme. But that was sort of a hint as to what possibly could happen in the future is that you could have a community which runs itself and provides content and interaction by providing payments in-game. Helium is another system that a lot of people absolutely despise. And I don't have – my bags weigh precisely zero, right? So I'm not shilling for anything here. But Helium is an interesting system that uses something called LoRaWAN or long-range wide area networks. And it takes these LoRaWAN nodes and then hooks them up to your home Wi-Fi router and then provides this LoRaWAN service, which allows you to control devices. Now, nobody uses LoRaWAN for anything useful, which is possibly why Helium is not being very widely provided.

And generally speaking, if you're trying to provide things over the airwaves, that's another area which is really tightly regulated. But what it hints at, right, is a possible future where things like cell phone service or, you know, Wi-Fi or various other stuff could in fact be provided on a decentralized basis, right? Where you pay as you go and it's metered that way rather than running through a telco, right? So that's just, that's one potential hint at where things are going. Why would we want those is because the distrust in the institutions at this point extends to pretty much every institution. Right. So if you go if you want to find out distrust of institutions in American life, law enforcement's there, Congress is there, the Supreme Courts are there, schools are there, universities are there, large corporations right now engage in overtly political activity as well. So a lot of people are really very displeased with that, particularly if their politics aren't official regime sanctioned politics. And so what we're starting to see is this ground swelling of creativity where people are building services that have completely exited the mainstream system.

And so I expect over the next 10 years, we're going to see more and more and more of those proliferate. And, you know, most of them will fail, right? 99.9% will fail. But the 1% that don't will be very impactful like a Bitcoin or an Ethereum. yeah i mean we're somewhat taking part of that right now as well not exactly right now but when this episode is syndicated to our rss feed we're part of the podcasting 2.0 platform so people will be streaming us stats as they listen uh and that is a way to exit the the corporate advertising model even though we do have advertisements here if they ever got completely uh disgusted by the

content i was putting out there and decided to pull their ad dollars i would have that that fail safe and podcasting 2.0 which nobody would be able to stop um so yeah no there is a lot of creativity but yeah it is scary like again this tornado cash targeting and uh the irs army that's being spun up it's it's like you're looking out i don't that irs army is not going to survive a republican congress um i i very strongly suspect it's not going to survive a republican congress they'll pull they'll just yank they'll yank the budget for that in the in the next uh the next congress so it's yeah i it's yeah it's a huge i mean it's like something ridiculous it's like one irs agent for every 500 americans that they'll be hiring or something

ridiculous like that so we can actually do the exact math here but even if the budget gets pulled there is that intent there is those in power that would like to thrust 4 000 americans so yeah i mean yeah but that's you know that's just that's the country we live in now it's not not the country we grew up in um it's not the country we're going to die in we're in this transitional period and people are doing some pretty people are doing extreme things um a very prominent in bc who i'm not going to name um he and i were discussing this about six eight months ago and his view is that we're living through the 1840s 1850s right and that there's something really dark and foreboding over the horizon that we don't want to, that we really don't want to

think about. We're not sure what it is yet. I don't know what it is, but that mood, right, is people in tech are paid. They make money because they can see the future, right? So particularly people who are VCs. And I like it to think that I remember, right, the way things were in the nineties and the early, even the early two thousands, right? Like America was a much calmer country like the the debates the criticism of george w bush over iraq seems tame compared to the stuff that's routinely being slung at biden and trump right so like it's absolutely it was like it's like oh that's what an adorable little country they like have they have discussions very earnest discussions over the presence or absence of weapons of mass destruction in iraq and they

go and do the invasion anyway and there are no consequences and no one's home gets raided And isn't that, you know, isn't that a civilized place, right? And you look at what's going on now, and like, I'm not going to mention what they say about the current president, but like, it's crazy. You know, it's, who knows whether it's true, but like, the environment is much, much, much more heated than it ever was when we were growing up. and like most of political debate before 2005 took place in the pages of the Washington Post and the New York Times. It was William F. Buckley and Bill Kristol, you know, writing opinion columns and Charles Krauthammer writing opinion columns. And then, you know, your dad sitting at the head of the table, reading his newspaper in the morning, nodding approvingly at the latest Krauthammer column in the New York Post. Like that's, that was how politics was done 20 years ago now like you you see it just people are completely unhinged they're way over the top

they're posting threats online they're talking about all kinds of stuff they do on tiktok they're doing it's totally bonkers um you know kids doing stuff on tiktok the latest one was something called the orbeez challenge and i actually this happened the other day to me like there's a thing called the orbeez challenge where basically people go around and they shoot each other with these Orbeez gel guns and they, you know, they, they would go, ha ha, gotcha, boom. And so they shoot each other. And if you're caught lacking, you know, without your piece, then you get zapped, right? That's, that's how it goes. So it started with people doing that. And then it evolved into people driving by innocent bystanders and shooting them with these gel guns from vehicles, like in

suburban Connecticut. Um, and people are getting arrested for it. And it's just like, and then And the reason they're doing it is because they can post the video to TikTok afterwards, right? So a little skeptical of the fact that TikTok is pushing a trend. TikTok, which is run by the People's Republic of China, is pushing a trend which encourages Americans to literally carry out drive-by shootings of one another. That's happening. And if you look up Orbeez, O-R-B-E-E-Z, challenge on the internet, like 17, 18-year-old kids, kids, 18 years old, you're an adult. are doing this. Could you imagine 20 years ago? I don't know how old you are. 20 years ago is when I was about that age. I cannot conceive of thinking ever, hey, you know what's a really

good idea? Let's drive by little old people in beach communities and assault them. That would be a really fun way to spend a Friday night. It never would have crossed my mind. It had never happened now it's routine like you look it up and not only is it routine there's a social contagion right in that it's a it's like a meme which has spread out across the country via the internet and people are going and copying it despite the fact that it wouldn't take much diligence to find out that doing this is like felony assault battery so like it's just that that's the kind of country and this is literally about a week and a half ago i was riding my bike and some kids went and at me on my bike and i was just like are you kidding like are you serious this and i looked

it up i was like what is this thing and that's what it was it was a tick tock thing so so that's that's you know that that's that's where we are that's the country we live in it's not the country we grew up in i fell down the tick tock not on the app somebody posted a thread on twitter uh apparently there's a growing trend of like open militia recruiting going on on tick tock as well uh in reaction to the uh in the state of the political environment here in the u.s it's so great that's crazy in connecticut it's actually unlawful to um it's actually unlawful to form a militia so uh if you're in connecticut and you see something on tiktok inviting you to form a militia don't do it you will go to jail it's a felony um so like it's

but that's crazy. That's totally, totally crazy. Um, so like, like, like what, why, where, where are people getting the idea? Like back in the day, I remember when Bush was president and I remember when Obama was president, I remember when Clinton was president. And the thing that really, I think actually encapsulates the difference between the present mentality and the past mentality was Bush versus Gore, right? So when Bush v. Gore happened, so obviously Bush won the electoral vote and Gore won the popular vote, won the popular vote. The popular vote's not a thing juridically, but Gore got more votes in terms of raw vote count than Bush did. So went to the courts, right? And every media pundit in the United States, right, left, center,

people on the right, people on the left, whatever, said, you know, it's a real testament to the stability and the enduring legacy of the United States that in any other country, there'd be tanks in the streets when this happened. And in the United States, we resolve our differences peacefully in accordance with rule of law, right? So Rehnquist was, I think, still in charge. So like the Supreme Court still was basically guys from the 70s, right? Still running the show. And so that was that. So everyone was very proud of themselves. Look at us. Look how good we are. Look at how civilized we are that we did that can you imagine right when trump did it right when he won the won the electoral vote but not the popular vote people want bananas right so granted there wasn't a

court case that went along with it but since then we've had packed the court we've had revised the electoral college this and that january 6th obviously happened so like and now people are recruiting for militias on i didn't know about this because i don't use tiktok but you're telling me people are recruiting for militias on tiktok because why because a search warrant was executed like like no that's not that's not the but the thing is the more people say it the fewer people believe in the old system so we have all of these destructive memes being propagated um you know and there's nothing you can do about it in the american system because it's freedom of speech but like the memes that are getting the most traction are not the memes which we grew up with

the memes we grew up with were you know what yeah fair is fair we lost an election see in four years or two years or whatever else at the midterms. And we'll teach you then. If you don't do a good job, we'll throw you out. If you said that now, it almost sounds quaint compared to the stuff that you hear. And it's everywhere. It's on the news. It's on social media. It's everywhere. And it's really like as a lawyer who, even in the law schools, they're doing the same thing. They're saying, well, burn it down. Roe v. Wade is illegitimate. The Supreme Court is illegitimate. You can see there's a law professor at Georgetown who said the other day, like what the supreme court's doing is not law they're um you know they're they're totally

illegitimate their precedence should be ignored and like as a lawyer you look at that you're like what like like where where where is this coming from like why why are people incapable of taking the l um and just like just like okay take the l go and organize like go participate in the democratic process uh get more votes than the other guy and congratulations you'll get whatever laws you want provided they're not unconstitutional. So that's like, it's hard to put my finger on it, but like every time I look at political discourse, I am perennially dismayed that nobody, that everyone seems to be losing their minds and no one can just sit down and say, oh, you know, maybe the people who are philosophical opponents and neighbors, you know, maybe their belief

systems, which are different from mine, you know, are part of a system of ideas on which reasonable people can disagree and still coexist peacefully. The fact that nobody can just say that and like, yeah, I don't care what my neighbor teaches their kids about pronouns and I'm just going to hang out here at my house and do my thing. There's no ability for people to just live and let live. It has to be all or nothing one way or the other. I don't know why that's happening. All I know is Bitcoin. Bitcoin never told me to do anything. Bitcoin never tried to boss me around. Bitcoin never tried to take anything from me. Bitcoin has always been nice to me. It's always done what I've asked it to do, as long as I play by the rules. And that's,

I don't know, it's kind of refreshing, the crypto world, because the crypto world never imposes, right and only you only have permission to do things or not and if you've got permission to do them you can go do them and no one will stop you and that's kind of a kind of a nice way to live unless you set up like a privacy preserving mixer and uh well but like that's that's where you interact with the real world right so it's you interact with the real world and laws that have been on the books for half a century and you know if you spin it if you spin it up if you publish the code right nothing wrong with that um but if you start managing something which is an illegal service i think you it's not unreasonable to expect that you're going to have company uh

at your front door from the federal government very soon yeah uh so what do you see on the horizon from a regulatory perspective or everybody wants clarity in regards to bitcoin uh i originally reached out to you because uh the blog post that you wrote in 2018 resurfaced of some precedent that was being set over in the UK court system. So I can, yeah, I can tell you about that. So, so it's not the UK court system, but it's, so the UK is a weird country. They have a queen. She's great. Everybody loves her parliament. She has no power, but she has ultimate power at the same time. But formally, you know,

formally she's, she is the state, but at the same time she ever exercised her power would trigger a constitutional crisis. It's a very weird system. Anyway, Parliament is their bicameral house that writes the laws. In practice, there's only one house that really has any real power, and it's called the House of Commons, which is directly elected by the people, district by district, in a first-past-the-post system. So currently the parliament, the House of Commons, is dominated by the Conservative Party, which is not really very conservative anymore. It's really more like the Labour Party of the 90s, just a sort of continuation. So that's – anyway, that's just my personal read of the situation. And it's full of politicians who don't write laws.

Who does write laws, we ask? generally speaking, every law in the books of the United Kingdom on any matter of consequence will be written in the first draft by something called the Law Commission. And the Law Commission is a bunch of nerds who are lawyers and very, very, very erudite legal scholars and academics who understand really the width and breadth of English law as it currently exists. English law isn't as politicized as American law because they don't have a written constitution like we do. Or rather, they don't have a written constitution in one place, which is then the subject of political interpretation. So in the

U.S., we have the constitution, and then we have two varying schools of thought about how to interpret it. One is textualist originalist. The other is more progressive, the living constitution approach, where we can be more expansive in understanding what it means. And so that sort of core discussion over what the Constitution means, the basic law means, kind of carries over into every other law that we write, right? So politicians have much more of an active role in writing laws in the U.S. than they do in the United Kingdom. In the United Kingdom, however, the politicians kind of set the priorities and the Law Commission basically sets the methods. So they'll say, we want to do this. And the Law Commission will go, OK, well, we've done a research on this particular subject.

And here's a 600-page report, which is a survey of all applicable law, you know, in the area because it's only one country. The United Kingdom is three nations or four nations, one country. So it's England, Wales, Scotland, and Northern Ireland. England and Wales is one jurisdiction within, you know, within those three. And Northern Ireland, Scotland, and England and Wales are the three constituent jurisdictions. And in England and Wales, at least, the law has been pretty much like it's an unbroken chain of tradition going back 1,000 years, right? So they have concepts around things like property, which are fairly well-defined. So this brings us to the subject of Bitcoin.

English law generally bifurcates property into two separate categories, shows as in possession or things in possession, shows as French for thing, and shows as in action or things in action. things which are enforced when you go to a judge to sue on them so um so is this is this video recorded as well as audio recorded yes cool excellent so this here is a shows in possession right so it's a thing i can hold on to it this is a shows in possession this contract here facing the other direction this is a show is an action right it's a thing that you go and enforce in front of the court. I'm going to show you off to everyone. This, on the other hand, is a shows in possession.

So stuff that you can, hey, you're such a good boy. Yes, you are. Want to say hi to everyone on the podcast? Yeah, OK. Sorry, I had to show off the dog. So anyway, shows in possession are tangible things you can hold. Shows in action are intangible things you enforce. The problem with Bitcoin, I wrote this post four years ago,

and I said, the problem with Bitcoin is that it is neither, right? And the UK figured this out pretty quickly. The English courts looked at this. And because they have these categories of property. In the US, let me rewind. In the US, we don't have property categories, which are that narrowly defined. Property law is a creature of state law in the United States. There are 50 separate approaches to it. And generally speaking, they rely on precedents, which kind of have the new world baked into them. so there's one famous case about a fox and capturing a fox and who acquires the proprietary interest in the fox another famous case uh it's called relative to title the doctrine which comes

from that which is that if you've got the better title than somebody else based on all the facts the property is yours in the event that you bring it in front of a court so there's another case called pop-up versus hayashi over one of mark mcguire's uh home run balls right he whacked it over the fence uh hayashi or pop-up caught it got knocked out of his hand someone else got it and the two guys who caught it both quarreled over the title of the ball, right? And they said, who actually owns the ball? Is it the person who caught it and then had it knocked out of his hand or the second person who retrieved it? And it wound up being a Pyrrhic victory for both of them because the price of the ball at auction did not pay their legal fees that they spent fighting over

it. So it was a bit of a silly decision on their part. So in the US, we're a little more flexible because we're a new world country. In England, they don't have that much flexibility because everything in england that has been owned right or is capable of ownership derives from something else and you can trace back the title or the entitlements or the money or everything else you can trace it back a thousand years right so it's pretty clear who owns what the problem with bitcoin is that it is neither of those things it cannot be possessed so the reason i thought of this a couple years ago is people are like well it's a digital bearer asset it's like well it's not a bearer asset because a bearer asset is literally something you can hold on to right

You can physically transport it, and title is transferred by the transfer of the object to the recipient. So if I have this and I give it to you, then you own it. That's it, right? That's what a bearer asset means. So it's not a chosen possession, right? Nor is it a chosen action, because if I have a Bitcoin and I lose my private key, I can go to any judge in the land and I can say, listen, there's a guy who lost four or five,

actually, it's more like $100 million now of Bitcoin in a computer that's in a trash dump in Wales. and he could go to any judge in the United Kingdom and he could get an Imran order against the Bitcoins. So yes, you own those Bitcoins now, but the likelihood that it could be enforced is zero, right? No one's going to, you can't enforce a, Bitcoin doesn't know, it doesn't care about a court order or a writ. So it's not a thing in action either. So I said, listen, it's actually something else. And it's not, so information in the United Kingdom, just one third category, information is not capable of being property, right? Pure information is not property. The

One of the cases whence this principle derives is a case called Oxford v. Moss, where a guy named Moss broke into the teacher's lounge at Oxford University, read the answers to a test, and then put the answer sheet back in the folder whence it came, went and took the exam and nailed it. So that's the idea. They tried to prosecute him for theft. And the court said, well, he didn't really steal anything from you. He just acquired knowledge of certain information.

And information is not the kind of – pure information is not the kind of thing which is capable of bearing an interest in – a property interest, right? Property interests do not – are not conferred with information because there's no exclusivity, right, that comes with it. So if you have a – if I write down a – I don't know. Let's just take a piece of paper here. Let's see. I can't use that piece of paper, but I can use this one. So let's say I write down – I have a secret code, right? 50571. Here you go. So here's my secret code. It says 50571. It's super secret and it's mine.

And I just transferred it to you, right? And I transferred it to every listener of your podcast. Have I moved property there or have I transmitted information? English system would say nothing really has been transferred, right? Because I haven't moved that number, that secret code beyond my possession. I've merely transmitted it over the internet. And now everyone has knowledge of the code, which is 50571. So therefore, everyone has access to this bit of information. And so it's not really something where I can now say, oh, well, you're infringing on my property rights, right? So if I took a picture of it, there'd be a copyright. If I kept it in a safe and kept it secret, maybe there'd be some type of duty of

confidence which would be breached if someone went into a safe and took it out and used it for their own purposes and made a profit from it. But fundamentally, the thing, the code that I've just transmitted to everybody, it's like the Higgs boson attaches itself to matter. That's the necessary piece. Information on its own is not enough to constitute matter or mass or something like that. And it's not enough to constitute property. Now, the question then turns to what is a Bitcoin. And my thesis was that it is in fact, for English law purposes, and probably the purposes of most other common law jurisdictions, a third category of property. And that doesn't mean that we've discovered something. It just means that we've discovered a whole. The only

thing we have discovered is a whole in the existing system rules that we have. And so because property is not, again, property is not just stuff. Property is the description of the rules that exist, which describe the relationship and govern the relationship between people and stuff. Property law emerges whenever people are present. We have to have a category that describes our relationship with Bitcoin. With Bitcoin, I said it's probably a new type of property. I called it crypto property with a K. The reason I use crypto with a K rather than crypto with a C is because I tried to be clever and distinguish it and hopefully it'd get memed and then I'd get lots of footnotes and journal articles about it. That hasn't yet happened. But basically,

crypto property, the idea is that the defining characteristic of the property is the secret which is required in order to control it. So it's a digital thing on a decentralized system where the defining characteristic of control is exclusive or non-exclusive knowledge of the secret which is required to write to that database. And so that is, in a sense, pure information, because a Bitcoin private key is capable of being ascertained through the passage of time. You could do it by hand. It would take you many trillions of years to do it, but you could do it. So it's a secret, which is ascertainable by human ingenuity, but is unlikely to be ascertained on commercial timescales and therefore should be treated as something which is distinct.

And I said, listen, this is a third category of property. We need their own rules. The law commission sat down, did a report, pleased to report that we at Anderson Kill, we were consulted on this as named in the acknowledgements, and they agreed with our conclusion. They basically said, listen, we agree with you. And here's a 500-page report explaining exactly why we agree with you and what's necessary to sort of change English law in order to accommodate it. As an academic exercise, this is of very little significance to the ordinary Bitcoin user. As a practical matter, though, the kinds of questions which this invites are, do we need new relationships, default relationships over custody? So at the moment,

If you sent your crypto to Celsius and Celsius went and frittered it away on stupid loans and then went bankrupt, right? You're an unsecured creditor. You lent the stuff to Celsius. Celsius then went and lent it to other people and your shit out of luck. Do we need new default rules which say, listen, Celsius actually should have been a trustee of those assets. And there should have been an imposition of a trust between Celsius and those creditors

because reasons, right? Should it automatically be subject to something like a bailment? or something like that. So basically, all of the rules that we have around taking security, taking custody, and the consequences of what happens when you give someone else your coins as part of a commercial relationship, they need to not be rewritten, but they need to be revisited. And so it's an opportunity to rewrite everything in a crypto native way that makes sense for users and makes sense for business, because the existing systems aren't quite applicable. They're close, and there are analogies being drawn. But I think the significance is that

because we've got this totally sui generis category of property, and people are starting to figure out that that's the case, there's an opportunity for the first time in 500 years to rewrite from scratch, if not ever, actually, to be honest with you. This is the first time ever that we can look at every single relationship in commercial law and property law, and we have an opportunity to redefine it from really year zero. So things in possession have been governed by laws for thousands of years. Things in action that you bring to court, similarly, those have been governed for thousands of years. But as we know it, the English legal system has really been quite advanced for the last 300 or 400. And so now we've got a new category of property. We're

going to need new relationships. We're going to need new stuff. We're going to need new rules around custody and then security and various other things. And it's a huge opportunity for any legal system willing to do that work to rewrite the rule book and create something that's digitally native and interesting. So that's kind of what happened in England. Well, how do we make sure if people agree that this new category of property exists, There needs to be new frameworks erected around it as it pertains to law. And you look around at the administrative state globally, whether it be here in the U.S., U.K., the world, they don't really seem to be respecting civil liberties or freedom in the digital age. Like, is it a problem that we have the administrative state in power now setting the precedent for all this stuff?

you know i think the problem with coming up with a global answer to that is that law is a very thoroughly local phenomenon right and it's something which a lot of lawyers are actually kind of bad at thinking about it in that way because they're usually most lawyers are only versed on one legal system um i i'm trained on two i got two law degrees from two different countries got admitted twice through you know from scratch in both places and that's england and the u.s so they're quite they're similar legal systems but they're different enough that like i kind of understand that nothing's really written in stone right it's just that everybody thinks it's written in stone because they haven't really they haven't uh they haven't managed to crawl out of

the cave yet um so there's it's very lawyers are very much like you know the the individuals in plato's cave seeing the shadows in the wall and mistaking it for reality um what they're looking at is thoroughly manmade, right? And it can be changed. And they just like, sometimes they lack the perspective to see how and what the pathway is, because they're so stuck in that one system in which they've been trained. So like law is local. I expect that there's going to be a lot of jurisdictional arbitrage between various countries. I have a huge amount of confidence, which I didn't have before the Law Commission did this, but I do now, that the English are being, that the English and UK more generally, so the Scots and the Northern Irish and the Welsh,

are being very capably advised by the Law Commission on this one. There are some very smart people who really understand crypto extremely well in the UK. And not only that, it's clear from the nature of the proposals that they're one of us, right? So there's a mole somewhere in the Law Commission, and I suspect there are more than one of them, or there is more than one of them. And they're being very well advised. And so I suspect that the English, and for whatever reason, I suspect the UK is going to come out okay when it comes to regulating this stuff. They're not so well advised when it comes to issues like free speech. So in the United Kingdom, they currently have a number of bills up for consideration. One of them is called the Online Safety Bill, which is basically, it's absolutely anathema

to traditional notions of freedom of expression that we have here in the United States. And it seems to be, despite huge amounts of opposition, it seems to still be marching forward, regardless of which government is going to be in power. Like if labor were in power, this bill would still be advancing. We saw the, was that out of the UK, the video of a man being arrested for causing stress to somebody on social media? Yeah, that would have been under Section 127 of the Communications Act 2003, which is sending a grossly offensive communication, I believe. Let me just make sure I got that right. So 127th Communications Act. Yeah, so it makes an offense, the Senate makes a grossly offensive or

an indecent, obscene or menacing character over a public electronic communications network. Like that's an example of one of, there are a couple of different UK provisions currently on the books, which criminalize basically being a troll, right? Section 127 of the Communications Act is one of them. Section one of the Malicious Communications Act is another. And so those, like, they would just not pass constitutional muster in the United States. It's like clearly infringing on American style freedom of speech. The online safety bill would basically impose regulatory obligations on providers of social media services to proactively police that content. So it gives the government an excuse essentially to sort of pry under the hood of a social media provider

that wants to operate in the United Kingdom and make them do what they want in terms of content moderation of propaganda or, you know, certain ideas which are offensive to the state. So if you didn't, you know, let's say they had this bill in the books three years ago and COVID happened, like you can guarantee that vaccine propaganda, for example, the government would seek to impose direct liability on social media companies for hosting, you know, COVID denialism as it was termed back then, even though much of that turned out to be true, right? So like that's the kind of stuff that exists in the United Kingdom.

you know, it's unfortunate that it does exist, but they just don't have the same tradition of freedom of speech that we do and haven't for a thousand years. So not unreasonable to expect that this is, uh, those are the kinds of laws that they have in the books. Yeah. Freedom of speech is Bitcoin speech. Uh, the Bitcoin code base is speech. I don't think Bitcoin is speech. I think, I think the code is speech. I think running a node is speech. Um, I think running a notice speech and i think publishing the code is speech uh transacting might be partially speech um depending on what you do what metadata you put on the transaction uh but like running a bitcoin

mixer that's probably not speech okay um yeah so so is a speech is a property i mean you have sailor calling a property you know the cftc defining it as a commodity yeah other it can be both i mean it can be both the bitcoin the bitcoin code base is property and it's speech right so it's property which is like the publishing when you publish the code you're engaged in speech um for sure right and when you whoever writes the code and contributes to it like they have a proprietary interest in the code which they submitted and it's licensed to you under the mit license right so it's capable of being multiple things to multiple people at you at different times and in different places and in different ways.

So in its capacity as code, it's speech. In its capacity as software, publishing software, which you might run on your computer when you run a full node, that's speech. And in the capacity of something which is capable of being transacted, where you can own it, it's property as well. So it can be both. Yeah. Is it legal tender? Now that El Salvador is rendered a legal tender,

Do we have to respect the international trade deal? It's legal tender in El Salvador, that's for sure. It's not legal tender here, but it's definitely legal tender in El Salvador. But aren't there people trying to make the argument that since aren't there some sections in international trade contracts that deem if one country renders a particular currency legal tender, anybody who is engaged in that trade agreement must also recognize that? I don't know. Usually, sometimes you'll see contracts where they designate a payment currency. So for example, they'll have a Greek bond, which is repayable in pound sterling or Greek bond,

which is repayable in euros. And so there was a concern. So back in 2014, 15-ish, The big concern was that Greece was going to crash out at the European Union and that they were going to replace the euro with the new drachma in order to get out of their debt crisis and re-denominate all government debts in the new drachma. So that was obviously a problem for certain securitization transactions where the currency of the transaction was the euro, because obviously the people who were note holders would have been very much left to hang out to dry if they had put euros into this deal and gotten back significantly devalued new drachma. And there were provisions saying that in the event of crashing out of the country in question, there are provisions in the contracts which dealt with what happened to that currency or to the contractually designated currency. So contracts can allocate risk in that way. So if your contract says, listen, you must pay in the legal tender of El Salvador, and the legal tender of El Salvador is Bitcoin. And presumably, you'd have to price it in something. So you'd say you can pay us an X dollar amount, either in US dollars, which I believe is the

other legal tender at El Salvador, or Bitcoin. And that would be fine. But that's something for the parties to allocate among themselves. However, El Salvador's designation of Bitcoin as legal tender doesn't really have any practical consequences for Americans, at least, in that we are taxable worldwide on our worldwide income and gains, right? So if you have a Bitcoin and you live in the United States, you buy the Bitcoin at $1 and you sell it for $10,000, you've got a gain of, let's call it $10,001. Then you have a gain of $10,000, which if you did it within a year of the initial

transaction, which of course is impossible given what Bitcoin did price-wise, but anyway, if you did it within a year, it's chargeable to income tax. And if you did it longer than a year, it's chargeable to capital gains. So that's the same actually with Forex transactions. So if you acquire foreign currency when you're out in England, right, and you're going and doing whatever, and you decide you're going to go buy a cup of coffee with it, right, instead of using USD. Well, actually, I suppose, so let's say you get foreign currency, and then you trade it back, and you make money when you trade it back, right? You would have to pay money on the gain that you realized when you did that foreign currency trade in practice right if there if

that ever does happen it's just like so de minimis that it's very rarely reported um you know and with bitcoin let's say you bought a cup of coffee with it right so you said i'm gonna go i'm gonna fly to england tomorrow and i'm gonna go buy a cup of coffee with this bitcoin i had and i acquired the Bitcoin, excuse me, for $1 and now it's worth 10,000. So I'm going to go buy this $3 cup of coffee with a much smaller. So normally I need, let's say I bought one Bitcoin for one buck. 10 years ago, it would have cost me three Bitcoins to buy the cup of coffee. Now it'll be 0.0001 Bitcoin to buy the cup of coffee. Technically, when you do that, right, you're realizing a gain because you're getting something of value, the coffee in exchange for the Bitcoin that you've

just spent. There are proposals in the US to ensure the de minimis transactions, like under 600 bucks, aren't taxed, because it makes it a nightmare to use Bitcoin as money. If every time you go and use it for a grocery store purchase or a cup of coffee or whatever, you're paying tax on it. But if you went and bought something big, like a car, then you would have a tax hit on the disposal, presumably, based on the difference between your acquisition price and your disposal the price of those coins. So there are some complicated tax issues. The long story short is the only legal significance there could be for a designation of Bitcoin as legal tender would be here, where you price your acquisition and your disposal, right? There's no difference. So if

there's a fluctuation in the value of a dollar, right, between the day I buy it and the day I spend it, I don't have to pay for that fluctuation in the value of the dollar in terms of like the movement in prices. So for whatever reason, with gasoline, right? Let's say I get paid $100, right? And I go and I fill up my tank. I've got a big truck. It cost me $100 to fill up the tank today. Then graciously, Vladimir Putin decides to cut gas prices as he's done recently after his price hike. And so Vladimir Putin cuts gas prices too. This is a joke for anyone who's listening, but Vladimir Putin gives us the Putin price cut. And he says, listen, I'm going to cut gas prices now to $50 to fill up your tank. I don't suddenly have to go and I get paid another $100 and I go

spend it on gas. The dollar has gone up relative to the gasoline, but I don't have to go and pay a tax based on the gain, right? So basically dollars are standard everywhere. There's no tax payable when I dispose of them and I earn money, right? So that's the significance of legal tender here in the United States. There's only one body competent to set the legal tender of the United States and that's the Congress of the United States. So far, the thought that they would do that with Bitcoin and essentially make it tax exempt is remote. I think that's a very remote possibility, but that would be the one time where the designation

of Bitcoin as legal tender would have legal consequences. Is there a scenario in which you see Bitcoin becoming ubiquitous, people using it? value for value stuff like people you can see on my wallet right now like people are sending me every minute like of every day like so the nature of bitcoin the lightning network specifically i think this does does it create a scenario which is like almost too hard to enforce all this stuff it is it is essentially i'm not if you hire not if you hire 87 000 irs agents

like a tenth of a penny i'm getting like every minute of every day that's awesome like that's that's awesome like but like so in i think in practice it's it's not really the people who are accumulating bitcoin now it's not going to be so relevant as later on because the bitcoin that's being accumulated now is going to be worth a lot later on, right? So if you're getting a 10th of a penny now, great. Keep stacking. That's all I got to say, is just keep stacking and stacking and stacking, and eventually you'll get to Valhalla. What I would say is that, what would I say? I would say that this is an issue which is going to have to be addressed later on when Bitcoin is more widely used for day-to-day transactions. And just given where

we are with layer two. Law is a trailing indicator, not a leading indicator, right? So legislative changes to address changes in human behavior tend to follow the actual changes in human behavior. The reason they do this is because you don't want to overbuild a legal system which doesn't actually address human reality, right? And so common law in particular tends to trail behind. Essentially, layer two is not big enough yet for any of these issues to become salient and important for the revenue to address. At the point where you have 100 million Americans transacting on Lightning Daily, we will get law reform, which says, listen, these transactions are de minimis. My guess is they'll do a carve out where they'll say any

transaction under $600 or $1,000 isn't taxable or something like that, or in aggregate isn't taxable. And then as crypto adoption grows, then you might move towards something like currency normalization. But we're nowhere. I mean, Lightning has, what, a million users, maybe? A couple million tops. So absolute tops.

I don't even know how many nodes there are. I need to look it up. But it's growing, but it's still very small. It's like where Bitcoin was in 2014. so that that's i think needs to catch up i think it'll catch up a lot more quickly than bitcoin has gotten to where it is i think you're probably looking at a very compressed time scale compared to bitcoin itself because bitcoin was the was the leader but um it still needs to grow into that and then create the legal problem which then the laws will be drafted to

address uh so you know people don't legislators aren't going to write laws for problems that haven't yet become problems. It's, they'll do, some legislators do do that. And when they do, they look stupid. So for example, the Wyoming Dow law is one such law. And we can go into that another time, but it's a stupid law that solves a non-problem and nobody's using it. So like they tried to be creative and get ahead of the curve and they wound up embarrassing themselves. So So, yeah, that's kind of my view on that, is that eventually the laws will catch up, but just we have to wait for the tech to make it a big enough problem

that the legislators pay attention to it. Yeah, that is crazy, the breakneck pace of development of the lighting network. I think, yeah, you said a million people. It's 1% of the way to 100 million. I think the stuff I'm seeing on the horizon is from the podcasting 2.0 alone. Like you're beginning to see podcasters that have no idea or they're not really interested in Bitcoin at all begin to push their users onto these podcasting 2.0 apps so that they can accumulate money in a different way. And I think there's a phenomenon going around where people are beginning to realize the benefits and the unique value prop and utility provided by the Bitcoin stack that it's beginning to bleed into popular culture, which is very interesting to see. Yeah, I concur.

I think lightning is going to be enormous. There are a lot of people who give it a lot of flack for this and that shortcoming. But I've seen all those arguments before. I made them once about Bitcoin itself, and they proved to be wrong. So the tech is growing in complexity and capability sufficiently quickly. But I think it's a matter of time before stuff like Lightning is in everyday use. Are Lightning Node operators going to need to get money transfer licenses? In my estimation, no.

But it depends. Let's see what the Treasury does. They may turn around. We'll have to see. But no. my my hunch is no all right good so i don't want to do that your mileage may vary this is not legal advice but that's just my hunch well i mean i had you uh on the calendar for an hour and a half we've gone over i want to respect your time on this beautiful friday yeah no i'm gonna i think

i'm gonna take the dog for a walk and uh i think that's a wonderful way to spend the afternoon so might do that but uh hey good talking to you as always it's always a pleasure well uh we'll have to do it again at some point in the future and uh yeah i mean very interesting times we find ourselves in freaks uh very happy that we were able to get preston on to to bring some clarity to the legal side of things in the in the bitcoin world appreciate you doing thanks thanks so much it's not a dog either it's a marmot in a dog suit this just this is yeah that's that's definitely definitely not a dog that's a that's a marmot that looks like a dog yes okay well go enjoy your marmot walk i'll uh i'll talk to you uh i'll see you on the internet awesome see you

on twitter in like two minutes yeah peace and love freaks Thank you.