Cyphernomicon Top
Cyphernomicon 12.9

Digital Cash and Net Commerce:
Legal Issues with Digital Cash

   10.8.1. "What's the legal status of digital cash?"
           - It hasn't been tested, like a lot of crypto protocols. It
              may be many years before these systems are tested.
   10.8.2. "Is there a tie between digital cash and money laundering?"
           - There doesn't have to be, but many of us believe the
              widespread deployment of digital, untraceable cash will
              make possible new approaches
           - Hence the importance of digital cash for crypto anarchy and
              related ideas.
           - (In case it isn't obvious, I consider money-laundering a
   10.8.3. "Is it true the government of the U.S. can limit funds
            transfers outside the U.S.?"
           - Many issues here. Certainly some laws exist. Certainly
              people are prosecuted every day for violating currency
              export laws. Many avenues exist.
           - "LEGALITY - There isn't and will never be a law restricting
              the sending of funds outside the United States.  How do I
              know?  Simple.  As a country dependant on international
              trade (billions of dollars a year and counting), the
              American economy would be destroyed." [David Johnson,
    , "Offshore Banking & Privacy,"
              alt.privacy, 1994-07-05]
   10.8.4. "Are "alternative currencies" allowed in the U.S.? And what's
            the implication for digital cash of various forms?
           - Tokens, coupons, gift certificates are allowed, but face
              various regulations. Casino chips were once treated as
              cash, but are now more regulated (inter-casino conversion
              is no longer allowed).
           - Any attempt to use such coupons as an alternative currency
              face obstacles.  The coupons may be allowed, but heavily
              regulated (reporting requirements, etc.).
           - Perry Metzger notes, bearer bonds are now illegal in the
              U.S. (a bearer bond represented cash, in that no name was
              attached to the bond--the "bearer" could sell it for cash
              or redeem it...worked great for transporting large amounts
              of cash in compact form).
           + Note: Duncan Frissell claims that bearer bonds are _not_
             - "Under the Tax Equity and Fiscal Responsibility Act of
                1982 (TEFRA), any interest payments made on *new* issues
                of domestic bearer bonds are not deductible as an
                ordinary and necessary business expense so none have been
                issued since then.  At the same time, the Feds
                administratively stopped issuing treasury securities in
                bearer form.  Old issues of government and corporate debt
                in bearer form still exist and will exist and trade for
                30 or more years after 1982.  Additionally, US residents
                can legally buy foreign bearer securities." [Duncan
                Frissell, 1994-08-10]
             - Someone else has a slightly different view: "The last US
                Bearer Bond issues mature in 1997. I also believe that to
                collect interest, and to redeem the bond at maturity, you
                must give your name and tax-id number to the paying
                agent. (I can check with the department here that handles
                it if anyone is interested in the pertinent OCC regs that
                apply)"  [, 1994-08-10]
             - I cite this gory detail to give readers some idea about
                how much confusion there is about these subjects. The
                usual advice is to "seek competent counsel," but in fact
                most lawyers have no clear ideas about the optimum
                strategies, and the run-of-the-mill advisor may mislead
                one dangerously. Tread carefully.
           - This has implications for digital cash, of course.
   10.8.5. "Why might digital cash and related techologies take hold
            early in illegal markets? That is, will the Mob be an early
           - untraceability needed
           - and reputations matter to them
           - they've shown in the past that they will try new
              approaches, a la the money movements of the drug cartels,
              novel methods for security, etc.
   10.8.6. "Electronic cash...will it have to comply with laws, and
           - Concerns will be raised about the anonymity aspects, the
              usefulness for evading taxes and reporting requirements,
           - a messy issue, sure to be debated and legislated about for
              many years
           + split the cash into many this "structuring"? is
              it legal?
             - some rules indicate the structuring per se is not
                illegal, only tax evasion or currency control evasion
             - what then of systems which _automatically_, as a basic
                feature, split the cash up into multiple pieces and move
   10.8.7. Currency controls, flight capital regulations, boycotts,
            asset seizures, etc.
           - all are pressures to find alternate ways for capital to
           - all add to the lack of confidence, which, paradoxically to
              lawmakers, makes capital flight all the more likely
   10.8.8. "Will banking regulators allow digital cash?"
           - Not easily, that's for sure. The maze of regulations,
              restrictions, tax laws, and legal rulings is daunting. Eric
              Hughes spent a lot of time reading up on the laws regarding
              banks, commercial paper, taxes, etc., and concluded much
              the same. I'm not saying it's impossible--indeed, I believe
              it will someday happen, in some form--but the obstacles are
           + Some issues:
             + Will such an operation be allowed to be centered or based
                in the U.S.?
               - What states? What laws? Bank vs. Savings and Loan vs.
                  Credit Union vs. Securities Broker vs. something else?
             + Will customers be able to access such entities offshore,
                outside the U.S.?
               - strong crypto makes communication possible, but it may
                  be difficult, not part of the business fabric, etc.
                  (and hence not so useful--if one has to send PGP-
                  encrypted instructions to one's banker, and can't use
                  the clearing infrastructure....)
             + Tax collection, money-laundering laws, disclosure laws,
                "know your customer" laws....all are areas where a
                "digital bank" could be shut down forthwith. Any bank not
                filling out the proper forms (including mandatory
                reporting of transactions of certain amounts and types,
                and the Social Security/Taxpayer Number of customers)
                faces huge fines, penalties, and regulatory sanctions.
               - and the existing players in the banking and securities
                  business will not sit idly by while newcomers enter
                  their market; they will seek to force newcomers to jump
                  through the same hoops they had to (studies indicate
                  large corporations actually _like_ red tape, as it
                  helps them relative to smaller companies)
           - Concluson: Digital banks will not be "launched" without a
              *lot* of work by lawyers, accountants, tax experts,
              lobbyists, etc. "Lemonade stand digital banks" (TM) will
              not survive for long. Kids, don't try this at home!
           - (Many new industries we are familiar with--software,
              microcomputers--had very little regulation, rightly so. But
              the effect is that many of us are unprepared to understand
              the massive amount of red tape which businesses in other
              areas, notably banking, face.)
   10.8.9. Legal obstacles to digital money. If governments don't want
            anonymous cash, they can make things tough.
           + As both Perry Metzger and Eric Hughes have said many times,
              regulations can make life very difficult. Compliance with
              laws is a major cost of doing business.
             - ~"The cost of compliance in a typical USA bank is 14% of
                operating costs."~ [Eric Hughes, citing an "American
                Banker" article, 1994-08-30]
           + The maze of regulations is navigable by larger
              institutions, with staffs of lawyers, accountants, tax
              specialists, etc., but is essentially beyond the
              capabilities of very small institutions, at least in the
             - this may or may not remain the case, as computers
                proliferate. A "bank-in-a-box" program might help. My
                suspicion is that a certain size of staff is needed just
                to handle the face-to-face meetings and hoop-jumping.
           + "New World Order"
             - U.S. urging other countries to "play ball" on banking
                secrecy, on tax evasion extradition, on immigration, etc.
             - this is closing off the former loopholes and escape
                hatches that allowed people to escape repressive
                taxation...the implications for digital money banks are
                unclear, but worrisome.

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