I wrote several articles on the accounting and taxation implications of bitcoin in Canada and one day received a call from the Canadian Virtual Exchange, a bitcoin exchange — wanting to know if my firm wanted to start accepting bitcoin as payment. The lightbulb flicked and I immediately said yes. From there, Xen Accounting became the first professional accounting firm in Canada to accept bitcoin as payment. Not only did it open up to a whole new market, but it also better accommodated existing clients wanting to pay by bitcoins. It was a win-win. Accepting bitcoin can help satisfy two critical goals for most businesses: increase sales and service your customer base.
When you accept bitcoin, you open yourself up to a whole new market. Some people prefer to pay by cash, some prefer credit card, and today, some prefer to pay by bitcoin. The boom has created overnight millionaires and these people are looking for something to do with this money. As bitcoin becomes more mainstream, a good chunk of your current customer base will likely be dabbling in it as well. Offering another way to pay for your product or service is just another way to accommodate your clients and give them a choice.
Your business could get media attention. Xen Accounting for instance, was featured in several articles, interviewed on the radio and featured in our local newspaper. When a local business starts accepting this exciting new form of currency, the media wants to tell that story.
Accepting bitcoin can differ depending on where you are located in the world. In Canada, we had to register for a merchant account with our local bitcoin exchange and from there we could issue invoices, as well as receive payments in bitcoin, convert them to Canadian currency, then transfer to our business bank account. From there, you can give anyone your bitcoin wallet address and they can send you bitcoin. You can then send your bitcoin to any other wallet in the world.
There are many security precautions you can take, just Google it. The price of bitcoin is volatile, which is a risk if you are accepting bitcoin. As a policy matter, the policies that justify insider trading law for other financial assets also apply to crypto assets: We care about fairness, price accuracy, property rights, and the rest. Regulation can be useful for taming the former while respecting the latter. Although much of this Article focuses on insider trading with a new asset, an examination of insider trading law and policy in crypto assets teaches us more than the right way to regulate crypto assets.
Most importantly, a discussion of crypto assets gives us purchase on a general theory of the domain of insider trading law. There is a principle that links common stock and crypto assets, which are within the domain of insider trading law, but not commercial real estate and precious art and other assets, which are clearly beyond the domain.
Specifically, I apply a market microstructure framework to delineate the reach of insider trading law. Informed trading tends to increase price accuracy and decrease liquidity. Optimal insider trading policy is a function of those two effects: discouraging types of trading that decrease liquidity by more than they increase price accuracy. While both effects vary by type of informed trading, only liquidity effects vary greatly by asset class.
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That includes many high-volume, fungible assets such as stocks and crypto assets, but not parking lots and paintings. The structure of this Article is as follows. Part II provides a stylized introduction to the technology and community of crypto assets. Part III reviews insider trading law. Part IV refutes the notion that insider trading doctrine does not cover or fit crypto assets.
Part V addresses some reasons that crypto assets may differ from familiar assets in terms of the policies of insider trading law, showing that these considerations can support insider trading enforcement. Part VI widens the lens from crypto assets in search of a general principle of insider trading regulation.
Several caveats before beginning in earnest: First, this Article is not focused on many important legal and policy questions posed by crypto assets in relation to money laundering, 32 custody, 33 taxation, 34 contract law 35 and theory, 36 corporate governance, 37 environmental law, 38 financial stability, 39 law enforcement, 40 national autonomy, 41 bankruptcy, 42 theft, 43 and ordinary fraud. Second, genuine data and research on crypto assets remains scarce, and the technology changes rapidly in this space, 45 making it challenging to say anything both meaningful and enduring.
Third, this Article does not argue for a specific form of insider trading regulation for crypto assets or elsewhere. The literature on insider trading is vast and cannot be rehashed as an aside in the middle of an otherwise full paper. This Article is meant to be compatible with most debates elsewhere in the literature. When scholars call for more or less regulation of insider trading, they have in mind some domain: This Article is about defining that domain. Crypto assets emerge as the confluence of several important social, economic, and technological trends.
New technologies for distributed and peer-to-peer networks arose just before the financial crisis of shattered public confidence in familiar financial institutions. Crypto assets are a form of property distinguished by their use of a distributed ledger, 53 a system by which features of the asset and its current ownership are verified and recorded semi-publicly, with no one person serving as the official record-keeper. Crypto assets can be functionally organized into four overlapping types. First, a payment token is a crypto asset that is intended to be used as a form of virtual currency.
For example, many merchants accept bitcoin in lieu of legal tender. Because these tokens operate as substitutes for the traditional securities stocks and bonds used in capital markets, these can be called security tokens. It has become common in some circles to talk about an ICO, or initial coin offering, as a public sale of coins to raise money for an enterprise. Third, some tokens entitle the possessor to patronize a business as a customer or consumer. For example, Filecoin tokens entitle the user to claim a certain amount of cloud storage or cloud processing capacity from the related company, Filecoin.
Some forms of crowd-funding are also similar to crypto assets: Supporters may contribute money to a band in the hopes that they can someday hear their newly recorded album. Finally, some crypto assets are defined exclusively in terms of the value of other crypto assets. Each dollar invested delivers five times the gains or losses of owning bitcoin itself. These categories are not mutually exclusive.
Some merchants may decide to accept these tokens rather than cash payment. The crypto asset drama has a cast of four main characters, 66 though a given individual may play more than one role at once. Users invest in, spend, or trade crypto assets. Developers work to create, market, and improve crypto assets. Many developers are programmers who work on technical problems including code, but some developers play managerial, strategic, or communicative roles. Trading venues are web-based businesses at which crypto assets may be bought or sold.
Finally, miners play a distinctive role in maintaining the ledger, the decentralized scorecard of who owns what. Miners are persons or corporations that own computers, which they instruct to perform computational operations essential to maintaining the ledger. For this service, they are compensated by fees, often in the form of the relevant crypto assets.
It is often said that crypto asset transactions are irreversible and immutable, 68 but this is only is half-right. The redundant records produced across multiple computers means that no single actor can unilaterally alter or conceal a record or lose it in a fire. Any time miners adopt a new version of a preexisting chain, it is a fork. However, if some miners continue to process transactions under the old chain after a fork, then there are two chains.
Both may persist, with independent value and a community of devoted users, or one may cannibalize attention and drive the other out of the economy. Some miners vote with their mining assets to support an alternative chain, and users vote with their wallets which version of the chain to buy and use. If transactional details were hidden, it would be impossible for miners to conclusively decide whether putative subsequent transactions were compatible with existing endowments. For example, if John transfers all his crypto assets to Rachel on Monday and then purports to transfer them all to Nancy on Tuesday, it is essential that the latter transaction be rejected by the community.
These two key traits of crypto assets, permanence and transparency, interact to produce a surprisingly accountable transactional universe. This Part provides a brief primer on federal insider trading law. Specific prohibitions on insider trading arise under three bodies of law: securities regulation, commodities regulation, and federal wire and mail fraud. This Part reviews the various theories of liability under each body of law.
The main source of insider trading law is securities regulation, as articulated in the Securities Act of , 82 the Securities Exchange Act of , 83 subsequent SEC rules, and judicial decisions. These laws apply only to trading in securities, 84 a category that includes most stocks and bonds, as well as similar assets and instruments whose value is fundamentally linked to them.
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There are three statutory or regulatory prohibitions on insider trading in securities. Second, Exchange Act Rule 14e-3 bars trading while in possession of material nonpublic information about a pending tender offer. Insider trading law overcomes this problem by identifying circumstances in which silence can be fraudulent.
The classical theory holds that a trader defrauds the shareholder with whom she trades by failing to disclose important information to a person for whom she is a fiduciary. The classical theory primarily contemplates inside trading by an officer or director, 95 who can be said to indirectly work for and manage property on behalf of her shareholders. The misappropriation theory holds that a trader who feigns loyalty to a company or person to gain access to secrets ultimately defrauds his source out of information when he misuses the information for trading.
For example, the misappropriation theory is violated if a member of Alcoholics Anonymous trades based on information learned at their confidential meetings, or a broker front-runs i. The Department of Justice can bring insider trading cases under the federal mail fraud and wire fraud statutes. It is common to believe that insider trading law and crypto assets do not fit together. Other skepticism arises out of issues that are distinctive to crypto assets.
Some wonder whether crypto assets fit into any regulatory box subject to insider trading law. And just what is material to an asset as speculative as Bitcoin or as fanciful as some of its lesser known competitors, such as CryptoKitty? This Part shows that the law of insider trading can, and in many cases does, apply to cryptocurrency. Although the three key issues jurisdiction; material non-public information; and duty are treated separately below, it is worth keeping in mind the following case in which all three allegedly came together.
Trading in advance of an announcement violated company policy. This Part does not argue that the law should apply in any given case or any cases at all. That policy discussion exists in Parts V and VI. Rather, the point is that cryptocurrency is a perfectly sensible subject of insider trading regulation, and it is a policy decision whether to ratify that existing status.