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US authorities recently indicted 18 people on charges of cryptocurrency market manipulation following an investigative operation by the Federal Bureau of Investigation (FBI). The FBI created tokens for legal practitioners to lure market makers into illegal wash trading.
This incident has sparked controversy within the cryptocurrency industry over the application of traditional financial laws, including anti-market manipulation regulations. The case also raises potential copyright issues, with claims that the FBI improperly used open source code for the tokens.
Meanwhile, technologies such as autonomous AI agents are now responsible for controlling cryptocurrency wallets, and questions about the liability of cryptocurrency transactions and tokens become more complex. Who is ultimately responsible?
Magazine spoke to a panel of legal experts to find out more. Catherine Smirnova, Co-Founder of Digital & Analogue Partners in Europe, Joshua Chu (Asia), Co-Chairman of the Hong Kong Web3 Association, and Charlyn Ho, Managing Partner of Rikka Law (USA).
The discussion has been edited for clarity and brevity.
Magazine: The U.S. Department of Justice has indicted 18 individuals and entities on charges of market manipulation and disguised trading. How is wash trading legally defined and how does it apply to the cryptocurrency industry?
Smirnova: The definition of wash trading is somewhat similar in various markets such as the US, UK, and EU. This belongs not only to the cryptocurrency market but also to the financial market. This involves buying and selling the same security simultaneously to create misleading market activity or create the false impression that there is high demand for that asset.
This is completely illegal in every single legal system, and surprisingly, it makes no difference to cryptocurrency assets. This is the securities market. Yes. White-collar crime is illegal. Even if the asset is a cryptocurrency asset, it is still a crime.
weight: Hong Kong has a mechanism that basically prohibits people from engaging in market manipulation, such as securities. We have these provisions in Section 53 of the Anti-Money Laundering Ordinance, which allows regulators to punish those who recklessly encourage or induce people to purchase virtual assets. The language of the Act was copied from the Securities Act.
If you know that it is unjustifiable for a certain product to have a certain price, but you take certain actions to raise the price and induce others to follow suit with a certain purchase, you may be prosecuted in and of themselves.
I have always argued that we don’t need a new set of rules to govern new technologies because existing laws are much better suited to dealing with most crimes. Fraud will always be fraud, (and) market manipulation will always be market manipulation.
Magazine: The FBI created its own token to lure market manipulators and wash traders in this operation. The public discussion about So, did you? The FBI violated the MIT license. So does that constitute copyright infringement?
to: The FBI failed to properly include the open source license text and attribution of the MIT Open Source License. This is more of an oversight than a copyright infringement. Copyright infringement means you do not have a legal right to use the code.
The MIT license is generally very permissive. This basically means that anyone who obtains a copy of this software and related documentation is granted free of charge the right to deal with it without restriction. The only condition is that the copyright notice and this permission notice must be included in all copies or substantial portions of the Software.
Thus, User
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Magazine: Could failure to include attribution under the MIT License constitute copyright infringement?
to: If we’re very picky about it, yes. It can be argued that it is an infringement because failure to meet this condition means they never received this permission in the first place. However, if challenged in an actual court, it would probably appear that the intent of the license has been met. Failure to copy this attribution notice does not defeat the entire intent of this MIT License, which is broadly designed to give people broad rights to use the software.
I take some issue with this alleged breach by user
Magazine: U.S. authorities and regulators are becoming more aggressive in cracking down on cryptocurrency companies, and the industry itself is calling for regulatory clarity.
So why aren’t more businesses attracted to the EU, where regulatory clarity is being developed through frameworks such as the Markets in Crypto Assets (MiCA) Regulation?
Smirnova: Today, Europe is in disarray because it still does not understand how to maintain its regulatory approach to new markets.
Mario Draghi, consultant to the European Commission, published a report on the EU’s competitiveness in the digital world. He said our regulatory approach is not working. The EU is trying to make life easier through a proactive approach, meaning preventive regulation before a breach occurs.
It has the opposite effect. It is easier for technology startups to enter growing markets without specific rules. I completely agree with Joshua that new technologies do not need new regulations because the nature of the market is still the same.
The gray area is still better for startups.
to: Numerous lawsuits have been filed against the SEC to prevent it from enacting the law through enforcement actions. In the United States, laws must come from the legislative branch, Congress, and not from the executive branch under the First Amendment. The executive branch has no power to make laws. This is an expansion of the Office of the President.
This is why many companies like Coinbase, Consensys, etc. are suing the SEC and claiming (SEC Chairman Gary) Gensler’s agency abused its power. If someone more pro-cryptocurrency comes into power, I expect there will be changes in the way the SEC operates.
Magazine: AI agents can now own cryptocurrency wallets. How will the authorities view the burden of responsibility on autonomous agents with financial capacity?
Smirnova: Frankly, we are really entering an area of uncertainty because there is no clear view on AI responsibilities yet. And when you talk about AI and cryptocurrency, it gets really crazy.
As for liability, I believe that the owners of these AI agents could be held liable for transactions with illegal actors, for illegal purposes, or for illegal assets. Even if autonomous, the owner has a duty to control the agent. This is what the EU’s civil law system says.
to: In the United States, AI responsibilities are also not necessarily clear. There is no equivalent EU artificial intelligence law at the federal level in the United States. There are certain states that have enacted the law at the state level, but so far only one: Colorado. There are many ordinances that are much narrower in scope, such as how to use AI in hiring, but EU AI law doesn’t really have that kind of governance at the federal level in the United States.
Therefore, it is difficult to say whether cryptocurrency agents will be held liable. And given the decentralized nature of cryptocurrencies, how far down the chain of responsibility should you go? It will be interesting to see how it works.
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Regulators will really struggle to figure out how to place parameters around AI agents. This is especially true when AI agents have their own wallets and can transact independently. This is absolutely ridiculous.
weight: AI agents ultimately perform through user messages. And of course the user is responsible. In reality, it’s quite simple to determine whether your service provider properly documents who their end users are. That’s a completely different area. And since this is heading towards KYC, it will actually require regulation.
Of course, if you were to say that it’s really ambiguous who owns responsibility at the moment, I would say no, because it’s pretty well spelled out in the user terms and conditions. Basically, you cannot use the AI agent deployed by Coinbase. You have to go through Coinbase. So the terms and conditions actually create the first layer of the risk-bearing contract.
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Yoon Yohan
Yohan Yoon is a multimedia journalist covering blockchain since 2017. He contributed as an editor to Forkast, a media outlet specializing in cryptocurrency, and covered Asian technology stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking and experimenting with new recipes.