Crypto Caselaw Minute #30–4/4/2019

This week’s Crypto Caselaw Minute covers some intriguing ground. Is teaching someone how to use bitcoin potentially nefarious? Is a boom in crypto mining that leads to energy price hikes a-okay? Is the identity of Satoshi Nakamoto even relevant? Those questions are discussed below. [As always, Rosario summaries are “NMR” and Palley summaries are “SDP”]

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes. (Picture credit: ; Pixabay License.)

US v. Hagan, Case No. 18–1430 (6th Cir. March 25, 2019)[NMR]

Link to the decision.

When you plead guilty to, or are convicted of, a crime you do not always know what sentence you’ll receive for the crime until after a sentencing hearing is held. At a sentencing hearing the judge in your case will determine what sentence is appropriate based on you past criminal history, the severity of your crime, as well as statements from the prosecution, the defense, and in some cases the victim. Depending on the jurisdiction judges will consult sentencing guidelines and they often have wide discretion to enhancement or lessen your sentence. This case, US v. Hagan, concerns an appeal of an enhanced sentence.

Nathaniel Hagan pled guilty to crimes arising out of his running a drug distribution ring that dominated the Lansing, Michigan ecstasy market. After he was arrested, Hagan cooperated with law enforcement to explain how his operation functioned. During the course of the investigation law enforcement learned that Hagan “had been distributing MDMA, LSD, DMT, mushrooms, and marijuana for approximately one year. He had at least seven customers, some of whom dealt the drugs Hagan sold them to others.” Hagan would use bitcoin to buy drugs on the dark web, he would sometimes complete the manufacture of certain drugs at his apartment, and he regularly coordinated the activity of his purchasers. At the sentencing hearing the district court applied two enhancements to Hagan’s sentence. The first was a drug house enhancement, and the second was a leadership enhancement. Hagan filed this appeal contesting both of those enhancements. He lost that appeal.

With respect to the drug house enhancement the Court found that Hagan’s apartment was central to his drug enterprise, and that the enhancement was not applied in clear error by the lower court. For leadership enhancement, the Court looked at several factors to determine if Hagan “organized or led ‘criminal activity that involved five or more participants or was otherwise extensive.’” Hagan had the connections to Dark Web drug sources, and coordinated the activities of his customers in the following ways:

Hagan’s outsized role in the conspiracy is apparent from his many text messages with customers, in which he bragged about his unique ability to “move 20 grand of product,” R. 34, PID 267, informed some distributors how to launder money or buy Bitcoin, advised other distributors what prices to set for their own deals, and explained to others how he manufactured his product. (emphasis added)

Given these and other factors the Court held that the leadership enhancement was appropriate in this case. It’s interesting that the Court specifically called out Hagan’s role in instructing his distributors on how to buy bitcoin. It seems that the judge might have thought that teaching someone who is part of a criminal enterprise how to buy bitcoin is somehow akin to teaching them how to launder money. Will we see this as a factor in criminal cases in the future? Maybe. Maybe not. It depends.

Blocktree Props., LLC v. Pub. Utility Dist. №2 of Grant Cty. Wash., 2019 U.S. Dist. LEXIS 54423 (E.D. Wash. 2019) [SDP]

Cryptocurrency litigation really runs the gamut. This particular opinion takes us deep into the really exciting world of electricity rate setting. OK, maybe electricity rates aren’t that exciting … unless you are cryptocurrency miner, like the plaintiffs are in this case, and that case rates are the difference between big bucks and big losses,

The Plaintiffs here a group of tech firms mostly focused on crypto mining. They asked a federal judge in Washington States to enjoin the Grant County Public Utility District (“PUD”) from implementing a new rate class which would substantially increase electricity rates charged to “evolving industries,” which would include crypto miners. The Court declined to grant the injunction because it found that the rate wasn’t discriminatory, arbitrary, made without due process, or violated the miners’ constitutional rights.

The Court begins its analysis by explaining blockchain tech in general and mining as well. It points out that one of a miner’s biggest expenses (the biggest?) is electricity, so miners locate themselves in places with cheap electricity, like Washington, apparently, with cheap hydroelectric power.

This particular PUD is a Washington States municipal corporation and claims to have the cheapest electricity in the country. It sets rates based on operations and power consumption, and different industries are grouped together. To deal with the significant interest from mining industry, it created an “evolving industry” rate class for miners.

Suffice it to say that the local mining industry didn’t like this new rate class because they said it would make their rates increase between 295% to 400%, effective April 1, which I am sure was just a coincidence.

Utility rates in Washington state are presumed reasonable, the Court says, “and courts will only overturn the rates if they are excessive and disproportionate to the services rendered or arbitrary and capricious.” The Court rejected Plaintiff’s challenge, noting in particular that it “fails to recognize one of the main aspects of the District’s justification for classifying cryptocurrency mining as an evolving industry: the sudden influx of interest from cryptocurrency mining companies in the District’s area of service. According to the District, since the summer of 2017, they have received 125 requests for service totaling 2,000 MW of new load, 75% of the new load being from cryptocurrency mining operations.”

Plaintiffs raise a couple of other arguments — including alleged violation of federal and state due process rights — and the Court shoots these down as well in the opinion. Now this is not a final order and it can certainly be vacated, appealed or modified at some point, but for now it shows that one of the real business risks associated with mining is long term assurance of electricity pricing. Bitcoin and other proof of work cryptocurrencies are in one way of thinking a form of electricity arbitrage. If power pricing can go up by 400 percent because some PUD says so, that’s a significant risk to consider at the outset. And as this opinion shows — at least in the US — rate challenges are not a straight over tackle proposition.

Kleiman v. Wright, CASE NO. 18-CV-80176-BB (SD Fla. March 26, 2019)[NMR]

Link to discovery meeting transcript.

In a lawsuit, the most time-consuming part is often the discovery process. Discovery is the way in which each side in the lawsuit gathers all the information that they feel is relevant to the case at hand. Information is gathered through interrogatories (written questions the other side is required to answer), requests for documents, requests for admissions (requiring a party to admit or deny something), and deposing witnesses where people are questioned under oath.

The discovery process takes a long time, because there is usually a lot of information to sift through, and there is always disagreement as to what information is relevant to case. Ultimately, those disputes over what is relevant is determined by a judge taking into consideration arguments from each party. Recently, there was a hearing on a newly filed joint discovery memo in this case that provides some insight into what information each side in this case wants.

Before jumping into what is going on in discovery, to briefly recap, this case involves Dave Kleiman’s brother Ira suing Dr. Craig Wright for alleged theft of over 1 million bitcoin that Dave allegedly controlled, as well as alleged theft of certain intellectual property associated with the creation of bitcoin. Okay, so where is discovery at right now? The first thing that jumps out from the transcript is the sheer amount of information that each side is having to deal with. Supposedly, the plaintiff has 1 million documents from the relevant time period, and the defense has somewhere in the neighborhood of 1.2–1.3 million documents.

One issue is what constitutes the universe of relevant documents. Typically, discovery works by identifying what documents might be relevant, collecting said documents, and ultimately producing said documents for the other side. As the judge put it “what I hear both sides saying is I don’t really know what the other side has. To me, that is a fairly fundamental discussion that you don’t need me to be here today.” Each side did not completely agree with that characterization and instead thinks the issue is more that the other side will not give them all the information they feel they are entitled to. One thing that the judge did at the hearing, and he referred to with respect to this issue, was to order each party to commit to a rolling “production schedule” whereby at agreed upon intervals they would turn over whatever documents they had found to be relevant at that time. The reason for this is that each side is staring at a June deadline for completing discovery, and although the judge was sure to state that he felt each side was acting in good faith they needed to move things along.

Another interesting consequence of this hearing has to do with the Satoshi Question. The plaintiffs allege that Dave Kleiman and Dr. Craig Wright partnered to create bitcoin, mine bitcoin, and develop intellectual property related to bitcoin. The plaintiff wants answers to from the defendant to interrogatories as to who all may have controlled the three email addresses known to have been used by Satoshi Nakamoto, as well as any information as to who all was involved in what they believe was “ association of co-owners for profit.” The defendant did not think these questions should be in an interrogatory, because:

[t]o put this in the form of an interrogatory essentially requires Dr. Wright to go back in time, because it’s asking for finite information, and sort of piece together everything that he’s done in his life in this space, as it were, in this cryptocurrency space, and we think it is inappropriate.

The judge overruled the objection to the interrogatories and as a consequence the defense will have to respond to those interrogatories. Additionally, the questions may come up during the deposition of Dr. Wright, which is scheduled for April 4, 2019. Today.



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