A proven fact is that blockchains and cryptocurrencies work outside of the commercial banking system. However, this particular feature becomes a challenge when cryptocurrencies are stolen (or more accurately, transferred without the account owner's consent) when the account owner provides some service. Unlike traditional banks, which can track funds, block transfers, or "recover" fraudulent funds, cryptocurrency exchanges have limited ability to detect fraudulently transferred funds. In addition, user agreements with the exchanges release the exchange from any liability for such fraudulent transfers, transfer account protection responsibility to customers and appoint arbitration to resolve disputes.
There are still no cryptocurrency-specific laws governing liability in such situations. Instead of inventing new avenues, courts relied on the old fraudulent wire transfer rules that governed the banking industry. According to banking law, determining whether the transfer is fraudulent depends on the purpose for which the account was created and the stolen property is considered "funds". Conflicting decisions stemming from cryptocurrency theft from Internet broker Uphold show that the court is trying to navigate the application of new technology to these old laws. In February, a court found the exchange liable for fraud, and another federal judge ruled last week that the same exchange was not liable under the same law, leaving cryptocurrency owners in limbo.
Electronic box? DILEMMA
In the year In 1978, in response to the advent of "electronic" banking and the risks it posed, Congress passed the Electronic Funds Transfer Act (EFTA). The purpose of this law, along with regulation E12 of the related law, is to place responsibility on senders, receivers, account holders and financial institutions for the theft or misdirection of "electronic funds transfers". By law and regulation, non-business customers' liability for unauthorized transfers is limited if they notify the bank of the unauthorized transfer. Although the regulation typically provides for nominal consumer fees of $25 to $50, most banks have voluntarily recovered fraud losses to increase ATM usage and reduce operating costs.
For more complex business customers, Regulation E does not apply. Instead, such transactions are governed by UCC 4A-205, which exempts financial institutions from liability for making fraudulent transfers if the financial institution can demonstrate that it used a secure and "commercially reasonable" method. Confirmation. In fact, many merchant account agreements contain terms that require the account holder to provide a "commercially reasonable" bank guarantee.
Transferring encrypted "money"?
Fast forward to 2020 and questions will arise as to whether these regulations apply to all electronic money transfers like cryptocurrencies. If a hacker "steals" cryptocurrency from a broker, wallet, or other cryptocurrency transfer agent, or requests money to be transferred to another wallet, does that count as an electronic "funds" transfer under 1978? In that case, the consumer (account holder) will have limited or no liability for fraudulent transfers.
According to the regulations, "electronic funds transfer" means any transfer of funds through an electronic terminal, telephone, computer or magnetic device other than a check, money order or similar paper instrument transaction. By ordering, directing, or authorizing a tape to pay a financial institution's account. Specifically, the Act defines "financial institution" as "a state or national bank, state or federal savings and loan association, mutual savings bank, state or federal credit union, or any other person with whom you directly or indirectly have a customer account."
Cryptocurrency exchanges hold currencies in an account (wallet) on behalf of the client or consumer. They then "transfer" that cryptocurrency from one "account" to another based on the client's instructions. This makes it a "financial institution" and makes the transfer an "electronic fund transfer", for which the customer assumes no responsibility if the transfer is fraudulent or unauthorized.
This means that if cryptocurrency is a "fund" (which is highly unlikely), the law only regulates "money transfers". If the cryptocurrency is a commodity (such as a gold bullion, 1,640 Dutch tulips, or a penny) and not a fund , logic dictates that the Electronic Funds Transfer Act should not apply. Similarly, if the cryptocurrency is a security, futures product or something other than a "fund", the EFTA rules may not apply.
A matter of meaning
In February of this year, the New York Federal District Court answered a question about this funding. In Ryder et al. c. HQ Inc. And others, the court stated that cryptocurrency is a "fund" under the European Free Trade Agreement, the common dictionary definition of "money" is a monetary exchange that can be used to pay. Products and services. Therefore, according to this court, cryptocurrency is a fund and an exchange fund that "operates" and therefore a "financial institution" can be held liable for fraudulent transactions.
What is the calculation?
Recently, in Yuille v. Reach HQ , another judge in the same court with Ryder said the same issue: cryptocurrency wallet is an extended protection from cryptocurrency theft and Regulation E, holding consumers harmless. According to Judge Louis Lehman in the Ryder case, Regulation E does not apply because cryptocurrencies do not qualify as "funds" but because a cryptocurrency wallet does not meet the legal definition of an "account." Or rather, because cryptocurrency wallets aren't designed to be a "withdrawal" account rather than a non-withdrawal account. The Act defines an "account" as a "demand deposit, savings deposit, or other active account ... established primarily for personal, family, or household purposes."
Here, the court looked at the intention of the cryptocurrency account owner to create the account. The court stated that the account holder had opened the account.
- "To hold [Bitcoin]."
- "To sell and reduce to dollars and transfer dollars to your bank."
- To trade cryptocurrencies listed on Uphold.
The judge ruled that the crypto wallet was not an "account" deserving of protection because the purpose of the cryptocurrency investment was not an "investment" or "profit purpose" and not a "personal, family or household purpose."
Where does this guy leave his cryptocurrency wallet?
Consumer or investor?
Cryptocurrencies should serve two purposes: To be a medium of exchange for goods and services (from groceries to furniture, etc.). If we look at them as a form of exchange, losses can be protected by rules designed to protect ATM debits. The cards. However, this decision will be case-by-case as each consumer's desire to buy or hold cryptocurrency is taken into account. A comprehensive account of the fraud risks of unauthorized cryptocurrency transfers through laws, regulations or contracts helps consumers and businesses understand their risks and responsibilities.
Summary
While the status of cryptocurrencies as "funds" under the European Free Trade Agreement is open to interpretation, a compelling case can be made by showing that financial institutions are consumers, not intermediaries. Responsibility. danger. Fraudulent transfer..
The court's final decision was that the difficulty was related to the consumer's desire to carry a wallet rather than use it as a purse. For example, if a consumer puts money into a savings account to pay off debt, but receives a staggering 0.1% annual interest, does his "investment" purpose outweigh the purpose of the account and lead to a fraudulent transaction? Being responsible? Similarly, for home-based businesses operating from personal consumer accounts, does using a bank account for both business and consumer purposes make it fair game for hackers?
The European Free Trade Agreement began in the late 1970s, and it is clear that times have changed significantly since then. Therefore, there is a clear need to update the platform to adapt to the dynamic changes in the technology landscape.