As much as any Bank would prefer to avoid being pulled into a Federal Criminal case, the fact of the matter is: it happens. I have had occasion to deal with a few of these for clients and have some suggestions.  The blog post considers a Bank’s response in the event a borrower is the subject of a Federal Grand Jury Proceeding and the Bank receives a subpoena.

For those of you who have not had to deal with it, a Federal Grand Jury is the body which considers whether to indict under Federal Criminal Statutes. Through this process, federal prosecutors have very broad power to compel testimony and production of documents.  In my experience, when a Bank gets subpoenaed into a Federal Grand Jury proceeding, it is to produce documents.  However, the difference between being a document source and a subject of investigation can be a close call.  Below are my suggestions for immediate consideration by the Bank in such a scenario upon receipt of a subpoena from a Federal Grand Jury.

Don’t make it a topic of discussion around the office. If you are not the legal officer within the Bank, go directly to that legal officer and do not talk to anyone about the Federal Grand Jury subpoena.  There are a number of good reasons for this, among them is that there may be a gag order in place.

Contact Outside Counsel. You probably hear this a lot from your outside counsel, but if you receive a Federal Grand Jury subpoena call your counsel immediately.  Time is of the essence.  Call me if you want, but please call your counsel right away.  Time is running from the moment you receive it, and trust me this is the real deal.

Outside Counsel should make contact with the USA. It is difficult to overstate the value communications with the United States Attorney (a “USA”) or the Assistant United States Attorney (an “AUSA”).  This can provide a credibility building exercise which can provide expeditious transfer of information, reduce cost and risk if done with integrity.

Be Prepared to Timely Produce Documents. There are surprisingly few objections to a Federal Grand Jury subpoena.  Be prepared to produce documents and information.  In my experience, the subpoena will request an enormous amount of information.  Outside counsel’s credibility with the AUSA will be critical in the ability to narrow the scope of the subpoena.

A Gag Order is preferable. Most clients have an initially negative reaction to being involved in a grand jury proceeding with a gag order – an order that prevents disclosure of the information involved.  I can tell you from experience, this is likely preferable for a number of reasons.  However, this does pose a serious risk to undisciplined organizations who simply share the existence of the subpoena around the office for one reason or another.

What about a SAR? The first rule of a SAR is that we don’t talk about a SAR.  There are rules about production of a SAR pursuant to a subpoena.  If you have any issue come up concerning this please feel free to give me a call.

Each response will be incredibly fact intensive, and no two responses are the same. However, swift engagement by outside counsel and a coordinated and timely response by the Bank will make a big difference between providing documents or having to produce a Bank representative to the grand jury.

There is a growing trend in the world of finance whereby the loan documents and signatures for the loan documents are all electronic. That is to say, there was never an actual physical document and thus no “signature” in the classic sense of the word.  The statutes are in place to deal with that trend, but a lack of case law makes disputes among Banks assigning these notes an open question.  Its always good to be at the front of a good trend, but the opposite is also true.

Credit: Warner Brothers

As you probably are aware, nationally electronic signatures for promissory notes are governed by the Electronic Signatures in Global and National Commerce Act (the “eSign Act”).  15 U.S. 96 §§7001 et seq.  Among other things, the eSign act mandates that electronic signatures on real estate finance documents, including promissory notes, cannot be denied validity, effect or enforcement because they are electronic.  Here in Texas, the Texas Uniform Electronic Transactions Act (“TUETA”) adds another layer to the statutory scheme. TEX. BUS. & COM. CODE § 322.001.

There are requirements to fall under the TUETA and eSign statutory framework. In Texas, once the preliminary requirements for TUETA are met, then if note can properly be considered a “transferable record” which permits the electronic note to be enforced under article 3 of the UCC.

The question then becomes: how can the electronic promissory note with the electronic signature be assigned to a new party in a way to ensure that the new party becomes the holder in due course?

Consider for a moment a physical negotiable instrument. In the olden days (ie, currently for most banks) the instrument would be a physical piece of paper and the actual holder (eg, in his hand) of the document was the prima facie Holder in Due Course of the instrument.

Article 3 assumes that the person without possession might be determined as the Holder in Due Course of an instrument in that article 3 places the burden on proving Holder status on the person asserting that status. This comes up, among other areas, when a Bank is handling a large volume of notes that are often assigned (eg, mortgage warehousing).  To accommodate the practical challenge of moving the physical notes, a bailee will be used to essentially hold in the name of Bank 1, such that transferring a note to Bank 2 is a book entry.

The question is whether an electronic instrument can be “held” and if so, how can an assignee of the electronic note prove it is the Holder when there is nothing to hold. The current practice is to utilize eVaulting, which provides something like a MERs system but for electronic notes.  These notes are incorporated with a secure token, which functions like password protection, such that only a party with the key (something similar to an extremely long and complex password) can utilize the document.

In this sense, both the signature and the note itself are identified by their secure token and the sole ability of the purported holder to be able to access the document. Its neat technology, which is akin to the block chain, which is the underlying tech for things like bitcoin.  However, it’s tough to explain and thus, tough to prove up to a judge.

Curious about how courts have handled this, I did a nationwide Westlaw search for “eVaulting” without any date parameters. A total of 20 cases were returned in the results.  None of the cases returned had anything to do with this topic in any substantive way.  For my Texas folks, there are zero returns for “transferable record”.

I have no doubt that lenders across the county have been able to assert their electronic notes against borrowers successfully and in ways which did not result in opinions on the topic (published or otherwise). However, the purpose in searching eVaulting was to see if any of the Bank’s had asserted claims against other Banks for failure to deliver holder in due course rights or other deficiencies in the electronic notes as a result of the assignments.

The point is, I am not arguing that the current paradigm isn’t right or proper, it’s just that there is a lot of money and notes moving around without a lot of case law to back up the reasons for the way things work.

In an earlier post on the scope of Attorney-Client privilege, I briefly mentioned the existence of an exception to the powerful Attorney-Client privileged.  That exception is the Crime-Fraud exception which, if properly invoked, has the ability to totally destroy the Attorney-Client privilege.  Because the exception seems relevant to the current news cycle, I thought I would write a quick note on the exception.

See also, Miley Cyrus.

Something most folks don’t internalize is: the privilege to keep communications between lawyer and client secret is owned by the client.  So, if the client waives the privilege, it’s gone.  The attorney does not have his/her own right to claim attorney client privilege.  In most jurisdictions, the law presumes that the client wants to invoke the privilege, thus attorneys can assert the privilege even when the client isn’t around.

I mention this because the goal of the breaching the Attorney-Client privilege is really an attempt to get the attorney to testify or provide documents, not an attempt to get the client to provide evidence.

Among the ways to breach the attorney client privilege is the Crime-Fraud exception to the privilege.  In order for the Crime-Fraud exception to be applicable, a person trying to breach the privilege must make an initial showing that:

  • The client was engaged in, or planning criminal or fraudulent conduct when it sought legal advice from any attorney, and
  • That attorney’s assistance was obtained in furtherance of the criminal or fraudulent conduct.

If the attorney is engaged in actively assisting the client in criminal or fraudulent conduct the second prong will be satisfied (as well as give rise to potential legal jeopardy for the lawyer); however, the attorney need only be the unwitting tool of the client in order for the second prong to be effective.

While the evidentiary bar for an initial showing (a prima facie showing) is relatively low, Courts do provide safeguards to protect the attorney client privilege.  In civil cases, there will be a hearing on the matter in open court and the client will be able to respond.  In criminal cases, this comes up in the context of a grand jury proceeding, and the attorney will not be able to alert the client to the challenge to the privilege.

Once the Crime-Fraud exception is found to be applicable, the Attorney-Client privilege no longer protects any of the documents, other evidence from being obtained and used in Court and further the attorney may now be compelled to testify on those topics against his (now former) client.

Most folks, I think, view this through the lens of a criminal case issue, but the exception does apply to actual fraud cases – which are a civil matter.  Types of fraud where the exception has been properly invoked involved things like fraudulent transfers and defrauding a Bank.

Just something to think about.

At the point in time when the economic structure of loan becomes financially unsupportable for the borrower, a lender is faced with a few options.  The lender could simply default the loan and begin collection activity.  Alternatively, the lender could seek to re-work the deal in some way to provide some breathing room for the borrower.  No good deed goes un-punished, so it’s good to understand the impact of the two most common types of borrower accommodations – the loan modification and the forbearance agreement.

First; the basics.  The core purpose of a loan modification is to adjust the terms of a loan because the borrower would have been in default under the prior terms.  The notion being that the loan relationship is going to continue.  The core purpose of a forbearance agreement is to prevail over the prior loan terms and legal rights for a period of time because the borrower needs relief from those rights in order to accomplish something of value to the lender.  The notion being that forbearance is not a long term fix.

That is not to say that there isn’t significant cross over for both types.  A loan modification may reduce payments and shorten maturity with the expectation of a re-fi.  Alternatively, a forbearance agreement may contemplate installment payments and an extended payout after maturity.  In between the two types of agreements there are a lot of different ways to structure the deals and choosing the right one is as much strategy as tactics.

Below is a breakdown of how different deal specifics typically are reflected in a loan modification vs. a forbearance agreement.


Loan Modification Forbearance Considerations
While a default may have existed just prior to the modification, after a modification the prior default is withdrawn. The prior default will typically still exist. With an existing and recognized default, the lender will not need to re-default the loan at a later time.  This will reduce the time to collection activity in relation to the loan document terms.


Loan Modification Forbearance Considerations
Regardless of whether the loan was previously accelerated, the modification will withdraw the acceleration. The loan will typically remain accelerated. Acceleration permits the lender to collect the whole debt immediately.  This and the default may be an issue if the borrower files bankruptcy.  In most jurisdictions, a bankruptcy court will require a lender to obtain relief from the automatic stay in order to accelerate the loan after the borrower files bankruptcy.


Loan Modification Forbearance Considerations
Maturity may be modified as part of the loan modification.  Although a loan modification can effect any terms of the original loan document, such as covenants, or economic / payment terms also. Maturity will have already occurred because of the default and acceleration.  A new maturity will not usually be provided because the loan typically remains in default under forbearance and throughout the forbearance period. Lack of a new maturity date under a forbearance provides the lender with a quicker reaction time for collection work.  On the other hand, modifying the maturity gives a borrower more flexibility under the loan terms to attempt to pay back the loan.

Statute of Limitations

Loan Modification Forbearance Considerations
As long as the maturity (and acceleration) remains in the future, most direct collection causes of action will not have their statute of limitations start running. Once the loan is mature and accelerated the statute of limitations for collections begins to run. It’s important to stay on top of your statute of limitations after acceleration and maturity.  If those deadlines are not extended, time will be on the side of the borrower (and guarantors).

Rights of Lender

Loan Modification Forbearance Considerations
A loan modification typically has similar terms to the original loan documents, but not always.  This is a good time to clean up any outstanding items. After default, the collection options are all open to the lender.  However, forbearance agreements will usually curb those to some extent during the forbearance period. Because loan modifications usually track closing with what a bank rep is used to dealing with, it takes less oversight to monitor.  On the other hand, forbearance is a whole new deal which might not integrate into the lender’s system or process well.

Notices of Future Default

Loan Modification Forbearance Considerations
Lender will need to comply with the terms of the modification. Lender will need to comply with the terms of the forbearance.  The difference is that the default under the loan agreement has already occurred and a forbearance agreement usually has a much tighter default provision; often with no cure period. With the notice periods in a loan modification applicable, the time to declare a default will cause a delay in moving forward.  Any cure time will add to this.  On the other hand, a forbearance will not require a default under the loan (and its provisions), but rather whatever the lender requires under the forbearance agreement.

Lender Booking

Loan Modification Forbearance Considerations
Bank accounting is beyond the scope here, but a modification may be shown as a differently from a non-performing loan. Bank accounting is beyond the scope here, but forbearance is likely still a non-performing loan. Consult your compliance folks on this.

Borrower Reporting

Loan Modification Forbearance Considerations
A modification will usually avoid a default for a borrower, which will have a significantly more positive impact on the borrower vs a forbearance. A forbearance will have a significantly more negative impact of the borrower because the default and acceleration will be subsisting.  Additionally, even in simple capital structures, loans by other lenders will often “cross default” resulting in a domino effect when the first of several loans to various lenders is put into formal default.

If the borrower has a chance of a refi at a different institution or program a default may preclude the refi.  So, a lender should consider its gain vs. its collateral.

Also, if the borrower is under several different loan agreements with different lenders, the defaulting lender should be aware of the potential domino effect and resulting spiral downward.

The decision to enter into a loan modification or a forbearance is both a strategic and tactical one.  I have outlined just a few considerations for making a determination.  In practice the process is extremely deal specific and, frankly, a risk opportunity.

Beyond the scope of this article is the impact each can have in bankruptcy, collection litigation and lender liability.  All of which should be considered.

As always, remember – no good deed goes unpunished.

When making a secured loan, the process of making sure your collateral is actually – legally – your collateral can be more difficult than expected or later determined. The steps are fairly simple, but the analysis and execution can be lacking for a number of technical reasons which can render your first priority lien a junior lien or gone all together if you are not careful.

Lord, P., Miller, C., Ferrell, W., Arnett, W., Banks, E., Offerman, N., Berry, C., … Warner Home Video (Firm),. (2014). The Lego movie

There are numerous opportunities to mess up collateralizing things for a secured loan.  This blog post will discuss personal property which has its own rules (as opposed to real property).

First, the down side.  If a lien is not properly attached or perfected the lender runs the risk of either being subject to a later lien or all together unsecured if the borrower files bankruptcy.  It’s a big deal.

There are two basic steps to create a lien.  The first step is “attachment” the second step is “perfection”.  Both are equally important but for different technical reasons.  However, the underlying purpose of the exercise is also two-fold.  1 – Agree on what is being pledged and, 2 – let everyone else know.

I. Attachment

When taking a pledge of collateral, the first deal a lender makes is with the borrower.  This agreement is contained (usually) within the security agreement.  This is the document, signed by the borrower, which identifies specifically what things are being pledged (hypothecated, etc.) as collateral.

The security agreement should either: specifically identify what is being pledged, or should enumerate the class of collateral by their defined terms in the applicable uniform commercial code.

The security agreement is the specifics of the agreement to pledge collateral by the borrower to the lender.  (By the way, be sure the borrower actually is the owner of the collateral.  One cannot pledge what one does not own).

There are many traps for the unwary in this process.  The type of collateral pledged may be one of several defined collateral classes depending on how it is being used. Thus, taking a lien on equipment will not give a lender a lien if that equipment is being used as inventory.

Once a lender has properly attached the collateral the lender has a lien on the collateral as between the borrower and lender.  BUT not third parties.

II. Perfection

When taking a pledge of collateral, the second deal a lender makes is with everyone else.  In short, once the lien is attached the lender needs to let everyone else know about the lien, otherwise it’s meaningless to third parties.

Different types of collateral require different types of perfection.  The typical perfection method is filing a form with the secretary of state called a UCC1 form. Other methods are used for specific types of collateral, but that is beyond the scope of this article.

The secretary of state’s filing system provides a public forum which provides legal constructive notice of the filing.  This means that if a UCC1 is filed everyone is on proper notice even if they never look at the filing.

The state of incorporation will determine which secretary of state needs to receive the lenders UCC1.  After that, the next task is the technical compliance with the requirements of filing.  More specifically, the lender needs to put the world on notice as to what the lender’s lien attaches to.  If this is done successfully, then all third parties will be subordinate to the lien of the first lender.

To accomplish this, the lender needs to properly name the borrower by its formal legal name (no DBAs) and give reasonable notice of the collateral pledged.

A failure on either of these can cause a lender to loose priority or the lien all together.  The formal legal name is easier to mess up than you think.  With regard to the collateral, here is where determining exactly the character of collateral becomes important as well.  If your security agreement says “equipment” but your UCC1 says “inventory” then there has not been proper perfection.

If perfection is not proper then there is no way to keep a third party from taking over a first position lien (assuming they attach and perfect properly) and, worse, if the borrower files bankruptcy ANY failure to attached or perfect will be attacked by the trustee and likely render a lien worthless.

There are, frankly, a number of ways to mess up this technical process.  The mind frame to approach securing a loan is “this seems simple, but it’s actually quite complex”.  Oftentimes, a misstep isn’t discovered until years later when it’s too late to remedy.

There is a significant amount more to talk about on the topic, but I wanted to give a brief overview of attachment and perfection.  Email me if you have any good war stories on the topic; they tend to be very interesting.

Things are not great in brick and mortar retail, and they really haven’t been for some time.  Most people are aware of this, but this is a quick note on the status of retail bankruptcy cases and the outlook for the year.

Lions Gate Television Inc. ; created by Matthew Weiner. Mad Men. Season One. Santa Monica, CA :Lionsgate, 2008. Print.


In 2017, there were more major retail bankruptcy cases filed than during any given year of the “great recession”.  Twenty-six in total with at least $50MM in liabilities.  Obviously a large number.  The question is whether that trend will continue into 2018 (or, alternatively, if there any more retailers of that size to go under).

So far this year, there have been at least 5 major retail bankruptcy filings.  S&P Global Markets has identified 19 retailers who it believes is at risk of filing bankruptcy in 2018.  While not quite at the record 26, this is still a large volume of retail to go into bankruptcy.

The effects of these bankruptcies often leave a huge hole in retail centers and may have a ripple effect with landlords across the country.  Toy’s R Us recently ceased operations and will liquidate all 735 stores in the U.S.  (Interesting side note, the lead attorney for Toys R Us sang the iconic Toys R Us jingle on their first day in Court.).

I am already hearing from landlords that there is little desire to lease to retail because it’s almost a foregone conclusion they will fail.  The preference seems to be restaurants. Because of the terms of these leases (in years) it’s likely to change the landscape of what these consumer facing developments look like for some time.

In addition to landlords, the equity funds who commonly have bought out and leveraged these retail stores may also feel the pitch.  A common theme repeated in the Toys R Us case is a leveraged buyout which places an un-serviceable amount of debt on the company leading to failure.  In the case of Toys R Us, the total debt is about $5 billion, requiring about $400MM annually to service.  That’s a lot of Paw Patrol to sell.

The cause of the decline of brick and mortar retail is beyond this blog post.  However, the effect on lenders who have loans out to these retailers will likely be negative again this year.

For all of those lenders, now would be a good time to review your collateral position in hard assets and consider cash flow when a renewal is requested.  Might also dust off that landlord subordination agreement to see if there is anything else you need to add.  I work on these quite frequently and they can go south pretty quick.

In good times many lenders are willing to approve a loan which is secured only by accounts receivable.  The ability to value A/R seems more straightforward than it actually is when considering underwriting.  There are several legal and practical problems with collecting A/R which will reduce its ultimate value to a lender if the lender ends up needing to monetize the A/R following default.  This post will discuss A/R and collecting the A/R.

Let’s begin with the basics: what is an account receivable (“A/R”)?  It’s a common misconception that A/R is the payment.  A/R is actually the right to receive the payment.  When a payment is made, the A/R ceases to exist.

So, when a lender takes a blanket lien against A/R, the lender is really encumbering the right to receive payment from third parties in the future, not the cash in the bank account.

Misunderstanding this can cause problems in a few ways.  One of the most common issues I have seen is when the borrower reports A/R that is actually just revenue.

In a hypothetical scenario: the borrower sells equipment.  A buyer orders some equipment online and at the same time pays for it. Then borrower ships buyer the equipment.  Borrower generates an invoice to account for the payment and the transaction closes.

Oftentimes an unsophisticated borrower will assume that this transaction created an account receivable, when, in fact, it did not.  Further, the borrower will then turn around and report the transaction as an account receivable on a borrowing base report or loan application.  Doing so can cause issues with covenants and underwriting for the lender if the lender is not aware of the misstep.  Simply stated, there is no A/R in this hypothetical and therefore there is no collateral to collect on if things go south.

Another problem I commonly see is when a lender overvalues the A/R when considering underwriting or loan modifications.  A/R’s true value for a lender is the lender’s ability to monetize the outstanding A/R at the time of the default.  Three basic things work against the lender in the scenario when the lender needs to collect A/R.

First – the reason the lender is seeking to collect A/R is because the borrower is in default.  Usually a borrower is in default because business has been going poorly.  Poor economic performance usually also means that the A/R that exists has diminished over time because the borrower has been doing less business.

Second – the practicality of collecting A/R is difficult.  The lender is immediately at a disadvantage because the lender doesn’t have the books and records of the borrower to show who actually owes money on an outstanding A/R.  It’s great to look at a balance sheet and see $10MM in A/R, but it’s another thing all together to track down the specifics.  I have been in situations where the A/R records were all on a cloud server which was deleted.  Next, the lender will oftentimes need to pursue the A/R in its own name, one way or another.  It’s likely that the account debtor (the person who bought the equipment) would simply ignore a demand by the lender to pay up.  There a number of reasons for this.  Part of the problem is that if the lender needs to actually resort to bringing a lawsuit, all of the evidence of the A/R is really the borrower who may not be helpful on the witness stand.

Third – Finally, there is the unknown relationship between the borrower and the account debtor.  Most all of the account debtors have some excuse about why they did not pay the invoice.  Usually these excuses include: the equipment was no good, I have a credit that’s not reflected, I have a deal with the borrower where I don’t have to pay, I returned the item, or – in cases of fraud – I have never heard of the borrower.  (All of which I have heard).  The facts related to all of these excuses will likely be unknown to the Bank when it tries to monetize the A/R and, if the excuses are true, may result in an offset to the A/R.

There are clearly a number of hurdles to monetizing A/R.  From a preliminary perspective, the A/R that exists when a lender takes a lien against A/R will not be the A/R that might be available for collection at a later date.  The lender is simply betting that the borrower will continue to generate A/R at a rate acceptable even in a time of default at some unknown time in the future.

In some recent minor news coverage the issue of attorney-client privilege has come up.  It often is surprising to non-lawyers (and non-litigators) how limited that privilege actually is in scope.  Many clients tend to assume that any conversation with an attorney will be protected.  However, the scope of the attorney client privilege is much more limited, and, not understanding that will result in your “privileged” communications becoming public record.

It's raining privilege
Peter Pan. Copyright Disney 1953

Let’s start with the general rule of attorney client privilege.  Communications between an attorney and client concerning legal strategy and analysis will be protected from compelled disclosure as long as the privileged isn’t waived.   This will be true so long as the communications don’t implicate the attorney in assisting an ongoing crime or fraud.

There are a few elements there to consider.  The first is obviously that there must be an attorney client relationship.  The classic law school exam is whether giving advice at a cocktail party will create such a relationship.  In order for an attorney client relationship to exist there need not be money that changes hands (think pro bono work).  However, there does need to be an agreement to create the relationship.  (The answer to the law school exam question is “don’t give legal advice at cocktail parties”, btw).  As a corollary to this, if an attorney is acting without direction (or knowledge) of the act of the client it may be determined to be outside of the scope of even an existing attorney-client relationship.

Next, the communication must be between only the client and attorney.  Including anyone else in the communication will waive the privilege.  In fact, if the client casually mentions only a small part of the communication to a third party, the privilege will be waived as to the entire communication or perhaps even topic.  For corporate clients, the “client” is the officers and directors and any employee whose duties make him/her necessary to include in the matter.

Perhaps equally important, the communication needs to be directed at the attorney to invoke attorney client privilege.  A common mistake is merely cc’ing an attorney in an attempt to invoke the privilege.  (I am looking at you board members).  This will likely not give rise to the privilege unless the attorney is an active part of the conversation.

Perhaps most importantly, the communication must concern legal strategy or legal analysis.  This is the part that trips the most people up.  If a client emails an attorney and asks about the pro’s and con’s of a business deal from a business perspective that communication likely won’t be privileged.  In instances where – for example – an email is discussing business matters and legal matters, if the legal matter discussion does not predominate the communication’s purpose the privilege will likely be waived.

As a footnote to the legal strategy or analysis section, facts are NOT privileged.  A client cannot avoid admitting a fact because of attorney client privilege.

Finally, simply writing “ATTORNEY-CLIENT PRIVILEGED” on the top of a document (or anywhere) is not a magic way of invoking the privilege.

The notion that including an attorney on communication is some type of fairy dust that sprinkles privilege is simply not true, despite a very common misconception.

Of course, there are good practices to avoid falling into a situation where your purported privileged communications turn out to be public.  There are also a few other types of privileges which may be invoked which are not discussed in this blog post.  If there is any interest I might post a more full description of the various claims to privilege.    Additionally, I have not touched on the crime fraud exception, which, depending on upcoming news stories may also be touched upon in a future blog post.

Until then, remember the golden rule.  If you wouldn’t want it published on the front page of the Wall Street Journal, don’t write it in an email.

In prior posts I have discussed what bit coin is, in terms of describing the technical aspects of the thing.  Bit coin is only one of numerous non-fiat currencies which currently exist, and seems to be the most common.  In this post I will not be focusing on the technical nature of non-fiat currencies, but rather consider what the character of a non-fiat currency is legally.  Stated more directly, is a bit coin legally a currency, security, instrument or something else.

The trick is to realize that there is no coin

Bear with me, because this is a long post.

To state the obvious, bit coin is not a currency in the sense it was issued by a sovereign.  However, non-fiat currency is not unheard of in the world.  You could argue with a straight face that the game tokens at Chucky Cheese are a form of non-fiat currency.  They can be exchanged for value (say a video game or perhaps a trinket) and there is a market to exchange them with others – if you happen to be 10 years old.  But to say that a game token is legally the same thing as a bit coin over simplifies that notion that something which represents value and can be exchanged in necessarily a currency.

In reality, anything can retain value and be exchanged for something else of value.  This is the basis for early barter system economies, such as the Mesopotamian culture.  However, currency has only one imperative, which is to be valuable.  Unlike bartering wheat for timber, a currency cannot be used to make bread or build a house.  Its only purpose is to retain value.

In the United States, this is enough for the criminal justice system to have determined that bit coin is money for the purpose of the various criminal statutes concerning money laundering, purchase of illegal items, and transferring money to conspirators.

On the civil side of the law, the Courts have yet to settle on a definition of its character.  The notion of a bit coin as a currency is, in my opinion, driven by the name itself.  If it was called bit-value, bit-stock, or bit-note the immediate perception might be different.

In fact, some forward thinking companies issue Initial Coin Offerings (an “ICO”) which is similar to an IPO, but instead of shares in the company in the traditional sense, the company will issue “coins” to investors which function more as token on ownership rather than as a fungible currency.  In using an ICO, the coins are tracked with the blockchain technology allowing for the quick and anonymous transfer of the coins instantaneously to anyone anywhere.

These ICO coins are certainly not currency because they act as ownership stakes in a company and, while they hold value and can be exchanges for value, the ICO coin is not fungible with another company’s ICO coin.

By the same token (pun intended), is a bit coin itself fungible?  While one bit coin will equal another bit coin on the exchanges, each bit coin is supremely unique because of its hashing and ownership on the ledger.

Perhaps the hashing is analogous to a dollar bills serial number, but the ownership function on the ledger has no analogous characteristic with currency.   Without the ledger there could not be a decentralized ability to transfer a bit coin from one person to another, and without that ability anything of “value” is really worthless.  It is therefore, I believe, a central element of bit coin that it requires a ledger, which likes the bit coin to the owner’s wallet.

Equally import is that fiat-currencies are backed by the sovereign while bit coin is backed by nothing but the common belief that it has value.

Both of these issues, I think, sets bit coin apart from a currency, which requires no ledger or mechanism to keep track of ownership and (for fiat currency) requires sovereign backing.  While the true owner of the bit coin may remain anonymous, the owner must like his/her wallet and public key to each of his/her bit coin.

What then, if not currency?

As mentioned above, some types of block chained “coins” are much closer to a security than a typical bit coin.  In fact, the SEC has recently ruled that these token type coins from an ICO are regulated.  However, the bit coin (and similar) are not shares of a going concern which will be run primarily by others from which you hope to capture a gain from such operations.

Rather, its value with only the purpose of being value.

If I may, I think that a bit coin is most like a letter of credit payable in a foreign currency.  The obligation of this “bit-letter of credit” would be the bit coin market place.  When a bit coin owner wants to cash out, he/she attempts to convert the bit coin into some sovereign currency, say US Dollars, by selling / assigning that “bit-letter of credit” to a person willing to accept the rights to the “bit-letter of credit”.

The letter of credit analogy is supported by the fact that actual letters of credit can be traded in exchange for value.  And, if you had a letter of credit payable in Yen, but needed US Dollars, you would be subject to the currency fluctuations among the two.

In fact, the Knights Templar, who pioneered the original letters of credit, allegedly used a cipher on the documents to ensure their validity and kept records on their ledgers.  Additionally, these letters of credit were traded as if currency because of the belief in the credit worthiness of the Knights Templar – who were not a sovereign and were specifically not subject to any sovereign by papal bull.

We are still $20 short. Who did not chip in for the tab.

Indeed, the a modern letter of credit can be assigned, and to do so requires notice to the Bank which is recorded on the bank’s ledger.  Additionally, a letter of credit is not backed by the sovereign.

For this reason, I think bit coins are most analogous to a letter of credit in terms of its legal character.

Please feel free to disagree or comment below.  This in an emerging issue and input is appreciated.

Facebook terms reviewed.  This blog is usually not a data security blog (although it’s something I care about); but the recent scandal with Facebook made me curious just what users agree to by using the site.  As the saying goes, “if the product is free, you are the product.”

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Credit: The Sound of Music, 1965. 20th Century Fox.

Say goodbye to you personal data.

Full disclosure, I do not maintain a Facebook page.  I understand the benefits of it, but it’s not for me.  Recently, the FCC has announced an investigation into Facebook and its CEO has been called to Capital Hill over the data sharing scandal.  The headline, of course, is that Facebook shared its information and that information was used to sway the election in the US in 2016.  The underlying issue is, what, if anything did users agree to by using the site. This blog post reviews some of those things.

In general, the terms of service with Facebook are what will govern the relationship between Facebook and the user.  The first thing you need to know is that the terms of service are scattered around a lot of hyperlinks.  Links within links.  If you want to know the true terms, be prepared to spend a long time navigating the site.

For example, section I of the Data Use policy states:

Things you do and information you provide. We collect the content and other information you provide when you use our Services, including when you sign up for an account, create or share, and message or communicate with others. This can include information in or about the content you provide, such as the location of a photo or the date a file was created. We also collect information about how you use our Services, such as the types of content you view or engage with or the frequency and duration of your activities.

The “Services” are defined here and include basically everything Facebook does, as well as its affiliates, which are identified here:

In short, anything you consent to by using any of these pages, or their mobile apps can be shared.   Importantly, the permissions on some of the apps allow Facebook to monitor you phone calls and text messages even outside of the Facebook app.

But that’s just the beginning.  Facebook collects all of your payment and credit card information.  Again, in section I of the data use policy, a user agrees that:

Information about payments. If you use our Services for purchases or financial transactions (like when you buy something on Facebook, make a purchase in a game, or make a donation), we collect information about the purchase or transaction. This includes your payment information, such as your credit or debit card number and other card information, and other account and authentication information, as well as billing, shipping and contact details.

By using Facebook, you agree that Facebook can track you on the web and in real life:

Device information. We collect information from or about the computers, phones, or other devices where you install or access our Services, depending on the permissions you’ve granted. We may associate the information we collect from your different devices, which helps us provide consistent Services across your devices. Here are some examples of the information we collect:

  • Attributes such as the operating system, hardware version, device settings, file and software names and types, battery and signal strength, and device identifiers.
  • Device locations, including specific geographic locations, such as through GPS, Bluetooth, or WiFi signals.
  • Connection information such as the name of your mobile operator or ISP, browser type, language and time zone, mobile phone number and IP address.

Facebook then can use all of that information and provide it to third parties, because the users agreed to it.

Apps, websites and third-party integrations on or using our ServicesWhen you use third-party apps, websites or other services that use, or are integrated with, our Services, they may receive information about what you post or share. For example, when you play a game with your Facebook friends or use the Facebook Comment or Share button on a website, the game developer or website may get information about your activities in the game or receive a comment or link that you share from their website on Facebook. In addition, when you download or use such third-party services, they can access your Public Profile, which includes your username or user ID, your age range and country/language, your list of friends, as well as any information that you share with them. Information collected by these apps, websites or integrated services is subject to their own terms and policies.

Facebook users also allow Facebook to provide your “cookies” to third parties affiliated with Facebook.  The terms use for cookies states:

Where do we use cookies?

We may place cookies on your computer or device, and receive information stored in cookies, when you use or visit:

  • The Facebook Services;

  • Services provided by other members of the Facebook family of companies; and

  • Services provided by other companies that use the Facebook Services (such as companies that incorporate the Like button or Facebook’s advertising services into their websites and apps).


Do other parties use cookies in connection with the Facebook Services?

Yes, other parties may use cookies on the Facebook Services to provide services to us and the businesses that advertise on Facebook.

For example, our measurement partners use cookies on the Facebook Services to help advertisers understand the effectiveness of their Facebook advertising campaigns and to compare the performance of those campaigns to ads displayed on other websites and apps. Learn more about the companies that use cookies on the Facebook Services.

Third parties also use cookies on their own sites and apps in connection with the Facebook Services. To understand how other parties use cookies, please review their policies.

To help temper the extremely broad usage of your data, Facebook states in its Terms that “You own all of the content and information you post on Facebook, and you can control how it is shared through your privacy and application settings.”  However, the background data being harvested is not “posted” on Facebook.  In essence, Facebook is saying “the pictures are yours but your soul is mine”.

There are a lot of things users sign away by using Facebook.  In my opinion users agree that all of their data and habits can be used by Facebook and third parties for a wide range of things.

By using Facebook, you are agreeing that Facebook can track you, your friends and anyone who shares information about you.  Facebook can monitor you communication; both inside and outside of the platform.  Perhaps, most importantly, it seems as if that Facebook can sell all of that information to the highest bidder.

Welcome to being the product.


The foregoing is simply the opinion of the author, and not a legal opinion.