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Pro Bono Legal Opinion for Victims of Steem HF23 & Bittrex

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apshamilton
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last month14 min read

I have already posted an initial report on the extraordinary events surrounding the so called hard fork 0.23 (HF23) of the Steem blockchain on 20 May 2020 at 1400 UTC.

I have now prepared a more detailed legal opinion below regarding these events on a pro bono basis.

This pro bono legal opinion is designed to assist the holders of the following 65 Steem accounts whose Steem & SBD assets were expropriated by HF23 ("Targeted Accounts"): @abusereports, @berniesanders, @kingdong, @nextgencrypto, @ngc, @ozchartart, @sirvotesalot, @sockpuppet, @thecyclist, @xx0xx, @xxxxxxxxxx, @z8teyb289qav9z", @agent14, @curatorhulk, @dhenz, @drbanner, @gokuisreal, @johnmadden, @realself, @theycallmedan, @arsahk, @blocktrades, @darthknight, @kevtorin, @kriborin, @lessys, @acidyo, @ats-david, @ausbitbank, @bittrix, @clappy, @drakos, @fefemz, @freedom, @gtg, @howo, @jawnz, @klobu, @likwid, @liondani, @neoxian, @netuoso, @ocd-witness, @pfunk, @pharesim, @roelandp, @roundbeargames, @sooty, @steempress, @themarkymark, @therealwolf, @timetickertickin, @transisto, @znnuksfe, @mottler, @mottler-1, @smooth, @smooth.witness, @smooth-a, @smooth-b, @smooth-c, @smooth-d, @smooth-e, @smooth-f, @safari

This pro bono legal opinion is also designed to help Bittrex (@bittrex) resolve, in accordance with the law, the difficult situation in which it has been placed.

As I am a lawyer admitted in Australia, I cannot give definitive advice about the law of every jurisdiction, but as will be seen below, the legal principles involved in this case are fairly universal.

Screen Shot 20200520 at 17.15.10.png

Legal Opinion

Facts

On 19 May 2020 the Steem Witnesses published Steem Consensus Witness Statement announcing HF23 which stated that HF23 would:

III. Seize some user accounts ...

The actual effect of HF23 was not to seize the accounts themselves, but instead to:

  • immediately power down the Steem Power held in the Targeted Accounts into Steem; and
  • to involuntarily transfer the Steem & SBD held in the Targeted Accounts to a new Steem account called @community321.

The amount of Steem involved was 23.6M Steem, worth about US$7 million at the time of HF23.
Coin Gecko records the Steem price as being US$0.298 at 1327 UTC immediately before HF23.

Importantly, HF23, did not actually fork the Steem blockchain into two separate chains, it simply changed the operating code of the existing Steem blockchain.

Details of the code of HF23 is at: https://github.com/steemhardfork/steemhf/commit/66321e06f862a28b53e5268f0d67db0fd65b3bcf#diff-5f5356c18939f3b2ce7f3e74ab944614R14

Details of the involuntary transfers implemented by HF23 from the Targeted Accounts into @community321 can be viewed directly on the Steem blockchain using the Steemd block explorer.

Immediately subsequent to HF23, @community321 transferred all the expropriated Steem and SBD to @bittrex, Bittrex Global Exchange's main account on the Steem blockchain. The transfers included a memo which stated:

“These are funds stolen by the Steem witnesses using HF23 May 20th 2020 - please return them to their original owners prior to the fork :)”

The relevant Steem blockchain transactions can be viewed on the Steemd block explorer

Legal Analysis

While we in the cryptocurrency industry like to use terms such as “code is law” and the “sanctity of the blockchain”, we must also acknowledge that the law of the land takes precedence over the law of the code.

In most cases, the law of the land has nothing to say about the operations of a blockchain, but when it comes to the involuntary transfer of assets, the law of the land becomes relevant.

The starting point in determining whether the law of the land is triggered is examining whether the implementation of HF23 was theft, as legally defined in relevant jurisdictions.

The legal prohibition on theft is one of the oldest in human history, going right back to law 22 of The Code of Hammurabi and the Eighth Commandment: "Thou shalt not steal" of the Ten Commandments.

As a result, it is a fairly consistently defined law across most legal jurisdictions in the world.

Law of Texas, USA

Lets look at Texas, USA, where Steemit Inc is based.

The Texas Penal Code, Title 7, Chapter 31 states (emphasis added):

Sec. 31.03. THEFT.
(a) A person commits an offense if he unlawfully appropriates property with intent to deprive the owner of property.

(b) Appropriation of property is unlawful if:

(1) it is without the owner's effective consent;
(2) the property is stolen and the actor appropriates the property knowing it was stolen by another; or
(3) property in the custody of any law enforcement agency was explicitly represented by any law enforcement agent to the actor as being stolen and the actor appropriates the property believing it was stolen by another.

From the definitions section 31.01:

(4) "Appropriate" means:

(A) to bring about a transfer or purported transfer of title to or other nonpossessory interest in property, whether to the actor or another; or
(B) to acquire or otherwise exercise control over property other than real property.

(5) "Property" means:

(A) real property;
(B) tangible or intangible personal property including anything severed from land; or
(C) a document, including money, that represents or embodies anything of value.

(2) "Deprive" means:

(A) to withhold property from the owner permanently or for so extended a period of time that a major portion of the value or enjoyment of the property is lost to the owner;
(B) to restore property only upon payment of reward or other compensation; or
(C) to dispose of property in a manner that makes recovery of the property by the owner unlikely.

Application of Texas law to Facts

The purpose and effect of HF23 on the Targeted Accounts clearly meets the above definition of theft.

  1. Unlawfully - without the consent of the owners of the Affected Accounts - indeed over their strong objections;
  2. Appropriates -
    a) brings about the transfer of a nonpossessory interest in property - transfer of Steem & SBD cryptocurrency meets this definition; or
    b) otherwise exercises control over property other than real property - the code of HF23 exercises control over property (Steem, SBD and the Steem blockchain itself)
  3. Property -
    a) Steem and SBD is intangible personal property - this is the general classification of cryptocurrency in most jurisdictions;
    b) the Steem blockchain is also property as it is a document representing or embodying things of value, including Steem and SBD
  4. With intent to Deprive - the purpose of HF23 is to permanently withhold the Steem & SBD from the owners of the Targeted Accounts. This is evident from the statements of the Steem Witnesses regarding HF23 and the code itself.

Law of United Kingdom

In the UK the definition of theft is very similar:

Basic definition of theft.
(1)A person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it; and “thief” and “steal” shall be construed accordingly.
UK Theft Act 1968
https://www.legislation.gov.uk/ukpga/1968/60/crossheading/definition-of-theft

The only difference between UK and Texas law is the use of the word "dishonestly" rather than "unlawfully".
However the effect is similar because for the act not to be dishonest it has to be based on legitimate belief that the owner gave consent or there is "in law the right to deprive the other of it." Neither is the case in relation to HF23.

Other definitions of Theft

Other similar definitions of theft are:

"Knowingly obtains or exerts unauthorized control over the property of another, with intent to deprive the owner of his or her property"
https://definitions.uslegal.com/t/theft/

"the generic term for all crimes in which a person intentionally and fraudulently takes personal property of another without permission or consent and with the intent to convert it to the taker's use (including potential sale)"
https://legal-dictionary.thefreedictionary.com/theft

Legal Opinion

Thus in my considered legal opinion, based on the analysis above, the implementation of HF23 meets the definition of theft under the criminal law of relevant jurisdictions.

Persons criminally liable for HF23 Theft

Criminal laws don't apply directly to code, they apply to people.

So the next step is to examine which people are criminally liable for the theft implemented by HF23.

The first and most obvious group of people are those Steem witnesses which actually implemented HF23.

Here is an archived screenshot of the Steem Witnesses at the time of HF23. https://archive.is/sEiHH

While witnesses accounts such as @justyy @steemchiller and @dlike are controlled by real people, active participants on the Steem blockchain, many other witness accounts were newly created or only became witnesses shortly before HF23.The were voted into top 20 witness status with the immense voting power of @dev365.

There is substantial evidence that such accounts were directly controlled by Justin Sun.

I will not examine this evidence in detail here because it is sufficient to demonstrate that Justin Sun controls @dev365.

Control of @dev365

@dev365 was created on 27 Feb 2020, shortly after Justin Sun's acquisition of Steemit Inc.

On 2 Mar 2020 @dev365 was nominated as proxy by the large cryptocurrency exchange accounts @poloniex (owned by Justin Sun) @huobi-withdrawal & @binance-hot. This provided sufficient Steem Power for @dev365 to singlehandedly vote 20 brand new witnesses with no previous participation on the Steem blockchain into the Top 20 witness positions which control the Steem blockchain.

It was by these actions that Justin Sun took singlehanded control of the Steem blockchain and reversed the soft fork which had temporarily suspended witness voting rights of accounts owned by Steemit Inc (which had never previously voted on witnesses).

Later on 2 Mar 2020 a series of accounts with immense voting power owned by Steemit Inc (@steem @steemit & @misterdelegation) also set @dev365 as their witness voting proxy.

These transactions can all be seen in the Steem Block explorer. Archived here.

Justin Sun and his controlled entities (Steemit Inc, Tron Foundation and the Steem Witness after the Hive hard fork) have posted on the Steem blockchain and on other social media claiming these actions by @dev365 as the actions of Justin Sun or Steemit Inc.

See 7 Mar 2020 Medium post by Tron Foundation (controlled by Justin Sun) which states:

"The only thing we do when we take control of the network is to take back our funds. We are willing to give all the witnesses and control back to the community once we are 100% sure that our fund and exchanges assets are safe."

The Steem Witness (appointed by @dev365) in late March 2020 (shortly after the Hive blockchain was created) stated that the above actions of @dev365 were done by Steemit Inc, which Justin Sun owns and controls.

See: https://steempeak.com/witness-category/@softfork22888/steem-consensus-witness-statement-softfork-0-22-8888

History Review based on facts
...
"02nd Mar. 2020 - With the help of the exchange's stake, Steemit Inc. executes Softfork 0.22.5 to reverse 0.22.2 and place 20 witnesses of their own. Exchanges withdraw their votes shortly after."

It is also quite clear from this analysis of the votes for the Top 20 Steem Witnesses that @dev365's vote completely determines which witnesses are the Top 20 witnesses which control the Steem blockchain.

Legal Opinion

In my legal opinion:

  • Justin Sun controls @dev365, either directly or via Steemit Inc, which in turn controls Steem's top 20 witness list, which in turn operates and controls the code of the Steem blockchain.

  • Justin Sun, Steemit Inc and the persons controlling witnesses @justyy, @steemchiller & @dlike are the persons responsible for implementing HF23.

Based on my analysis above, in my considered legal opinion, Justin Sun, Steemit Inc and the persons controlling the Steem accounts @justyy, @steemchiller & @dlike have committed the criminal offence of THEFT in relevant jurisdictions.

Criminal Conspiracy

When a group of persons works together to commit a crime this is called a criminal conspiracy.

Texas Penal Code § 15.02. Criminal Conspiracy

(a) A person commits criminal conspiracy if, with intent that a felony be committed:
(1) he agrees with one or more persons that they or one or more of them engage in conduct that would constitute the offense;  and
(2) he or one or more of them performs an overt act in pursuance of the agreement.
(b) An agreement constituting a conspiracy may be inferred from acts of the parties.

See https://codes.findlaw.com/tx/penal-code/penal-sect-15-02.html

In the UK conspiracy is both a statutory offence and a common law offence.

Section 1(1) of the Criminal Law Act 1977 provides:

if a person agrees with any other person or persons that a course of conduct shall be pursued which, if the agreement is carried out in accordance with their intentions, either –

(a) will necessarily amount to or involve the commission of any offence or offences by one or more of the parties to the agreement, or
(b) would do so but for the existence of facts which render the commission of the offence or any of the offences impossible,

he is guilty of conspiracy to commit the offence or offences in question.

See: https://en.wikipedia.org/wiki/Conspiracy_(criminal)#Conspiracy_in_English_law

The common law offence of conspiracy to defraud, including theft, is preserved by the statutory regime. See https://lawi.org.uk/conspiracy/

Legal Opinion

The code of HF23 constitutes the terms of an agreement to carry out a theft, as outlined above.

The decisions of Justin Sun and his controlled entity Steemit Inc. to use @dev365 to vote for Top 20 witnesses that would implement HF23, including replacing Top 20 witnesses in the hours before HF23, constitute their agreement to HF23 and thus to carry out the theft of Steem and SBD from the Targeted Accounts.

The decision of each of the persons controlling Top 20 witnesses to change the version of the Steem blockchain computer code which their witness server computers was running to the HF23 code constitutes their agreement to HF23 and thus to carry out the theft.

Thus there was an agreement between Justin Sun, Steemit Inc and the persons controlling the Steem accounts @justyy, @steemchiller & @dlike to implement HF23, which necessarily involved committing a felony - theft. That agreement was carried out and the felony theft committed.

Based on my analysis above, in my considered legal opinion, Justin Sun, Steemit Inc and the persons controlling the Steem accounts @justyy, @steemchiller & @dlike have individually and jointly committed the criminal offence of CRIMINAL CONSPIRACY in relevant jurisdictions.

Situation of Bittrex

Legally, the situation which Bittrex faces is that a theft has taken place and the initial recipient of the stolen property (@community321) has immediately transferred it to the control of Bittrex with instructions to return the stolen property to its original owners.

Through no fault of its own, Bittrex is the recipient of stolen property and has a legal obligation to return that property to its original owners. These are also the clear instructions of the party that transferred the stolen property to Bittrex.

The likely reason that @community321 transferred the stolen Steem to @bittrex rather than directly back to the affected accounts on the Steem blockchain is that with the Steem blockchain under the centralised control of Justin Sun, a second hard fork to steal the Steem again was a real risk. Instead, Bittrex was seen as an honest custodian that could both distribute the stolen Steem back to its original owners on its exchange platform, and was less likely to be targeted by another hard fork.

Indeed as of a short time ago, the Steem Witnesses have implemented another "soft fork" to limit activity of @community321. See https://steempeak.com/witness-category/@softfork22888/steem-consensus-witness-statement-softfork-0-23-1

About the Author

Andrew Hamilton is a lawyer with over 25 years experience who has worked at Herbert Smith Freehills (Sydney), Sidley & Austin LLP (Washington DC) and has been General Counsel numerous companies in the technology sector.

He was instrumental in winning two landmark cases in the High Court of Australia.

He is currently CEO of JPB Liberty (@jpbliberty) a litigation funding company which prepares and arranges funding of legal claims related to and supporting the cryptocurrency industry.

JPB Liberty’s main activity is preparing a class action lawsuit against Facebook, Google and Twitter for banning the advertisements of the cryptocurrency industry in early 2018. Most cryptocurrency investors and projects have claims in this lawsuit. More details at https://www.jpbliberty.com/

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