Legal Attack on Bitcoin

A lawsuit against Tesla, Musk et al. May have better odds than other recent attempts at climate impact litigation.

Before we begin, three quick points.

  1. The goal isn’t to destroy “Bitcoin : A peer-to-peer Electronic Cash Sytem.” The goal is to destroy “Bitcoin: A Number Go Up System That Will Make You Rich By Doing Nothing.” The latter can be destroyed, but the former can not.
  2. Why would one want to attack Bitcoin? Here’s my quick manifesto which is independent of environmental concerns. Environmental concerns alone would be enough. A $2000 Bitcoin is fine. A $2,000,000 Bitcoin is not.
  3. I am not a lawyer.

Bitcoin is a rational asymmetric bet, for those who can afford to make such bets, based on the following argument.

“Corporations with a little bit of extra cash will begin by putting 0.5% in. First a few corporations will, then a few others, maybe a little more, not more than they can risk, maybe 2%, 3%, maybe 5%. Then more corporations see the gains and put a little more in. Some corporations go in more, 10%-20% and are rewarded handsomely. Some corporations, maybe a few municipalities, maybe a few state treasuries. First, slowly, then all at once. And just like that Bitcoin is $5,000,000”

Even if you think the scenario above has a 98% chance of not happening, your expected gain is still positive. So you decide to put a little bit in, and the whole process cascades from there. This is the NGU scenario that can be self-fulfilling.

The key in this scenario is institutions. They have to decide collectively that it’s OK to put some cash reserves into Bitcoin. At this point, we clearly aren’t there yet: the corporations noted for doing this are run by Michael Saylor, who famously settled fraud charges with the SEC about twenty years ago, and Elon Musk, who also settled fraud charges with the SEC three years ago. More reputable institutions like Berkshire Hathaway aren’t jumping in, at least yet.

But there could be more corporations slowly dipping their feet in, especially if Musk and Saylor find themselves rewarded, and not punished, for doing so. The goal is to stop corporations or local governments from diving into Bitcoin using litigation.

Impact litigation or strategic litigation is the practice of bringing lawsuits intended to affect societal change. It is an old practice that has been used by the ACLU, NAACP, and to further causes such as tobacco regulation and women’s rights. Recently, climate change activists have attempted to use impact litigation. One of the most notable cases is Juliana v. United States where a number of younger Americans have sued the United States, asking the United States to do more to protect the environment. This case faced a major obstacle: Essentially, the plaintiffs are asking the Courts to assume the role of executive and legislative branches. For general sensible reasons, the Courts are not allowed to overstep their bounds and wade into the roles of the legislative or executive branches of government. This seems to be the major obstacle here.

There have been many lawsuits filed against oil companies. (See the link for a good overview.) These contain a wide range of legal claims, including claims based on misrepresentation by the oil companies and the common claim that oil companies committed a public nuisance.

In the litigation I’m proposing, the plaintiff would be either states, cities, or individuals and the defendants would be corporations that hold Bitcoin, most notable Tesla and Microstrategy, and their CEOs, personally. Also, shareholders of either corporation could sue the CEOs personally, suggesting they unjustly enriched themselves by investing the corporation’s money into Bitcoin.

The case is the following. Microstrategy dumped $2.2 Billion dollars into Bitcoin at an average price of $23,000. This appears to have played a crucial role in driving the price up, as the price has more than doubled since then. It appears true, and could easily be argued, that heavy investments by big players have a nonlinear effect on the price. Because the mining reward directly corresponds to the price of Bitcoin, the incentive to mine has increased by the same rate. Thus also the consumption of energy. So it’s feasible that Microstrategy or Tesla alone could have directly caused additional dozens of Terawatt Hours of electricity to be burned, much in the form of fossil fuels. This is significant. They should be asked to pay for the damage they have caused so far and divest completely.

Again, I’m not a lawyer, but here are some observations which lead me to believe the outcome might be more favorable than the efforts against oil companies or Juliana.

  1. Because much of the mining happens outside of US jurisdiction (we can’t directly regulate Chinese miners, obviously), but still causes nuisance within the United States, public nuisance may apply. However, we don’t ask courts to violate the separation of powers. The EPA is an executive agency created by congress. My understanding is that the courts are not permitted to take over the jurisdiction of the EPA, and this poses a serious obstacle for Juliana v. United States. There is no such executive agency or act of congress that even attempts to consider the global effect of a US corporation owning Bitcoin, thus the court would not be overstepping its bounds by making a ruling here.
  2. Because neither Microstrategy nor Tesla uses Bitcoin in their primary business model, they will not behave liked cornered animals in such a lawsuit, so a scorched earth response probably is unlikely. If you sue Exxon, Exxon is going to fight tooth and nail. They simply can’t afford to lose, because Exxon is an oil company. Tesla, on the other hand, could sell their Bitcoin tomorrow and have made a ton of money and continue to make electric vehicles.
  3. Both of the CEOs, Musk and Saylor, are loose cannons and seem like the type of characters who will ignore legal counsel, preferring the certitude of their own infallible wisdom. Both have settled fraud claims with the SEC. Both are arrogant and don’t know when to shut up. Further, both seem to have personally invested in Bitcoin prior to guiding their publically traded corporations into investing in Bitcoin, in effect pumping their own bags. Again, I’m not a lawyer, but this seems malfeasant on its face. It could be a very awkward situation if it turns out that they strong-armed the corporations into investing company reserves.

Necessary to the complaint outlined above is the assertion that a large corporation investing in the order of billions of dollars has a nonlinear effect on the Bitcoin price. Elon Musk has admitted to doing “liquidity testing.” It would follow to reason that both Tesla and Microstrategy have developed models attempting to understand how selling or buying large quantities of Bitcoin affects the market price. The price dropped significantly during the period in which Tesla was engaging in “liquidity testing.” This could confirm my suspicion that the big players have an outsized effect on market price. Again, IANAL, but to me, this suggests that any such models would be relevant and subject to discovery.

Discovery could also wade into the reasons for the corporations investing in Bitcoin. I would like to see Musk or Saylor deposed under oath explaining the rationale. Knowing Musk’s careful and studied approach to saying stuff out loud, he will undoubtedly perjure or incriminate himself dozens of times. Countless shareholder class action watchdog law firms will be hanging on every word, hoping to find an angle to attack a $700 Billion corporation.

The industry has waved quite a few hands describing how Bitcoin something-something renewable energy. I would be very interested to see these people take the stand and back up these claims while under oath. A witness engaging in whataboutism is not a good look.

Because the claims would be not only about future energy use but about over the past few months, we would hopefully gain a snapshot of how much mining is actually renewable. My guess: Most is not, not even close.

If either corporation has misled the public or their investors about any aspect of their “research” into Bitcoin, this could come to light.

The goal is to keep corporations from diving into Bitcoin. If a public nuisance case is brought against them, and it turns out to be viable, corporations will put Bitcoin out of their minds for good. The threat of discovery, damages and the general brand embarrassment would not be worth the risk.

The Civil Liberties Defense Center is hosting a webinar May 20