New Jersey Case Could Set Restrictive Precedent for Bitcoin Businesses

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Policy & regulation
14 February 2014

Though we have only hints at what regulation could result from last month’s NYDFS hearing in New York, members of both sides largely agree the dialogue did much to improve relations between New York regulators and the bitcoin community.

Despite the steps forward, however, recent actions taken by the state’s southern neighbor New Jersey suggest that US law enforcement is going the extra mile to try and prevent any potential bitcoin threats, no matter how dubious.

In a controversial move, the New Jersey Division of Consumer Affairs issued a subpoena this December against Jeremy Rubin, a 19-year-old bitcoin developer and MIT student, who, along with three other students, has created an innovative computer code called Tidbit.

Tidbit would allow web surfers to put their computer power toward bitcoin mining, providing a website with the proceeds of this activity in exchange for the ability to view content without advertising.

New Jersey doesn’t quite see the innovation, and the implications of its potential victory in court could have an impact on the wider bitcoin business community.

The Electronic Frontier Foundation, which is representing Rubin, told CoinDesk:

“The precedent that [it] would set is to validate the authority of a state to investigate and regulate conduct taking place online and outside of the state’s borders.

That means Bitcoin innovators will have to be very careful with what they do and understand that there is going to be scrutiny into their activities.”

Necessary action?

The subpoena isn’t just asking introductory questions about Tidbit.

Rather, law enforcement officials have moved aggressively to prompt Rubin to turn over all of Tidbit’s assets, including its source code, related bitcoin wallets, agreements with third parties, as well as the name and IP addresses associated with its development team, all of whom are undergraduates at MIT. Though, it should be noted it stopped short of accusing Rubin of criminal wrongdoing.

Looking more closely at recent headlines from the state, the action may not be surprising. Last November, E-Sports Entertainment settled for $1m after it was accused of using malicious software code to illegally mine bitcoin on the computers of state residents.

At peak power, the company was able to take control of 14,000 computers without users’ knowledge and generate $3,500 in profits over two-week span. It was eventually accused of violating the New Jersey Consumer Fraud Act and the New Jersey Computer Related Offenses Act.

Indeed, the language of the Tidbit subpoena suggests this interpretation as it asks Rubin to turn over “all documents and correspondence concerning all breaches of security and/or unauthorized access to computer”.

 

Comparisons between E-Sports’ botnet program and Tidbit’s mining program certainly exist, but the accusations against Tidbit are particularly puzzling to many for one reason.

As Rubin has noted in an interview, Tidbit is incomplete, in part so the terms and conditions of its use under the law could be established. Further, he says no one has ever used the program to mine bitcoin.

Mounting a defense

Initially developed at the Node Knockout Hackathon, where it won a prize for innovation, Tidbit was lauded for its out-of-the-box thinking to a problem that has long dogged the Internet, a dependance on advertising.

 

Since the announcement of the subpoena, however, reaction from the bitcoin community has been marked by confusion and disappointment with US law enforcement.

The EFF has been the most vocal about its support, questioning whether New Jersey has the legal standing to pursue any action based on the fact that Rubin is not a resident.

A spokesperson for the EFF told CoinDesk:

“New Jersey had no jurisdiction to issue a subpoena to Rubin, who lived in Massachusetts, or Tidbit, which had no connections to New Jersey at all; the server housing the code is not located in New Jersey and Tidbit didn’t do anything to target New Jersey users specifically.”

The EFF believes the subpoena should be thrown out on three counts, and is “hopeful” it will be quashed.

For now, plans for Tidbit are in flux. The developers had earlier aimed to launch a beta release in February, adding support for litecoin to the trial.

However, the future viability of these objectives will likely depend on the first hearing in the case to be held later this February.

At press time, the New Jersey Division of Consumer Affairs had not responded to requests for comment.

Image credit: New Jersey state capital via Shutterstock

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