Oyster Protocol and Bruno Block tax evasion case at a glance

Authors: TaxDAO-Ray, TaxDAO-Leslie

In October 2018, the encryption platform Oyster Protocol encountered a serious crisis. Its founder Bruno Block (real name Amir Bruno Elmaani) used intelligence to A loophole in the contract secretly minted a large number of new Oyster Pearl (PRL) tokens and sold them on the market, causing the price of PRL tokens to plummet. Elmaani was subsequently charged with tax evasion and fraud and was sentenced to four years in prison on October 31 this year.

This article will outline the facts and background of the Bruno Block fraud and tax evasion case, analyze the legal basis for the U.S. government to accuse him of tax evasion, and on this basis analyze the U.S. government and the IRS’s approach to encryption Regulatory and compliance requirements for currency issuance, with a view to providing a reference for the industry.

1 Case facts and background

1.1 Oyster Protocol and its business model

Oyster Protocol is owned by Launched in September 2017 by the anonymous founder of the pseudonym Bruno Block, it is a blockchain-based data storage platform that uses IOTA and Ethereum technologies to provide a decentralized, privacy-protecting platform for websites. and low-cost data storage and transmission solutions. The goal of Oyster Protocol is to provide decentralized storage and encryption services for websites by utilizing the free storage space and CPU of users’ browsers, while providing a new revenue stream for website owners.

Oyster Protocol’s native token is Pearl (PRL), which is an ERC20 token based on Ethereum that can be used to buy and sell data on Oyster Protocol. PRL can also be used to motivate nodes in the network and maintain the security and stability of the network.

The reason for the issuance of PRL is to realize the operation and monetization of the data storage platform. Oyster Protocol enables their users to store and retrieve files through a decentralized, anonymous and secure system. On the one hand, anyone with internet access to a website using the Oyster Protocol can contribute a small portion of their computing power to other users to store data in the distributed ledger. At the same time, users who need to use cloud storage can use PRL tokens to pay for data storage, and can also receive PRL token rewards by participating in network maintenance. On the other hand, website owners and content publishers can also earn income by using Oyster Protocol. They only need to add a line of code to their website to use computing resources provided by users to store their content and receive a certain percentage of the PRL tokens paid by users. This way, they don’t need to rely on traditional advertising models or worry about things like ad blockers or malware. Oyster Protocol claims that the issuance of PRL is to create a win-win ecosystem, allowing both websites and users to benefit from data storage, and to achieve value exchange and incentive mechanisms through PRL tokens.

1.2 The development history of Oyster Protocol

In October 2017, Oyster Protocol conducted its initial coin offering (ICO) and raised approximately 3 million USD funds.

In January 2018, Oyster Protocol released its testnet, demonstrating its data storage and retrieval capabilities. In April of the same year, Oyster Protocol released its mainnet and officially launched its data storage service. The mainnet also introduced a new token, Shell (SHL), which is used to pay for network connections and decentralized applications (Dapp) running costs; the token is distributed to PRL holders through airdrops. The release of the mainnet marks the transformation of Oyster Protocol from an idea to a usable product, and also opens up more possibilities for its future development.

In October 2018, Oyster Protocol encountered a serious crisis. Its founder Amir Bruno Elmaani (also known as Bruno Block) exploited a loophole in the smart contract to privately mint a large number of new PRL tokens. , and sold off in the market, causing the price of PRL tokens to plummet. Elmaani was subsequently charged with tax evasion and fraud and sentenced to four years in prison.

In November 2018, Oyster Protocol announced that it would change its name to Opacity and launch a new token OPQ to replace the PRL token. Opacity inherited Oyster Protocol’s technology and vision but severed all ties with Elmaani. Opacity is still running and has a certain user base and community support.

2 Analysis of Elmaani’s tax evasion and fraud case

In addition to being criminally charged by the U.S. government, Elmaani’s act of privately minting and realizing PRL also faced U.S. securities A civil action brought by the Exchange Commission (SEC). The SEC filed a lawsuit claiming that Elmaani sold and issued PRL through false promises and deception, violating the corresponding provisions prohibiting fraud in the Securities Law and the Exchange Law, and requested the court to confiscate its illegal gains and impose civil penalties. According to existing U.S. legal precedents,[1] fraudulent income is also subject to tax. Therefore, the judgment of the civil lawsuit filed by the SEC does not affect the determination of whether Elmaani has taxable income. Therefore, this article will mainly focus on the criminal case filed by the U.S. government. Litigation unfolds analysis.

It should be noted that although according to relevant news reports, Elmaani had pleaded guilty to the judge on April 5, 2023, and the judge made a formal verdict on October 31 of that year, [2] as of the publication of this article At that time, the author still could not retrieve the original text of the judgment. The latest relevant legal document that the author can retrieve is a "slip copy" signed by the presiding judge updated by West Law on April 4, 2023, which is a draft judgment that has not been officially released. [3] Considering that Elmaani pleaded guilty to the judge the day after the draft judgment was released, and according to the draft judgment, Elmaani did not raise any objection to the main facts of the case, this article will use the draft judgment as a basis to analyze the court’s decision thinking. Carry out combing.

2.1 The prosecutor’s testimony in Elmaani’s investigation

According to the indictment filed by the prosecutor (that is, filed on behalf of the U.S. government), the prosecutor has evidence to prove that Elmaani The following behaviors are suspected of tax evasion and fraud:

First, between 2017 and 2018, Elmaani sold the PRL he owned for US dollars through a series of intermediate steps. Elmaani exchanged a large amount of PRL it held on the first cryptocurrency exchange (“Exchange-1”) for other cryptocurrencies. Elmaani then transferred the new coins to a second cryptocurrency platform ("Exchange-2") and exchanged them for U.S. dollars.

Second, in October 2018, Elmaani secretly issued millions of PRLs, sold them and retained the proceeds ("Exit Scam"). Elmaani created millions of new Pearl tokens for herself for free by modifying PRL’s smart contract. At the same time, Elmaani used the same method as the first step to convert PRL into US dollars. In the process, Elmaani used cryptocurrency services called "mixers, or tumblers," which combine transactions from multiple customers to make individual transactions difficult to trace; he also used his friends and Cryptocurrencies and U.S. dollars were transferred from the accounts of family members, including his spouse, all of which had the effect of concealing cryptocurrency movements.

Third, Elmaani took other measures to conceal its income, including trading precious metals.

The consequences of Elmaani's series of transactions resulted in PRL becoming almost worthless. Exchange-1 halted all trading in PRL when it discovered the exit scam and delisted PRL from its exchange two weeks later; the scam resulted in investors losing significant amounts of money. Two days after launching the exit scam, Elmaani said he executed the exit scam in part because "taxes are very annoying."

2.2 The prosecutor’s accusation against Elmaani

The US government alleged: In 2017 and 2018, the defendant Amir Elmaani received millions of dollars in income, That included income from a new cryptocurrency he created called the Pearl token, and he paid no taxes on nearly all of it. The U.S. government's indictment alleges that Hermani used various means to avoid paying most of his income taxes for the past two years, including:

(a) Submitting a false income tax return for the 2017 filing year and failing to file a The IRS reported large amounts of income;

(b) In 2018, the nominee was used to receive a portion of his/her unreported income and transfer that income to himself/herself;

( c) In 2017 and 2018, by operating a business under a pseudonym and concealing his true identity, he earned his unreported income;

(d) In 2017 and 2018, by operating a business under a pseudonym and concealing his true identity; Notionally owning assets;

(e) deriving further unreported income from a cryptocurrency exit scam in October 2018 while attempting to conceal his participation in the scam; and,

(f) Largely traded cryptocurrency, cash, and precious metals in 2017 and 2018 to conceal its unreported income.

2.3 Elmaani’s defense

Elmaani did not deny that he had committed several acts listed by the prosecution, and even admitted that he knew that he had a tax liability, but he still Three defenses were raised. First, Elmaani claimed that he did not carry out the above-mentioned behavior to evade taxes, but only to avoid the scrutiny and tracking of Pearl investors, company members and Pearl community members. Second, Elmaani claimed that he did not receive the tax bill from Exchange-2, so he did not know how much tax he needed to pay, and therefore was unable to pay tax. Third, Elmaani proposed that he suffered from mental illness (Insanity) during the period of committing the aforementioned acts. Therefore, he did not have the intention to evade taxes, let alone take the relevant acts for the purpose of evading taxes. Interestingly, his explanation for this mental illness is: after setting up related scams, he began to worry about the collapse of the world's financial system, so he hoped to renovate the yacht he bought after making a profit to provide for his family after the financial crisis. Provide financial security.

2.4 Summary of court decisions

Section 7201 (IRC §7201) of the U.S. Internal Revenue Code (IRC) provides for the crime of federal tax evasion (The Federal Crime of Tax Evasion), which is a felony in the United States and is punishable by up to 5 years in prison and a fine of US$100,000 (a company committing this crime can be fined up to US$500,000). The presiding judge in the Elmaani case pointed out that if the prosecutor wants to prove that Elmaani constitutes the crime of tax evasion, it should follow the precedent of United States v. Josephberg, [4] and prove that Elmaani’s behavior meets the following three major elements: (1) There is a large amount of tax debt; (2) having the intention to evade taxes; (3) taking positive actions. As mentioned above, Elmaani has admitted that element (1) is established, and despite denying his intention to evade tax, Elmaani still decided not to object to element (2). Therefore, the focus of the case ultimately fell on element (3), that is, whether Elmaani had engaged in active tax evasion, and this was mainly related to Elmaani’s third defense.

The prosecution rebutted Elmaani’s defense in the form of a motion. The prosecutor believed that mental health evidence should be subject to strict restrictions, and the evidence of mental illness presented by Elmaani was "impermissible evidence that seeks to 'excuse' the crime", that is, "impermissible evidence that seeks to 'excuse' the crime." The reason is that even if Elmaani does have fantasies and fears about financial crises and the end of the world, such mental problems will not conflict with the payment of income tax, that is, Elmaani can have this kind of mental illness and the intention to evade taxes at the same time. The prosecution's rebuttal was accepted by the court, while Elmaani's defense was excluded by the court. In the end, the court concluded that there was no evidence or explanation that could help Elmaani escape the charge of tax evasion. Of course, this draft did not specify the specific outcome of the trial. Detailed reasoning and argumentation will be announced after the official judgment document is released.

In general, during the trial of the Elmaani case, there was no fierce confrontation of opinions, no theoretical difficulties that were difficult to decide, and no ambiguous case facts. The focus of the dispute focused on traditional crimes. In terms of judgment of essential elements, it does not directly reflect the characteristics of cryptocurrency tax crimes and the tendency of judicial trials. However, considering that the Elmaani case occurred at the time when the ICO craze was beginning to decline, and there were very few criminal cases involving taxation of cryptocurrency, the case does have a certain cutting-edge and representative significance in the field of cryptocurrency cases in the United States and even the world. The following article will try my best to The U.S. cryptocurrency tax regime involved will be excavated from this and an appropriate extended analysis will be conducted.

3. Analysis of the tax-related content of this case

3.1 The U.S. cryptocurrency tax system

On crypto The prerequisite for currency taxation is to clarify the legal nature of cryptocurrency. In this regard, different organizations and institutions in the United States hold different views. For example, the SEC considers cryptocurrencies to be securities, the U.S. Commodity Futures Trading Commission (CFTC) defines cryptocurrencies as commodities by explaining the nature of cryptocurrency derivatives, and the IRS defines cryptocurrencies as property. Since the IRS is the tax authority, the characterization and regulations of the IRS should prevail in terms of the cryptocurrency tax system.

The U.S. cryptocurrency tax system mainly revolves around income tax and capital gains tax. Of course, broadly speaking, capital gains tax is also a type of income tax, but it is often established separately due to legislative policy considerations. As early as 2014, the IRS stipulated the tax calculation rules for cryptocurrencies in the "Investor Guidance and Rules" (Notice 2014-21), requiring that cryptocurrencies be subject to the same tax system as property. Specifically, buying and holding cryptocurrencies does not require tax; in terms of income tax, receiving cryptocurrencies from airdrops (AirDrop), decentralized finance lending (DeFi), mining, and receiving cryptocurrencies as wages, remuneration, etc. All are required to pay income tax, and fair market value is used when calculating income; in terms of capital gains tax, conversion of cryptocurrency into legal tender, gifting cryptocurrency, using cryptocurrency to purchase goods and services, cryptocurrency swaps, etc. all need to be paid Capital gains tax, and on the basis of deducting costs, different tax rates are applicable depending on the length of holding time. [5]

However, Elmaani’s behavior in this case is special because he also minted Pearl tokens before selling them. It goes without saying that capital gains tax should be paid on the proceeds from the sale of tokens, but the IRS has not yet reached a conclusion on whether the act of minting tokens should be taxed. In this regard, some people believe that minting tokens and mining both create new digital assets through calculation, so the income from minting tokens should also be taxed. This article believes that whether the tokens obtained from minting are taxable income should depend on their market liquidity. When there is a lack of liquidity, the true value of the tokens is difficult to determine, and naturally the income cannot be determined. Elmaani has been issuing tokens for a period of time. Tokens minted in violation of regulations later, since the token market already had a certain degree of liquidity at that time, the value of these newly minted tokens is relatively clear, and they belong to Elmaani's income and should be taxed.

3.2 U.S. federal tax evasion crime

The three basic elements of the U.S. federal tax evasion crime have been mentioned above. These three elements seem simple, but in fact After being supplemented and improved by many judicial precedents, these three elements have a relatively rich connotation. Some of them are not mentioned in the draft judgment of the court in this case, but are crucial to understanding this case.

Element (1) requires the existence of a substantial (substantial) tax debt, that is, the actual amount of tax paid by the taxpayer is far from what should be paid. In this regard, there are three points to note. First, the income tax liability of the United States is based on the year, that is, the tax liability of each year is independent. If a taxpayer has taxable income in three tax years and has committed tax evasion, then the taxpayer will be punished. Three counts were charged instead of one, so the three years of tax evasion amounts could not be combined. From this perspective, Elmaani may have been guilty of federal tax evasion once in 2017 and once in 2018. Second, prosecutors of federal tax evasion crimes (usually the U.S. federal government) do not need to provide evidence to prove the exact amount of tax evaded by the defendant, because the purpose of imposing penalties for tax evasion is not to recover a specific amount of tax, but to punish tax evasion. payments and violations of the tax system. As for how to determine whether an imprecise amount is a "large amount", U.S. case law has not established an absolute standard or used a specific formula. Instead, it is often up to the jury to decide whether the evaded tax amount is a "large amount" based on the specific circumstances. . [6] Understanding this, you can understand why in the aforementioned draft judgment, the judge, prosecutors or Elmaani did not investigate or dispute the amount of the tax. Third, as mentioned above, the source of income does not affect its taxability. Illegal income such as fraud also falls within the scope of income tax. [7] Therefore, regardless of the outcome of the SEC v. Elmaani securities fraud case, the Elmaani tax evasion case will not be affected.

Element (2) requires the defendant to have the intention to commit tax evasion, and there are many standards for how to determine "intention". First of all, "good motive" cannot excuse "intentional", and the prosecutor does not have to prove that there is some evil or negative motive behind "intentional". "Intentional" only needs to be voluntary and intentional ( It suffices to intentionally breach a known legal obligation. [8] Secondly, intentional ignorance should also be recognized as intentional. The so-called willful ignorance means that taxpayers know that they are not aware of the relevant tax regulations, but still file tax returns in this state of ignorance. However, there are exceptions to this situation. When the tax law itself is unclear and prone to ambiguity, ignorance and misunderstanding of the law can be used as valid defenses. [9] Finally, the decline or loss of willpower can also be a valid defense, provided that there is a direct connection between this willpower problem and the criminal behavior, otherwise, as the prosecutor argued in this case, some mental issues that have nothing to do with paying taxes Illness does not excuse tax evasion.

Element (3) requires the existence of active behavior for the purpose of tax evasion. This type of behavior has two major forms: evasion of assessment and evasion of payment. The former refers to omission, under-reporting of income or over-reporting of deductions. , the latter refers to concealing property to avoid taxes after completing tax assessments, and simple non-payment of taxes is not the target of federal tax evasion crimes. What Elmaani did was to evade assessment, which is also the most common tax evasion behavior. If Elmaani did not submit false tax returns, operate and trade anonymously after selling the tokens, but just refused to pay taxes, then at most it would be was charged with a misdemeanor charge of willful failure to pay taxes under IRC Section 2703, rather than a felony charge of federal tax evasion.

3.3 U.S. reporting requirements for cryptocurrency taxes

There is no separate reporting content and reporting procedures for U.S. cryptocurrency taxes, and relevant reporting is still under the income tax It is carried out under the framework of capital gains tax. However, the IRS’s requirements for cryptocurrency tax declarations are becoming increasingly strict and precise, and enforcement and supervision are also increasing. This reflects both direct and indirect perspectives. The so-called direct perspective refers to the IRS increasing tax collection and administration on cryptocurrency traders. For example, starting in 2020, the IRS's 1040 tax form began to include questions such as "Did you receive, sell, send, trade, or otherwise obtain any financial interest in any virtual currency during 2021?" For another example, the IRS has increased relevant budgets and invested more manpower and financial resources to improve enforcement against cryptocurrency traders. As another example, as new regulations take effect in 2024, people who receive more than $10,000 worth of cryptocurrency in transactions or operations have an obligation to report to the IRS. From an indirect perspective, the IRS mainly obtains tax-related information through pressure from centralized exchanges (CEX). Since KYC verification must be completed after registration at CEX before transactions can be conducted, even if taxpayers do not actively fill in cryptocurrency transaction tax information, CEX will indirectly provide users’ cryptocurrency transactions to the IRS through 1099 forms and other forms when filling out its annual tax forms. Condition. In addition, the IRS is already using blockchain analysis technology to track relevant transaction information. If the relevant address has interacted with some centralized exchanges, the holder's information and tax status may also be captured.

Specifically, when declaring cryptocurrency taxes, taxpayers may need to fill out the following form:

In addition, taxpayers may also receive Form 1099-K, 1099-MISC or 1099-B from the CEX, depending on the exchange. However, the 1099-K is not used to report the tax status of personal transactions like the forms listed above, but is only used to provide the IRS with transaction information, as is the 1099-MISC and 1099-B forms. However, these three forms are not entirely suitable for cryptocurrency transactions, so the IRS is planning to launch a 1099-DA form that is more realistic for cryptocurrency transactions.

4. Conclusion

In sharp contrast to the vigorous and rapid development of cryptocurrency, there is a relatively lagging and lacking legal system, especially for Regarding fraud and tax issues in cryptocurrency transactions, countries around the world, including the United States, have not yet formed a sound regulatory plan. The Elmaani case involves both civil securities fraud and criminal tax crimes. The former harms the legitimate rights and interests of investors, while the latter harms national fiscal revenue. This article focuses on the U.S. federal tax evasion crime involved in the Elmaani case, and analyzes the elements of the tax evasion crime. It also analyzes the U.S. cryptocurrency tax system and its specific reporting requirements. However, it is limited by the complexity and tax compliance of the cryptocurrency field. Due to the professional nature of the work, this article can only select the key points to expand on. As for more theoretical and practical issues on the taxation of cryptocurrency transactions, we will leave it to be discussed in another article in the future.

[1] See Moore v. United States, 412 F2d 974, 978 (5th Cir. 1969). See also United States v. Wright, 798 Fed. Appx. 849, 857 (6th Cir. 2019).

[2] See IRS. (2023, October 31 ). Cryptocurrency founder “Bruno Block” sentenced to four years in prison. Retrieved February 4, 2024, from https://www.irs.gov/compliance/criminal-investigation/cryptocurrency-founder-bruno-block-sentenced-to- four-years-in-prison.

[3] See UNITED STATES of America, v. Amir ELMAANI, 131 A. F. T. R. 2d 2023 -1308 (20 Cr. 661(CM)).

[4] See United States v. Josephberg, 562 F.3d 478, 488 (2d Cir. 2009).

[5] See Overview of the U.S. Cryptotax System | By TaxDAO | CoinTime. ( n.d.). Cointime. https://cn.cointime.ai/news/mei-guo-jia-mi-shui-zhi-du-gai-lan-35353

[6] See United States v. Cunningham, 723 F2d 217, 230–231 (2d Cir. 1983), cert. denied, 466 US 951 (1984).< /p>

[7] See United States v. Stafoff, 260 US 477, 480 (1923). See also United States v. Mueller, 74 F3d 1152, 1155 (11th Cir. 1996).

[8] See United States v. Phipps, 595 F3d 243, 247 (5th Cir. . 2010)

[9] See Connally v. General Construction Co., 269 US 385, 391 (1926); McBoyle v . US, 283 US 25, 27 (1931).