Open Source and Liability

Date: 2021-01-26

Source: https://craigwright.net/blog/law-regulation/open-source-and-liability

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Several individuals in what is termed the “cryptocurrency

space” have started to promote a misleading and false premise: that open-source

software is necessarily free and comes without copyright. And, dangerously for

those involved with any associated projects, there is the false perception that

open-source developers do not have any liability for the software they are

developing. Both concepts could not be further from the truth.

Such mythology is promoted by organisations

such as Twitter and Facebook, which use closed source code internally and open

source developed by third parties. In developing software, reliability is

associated with the offering of a product. For companies like Twitter, the undertaking

of open-source projects allows them to distance themselves from liability, handing

it to unsuspecting developers. In effect, such large Silicon Valley companies end

up having products developed for them at near to no cost, with the risk and

associated problems lying with third parties. That is, developers without knowledge

of the law, or what they need to know about the development of software and the

fiduciary duties that apply.

The law recognises a few business and

corporate structures. Everything fits within them in one way or another. They include:

• the individual (including

simple business structures);

• associations or partnerships;
• companies and corporations; and
• trusts and foundations.

For all the simplification, the same four

groups cover practically every available structure offered by a software

development group.

The Individual

Such a structure occurs when individuals

act and control a project by themselves. A simple business structure falls

under such an environment, leaving the individual liable for all risk and

damages. Businesses present the simplest and most common reporting framework, where

the taxation liability resides with the individual.

Associations or Partnerships

The formation of a common-law partnership

can occur whenever groups are working together outside of formalised structures.

There are multiple rules for the creation of partnerships, and entire courses

are taught in law schools around partnership law. Generally speaking,

partnerships are formed where corporations have not been developed. Most

development groups that we are seeing in the “cryptocurrency space” are general

partnerships.

A general partnership is a form of

structure where all of the partners (such as developers who submit) are part of

the system, where they may be personally liable for all the debts. General

partners end up with a strict liability to third parties for any injury or loss

that can be attributed to the partnership. In the case of software development

systems, some individuals believe that because we are talking about a group of

software developers, there cannot be any liability. It cannot be further from

the truth. Without a corporate structure, those developing the software and

controlling the project maintain joint liability.

Companies and Corporations

Corporations present one of the greatest

freedoms ever won against government. Prior to corporations, an individual

going bankrupt or actions by one partner would impact the entire endeavour.

Corporations allow all risk to be minimised and individuals working on a

project to maintain a limit to the loss that they can face.

What many people are failing to see in the

open-source movement is that large Silicon Valley corporations are using

individuals to migrate risk away from their companies. Corporations such as

Twitter use open-source software, and tweak it for internal use. They do so

without having to pay any costs or assume any liability. All the liability for

potential losses remains with the developers of a project. From the user’s

perspective, corporations such as Twitter gain all the benefits, with none of

the overheads.

Trusts and Foundations

Trusts and foundations act as an

alternative form to corporations, and are mostly constructed to protect assets,

such as for succession planning and to create charitable foundations and

structures for the continuation of a goal or purpose created by the individual

or group initially forming and funding the foundation.

“Donations”

There have been individuals seeking to

raise capital and income to defend themselves against lawsuits that may be directed

towards open-source software groups. When an individual, or a developer, is

given money to pay for their defence in a lawsuit, such money is income. It is

not tax-deductible, and the individual needs to declare it and pay tax at the

full rate, the rate they owe for additional income. For instance, if you are a

US citizen and a developer on an open-source project, and you gain funding for

a legal case you are facing, you will need to pay tax on the full amount.

For example, as a US developer, if you are

provided with US$100,000 and your top-bracket tax rate is 46%, it is your legal

responsibility to pay US$46,000 to the Internal Revenue Service (IRS). If you

face US$160,000 worth of legal fees, none of the cost associated with the legal

fees will offset your taxable income in this instance. The scenario may differ

for corporations and other registered entities. As an individual, a partner in

the development group, you cannot claim the cost of a legal defence against

your tax. You will owe all the money that is due to the IRS and have to pay

your lawyers.

Even though people talk as if such moneys were

donations, donations are only valid for registered charitable organisations. In

all other instances, such money presents not a donation, but taxable income.

If you are given money to develop an open-source

platform, it is not yours to spend as you wish. Simultaneously, it is treated

as income under tax rules. It is the same as raising money through ICOs,

presenting taxable events.

What Else Is There?

Of course, the big Silicon Valley companies

will tell you that you are free because of open-source projects. Open-source

projects allow them to develop and use external software for less. Twitter,

Facebook, Google, and a swathe of other Silicon Valley companies have lowered

the production costs faced by their companies, managed to hand risk to third

parties, and foregone responsibility, whilst getting uninformed and legally

untrained software developers to believe that they were doing good. Here lies

one of the big lies of the Silicon Valley Internet industry. They are taking

away their own risk and handing it to uninformed individuals.

When you become part of an open-source

project, make sure that you cover the legal aspects of what you are doing.

Those who tell you that there are no risks associated with being a developer

are either ignorant or lying. There seems to be a lot of promotion along such

lines in Silicon Valley. Silicon Valley seems to be hosting the new former

pirates of the world; they lie, they steal, and they misinform.

With systems involving “cryptocurrency”, including BTC Core, the individuals behind the associated

website will try to tell you that they are only an open-source group, and hence

there is no liability. You cannot simply remove liability from your actions by

saying you do not have liability. It does not matter what the website says; if

you become part of such a group, you are liable for the actions of the group. Here

is why corporate structures were developed; they limit liability.

Bitcoin Core is a partnership-based

software vendor. It owes a duty to its users and those who put money into the

ecosystem they are developing. It has a duty of care and fidelity to provide

functioning software. Likewise, actions such as passing a system off as

another can leave each of the developers liable for the actions of a few

malicious individuals. Ignorance is not a defence.

In accordance with the common test provided

through Reckitt & Colman Products Ltd v Borden Inc [1990]

1 WLR 491, the development of an alternative system, changing something that

was set in stone, and misrepresenting it as the same product is an act of

passing off. In the case of BTC Core, you cannot decide that a community now owns

a project. I did not ever hand the project over. I explained that the project

was based on a protocol that had been set in stone.

So, from a legal point of view, there are

hundreds of billions of dollars’ worth of goodwill and reputation that have

been destroyed, which has been done through a misrepresentation. Consequently,

as Bitcoin Core forms not a corporate structure, and is merely run by its

members, the developers, it is the developers who are liable for such actions.

The liability is unlimited. And, being that there is no corporate structure,

there are no donations. Here, any money sent as payment is not tax-deductible whatsoever.

Interestingly, such cases do not even

require my asserting my personal rights. As with the protection rights in the

case of one company, Champagne and Port, acting to defend their rights against

producers such as those in California which sold sparkling wine as champagne,

any individual within the Bitcoin (BSV) community, or any company or investor

in the community, has a right of action. In other words, all individuals within

the Bitcoin community and all the companies within the community which have

lost money have personal rights of redress against the developers of BTC Core.

It is time for the truth about open-source

software to come out. It is time for the lies promoted by Twitter and other

companies in the Silicon Valley industries, who have been parasitically

reducing risk and cost by handing both to individuals, to end.

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