Hot Takes

An opinion piece in The Hill today tells the SEC to reject the listing of Bitcoin ETFs and it's very misguided.

Penned by Georgetown business professor Jim Angel, the article is almost as alarmist as it is pessimistic.

While he writes that “Informed investors should be allowed to make their own investment decisions without interference from a nanny-state government,” Angel nevertheless argues that investors should be denied the opportunity to decide to invest in Bitcoin ETFs. The reason, he says, is that Bitcoin ETF applications have not disclosed that “criminal activities are the primary use of Bitcoin.” Unfortunately, Angel doesn’t cite any evidence for this proposition, just some personal anecdotes.

No doubt there are illicit uses of Bitcoin, but as law enforcement officials have said time after time, it’s a challenge they are more than capable of meeting. While Angel says that “Bitcoin is a payment system ideally suited to the black market,” I think the dozens of criminals now behind bars because law enforcement used Bitcoin’s blockchain to track them would disagree. Bitcoin is not as anonymous as is often portrayed. And it certainly isn’t the cause of ransomware as Angel implies.

If every company whose products were used illicitly by criminals had to disclose as much in their securities filings, drug companies might have to state that a large proportion of pain killers end up on the black market, banks would have to disclose how their accounts are routinely used by criminals to launder billions of dollars, and maybe even car companies would have to say that their vehicles are used for getaways. It’s not clear retail investors would be any better denied the opportunity to invest in drug companies, banks, or auto firms because they don’t disclose this on SEC forms, but that’s what Angel suggests for Bitcoin ETFs.

The advent of the Internet led to rampant piracy, the proliferation of porn and illegal gambling, easier criminal communications, anonymous harassment, as well as new kinds of confidence scams. Could you imagine if the government in the early 1990s took advice like that of Mr. Angel? Advice that amounts to, “Please look only at the potential costs of this technology and ignore all the potential benefits because they’re too unproven and uncertain.” (That advice might have looked a little like this.) We would be much, much poorer today.

Luckily the government then dismissed techno-pessimists like Angel and, at the time, Newsweek columnist Clifford Stoll, who wrote this timeless piece in 1995. Instead the federal government adopted the optimistic view that we could embrace the promise of technology while mitigating its risks where needed. This was the basis for the Clinton Administration’s policy toward the Internet, and it should be what guides the SEC as it makes its decisions on Bitcoin ETFs.

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The judge in the Coinbase/IRS case just granted a motion that’s a win for privacy.

Late last year the IRS petitioned to file a “John Doe Summons” for all Coinbase users active between 2013 and 2015.

Coin Center was quick to respond, calling out the dangerous precedent that that such a petition would create if granted:

The Fourth Amendment to our Constitution protects "the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures[.]" It aims to accomplish that, in part, by prohibiting general warrants that give government agents broad authority to search unspecified places or persons. While the courts have weakened Fourth Amendment protections when a third party like a bank or business keeps your information, the tide has begun to turn back. Courts have begun to recognize that there must be some limits as more and more of our private data is stored not in our homes, but in "the cloud." If the IRS can get a summons to search all users of bitcoin, it may only be a matter of time before it can get one targeting all video gamers or all eBay shoppers and sellers.

Now, some customers of Coinbase who would be affected by the summons have petitioned the court to intervene on their own behalf. Yesterday we learned that the court granted their petition. In doing so, the court made some similar points:

[The IRS] contends that “there seems to be a substantial gap between the number of people transacting in virtual currency (for which tax consequences might attach) and those that are reporting such transactions.” (Dkt. No. 28 at 13.) But that argument proves too much. Under that reasoning the IRS could request bank records for every United States customer from every bank branch in the United States because it is well known that tax liabilities in general are under reported and such records might turn up tax liabilities. It is thus no surprise that the IRS cannot cite a single case that supports such broad discretion to obtain the records of every bank-account holding American.

With this motion granted, the users of Coinbase will have an anonymous representative challenging the IRS petition in addition to Coinbase. This means that even if Coinbase decides to drop its challenge, there will still be an interver challenge to the summons sticking up for privacy, and that’s a good thing. We will continue watching this case and advocating for consumer privacy. For now at least, it seems as though the court agrees with our assessment: that the IRS’s petition is dangerously overbroad.

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The digital currency industry supports the ULC’s model state law.

In an open letter to attendees of the Uniform Law Commission’s annual meeting this week, several major digital currency firms and investors called for the adoption of the “Regulation of Virtual Currency Businesses Act” as an official ULC model act, which states may then want to consider promulgating into law. For nearly two years, Coin Center has been working with the Act’s drafting committee to ensure that the model act not only avoids the stifling overbreadth of previous attempts at crafting digital currency rules like the BitLicense, but also creates regulatory clarity that fosters innovation by:

  1. Fully exempting all persons and businesses who do not take control of others’ digital currency
  2. Have simple and reasonable licensing requirements for those firms that do take control of customers’ digital currency
  3. Providing other exemptions and an on-ramp for small businesses

We are optimistic that the ULC will adopt the draft model act when it votes later this week, and we’re glad to see such broad industry support for the act.

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demoday
We demonstrated how Bitcoin works in Congress.

Earlier this month the Terrorism and Illicit Finance Subcommittee of the House Financial Services Committee held a hearing to assess the national security implications of open blockchain networks like Bitcoin. Coin Center testified to explain how the technology works and stress that policymakers must approach them the same way they do the internet--as a purpose agnostic platform that is rich with innovative potential.

Yesterday Coin Center continued its Congressional education efforts by holding a demonstration day event for members of Congress on the full committee and their staff. We partnered with Xapo, Chainalysis, and Elliptic to showcase how a typical user would interact with the Bitcoin network. The demonstration covered the process of setting up a software wallet (BitPay’s Copay) and a hosted wallet (highlighting the important distinctions between the two), the stringent AML/KYC process needed to create an account on a regulated exchange, sending a transaction, and viewing transactions on the publicly available Bitcoin blockchain.

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peter-dinner
Pictures from the 2017 Coin Center Annual Dinner are now available.

Our second annual fundraising dinner, held this year after first day of Consensus 2017, was a huge success. Hundreds of open blockchain technologists and businesspeople came out to support Coin Center in what was once again the space’s biggest night out.

You can see photos of the evening here.

Thanks again to our sponsors: Kraken, the Centre for International Governance Innovation, Fidelity Labs, Poloniex, AlphaPoint, Bloq, the Charles Koch Institute, Pantera Capital, Perkins Coie, and ShapeShift.

We’ll see you next year!

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Video: How does multisig make bitcoin more secure?

Coin Center has partnered with the Federalist Society to produce this simple explanation of multisignature cryptocurrency wallets.

Multsig allows users to split up the permission needed to move cryptocurrency held by a particular address. Rather than one person having the ability to unilaterally move funds, a multisig wallet may require two of three (or any m of n) key-holding users to authorize a transaction before any funds are moved.

Read more: “What is Multi-Sig, and What Can It Do?

With this technology it becomes possible for a third party to provide some security for your bitcoins (by protecting one of the keys) without ever having the ability to run away with or lose them. We’ve argued before that companies that use secure arrangements like this do not pose consumer protection risks and therefore should be exempted from money transmission licensing through a safe harbor for non-custodial companies.

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Coin Center briefed four major DC organizations on open blockchains this week.

June has been a busy month for Coin Center. In addition to directly advocating for sound policy toward open blockchains, such as by responding to a recent anti-money laundering law in Congress, we are also a resource for policymakers that are seeking to learn more about these technologies.

Here’s a small snapshot of some of the educational outreach we’ve done over the last week:

We participated in a staff briefing for the House Committee On Agriculture, which oversees the CFTC. The briefing was a “blockchain 101” session that covered the technology, its capabilities, and differentiated between the different types of blockchains out there.

We were part of the American Bankers Association’s annual Payments Forum conference. During his panel, Coin Center executive director Jerry Brito helped the audience grasp what “blockchain” is and what it can realistically deliver in the context of payments:

Blockchain technology consists of three distinct parts, said Jerry Brito, executive director of Coin Center, a D.C.-based advocacy group. The blockchain itself, a series of containers enclosing time-ordered data in an unbreakable and distinct block, linked together; peer to peer networking; and a consensus mechanism, where all participants can agree on the rules of the road and monitor transactions as they happen.

Similarly, our research director Peter Van Valkenburgh presented at the National Governors Association’s National Summit on State Cybersecurity. His talk was one he’s given in Congress before, that answers the question, “What is ‘Blockchain’ Anyway?

And finally, Peter is at the World Bank’s Blockchain Lab this week to discuss opportunities to apply open blockchains in building a more inclusive financial system for the developing world.

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How will regulators look at your token sale?

Recently a small conference called “Token Summit” brought together the growing community of developers that are interested in the red hot area of tokenized crowdfunding. Through the new mechanism, millions of dollars are pouring into projects from the excited cryptocurrency community. This promising new model could hold the key to funding public goods such as open blockchain networks, but raises significant regulatory questions that must be answered first.

On the first day of the conference, Coin Center’s Peter Van Valkenburgh led a panel entitled, “Is Grey the New Normal in Legal & Compliance?” that called attention to the regulatory concerns for this fundraising model. The panel of legal experts shared their views on how regulators might evaluate a token sale project and laid out some of different approaches to designing and implementing a sale in a way that properly navigates those concerns

Read more:

You can watch the full panel below:

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Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permisionless blockchain technologies.