Hot Takes

Maybe the EU's proposed new AML rules are not so clear after all.

While I think it’s very heartening they seem to draw a distinction between custodial and non-custodial wallet services, Bitcoin Magazine reports that some in the Netherlands are unsure what would qualify as “custodial” and what wouldn’t. Bitonic CEO Jouke Hofman:

Under the current provision, it’s not that clear who or what the regulation applies to, exactly. It covers wallet providers that hold onto private keys of their users. But does it also include wallet providers that hold onto one key for a two-of-three multisig address? What if bitcoins are time-locked and wallet providers cannot spend the funds now, but perhaps in the future? And if the regulation applies to any key holder, where does the definition of a wallet provider begin? Could the regulation perhaps even apply to Lightning Network nodes?

This kind of uncertainty is exactly why we need absolutely clear language both in AML and consumer protection rules. Typically you want to avoid over-specifying when you draft a law, but in this case you want to be as clear and specific as possible to make sure you are exempting applications that should not be covered. For example, here’s the definition of “control” (i.e. custodial) that we helped the ULC develop for its draft Virtual Currency Business Act:

(3) “Control” means possession of sufficient virtual currency credentials or authority on a virtual currency network to execute unilaterally or prevent indefinitely virtual currency business transactions. The term does not include possession, for a reasonably time-limited period, of virtual currency credentials sufficient to prevent virtual currency transactions to provide a service such as an escrow, provided that the user is able to regain unilateral rights to execute transactions following the period in which the escrow was in effect.

We think such clear language would address all of Hoffman’s questions.

Link/Tweet

Two new digital asset associations launch to advance cryptocurrency professionalization.

Over the last week, The Association for Digital Asset Markets and Mexican Blockchain Association both launched. Their goals are to develop industry standards, codes of conduct, and best practices among companies working with public blockchain networks.

You can read ADAM’s founding principles here and about the Mexican Blockchain Association (in Spanish) here.

It is great to see cryptocurrency industry participants increasingly work together to improve their standards and build an orderly cryptocurrency ecosystem. We are looking forward to working with both organizations.

Link/Tweet

The SEC published much-needed guidance on tokens and trading.

It recently released a “Statement on Digital Asset Securities Issuance and Trading” that uses the example of recent enforcement actions and settlements to illustrate how the securities laws will be applied to token issuance and exchange. It’s well done, reasonable, and says much of what one would expect: That looking at the totality of an activity, doing something that would otherwise be regulated isn’t exempt just because one uses blockchain technology to do it.

That said, we’re a little concerned that the Statement suggests that “an entity that provides an algorithm, run on a computer program or on a smart contract using blockchain technology, as a means to bring together or execute orders could be providing a [regulated] trading facility.” As we’ve explained previously, writing and publishing code alone cannot be a crime.

We do not think the SEC intends to directly regulate the mere creation and publication of code. For one thing, this statement is focused on the current landscape of decentralized exchanges and, as of today, there is no code that, when published to a blockchain on its own, could result in a fully functional exchange. Additionally, the statement repeatedly focuses on “the totality of activities and technology used” to generate the exchange platform, not on any particular activity, such as software design. However, we encourage the SEC to make it clear that merely writing and publishing code for decentralized exchange by itself does not “provide a trading facility.”

Link/Tweet

The Blockchain Alliance reaches 100 law enforcement, regulator, and cryptocurrency industry members.

The alliance, launched in 2015, is a forum for the law enforcement, regulators and cryptocurrency businesses to communicate with each other.

When we helped found the Blockchain Alliance, we wrote:

Law enforcement will pursue criminals no matter what technology they’re using, and how law enforcement does this can affect an open technology. As a result, it’s in everyone’s interest–law enforcement, industry, and those of us who want to keep the technology free and open–to make sure that law enforcement understands how the technology works, what can and can’t be done with it, and what are the opportunities and limits it presents for their investigations. To that end, today we announced the formation of the Blockchain Alliance, a forum for law enforcement and regulators to ask questions of each other and to share information, and for law enforcement and regulators to get technical assistance from industry on understanding the blockchain.

We’re excited to see the Blockchain Alliance grow so fast and are hopeful that collaboration between cryptocurrency innovators and government continues to flourish. Read the full announcement here.

(Image credit: /u/Chinxcore)

Link/Tweet

We briefed Congress on tracking illicit cryptocurrency use and moderated a convening on ICO regulatory uncertainty.

This was a big week for cryptocurrency in DC.

On Tuesday, members of Congress and over 50 representatives from the crypto industry convened at the Library of Congress for a roundtable entitled “Legislating Certainty for Cryptocurrencies.” The event was organized by Rep. Warren Davidson and also attended by Reps. Tom Emmer, Ted Budd, and Darren Soto. Coin Center executive director Jerry Brito moderated the event, and entrepreneurs voiced their concerns about the lack of clarity around when exactly a cryptocurrency token is or is not a security.

Following the roundtable, 14 members of Congress, led by Rep. Budd, sent a letter to SEC Chairman Jay Clayton echoing the concerns of cryptocurrency innovators and asking for more clarity around the regulatory treatment of these networks.

In another event in Congress on Wednesday, in conjunction with the the Congressional Blockchain Caucus, Coin Center put on a briefing about the tools law enforcement has to track illicit use of cryptocurrencies. Blockchain forensics company Elliptic presented how their product works with real-world examples of illicit funds being traced by law enforcement. Reps. Emmer and Schweikert also gave remarks highlighting the importance of getting the regulatory approach to these technologies right and preserving a fertile climate for innovators in America.


Link/Tweet

Several members of Congress have sent a letter to the IRS calling for cryptocurrency tax clarity.

Today's letter, published by House Ways and Means Committee Chairman Kevin Brady, calls on the agency to “expeditiously issue more robust guidance clarifying taxpayers’ obligations when using virtual currencies.” It is a follow-up to a letter published in 2017.

These letters echo Coin Center’s calls for greater clarity and guidance around the tax treatment of cryptocurrencies. Right now, American cryptocurrency users who want to pay their taxes simply don’t know how to do so properly. This gray area is not only frustrating, but can also create serious liabilities for well-meaning citizens.

The 2017 letter goes on to ask for more information about the rationale behind the IRS’s 2017 John Doe summons for Coinbase user data, which we believe is an overly broadfishing expedition.

We were also pleased to see them ask if the agency will consider a de minimis exemption for small transactional use of cryptocurrencies, which we called for in April of last year. Currently, a user needs to calculate capital gains on every stick of gum they buy with cryptocurrency. That doesn’t make sense. The Cryptocurrency Tax Fairness Act, introduced last year, would address this issue.

We are glad to see Congress take action–there are clearly many open questions surrounding taxation of cryptocurrencies. It’s promising to see members of Congress step up to call for a more welcoming environment for these new technologies.

Link/Tweet

The Comptroller of the Currency is making the case for a Federal Fintech Charter, a welcome alternative to state-by-state licensing for cryptocurrency and other payments companies.

In a recent op-ed, Comptroller Otting rightly celebrates competition between state and federal regulators and describes the existing dual banking system:

“Since 1863, the United States has benefited from a dual banking system in which companies seeking to conduct the business of banking can choose to operate via state licenses and charters or apply for federal charters and operate nationwide.”

A shortcoming of the dual banking system, as we see it, is that while there are both state and federal options for traditional deposit-taking banks, payments companies who don’t take deposits (cryptocurrency exchanges among them) generally only have one option: state regulation through money transmission licensing. Why, we’ve asked on several occasions, isn’t there a federal regulatory alternative for money transmitters as there is for regular banks?

The OCC’s fintech charter could be that alternative. It would allow a financial services company to become federally regulated as long as it performs any one of the three core banking functions described in the National Bank Act: deposit-taking, lending, or check-cashing (or as the kids these days call it, payments).

Moreover, as we’ve written in our comments submitted to the OCC Fintech Charter proceedings, companies that facilitate payments in cryptocurrency should also be eligible for federal charters just like the Paypals or Venmos of the world.

Today, the Comptroller echoed that sentiment, suggesting that there should be a Federal analog to New York’s recent decision to regulate Gemini and Itbit’s issuance of dollar-backed tokens. We’re thrilled that the federal charter effort is alive and kicking and that the Comptroller is excited for his agency to play a role promoting innovation in the cryptocurrency space.

Link/Tweet

The Federal Reserve of St. Louis has published an excellent paper on payment systems and privacy.

Research Fellow Charles Kahn explains why financial privacy is important irrespective of concerns over illicit transactions, and how privacy is being actively eroded as electronic payment systems replace anonymous cash.

Not all of the privacy provided by cash is bad, and if cash disappears we will need new ways of providing that privacy. Because privacy needs are different in type and degree, we should expect a variety of platforms to emerge for specific purposes, and we should expect continued competition between traditional and start-up providers.

He goes on to offer two reasons why the private sector may be better poised to provide future cashless payment privacy than the government: technical expertise and trustworthiness.

First, it's hard to argue that the central bank will have greater technical skills in protecting privacy (at least in retail transactions; wholesale and infrastructure may be a closer call). The standard regulatory arguments for oversight of payments systems apply, however: There is an easy case for a regulator to be in charge of setting and harmonizing standards for privacy protection.

On the issue of trustworthiness, the answer is more difficult: … Every twist and turn in politics provides an opportunity to justify an examination of one or another aspect of individuals' transactions. And it is not clear in the current political environment that a central bank or a payments authority will be any stronger at pushing back on these intrusions than private institutions are.

Nor will transparency solve the problem. Paper money is transparent: The technology eliminates the ability of the issuer to monitor transactions, and "it is a truth universally acknowledged" that paper money does so. No computer technology can have this degree of confidence. Only an infinitesimal proportion of people on this planet can verify that computer code does what it advertises it does and only what it advertises. To believe that the CIA has imprinted paper currency with a technology enabling it to report hand-to-hand transactions is paranoia. To believe that spy agencies have backdoors to common computer programs is last week's news. Generating trust in the privacy promises of a public payments authority's new electronic money will be an extremely tall order.

He's also understandably wary of the trustworthiness of private sector payments providers given the lucrative incentives behind customer data collection and monetization. In light of that unfortunate reality, he offers an optimistic balance-of-powers prognosis for privacy:

All institutions, public or private, are likely to be untrustworthy—they are just going to be untrustworthy in different ways. Citizens are not really interested in an absolute guarantee of privacy; we simply want it to be sufficiently difficult to violate privacy that it can be done only in a publicly observed and generally agreed way. Using the differences in objectives of the private and public spheres becomes, it seems to me, a way of making this tension work for us: Public regulation with pushback by private providers seems to me the more hopeful formula.

That's a reasonable approach, but it also points to an alternative. Rather than looking for trustworthy institutions or pitting one untrustworthy institution against another, perhaps we can use open source software development and open blockchains to build private payment systems that don't require trustworthy administrators at all! This, it seems to me, is one way to describe the goal of privacy-protecting cryptocurrency projects like Zcash, Monero, and Grin, and it's why we at Coin Center are so keen on promoting a regulatory climate that does not deny these new technologies the room they need to grow into robust cash alternatives.

Link/Tweet

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 permissionless blockchain technologies.