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New CFPB prepaid rules leave out Bitcoin, and that’s mostly a good thing.

Two years ago this December, the Consumer Financial Protection Bureau began working on a new regulation of prepaid products. The CFPB said at the time that some of the new requirements might apply to virtual currency products. Coin Center filed a comment in that rulemaking process arguing that: 

  1. The CFPB had not conducted adequate study of the virtual currency industry to determine whether and how to apply existing rules to digital currency products.  
  2. The small scale of the digital currency industry relative to the legacy prepaid industry made the application of these rules less urgent. 
  3. That certain specific technical aspects of virtual currency technologies made the application of these rules fraught and worthy of further study and consideration. 

We concluded by asking the CFPB to include a formal exemption of virtual currency products within the final rulemaking.  A number of legacy prepaid industry groups asked for the opposite: for virtual currency products to be explicitly added to the definition of prepaid access, thereby making these products explicitly covered by the rule.  

Today the CFPB has released the final rule [PDF]. Coin Center’s comments and concerns were cited by the CFPB in opposition to the demands of the legacy prepaid industry groups: 

On the other hand, a diverse group of industry commenters and a non-governmental virtual currency policy organization commenter urged the Bureau to expressly provide in the final rule that it does not apply to virtual currency products and services. Commenters expressed concern that regulation would be premature, thus potentially stifling innovation. Several commenters highlighted the low rate of consumer adoption of virtual currency products and services. Commenters also asserted that the Bureau has not adequately studied the virtual currency industry, and that regulations developed for GPR cards are unsuitable to apply to virtual currency products and services because of the differences between such products and services and GPR cards.

And, to our satisfaction, the final rule does not explicitly include digital currency products within the definition of prepaid access, as legacy industry commenters had requested and we had opposed: 

the Bureau reiterates that application of Regulation E and this final rule to [virtual currency] products and services is outside of the scope of this rulemaking.

However, if you parse that language carefully, you'll note that this doesn't say that digital currency products are outside the scope of these regulations. It only says that the question, "are virtual currency products regulated under Regulation E or this final rule?" is outside the scope of this particular rulemaking. So the result is that we still don't know. That's better than an explicit statement that these ill-fitting regulations definitely apply right now to digital currency products, and it allows the CFPB to take more time studying the question (as we asked them to do), but it doesn't provide any certainty for innovators wondering whether their products are covered today, either. We'll have to keep waiting.

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A top SEC official said that Ether is not a security.

Speaking today at a conference, the U.S. Securities and Exchange Commission’s Director of Corporate Finance, William Hinman, revealed in a speech that the SEC does not consider Ether, the Ethereum network’s native cryptocurrency, to be a security:

"Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions."

We are glad the SEC agrees with our long held analysis of how securities law applies to decentralized cryptocurrency networks like Bitcoin and Ethereum (See, in particular, our analysis of Ethereum here). We are thrilled to see it take strong pro-innovation approach to this nascent technology. With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.

Director Hinman’s analysis was based on an appreciation for the nuances of how decentralized technology really works, something we laid out years ago in our framework for securities regulation of cryptocurrencies. He used his speech to explain the Howey Test for determining whether a financial instrument is an investment contract and concluded that his analysis was that Ethereum failed the Howey test and, therefore, could not be considered a security:

When the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. ... the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.

It is a very good day for US policy toward the technology of innovation.

For more information on Ethereum, please see this explanation written by Ethereum’s founder, Vitalik Buterin, on Coin Center’s website: What is Ethereum?

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CFTC Commissioner recognizes the “transformative” nature of cryptocurrency.

During his speech at the United Nations last week, Commissioner Behnam spoke at some length about the potential value that this new technology can bring to the United States and other nations. He noted that cryptocurrency has the potential to be an effective runaround the problem of corruption in International Development:

Here is our chance to put money directly into the hands of those who need it, without bribery, rake-offs, graft, and shakedowns. Virtual currencies could transform the economic and social landscape. It could mean a massive, and equitable, shift of wealth. Technology could be transformational, without a military take-over, civil war, or political or religious creed.

Benham also spoke about sectors of the United States economy that have tremendous potential to apply this new technology. Here is what he said about agriculture:

Through blockchain technology, finding solutions to these challenges may become significantly more attainable. Food could arrive on grocery shelves faster, using an intricate system of measures meant to trace location from the farm to the table, with the additional bonus of providing abundantly more information about the product source… we could eliminate food waste and even improve distribution through networks domestically and internationally.

And about healthcare:

Blockchain could allow patients to create smart records that gather and harmonize information, leading to better continuity of care and even new models of care. Blockchain could also address medical fraud and waste. And, as a result, help contain the rising cost of health care.

In 2016, we published a report in which we explain why open, permissionless blockchain technology is essential for powering identity and digital cash use-cases that are inherent to addressing the supply chain and charitable aid issues Benham discussed. Indeed, we are cautiously optimistic about proclamations that imply these technologies are the skeleton key to unlocking greater equality and efficiency in global markets.

Behnam also spoke about the importance of pursuing legal action against fraudsters, and the challenge and importance of correctly categorizing specific tokens. Furthermore, Commissioner Behnam signaled that the CFTC was completely convinced that cryptocurrency is primed to permanently disrupt financial and economic sectors. In fact, he is so confident in cryptocurrency’s staying power that his rhetoric ascended from the analytical to the prophetic:

These currencies are not going away and they will proliferate to every economy and every part of the planet… We are witnessing a technological revolution. Perhaps we are witnessing a modern miracle.

We couldn’t agree more, Commissioner.

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Coin Center raises $1.2 million spurred by Kraken matching pledge.

Last week we announced on Twitter that we have reached and exceeded our goal of raising funds to match a generous $1 matching offer from cryptocurrency exchange Kraken (in addition to their already unprecedented $1 million donation), bringing our total fundraise in May to over $3 million.

This enormous outpouring of support from the cryptocurrency community is three times Coin Center’s annual budget, which will help us step up our education and advocacy work at a time when government interest in these technologies is the highest it’s ever been.

In addition to donations from the 100+ individuals, here are the companies that helped us hit our goal: 1Confirmation, Andreessen Horowitz, Ausum Ventures, Autonomous Crypto, Baroda Ventures, Blockchain Capital, Blockchange Ventures, Chia, Digital Currency Group, Dispatch Labs, DRW/Cumberland Mining, eToro, Hudson River Trading, itBit/Paxos, Kik, Medici Ventures, Polychain Capital, Protocol Labs, Ripple, SIG, SolidX, Steemit, Tlon, and Union Square Ventures.

Thanks to all of you who supported us. Your confidence in our work continues to humble us.

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The New York State Department of Financial Services just approved the trading of privacy-protecting cryptocurrency.

Gemini will become the first BitLicensed exchange to offer trading in Zcash.

The DFS press release summarizes Zcash in the following way:

The Zcash network supports two kinds of transactions, transparent and shielded. Transparent transactions operate similarly to Bitcoin in that the balance and the amounts of the transaction are publicly visible on the blockchain. Shielded transactions utilize z-addresses and are entirely private. Transactions associated with z-addresses do not appear on the public blockchain. Zcash is the digital cryptography-based asset of the Zcash network, similar to how bitcoin is the digital cryptography-based asset of the Bitcoin network.

Earlier this year, the Japanese Financial Services Agency (FSA) strongly encouraged the Japanese cryptocurrency exchange, Coincheck, to ban trading on privacy protecting coins. They claim that privacy protecting coins such as Zcash and Monero are more likely to be employed in transactions for illicit purposes.

We’ve previously explained why there’s no reason an exchange wouldn’t be able to compliantly deal in privacy protecting cryptocurrencies.

Financial institutions are legally required to comply with anti-money laundering and anti-terrorist financing laws and regulations. Can these institutions use a payment system and currency that leaves no record of individual transactions? Absolutely! That system is called cash and just about every financial institution in the world uses it. Cash transactions are still much more opaque than any cryptocurrency transaction, even a Zcash transaction from a shielded address.

And it is encouraging to see New York’s DFS resist much of the panic around privacy-protecting coins, and recognize the potential value they may bring to users. The forward thinking spirit of the decision is capsulated best by this statement by DFS Superintendent Maria T. Vullo:

"This action continues New York’s longstanding commitment to innovation and leadership in the global marketplace. With smart and thorough regulatory oversight, the development and long-term growth of the industry will remain thriving.”

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Photos from the 2018 Coin Center Annual Dinner now available

Thank you to everyone who came out for our most successful fundraising gala yet. It was a pleasure to host some of the best and brightest from the cryptocurrency world for a lighthearted night of fun.

Here are some pictures from the event.

A lot of you have been asking for a copy of the remarks made by keynote speaker Joe Weisenthal. Those are available here.

Stay tuned for next year’s dinner. Hope to see you there!

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SEC Commissioner doesn’t want to pick cryptocurrency winners and losers.

Commissioner Hester Peirce added herself to the list of SEC officials making sensible comments about the agency’s role in regulating cryptocurrencies. At the Medici conference in Los Angeles last week she revealed a nuanced view. Here’s some of what she said, per Axios:

“On a beach, you have a lifeguard…. but she’s not sitting with the sand castle builders,”

For years now many have pointed to the need for regulatory “sandboxes” wherein an innovator can obtain binding agreements from a regulator: e.g. “we (the regulator) will regulate you differently than the underlying law would otherwise require if you commit to sharing data or designing your project in a specified manner.” While that could lighten the compliance load for some folks in the ecosystem; it also creates risks that some projects will get prefferatory treatment and an unfair advantage over other projects or technologies.

Peirce’s preference to be a lifeguard over a sand castle architect is laudable. In general, it’s best that regulators only get involved in emergencies, when there are grave risks to consumers or investors that can only be addressed through the law. Regulators should avoid making legally binding pronouncements that dictate specifics about how consumer or financial technologies should be built. Cryptocurrencies are at a nascent stage where any action from regulators could create far reaching consequences for development and U.S. competitiveness.

We would like to see policymakers approach these new networks similarly to how the early internet was approached: hands off policy calibrated to encourage developer experimentation. We are glad to see Commissioner Peirce shares these sentiments. Be sure to read some more of what she said.

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SEC Chairman Clayton: Bitcoin is not a security.

In a hearing yesterday before the House Appropriations Committee, SEC Chairman Jay Clayton was asked by Congressman Stewart to clarify his view on how regulatory oversight of cryptocurrencies could be split between the SEC and CFTC. He responded:

It's a complicated area. Because, as you said, there are different types of cryptoassets. Let me try and divide them into two areas. A pure medium of exchange, the one that's most often cited, is Bitcoin. As a replacement for currency, that has been determined by most people to not be a security.

Then there are tokens, which are used to finance projects. I've been on the record saying there are very few, there's none that I've seen, tokens that aren't securities. To the extent something is a security, we should regulate it as a security, and our securities regulations are disclosure-based, and people should follow those and provide the information that we require.

This is the clearest indication yet that the SEC does not view Bitcoin as a security. Though that may seem like a settled question to the cryptocurrency community, the commodity status of Bitcoin has not yet been set in stone by U.S. regulators.

We have seen some members of Congress suggest that Bitcoin be treated as a security, something we have argued against for years, so it is reassuring that the head of the SEC does not seem to believe that is appropriate.

Here’s video of the exchange:

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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 permissionless blockchain technologies.