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

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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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The hedge fund Numerai is going to issue its own cryptotoken, and this article nails the policy issues.

It doesn't hurt that they quoted me, but--in all seriousness--the two primary risks inherent in app-coin issuance are well flagged: securities regulation and buggy smart-contract code. And, on the securities question, the article focuses, appropriately, on the Howey test and whether there is an issuer-investor relationship here: 

First: securities law. The Numeraire is one of a slew of new cyptocurrencies that have been released in the last year or so that have piqued the interest of Andreessen Horowitz, USV and other venture capital firms and entrepreneurs — and they’re generating real money for their developers. In 2016, according to cryptocurrency research firm Smith + Crown, 64 tokens were released in what are commonly called “initial coin offerings,” raising $103 million, enabling these efforts to bypass venture funding.
However, Peter Van Valkenburgh, research director at Coin Center, an advocacy group focused on the public policy issues facing cryptocurrencies, says that, unlike some other new tokens, the Numeraire would likely not be considered a security. “If they’re giving them out to people who submit trading strategies or perform some sort of useful work, it’s not a speculative investment relationship between the putative issuer and putative investor,” says Van Valkenburgh. “It’s really more like someone being paid for contributing something, more like a wage in a giant decentralized corporation. … It wouldn’t be that different from rewarding people with points.”

Numerai's work here is a great example of how app-coins and open blockchain networks may be able to streamline the provision of public goods and enhance transparency in financial markets. Read the whole article.

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We taught Congress about Bitcoin vs Blockchain.

The Congressional Blockchain Caucus, which we helped kick off a couple of weeks ago, held its first briefing on blockchain technology yesterday. The event was full to standing room only as lawmakers and their staff gathered to build their understanding of these technologies. Coin Center director of research Peter Van Valkenburgh demystified the buzzword “blockchain technology,” giving attendees a better sense of the difference between permissionless blockchain networks, like Bitcoin or Ethereum, and the private blockchain networks being experimented with by corporations around the world. As we’ve stressed before, understanding this distinction is essential to understanding the critical role that open networks will play in the future of internet infrastructure and business innovation. Joining Peter on the panel were Reuben Bramanathan of Coinbase, Mark Wetjen of the DTCC, and it was moderated Robin Weisman of Coin Center.

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North Dakota’s new money transmission bill fails to define “control” of bitcoins.

Update: The original text of the bill has been amended. It now only calls for a legislative study to be carried out regarding:

the feasibility and desirability of regulating virtual currency, such as bitcoin.

We're glad to see the legislature taking a more cautious approach!

Original post:

The bill defines money transmission with respect to digital currency in a way that is a bit more specific than some we’ve seen (looking at you Bitlicense):

Money transmission … also includes … maintaining control of virtual currency on behalf of others …

and generally mirrors language we saw in North Carolina legislation last year, and which we thought could be improved.

As we said in regard to the NC bill:

A clear definition of ‘control’ written in law—not just in guidance that can change at the discretion of a banking commissioner—has been recognized by the Uniform Law Commission to be of paramount importance to any serious virtual currency legislation. Working with the ULC, Coin Center has helped develop a very precise definition for the draft ULC Virtual Currency Businesses 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 transactions[.]”

That definition echoes the one we proposed in our State Digital Currency Framework last year, and it’s a legal definition that is important to ensure that innovation on open permissionless networks is not inadvertently squelched.

We urge North Dakota to include that definition in their legislation, so that the law would not be amenable to interpretations treating infrastructure providers (mult-sig wallets, lightning network nodes, miners, or full nodes) as money transmitters thus requiring that these low-risk, non-custodial innovators be licensed.

Additionally, unlike the North Carolina bill, the North Dakota bill does not include virtual currency among the list of permissible investments for licensed firms. This is a big problem because it would mean that a company holding other people’s bitcoin would need to hold an equal amount of value in dollar-form. That’s a 200% reserve requirement and it discriminates against virtual currency firms seeking to get regulated as money transmitters.

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ESMA issued their final DLT report but continues to underestimate open networks.

Our previous comment to the European Securities Markets Authority was referenced in the final report; it looks like we were the only commenter sticking up for permissionless blockchain networks:

For many respondents, appropriate governance frameworks will play a key role to ensure trust and provide legal certainty to market participants. Many of them agreed that permissioned-based DLT networks would be the most appropriate for financial markets. One respondent however disagreed that permissioned-based DLT networks were more appropriate. According to this respondent, all permissioned-based systems remain in the proof-of-concept stage of development. In contrast, permissionless systems have been running in public for almost ten years and are battle-tested.

But unfortunately the bulk of the report continues to prematurely identify permissioned systems as the only viable technological architecture for building-out future financial systems:

Importantly, ESMA understands that the DLT that would be used for financial services would differ from the Blockchain designed for Bitcoins in a number of ways. In particular, while the Bitcoin Blockchain is an open system where all can contribute to the validation process (‘permissionless’ system), the DLT that is likely to be used in financial markets would be a permissioned system with authorised participants only. Permissioned DLTs have a number of advantages compared to permissionless systems when it comes to governance issues, scale or the risk of illicit activities, which makes them more suitable for securities markets. Yet, some of the benefits attached to permissionless frameworks, e.g. ‘openness’, may be lost in a permissioned framework. In line with current market initiatives in securities markets, the rest of the report deliberately focuses on permissioned DLT.

As we point out in our recent report, the "benefits attached to permissionless frameworks" (e.g. privacy, security, and interoperability) shouldn't be underestimated. Even in the securities settlement process, "openness" may matter in the end.

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Great news for bitcoin and other blockchain startups from Switzerland today.

The Swiss Federal Council has proposed a simple plan that would exempt small fintech firms (accepting less than 1 million CHF from customers – or a bit over $1 million) from the requirement to seek authorization in order to conduct business:

the acceptance of public funds up to CHF 1 million should not be classified as operating on a commercial basis and can be exempt from authorisation

This is probably the simplest “sandboxing” proposal we’ve yet come across. A clear and easy to interpret minimum-dollar threshold for when you are and are not regulated is exactly what we’ve advocated for here in the US in the context of state money transmission licensing.

Again, as with the FCA in the UK and the MAS in Singapore, foreign jurisdictions are leading the way in offering reasonable and pro-innovation policies for these new financial technologies and the small start-ups that are building them.

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The price of bitcoin still doesn’t matter right now.

The new year began with a bang as the price of a single bitcoin rocketed up past $1,100 and quickly fell back to around $900, where it seems to be holding steady for now. With such dramatic price movement comes attention, especially from those who are excited about the investment possibilities for Bitcoin and similar decentralized blockchain-based assets.

The last time there was so much attention on the price, Coin Center executive director Jerry Brito made the case in Wired that focusing so much on this one fluctuating metric is a distraction:

Unlike the early Web, though, Bitcoin has a price ticker people look at daily, and so they wring their hands. Every dip and spike in the price gets a lot of attention and spells either doom or “irrational exuberance.” But as Marc Andreessen has pointed out, “the price of domain names didn’t determine the usefulness of the Internet.”

With a longer time horizon in mind, you can put the short-term drops and rallies in price of Bitcoin in perspective. So don’t worry so much.

The case holds true even today and should be referred to for perspective every time there is a sudden burst in bitcoin price news.  

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"Dear Mr. Trump: To ‘Cyber’ Better, Try the Blockchain."

As president-elect Trump prepares to take office he must develop comprehensive plans to address growing cybesecurity concerns. In a recent op-ed for WIRED, Coin Center director of research Peter Van Valkenburgh suggests a novel approach: embracing new internet infrastructure built on open, permissionless, blockchain networks that would be far more resilient than the vulnerable system in place today.

Trump’s team should know that open networks like bitcoin are a promising development in the otherwise bleak story of cybersecurity, even if while they sometimes present challenges to law enforcement and financial regulators. Just like the early internet, these tools may cause a policy headache or two, but they are well worth protecting.

Read the full op-ed on

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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.