Hot Takes

The CSBS is suing the OCC to stop the new special purpose national bank charter for fintech firms.

In a press release, CSBS (the Conference of State Bank Supervisors) makes some alarming claims, suggesting the OCC is doomed to fall asleep at the switch, allow firms to fail, and leave fintech customers and US taxpayers as hapless victims:

The OCC’s proposed action ... harms markets and innovation, and puts taxpayers at risk of inevitable fintech failures. This is a dangerous combination and one the court should decisively halt

That sounds fantastical. The OCC is a heavy duty regulator with a century-plus-long track record; it’s not as if becoming a national bank is some easy feat, or that compliance costs are trivial. Also, as we and several others have stressed in comments throughout the OCC’s (very transparent and careful) responsible innovation proceeding, applying the patchwork of state-by-state licensing and oversight to global-by-default internet businesses is extremely costly. Any other claims aside, it's hard to imagine how providing a unified federal alternative could be bad for innovation and competition.

Moreover, if the states are doing such a great job at promoting innovation and protecting consumers, then why be so defensive here? The OCC’s charter merely provides a new alternative route to becoming a regulated fintech company; companies are free to continue seeking licensing and oversight from the states if they so choose.

Regardless of who is ultimately in the right here, this could become a turf war between powerful regulators with consumers and companies playing the part of unwitting pawns. This is not the sort of unified approach to regulating innovators that is likely to make the U.S. a technological leader. The Financial Conduct Authority in the UK and the Monetary Authority of Singapore may increasingly become the safest ports in a growing storm.

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Get your tickets for the 2020 Coin Center Annual Dinner

Individual tickets are now available for our annual fundraising gala. Get them here.

Every year, the Coin Center Annual Dinner brings the best and brightest from the blockchain community together for a night out in New York City during Consensus 2020. We hope you will once again join us in rubbing shoulders with the people building the future of this technology, all while supporting Coin Center’s critical policy advocacy mission. Here are some photos from years past.

Monday, May 11, 2020

Reception: 7:00 PM

Dinner: 8:00 PM

Ziegfeld Ballroom

141 W 54th Street, New York, NY 10019

Get your tickets here

Thank you to our sponsors: Fidelity Digital Assets, John Pfeffer, Baker Marquart, Digital Currency Group, Cooley, Perkins Coie, and Stand Together.

If you would like to join in by sponsoring a table please contact antonie@coincenter.org. Details on sponsorship levels are available at coincenter.org/dinner

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Eight members of Congress have asked the IRS to fix its broken guidance on forks and airdrops.

In October the IRS released long overdue answers to pressing questions about how Americans can properly calculate their taxes owed for various cryptocurrency activities. Unfortunately, that guidance is muddled, raises more questions than it answers, and seems to be based on a poor understanding of how cryptocurrency networks work.

Now Congress has taken notice of this problem. A new letter signed by eight members of Congress succinctly lays out the problem:

The guidance appears to suggest that taxpayers may have dominion and control, and thus be taxed on forked or airdropped assets when the fork or airdrop occurs, even if the taxpayer has no knowledge, and even if the taxpayer takes no affirmative step, or manifests any intention to claim or access those forked or airdropped tokens. This creates potentially unwarranted tax liability and administrative burdens for users of these important new technologies and would create inequitable results. We do not expect this is the intended effect of the guidance, and we urge the IRS to clarify the matter.

And asks the agency what it will do about this:

  1. Does the IRS intend to clarify its airdrop and fork hypotheticals to better match the actual nature of these events within the cryptocurrency ecosystem? When does the IRS anticipate issuing that clarification?
  2. Does the IRS intend to clarify its standard for finding dominion and control over forked assets wherein some level of knowledge and actual affirmative steps taken are necessary to find that the taxpayer has dominion and control?
  3. Does the IRS intend to apply the current guidance or any future guidance retroactively, or will the IRS issue proposed guidance that is subject to notice and comment?

Coin Center worked with Rep. Tom Emmer to develop this letter and we are grateful for his and his colleagues leadership on this topic. We also worked with him to develop legislation that would offer a safe harbor from tax penalties for taxpayers who have made good faith efforts to comply over the years, despite the lack of clarity. Since the recent disappointing guidance was released, Coin Center has been working to educate more policymakers on this issue, and it seems as though our efforts may be bearing fruit. Getting cryptocurrency tax policy right is a top priority for us and we are pleased to see Congress stepping in on this critical issue for its users.

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The Human Rights Foundation has published a guide to stablecoins for people living in at-risk economies.

In the latest installment of their multi-part series meant to help those who may need to transact privately in the course of their sensitive work, security expert Eric Wall details compares the properties of several popular stablecoins.

Stablecoins are designed to maintain a peg to an existing currency, usually the dollar. These are similarly experimental yet promising technologies for those who need censorship resistance but prefer to be insulated from the volatility that comes with using something like Bitcoin.

Eric explains why permissionless dollars are interesting:

Most digital dollars exist as entries in central databases, where your access to them as a user is at the mercy of the system owners. To provide you with this service, the system owners will almost always demand that you provide identifying information. Examples of such systems include banks, PayPal, Wechat Pay, Venmo, and Skrill. These operators in turn fall under the regulatory purview of the jurisdictions they operate in. As such, they provide little to no help in regions where usage of the dollar is not permitted or blocked by sanctions.

Stablecoins, by virtue of existing on cryptocurrency ledgers, are — perhaps to some amount of surprise — different. The entire purpose of cryptocurrency ledgers is to be without central system owners. As such, these coins can to varying extent slip through the cracks and into the hands of people who can use them without the blessing of their government. Because cryptocurrency ledgers do not typically embed the notion of people’s real-world identities in them, stablecoins can often be held by completely unknown users.

He goes on to explain the relevant risks and benefits of various stablecoin system designs. You can read the full piece here.

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Save the Date: The 2020 Coin Center Annual Dinner will be on May 11, 2020.

The Blockchain community’s night out is coming back to New York City during Consensus 2020. We hope you will join us once again to rub shoulders with some of the best and brightest in the industry, all while supporting Coin Center’s critical policy advocacy mission.

Monday, May 11, 2020

Reception: 7:00 PM

Dinner: 8:00 PM

Ziegfeld Ballroom

141 W 54th Street, New York, NY 10019

Tickets will be on sale in early 2020. For sponsorship information please contact antonie@coincenter.org.

Check out these photos from last year’s dinner.

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China intends to launch a national digital currency that will let the government easily surveil spending. Following in their footsteps would be a mistake.

A recent New York Times report highlights that Facebook’s Libra project has led Beijing to accelerate its cryptocurrency effort:

A state-issued e-currency would help China’s government know more — much, much more — about how its citizens spend their money, giving it sweeping new powers to fight crime and manage the economy while also raising privacy concerns.

“It’s extraordinary power and visibility into the financial system, more than any central bank has today,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

Yet some in the U.S., including members of Congress, have been pointing precisely to China's pursuit of a state digital currency as a reason why the U.S. should consider its own corporate-led or central bank digital currency. As policymakers look at the issue they should make sure not to fall into the trap of undermining American values--like freedom of speech and assembly and rights to privacy and due process--in the haste of competing with China. Such values are absent in China's planned system, according to the Times:

Chinese officials use something of an oxymoron to describe what their new currency will offer: “controllable anonymity.”

“As long as you aren’t committing any crimes and you want to make purchases that you don’t want others to know about, we still want to protect this kind of privacy,” Mr. Mu, the deputy director of the central bank’s payments department, said in another recent online lecture on China’s cryptocurrency plans.

The capacity to perfectly surveil and control transactions on a payments or currency network is possible when intermediaries--whether banks, or companies, or consortia of either--operate a network. Any such American-led effort must forswear that kind of power by making anonymity and censorship-resistance core network features. To do otherwise would be to import authoritarian values out of fear when it is the liberal values enshrined in the U.S. Constitution that are the basis of our global leadership.

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Coin Center has published a new plain English explainer on forks and airdrops to highlight ambiguities in recent IRS guidance.

Last week we published our analysis of the recently released IRS guidance. Our biggest concern with that guidance was that it incorrectly described how forks and airdrops occur, and therefore failed to provide much needed clarity with respect to how these events will be taxed.

Today we published an updated explainer on forks and airdrops to provide policymakers with a plain english description of how these events actually unfold. We hope this material will help to underscore how inappropriate it would be to hold taxpayers liable for forked or airdropped assets that they have taken no affirmative steps to claim and of which they may not even be aware. We are working closely with tax professionals, members of Congress, and other policymakers to ensure that this ambiguity is quickly resolved in a manner that does not leave cryptocurrency users with unreasonable obligations.

Read the explainer here.

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This week’s EOS and Sia settlements with the SEC reinforce Coin Center’s 2016 policy recommendations.

Block.one has settled and is paying a fine for doing a pre-sale of EOS as ERC20 tokens, and Nebulous has settled and is paying a fine for selling Sianotes, a profit share in the returns from their network’s decentralized storage system. In both cases, the cryptocurrency on each project’s running network has not been deemed a security in their respective settlements: EOS (the tokens on the now functional EOS network) is not deemed a security, and Siacoin (the tokens on the now functional Siacoin network) is also not deemed a security in their settlement.

In our Framework for Securities Regulation of Cryptocurrencies we explained why this exact type of outcome strikes an ideal policy balance. Tokens providing some use-value from a decentralized network are not a good fit for securities regulation, while heavily marketed and pre-sold tokens (as in trading before the network is live) are a good fit for securities regulation.

In a 2018 update to our Framework we stressed that two separate inquiries should be performed regarding security classification if a network’s token was presold but later successfully launched and now provides functionality. First, an inquiry about the pre-sale agreement (and any tokens representing it, e.g. EOS’s original ERC20 token) will likely find them to be a security and investors could benefit from appropriate disclosures and controls. Second, a separate inquiry should look at the resultant decentralized token (once distributed) and if the network is powered by open source software and running with an open consensus mechanism the token is not a security, current purchasers have less need for a disclosure regime focused on the original issuer.

This division between pre-sold token and resultant token is sometimes referred to as a transmutation of a security into a non-security or commodity. We don’t like this framing. Nothing, in our opinion, ever transmutes. The agreement for future tokens was (and always will be) a security, and the tokens that get delivered are the fruits of that agreement. The resultant assets are not tainted by their being part of an earlier crowdfund any more than the Floridian land sold in the Howey case is tainted today. Yes the land and the tokens were involved in investment contracts that were rightly regulated as securities, but these assets are not securities when they trade on secondary markets amongst persons who did not participate in the prior investment schemes. With regard to functional and decentralized cryptocurrencies, there is no original sin and there is no transubstantiation.

While some may be vexed by the size of the fines involved, the policy here is sound. We are very gratified that the SEC continues to take a reasonable approach to providing investor protection in this space.

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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.