Hot Takes

Want to understand cryptocurrency policy? Try these podcasts.

The volume on Bitcoin in DC has recently been turned up to eleven. As we saw from this week’s hearing, Federal regulators have their eye on cryptocurrencies. Coin Center has been working with federal policymakers for a while now, helping them understand the value of protecting and fostering this technology. Here are some podcasts that will update you on our work:

On The Federalist Society’s Free Lunch podcast Coin Center director of research Peter Van Valkenburgh talked about our most recent policy proposal: a federal alternative to onerous state-by-state money transmission licensing. Revisiting this system is something the chairmen of the CFTC & SEC have mentioned, and Peter lays out how we think it could be done to help cryptocurrency innovation.

And on The American Enterprise Institute’s Political Economy podcast, Jerry lays out the nuances of what open blockchains are and why they are an important technology that is worthy of protection.

On the Cato Institute’s podcast Coin Center executive director Jerry Brito discusses what renewed regulatory interest in cryptocurrencies means for the technology and what Coin Center is doing to respond.

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SEC refusal to allow exchange to list Winkelvoss ETP “Dampens Innovation,” according to SEC Commissioner Hester Peirce.

The SEC rejected a request to allow the BZX Exchange to list and trade shared of the Winkelvoss Bitcoin Trust, a Bitcoin based Exchange-Traded Product (ETP). In order to allow the exchange to list the ETP, the SEC would have had to approve a rule change. The SEC refused to do so, largely because they felt that the BZX Exchange did not have sufficient safeguards in place to prevent market manipulation.

In her dissent from the decision, Commissioner Hester Peirce laid out the flaws in the SEC’s reasoning, and shone a light on the challenge to innovation that this decision poses:

By suggesting that bitcoin, as a novel financial product based on a novel technology that is traded on a non-traditional market, cannot be the basis of an ETP, the Commission signals an aversion to innovation that may convince entrepreneurs that they should take their ingenuity to other sectors of our economy, or to foreign markets, where their talents will be welcomed with more enthusiasm.

To support her point, Peirce lists some of the many benefits that decentralized cryptocurrencies offer:

For example, trading in bitcoin is electronic, which facilitates competition and price transparency. Bitcoin are interchangeable, so that a purchaser is sure to get exactly the same thing no matter where she purchases it. In addition, bitcoin mining is not geographically limited (except to the extent it migrates to places with cheap electricity), so it is not subject to geopolitical threats that plague other commodity markets.

Peirce voices serious concerns about the discord between the SEC’s actions and its mission. She warns that with this decision, the SEC has positioned itself as the “gatekeeper of innovation,” which, in Peirce’s view, is a role that “securities regulators are ill-equipped to fill.” Peirce argues that investors in the cryptocurrency space tend to have far more sophisticated knowledge of the technology and should be left to decide for themselves whether they wish to invest. She concludes by asserting that the SEC has overstepped its boundaries and is acting in interests contrary to the ones it was founded to protect:

I reject the role of gatekeeper of innovation—a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets Accordingly, I dissent.

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Despite criticisms, Fed agrees it won’t regulate cryptocurrency.

Last week, Federal Reserve Chairman Jerome Powell testified before the House Financial Services Committee, and while reports of his remarks on cryptocurrency have focused on his narrow and negative views of the technology, we think the real news is that he stated that the Fed doesn’t have jurisdiction over cryptocurrencies and isn’t seeking to provide oversight.

An exchange between Powell and Rep. Patrick McHenry, who understands cryptocurrency, basically restates Coin Center’s recent explainer on crypto and monetary policy: “Cryptocurrencies hold much promise to expand the range of monetary options available to all classes of people and secure a degree of security and liberty not offered by some of the world’s government-backed currencies. They currently exist in a small and experimental corner of the world’s financial markets, and are therefore unable to restrain central bank’s monetary policy levers.”

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Experts weigh in the the state of cryptocurrency regulation.

At a recent event hosted by Andreessen Horowitz and #Angels, Coin Center Senior Policy Counsel Robin Weisman joined former federal prosecutor and now lead of a16z’s crypto fund Kathryn Haun on stage to talk through recent movements in cryptocurrency policy and the effect they may have on the development of this technology.

The session was recorded. Listen here:

(Photo courtesy of @beLaura on Twitter)

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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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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.