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This OCC rulemaking could a make a big difference for digital currency exchanges.

Almost two months ago the OCC issued a notice of proposed rulemaking regarding receiverships for uninsured national banks. That doesn't sound like something related to cryptocurrency but, as the comment we filed today explains, digital currency exchanges may be able to become nationally chartered institutions via a limited purpose charter from the OCC. That would mean that they would not need to get a money transmission or bitlicense in every state where they have customers. This would be a huge reduction in compliance complexity and uncertainty that may make the U.S. more comeptitive globally as a home for digital currency businesses and, by extension, technologists. In our comment we explain why digital currency exchanges may be eligable for a limited purpose charter:

Existing rules require that any entity seeking such a charter will need to perform “at least one of the three core banking functions, namely receiving deposits, paying checks, or lending money.” Digital currency exchanges do not engage in lending money and do not generally receive deposits as that activity is traditionally characterized. These companies may, however, pay checks... Though no longer accomplished with paper checks, the result is the same: a customer delivers a payment instrument to the institution, and the institution grants that person the value of the instrument in a digital form and holds it for her benefit. The digital currency exchange is paying checks in the same manner that a traditional state or nationally chartered trust can accept payment instruments and secure the value of those instruments on behalf of the beneficiary.

We explain, as we've done before, why the U.S. is less competitive globally in the digital currency sector: 

The U.S. does not currently offer a particularly welcoming home for digital currency exchanges because of two troublesome structural features of U.S. financial regulation that are not present in many foreign jurisdictions: federalism, and a rules-based rather than principles-based approach.

And we describe how these businesses present no substantially different challenges in the recievership context than do existing natioanlly chartered trust companies: 

...a digital currency exchange is paying checks in the same manner that a traditional state or nationally chartered trust can accept payment instruments and secure the value of those instruments on behalf of the beneficiary. Like a chartered trust company, virtual currency exchanges do not have FDIC insurance, and do not engage in the lending out or hypothecation of the assets that they hold for the benefit of their customers. These firms present a similar risk profile as chartered trust companies. Accordingly, we believe there are no unique considerations with respect to receivership presented by virtual currency exchanges, and that rules suitable for traditional trust companies should be a good fit for newly chartered virtual currency firms, should the OCC see fit to grant such a charter.

This rulemaking is a very encouraging, tangible step for the OCC to take on the road to chartering more innvovative financial companies including digital currency companies, and we're happy to participate and hopeful that the outcome will be a more competitive landscape for financial technologies in the US. 

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peter-epicenter
More mainstream use will help regulators understand Bitcoin's benefits.

That’s what Peter Van Valkenburgh, Coin Center’s director of research, said when he went on the Epicenter podcast recently. The wide ranging interview, which covered topics such as the differences between open and closed blockchains and the regulatory considerations for appcoin crowdfunding, is embedded below. Or, if you prefer text, Bitcoin Magazine captured the highlights.

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wannacrypt
Why ransomware criminals use Bitcoin and why that could be their undoing.

Last week's major ransomware attack put Bitcoin back into spotlight. With that comes questions about what Bitcoin is, how it works, and why it is apparently favored by ransomware hackers.

Coin Center director of research Peter Van Valkenburgh was on the Marketplace radio show yesterday to talk through these questions. On why hackers are using Bitcoin, he said:

"The efficiency of the network is what criminals are really using it for here. It's electronic cash, so it’s easy to write software that can automatically demand payment and automatically demand that payment has been made."

He goes into more detail on what that means in his blog post, "Why Bitcoin is not the root cause of ransomware:"

"Bitcoin is particularly useful here because it’s fast, reliable, and verifiable. The hacker can simply watch the public blockchain to know if and when a victim has paid up; she can even make a unique payment address for each victim and automate the process of unlocking their files upon a confirmed bitcoin transaction to that unique address.

The truth is that criminals have, as usual, very strict design parameters for the tools they use because there’s no tech-support, contract, or legal recourse for a criminal whose tools fail to perform as they should. Criminals are using Bitcoin in this case because it’s a reliable system that just works. Ransomware hackers are rather like the proverbial rumrunners of prohibition: they like fast custom cars because almost everyone else is still driving a Model T."

Of course, as many have pointed out, there is an inherent problem with the choice to use cryptocurrency in this attack. The open, transparent, nature of bitcoin blockchain transactions means that the global community is closely watching the ransom money. This is going to make converting it into fiat currency pretty difficult to get away with. As Peter told the International Business Times:

"In the US, every major bitcoin exchange is regulated by FINCEN. Right now the $50,000 extorted from victims is just sitting on the bitcoin network...that [exchange into local currency] is where you're vulnerable to being identified."

We’ve detailed how law enforcement can use the bitcoin blockchain to track criminals before and have already seen high profile cases in which blockchain forensics exposed criminals. All they need to do is slip up once and a global community of professional and enthusiast cyber crime fighters will jump on them.

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fred-dinner
Get your tickets for the Coin Center Annual Dinner.

The blockchain community’s biggest night out is fast approaching. Please join us on May 22 in New York City, after the first day of Consensus 2017, for a fundraising gala in support of Coin Center’s policy mission.

Wences Casares, CEO of Xapo, will be the evening’s keynote speaker. Casares has been a central figure in driving Bitcoin forward since the earliest days and has an unshakable vision for the technology.

We expect this event to sell out. If you haven’t already, get your tickets today.

Special thanks to the dinner sponsors: Kraken, Fidelity Labs, Poloniex, Alphapoint, Bloq, the Charles Koch Institute, CIGI, Pantera Capital, Perkins Coie, and ShapeShift.

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waitingcustomers
Wary banks may be choking off the blockchain industry.

Aggressive de-risking is nothing new for digital currency businesses. Last year we released a report documenting the difficulty these startups had been having in securing banking relationships. Now the problem has gotten much worse with three exchanges, including the world’s largest, reporting that they are completely unable to process deposits or withdrawals, leaving customer funds trapped within their system. The Wall Street Journal has the story:

J.P. Morgan Chase & Co. prohibits banks it transacts with from dealing with virtual-currency exchanges, according to an internal document seen by The Wall Street Journal. Standard Chartered PLC also doesn’t process such transactions, according to a spokesman.

To be able to transact with the wider financial system, bitcoin exchanges must play cat-and-mouse, said Bitfinex’s Mr. Potter, continually switching bank accounts.

“They close one account, we open another somewhere else,” Mr. Potter said. “It’s a battle, but it looks like one that we appear to be losing, largely because we’re the largest such exchange in the world and we’ve got the biggest target painted on our back.”

Digital currency companies are not alone in overzealous targeting for this cut -off from the legacy financial system. Last week a Washington Post report showed that groups attempting to deliver aid to war-torn regions are suffering as well. While the goal of stopping money laundering and terrorist financing is a noble one, the incentives in place today might be driving regulators and banks to go far beyond what’s necessary and reasonable and could drive innovation overseas.

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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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humanitarian-aid
Overzealous AML enforcement doesn’t just harm innovation, it can also be deadly.

That’s what the conclusion of new research reported in the Washington Post today showing that the same kind of bank “derisking” that affects the deposits, wire transfers, and access to banking of digital currency firms is also affecting charities trying to save the lives of civilians injured in the Syrian civil war.

Although the hospital was run by the Syrian American Medical Society — a District-based charity that relies on donations — lack of funding wasn’t the issue. And in this case, the brutality of the Syrian regime wasn’t responsible for the supply shortage.

The problem was a U.S. bank.

During the bloody siege, the medical society had tried to wire $80,000 to a vendor in Turkey so its hospitals could stock up on medical supplies. But the U.S.-based bank, in its diligence to ensure the funds weren’t being funneled to overseas terrorists, was holding up the transfer. By the time the money went through six months later, the deadly siege was over.

The problem? AML regulations and enforcement actions have instilled such fear in banks that they won’t take a risk on anything mildly suspicious looking. A representative of the American Bankers Association explained:

“Unfortunately, banks just can’t send funds,” he said. “They look at it and say, ‘We can’t make the distinction between a charity that’s trying to get money to a starving family versus one that is ready to go out and buy a stockpile of Uzis to fire on civilians. We don’t have enough information, we can’t make that call, and if we make the wrong guess, we’re the ones that are in trouble.”

And from what we understand, there’s no simple policy fix. To address the unintended consequences of the federal government’s zealous pursuit of bad actors will require not only a change in law, but a change in culture as well. Financial institutions need to believe that they won’t be fined into oblivion for making one small mistake. This is why banks and policymakers in Congress and the Treasury should take seriously proposals like those by The Clearing House to overhaul the federal government’s AML/CFT regime.

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Amazon, Apple, Google, Intuit, and Paypal just asked Congress for a unified federal alternative to state money transmission licensing.

In a letter to congress, their industry group, Financial Innovation Now, explained how state-by-state money transmission licensing is a major impediment to innovation in financial services here in the US:

Payment innovators currently must obtain and continually update money transmission licenses in nearly every state. Consumer protection is a critical part of payments regulation, but it makes no sense for different states to regulate digital money differently from one state to another, especially if that process significantly delays entry to market and prevents consumers and businesses in many states from having equal and consistently safe access to cutting edge payments technologies.

We've been highlighting the inefficiencies of this state-by-state approach since our inception; it's probably the biggest hurdle to operating a cryptocurrency exchange or hosted wallet in the US, and (given how vaguely the definition of money transmission can be in various state statutes) it's even a potential landmine for open blockchain developers working on non-custodial apps and infrastructure. So we are very happy to see that Financial Innovation Now, with companies like Google and Apple as members, is also disatisfied with the patchwork regulatory landscape for financial technology. And we're thrilled with their suggested solution, a unified federal money transmission license issued by a new sub-branch of the department of treasury: 

Establish an optional federal money transmission license,managed by the Treasury Department, that: 1) oversees application and licensing, safety and soundness, BSA/AML compliance; 2) incorporates a number of existing state money transmitter laws and Uniform Money Services Act requirements; 3) preserves the current state structure for those wishing state licenses; and 4) offers uniform federal law only for an applicant choosing a federal license.

We've previously talked about how the OCC's fintech charter could be the vehicle for that unified approach. A fintech charter wouldn't require new rulemaking or legislation, so in some ways it could be an easier road. But! An entirely new approach would also be a great way to reach that end result, and if the bigger players in the tech world push, a legislative solution might be viable. Exciting times.

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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.