Hot Takes

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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How will regulators look at your token sale?

Recently a small conference called “Token Summit” brought together the growing community of developers that are interested in the red hot area of tokenized crowdfunding. Through the new mechanism, millions of dollars are pouring into projects from the excited cryptocurrency community. This promising new model could hold the key to funding public goods such as open blockchain networks, but raises significant regulatory questions that must be answered first.

On the first day of the conference, Coin Center’s Peter Van Valkenburgh led a panel entitled, “Is Grey the New Normal in Legal & Compliance?” that called attention to the regulatory concerns for this fundraising model. The panel of legal experts shared their views on how regulators might evaluate a token sale project and laid out some of different approaches to designing and implementing a sale in a way that properly navigates those concerns

Read more:

You can watch the full panel below:

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We helped NPR buy some bitcoin.

National Public Radio’s Morning Edition stopped by the Coin Center offices to admire our “hipster vibes” and update their listeners on the status of Bitcoin. The short segment covers basics like why Bitcoin works like cash for the internet and why that’s important. We even took a trip to a nearby Bitcoin ATM, which worked flawlessly.

Listen to the whole segment here:

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Bitcoin will grow organically, but there are a few things government can do to clear its path.

In an editorial for Fortune, Coin Center executive director Jerry Brito lays out three things that the government can do to reduce regulatory friction on the growing open blockchain network ecosystem:

First, some Bitcoin businesses fall under the definition of money transmitters and rightly need to get money transmission licenses, which are handled by the states. The problem is that there are 47 different state money transmission licensing regimes and they all have their own rules. It’s a nightmare for a digital currency companies to navigate, with compliance costs easily reaching into the millions of dollars a year. If a federal alternative, like the Office of the Comptroller of the Currency’s proposed special purpose fintech charter, were adopted, then Bitcoin businesses would have a more streamlined alternative.

Another issue with money transmission licensing is that it shouldn’t apply to every application of Bitcoin. Some types of Bitcoin businesses never take custody of a customer’s funds, which means they can’t run away with or lose them. Those businesses should not need licenses. To protect those companies, Congress could create a federal safe harbor for non-custodial digital currency companies.

Finally, Bitcoin taxation is broken. Since it’s not technically a foreign currency, it is treated as property by the Internal Revenue Service (IRS) for tax purposes. This means a user needs to calculate capital gains tax every time they buy a cup of coffee. That’s pretty difficult to manage. If the IRS amended the tax code to treat online currencies like foreign currencies, they would become much easier to use day to day.

These are the type of sensible policy proposals that we advocate for. During a congressional testimony last week, Coin Center director of research Peter Van Valkenburgh directly called on Congress to enact these solutions to the problems with money transmission licensing. He explained why, if left unaddressed, the inhospitable climate in the United States would likely drive drive financial innovation overseas to jurisdictions with more easily navigable regulatory regimes.

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Illinois state-chartered banks learned how they can support Bitcoin businesses.

Coin Center, in collaboration with Digital Currency Group and the Illinois Blockchain Initiative, hosted an event in Chicago this week to help interested banks become more familiar with the technology and what they can do to support it.

Digital currencies companies have a hard time establishing banking relationships with traditional financial institutions. Rather than risk navigating the complex regulatory considerations around the technology, many banks have chosen to avoid servicing the industry altogether. This makes it that much harder for startups to operate, even putting aside regulatory burdens.

During the daylong event, Coin Center executive director Jerry Brito presented the conclusions of our report on banking, laying out the obstacles that digital currency companies face when attempting to get banked, what banks perceive as the risks, and how they can be overcome. The banks also had an opportunity to voice their concerns and offer suggestions for measures that companies could take to help potential banking partners feel more comfortable with digital currency business models.

Following the bank briefing, Coin Center and Digital Currency Group headed over to Chicago’s Bitcoin & Open Blockchain Community meetup to share their views on regulation and the ecosystem, respectively, and take questions from the audience. The packed event was a great time for all. If you are interested in hosting Coin Center at your local meetup, be sure to reach out.

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The Congressional Blockchain Caucus co-chairs asked the IRS for better guidance on digital currency taxation.

In a letter sent today to IRS Commissioner John Koskinen, Reps. Jared Polis and David Schweikert asked the IRS to take action on recommendations the Treasury Inspector General for Tax Administration made last year, which dinged the IRS for not providing sufficient clarity to tax payers and digital currency exchange.

We encourage the IRS to consider the recommendations of the TIGTA and take action based on those recommendations to increase taxpayer compliance with Notice 2014–21. Further, we encourage the IRS to engage with virtual currency exchanges to better understand their ability to engage in information reporting, including recordkeeping to track realized gain or loss and identify the amounts of virtual currency used in taxable transactions.

Had the IRS made tax reporting clearer and simpler, as the letter suggests it consider, perhaps they would not have felt the need to issue its incredibly overbroad John Doe Summons of a million digital currency users. We applaud Reps. Polis and Schweikert for taking leadership on this issue, and we look forward to working with them on other important tax issues, like creating a de minimis exemption for digital currencies.

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Coin Center to testify at two separate Congressional hearings on Bitcoin this Thursday.

Government interest in digital currencies and open blockchain networks such as Bitcoin continues to mount, as evidenced by the unusual circumstance that two different Congressional committees are holding hearings about the technology at exactly the same time. Coin Center will be testifying in both hearings and they will be live streamed.

First will be a hearing entitled “Virtual Currency: Financial Innovation and National Security Implications” in the Terrorism and Illicit Finance Subcommittee of the House Financial Services Committee. This follows a full-member briefing Coin Center put on last week on the topic, and our executive director Jerry Brito will be testifying. It starts at 10 a.m. You’ll be able to watch at this link.

The second is a hearing entitled “Improving Consumer’s Financial Options With FinTech” in the Digital Commerce and Consumer Protection subcommittee of the House Energy and Commerce Committee and Coin Center research director Peter Van Valkenburgh will be testifying. It will start at 10 a.m. as well and his testimony is to be focused on the barriers to innovation that cumbersome state regulation presents. You’ll be able to watch at this link.

Not only are concurrent hearings on the same topic not typical, but it’s also unusual to have two persons from the same organization invited to testify at the same time by two separate committees. It’s a testament to Coin Center’s hard work over the past few years laying a foundation of credibility on Capitol Hill.

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Come meet Coin Center in Chicago on June 5th.

The Chicago Bitcoin & Open Blockchain Community meetup has invited Coin Center’s Jerry Brito to give an overview of the regulatory challenges facing these technologies, what we are doing to address them, and what you can do to help.

He’ll be joined by Meltem Demirors of Digital Currency Group, who will be going over their perspective as a major investor in the space.

Monday, June 5, 2017

5:45 PM

3519 N Elston Ave, Chicago, IL 60618, Chicago, IL

More information and registration are available on MeetUp.com.

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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.