Hot Takes

peter-tokensummit
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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morning-edition-logo-detail
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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capitol
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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jerrychicago
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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caucus-1-31-1-1
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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jerrytestimony
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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chicago
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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usv-fireside
Open blockchains have all kinds of startup innovators excited.

That’s what we took away from a fireside chat that Brad Burnham conducted with Peter and me at Union Square Ventures’ office this week. The room was mostly comprised of startup employees from USV portfolio companies that don’t have anything to do with blockchain, but know that something important is happening with this technology and wanted to learn more.

Through the evening we covered a broad range of topics: tokenized crowdfunds and our views on the appropriate way to build those from a regulatory perspective, the new things that the novel features of cryptocurrencies such as micropayments and multi-sig transactions make possible, what decentralized trusted computing platforms (such as Ethereum) are, and the importance of permissionless, open blockchain networks.

It was clear that the animated audience was thinking through how to best apply these technologies to their current and future projects. There was particular interest in tokenized crowdfunding and what this phenomenon means for startups. Could this technology totally change the relationship between investors and businesses? Or businesses and their customers? Will developing open platforms become more economically feasible than it has been traditionally? As more and more entrepreneurial minds begin exploring applications of open blockchains, we’ll soon find out.

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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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