Hot Takes

The digital currency industry supports the ULC’s model state law.

In an open letter to attendees of the Uniform Law Commission’s annual meeting this week, several major digital currency firms and investors called for the adoption of the “Regulation of Virtual Currency Businesses Act” as an official ULC model act, which states may then want to consider promulgating into law. For nearly two years, Coin Center has been working with the Act’s drafting committee to ensure that the model act not only avoids the stifling overbreadth of previous attempts at crafting digital currency rules like the BitLicense, but also creates regulatory clarity that fosters innovation by:

  1. Fully exempting all persons and businesses who do not take control of others’ digital currency
  2. Have simple and reasonable licensing requirements for those firms that do take control of customers’ digital currency
  3. Providing other exemptions and an on-ramp for small businesses

We are optimistic that the ULC will adopt the draft model act when it votes later this week, and we’re glad to see such broad industry support for the act.

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We demonstrated how Bitcoin works in Congress.

Earlier this month the Terrorism and Illicit Finance Subcommittee of the House Financial Services Committee held a hearing to assess the national security implications of open blockchain networks like Bitcoin. Coin Center testified to explain how the technology works and stress that policymakers must approach them the same way they do the internet--as a purpose agnostic platform that is rich with innovative potential.

Yesterday Coin Center continued its Congressional education efforts by holding a demonstration day event for members of Congress on the full committee and their staff. We partnered with Xapo, Chainalysis, and Elliptic to showcase how a typical user would interact with the Bitcoin network. The demonstration covered the process of setting up a software wallet (BitPay’s Copay) and a hosted wallet (highlighting the important distinctions between the two), the stringent AML/KYC process needed to create an account on a regulated exchange, sending a transaction, and viewing transactions on the publicly available Bitcoin blockchain.

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Pictures from the 2017 Coin Center Annual Dinner are now available.

Our second annual fundraising dinner, held this year after first day of Consensus 2017, was a huge success. Hundreds of open blockchain technologists and businesspeople came out to support Coin Center in what was once again the space’s biggest night out.

You can see photos of the evening here.

Thanks again to our sponsors: Kraken, the Centre for International Governance Innovation, Fidelity Labs, Poloniex, AlphaPoint, Bloq, the Charles Koch Institute, Pantera Capital, Perkins Coie, and ShapeShift.

We’ll see you next year!

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Video: How does multisig make bitcoin more secure?

Coin Center has partnered with the Federalist Society to produce this simple explanation of multisignature cryptocurrency wallets.

Multsig allows users to split up the permission needed to move cryptocurrency held by a particular address. Rather than one person having the ability to unilaterally move funds, a multisig wallet may require two of three (or any m of n) key-holding users to authorize a transaction before any funds are moved.

Read more: “What is Multi-Sig, and What Can It Do?

With this technology it becomes possible for a third party to provide some security for your bitcoins (by protecting one of the keys) without ever having the ability to run away with or lose them. We’ve argued before that companies that use secure arrangements like this do not pose consumer protection risks and therefore should be exempted from money transmission licensing through a safe harbor for non-custodial companies.

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Coin Center briefed four major DC organizations on open blockchains this week.

June has been a busy month for Coin Center. In addition to directly advocating for sound policy toward open blockchains, such as by responding to a recent anti-money laundering law in Congress, we are also a resource for policymakers that are seeking to learn more about these technologies.

Here’s a small snapshot of some of the educational outreach we’ve done over the last week:

We participated in a staff briefing for the House Committee On Agriculture, which oversees the CFTC. The briefing was a “blockchain 101” session that covered the technology, its capabilities, and differentiated between the different types of blockchains out there.

We were part of the American Bankers Association’s annual Payments Forum conference. During his panel, Coin Center executive director Jerry Brito helped the audience grasp what “blockchain” is and what it can realistically deliver in the context of payments:

Blockchain technology consists of three distinct parts, said Jerry Brito, executive director of Coin Center, a D.C.-based advocacy group. The blockchain itself, a series of containers enclosing time-ordered data in an unbreakable and distinct block, linked together; peer to peer networking; and a consensus mechanism, where all participants can agree on the rules of the road and monitor transactions as they happen.

Similarly, our research director Peter Van Valkenburgh presented at the National Governors Association’s National Summit on State Cybersecurity. His talk was one he’s given in Congress before, that answers the question, “What is ‘Blockchain’ Anyway?

And finally, Peter is at the World Bank’s Blockchain Lab this week to discuss opportunities to apply open blockchains in building a more inclusive financial system for the developing world.

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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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