Hot Takes

We got a deeper look at how law enforcement uses Bitcoin forensics.

This compelling story from Ars Technica gives us the deepest look yet into the corruption scandal that brought down two federal agents. The duo attempted to steal and extort hundreds of thousands of dollars from the Silk Road dark net market but were thwarted by a mix of investigative work and simple analysis of the publicly available Bitcoin blockchain. 

This new site, like no other before it, could accurately trace the history of bitcoin payments and wallets. Moreover, it was able to map wallets into known "clusters"—that is, mapping addresses to known entities like Silk Road, Coinbase, and other large Bitcoin players. (Wallet Explorer, and its commercial successor, Chainalysis, made use of academic research that first debuted in October 2013.)

There was more to this discovery. After becoming more comfortable with his blockchain analysis, Gambaryan strongly suspected there was another bad actor. The dozens of hours he'd spent tracing the movements of bitcoins through the blockchain showed some currency being moved in small groups, while others were bouncing around as large chunks. Force had made simplistic transfers of money using his own name. But Gambaryan saw another, more complicated set of transfers as well.

The whole thing is worth reading.

Our advisory board member Jason Weinstein, a former federal prosecutor and director of the Blockchain Alliance, previously looked at how law enforcement leverages the blockchain in investigations. Tools and savvy have only become more available since then. We will likely hear many more stories of criminal enterprises foiled by the blockchain in the future. 


Is the EU about to impose on itself state-by-state licensing of digital currency businesses?

That's the concern raised by Diacle's Adam Vaziri in response to a new European Banking Authority report on applying EU anti-money-laundering rules to exchanges and wallets:

[T]he EBA's remarks notably mention that VC exchanges and wallets operating in multiple countries in the EU "may […] be required to be registered or licensed in each Member State in which they intend to provide VC-related services".

The seemingly small aside in the nine-page response is notable, as such a measure would be akin to the state-by-state registration process that VC exchanges have to do in the US.…

Usually that process can take between three to six months, however, the VC exchanges and wallets will now need to contend with language barriers, administration and bureaucratic fragmentation in each member state where it wants to do business.

It is sadly ironic that registering in 50 states in the US may be easier as at least the process is in one language. The same state-by-state requirement in the EU will mean the VC exchange operator will need to contend with 24 official languages.

In the U.S. businesses face one national AML regulator and dozens of state consumer protection licensors. The easy "passporting" of licenses in the EU has been seen as a competitive edge for the bloc. That would be undermined if legislators pursue a new route that retains single "passportable" consumer protection licensing, but then require dozens of state-by-state AML registrations.


The California bill fight is over.

Faced with overwhelming opposition ahead of a Senate banking committee hearing on Monday, and with some in the state government unwilling to compromise, the bill’s sponsor, Assemblymember Matt Dababneh, on Friday afternoon decided to drop the bill and it won’t be considered again this year. Although constrained by different interests within and without government, Dababneh's intent has always been to bring regulatory clarity for digital currency businesses in California while remaining a state welcoming to entrepreneurs and encouraging of innovation. If he takes the issue up again next year, we’ll be happy to work with him again to get it right.


Here's an update on the new California digital currency bill.

We've been hard at work since Assembly Bill 1326 had its language replaced with new language earlier this week. As we noted in a recent blog post, this completely new language does nothing to clarify the status of digital currency users with respect to money transmission law (the original purpose of the bill) and contains language that could be interpreted to cover non-custodial services like mining, providing multi-sig services, or operating full nodes or lightning network nodes. 

We have been communicating with legislative staff and are happy to report that they have been very receptive to our concerns and suggested changes. We hope that the new bill will be amended to address our concerns. If that can be accomplished, the final bill may even be better than the previous version as there would be no capital requirements or other similar burdens on covered entities. That said, the bill today remains unchanged, and we cannot support it as it stands.

For those of you who are interested in our complete analysis of it, you can read here a letter we have sent today to the California Senate Banking and Financial Services Institutions Committee, which will soon be holding a hearing on the bill. It lays out in detail our concerns with the bill and our suggested changes.


What does the CFTC have to do with the Bitfinex hack?

Yesterday we explained that CFTC’s enforcement action against Bitfinex was not the proximate cause of the exchange’s hack, but some are arguing that it was the but-for cause. It’s probably also a stretch to say that the enforcement action was the but-for cause of the hack, but it certainly seems to be the case that Bitfinex implemented a multisig security model the way it did in order to avail itself of a statutory exemption to the Commodities and Exchange Act.

The exemption in question applies to retail commodity trades that result in “actual delivery” of the commodity (in this case bitcoin). What qualifies as actual delivery of traditional commodities like wheat or gold is pretty well understood and the subject of many court cases as well as CFTC guidance. However, what constitutes actual delivery of cryptocurrency has not been well defined.

As we pointed out a couple of weeks ago, the CFTC has before it a petition for a notice-and-comment rulemaking to define what constitutes actual delivery in the cryptocurrency. We believe the CFTC should grant that petition and embark on such a rulemaking, and we believe this for a couple of reasons.

First, rather than case-by-case negotiated settlements with individual companies, an open and transparent process in which all parties can provide input is a preferable way to determine the contours of actual delivery. And second, it’s possible, if not probable, that under consideration of the full Commission, rather than only enforcers, the CFTC might conclude that actual delivery of cryptocurrency can be achieved in a way that allows for many different security models and implementations. That would be good for everyone.


Open blockchains could be a democratizing force for social good.

...Maybe. But at the very least the idea of incorruptible record keeping has gears turning in the minds of the international development community. Problems from corruption-proofing land title systems to stamping out the blood diamond and ivory trade has smart people considering blockchains as a possible addition to toolbelts.

Jerry Brito was recently on the Democracy that Delivers podcast, produced by the Center for International Private Enterprise, a non-profit focused on global democratic and economic empowerment, to introduce their audience to blockchain technology and to discuss the social good applications that an open, public, distributed blockchain could have. The full audio is available below.


The DC scene got a little dose of blockchain today.

While some markets are up to their necks in blockchain conferences, they come somewhat fewer and further in between down here in wonderful Washington, DC.

We appreciate any opportunity to brief large audiences of policy-minded people, so our participation in today’s first annual Blockchain DC conference was a no-brainer. Both Jerry Brito and Peter Van Valkenburgh joined other local experts and policymakers to discuss the state of this technology. Jerry moderated a panel which hoped to demystify “Bitcoin v. Blockchain” and Peter covered the promise held in “the Internet of Money.”

As you would expect, the resulting conversation came through the typical policy and legal prism that one would expect from this town. We will be sharing a recording of the event as soon as it is available.


The world’s regulators are racing to develop blockchain policy.

If you follow our work you will be familiar with regulatory movement here in the United States, such as New York’s BitLicense, California’s AB 1326, and the Office of the Comptroller of Currency’s recent commitment to fintech innovation. But what about internationally? To answer this, our friends at Ripple have put out a great blog post that highlights some of what they have seen in Singapore and the United Kingdom.

We particularly like this line, which hits the nail on the head as to why it is so important for innovators to work with regulators and be a part of the policy process:

When crafted in a balanced, proactive way, regulations actively drive innovation and market competition. Yet, when regulatory frameworks are poorly crafted or not given necessary attention, they can directly restrict innovation and product development.

This is exactly the mindset we have when developing and advocating for sound policies toward cryptocurrency technology.


A Florida court just dismissed a money laundering case and said that bitcoin isn't "money."

There's a great passage in the Court's opinion:

The Florida Legislature may choose to adopt statutes regulating virtual currency in the future. At this time. however, attempting to fit the sale of Bitcoin into a statutory scheme regulating money services businesses is like fitting a square peg in a round hole.

We've had a lot of time to think about square pegs and round holes; our State Framework explains the two approaches for state regulation that we favor, either:

  1. Clearly issue regulatory guidance excluding virtual currencies from existing money transmission regulation, or
  2. Craft new legislation (not regulation or guidance) that would set up a regulatory system that countenances the peculiar squareness of a virtual currency peg.

You can see how different states have measured up against our framework on our State Tracker. You'll notice that Florida is not on that tracker because there hasn't been any new guidance or legislation proposed there in this space: which may explain the confusion that led to this case.


Patents for an open source project sound scary, but it makes sense.

Bitcoin was born of the open source movement, the sort of passionate fervor that makes you want to scream STALLMAN! late in the night, while charging the Oracle campus gates. And open consensus model blockchains have added another layer of "open" to the mix: both software and consensus methods should be unencumbered by permissions for maximum libre!

So it's no surprise that talk of patents tends to get this community riled up. This week Blockstream announced its defensive patent strategy, which indeed involves seeking patents on some of the awesome tech they've been developing. But before you go grab a gnu-pitchfork or libre-flaming-torch, consider the alternative: a world where some outsider or troll gets patents to this technology and uses them to hold the entire ecosystem hostage. Blockstream is doing the right thing: seeking patents so they can be used (and only ever used) to defeat the claims of charlatans and trolls (our space has a few).

This is the same IP strategy that's been effectively employed by Google, Tesla, and a host of other cool kids who understand that innovation = open. We hope more companies and developers will join Blockstream in this effort.

Image credit to the always on-point XKCD.