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Coin Center Annual Dinner 2017

Hot Takes

The OCC has decided to pursue the federal fintech charter for which we have been advocating.

We've been calling for a federal alternative to state money transmission licensing for digital currency companies since our inception, and today we are thrilled by Comptroller Curry's remarks: that the OCC will be providing that path in the form of a national fintech charter.

We've repeatedly argued in regulatory comments, letters, testimony, and breifings that the complexities and uncertainties of the state licensing system is one of the key impediments to digital currency innovation here in the U.S. As we wrote in our most recent comment to the OCC:

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.

Today's announcement is great news for the federalism half of that problematic equation, because it opens up the possibility for preemption of state by state licensing laws for those companies that obtain a federal charter. Best of all, this approach doesn't necessarily create new obligations for companies. Firms can still seek licenses or charters at the state level, but now a unified federal approach will also be an option. As the Comptroller remarked:

Merely making a charter available, does not create a requirement to seek one. Nor does it displace the other choices a fintech company may have—for example, seeking a state bank charter in a state that makes one available or to continue operating outside the banking system. A company’s choice to pursue a national charter should be driven by the company’s business model and strategy on how best to serve their intended customers.

And a federal charter would be a very sensisble option for companies in the digital currency space who, because of the nature and of the Internet and digital currency networks, operate globally from day one. We've yet to review any specifics of the proposed chartering process but hopefully it will be in line with our other big ask from the OCC: that consumer protection regulation of these innovative firms follow a principles-based rather than rules-based approach, mirroring the FCA's flexibile approach to regulating these firms in the UK.

We'll keep working toward that goal, but today we're happy just to celebrate this excellent step in the right direction. 

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The IRS’s indiscriminate request for Coinbase data sets a dangerous precedent.

In a recent editorial for American Banker, Coin Center executive Jerry Brito lays out why this apparent fishing expedition by the agency is based on flimsy evidence and a simplistic assumption that all Bitcoin users are tax cheats:

In this case, the specific criteria are not very specific at all. The government is seeking the information on every U.S. customer who used the exchange between 2013 and 2015 – a class so broad that it encompasses millions. And what is the "reasonable" basis? In its filing, the IRS notes the fact that some people have indeed used bitcoin to evade taxes, as well as "a public perception that tax evasion is possible with virtual currency." But all the IRS cites to back up that point is a Huffington Post article. This is an incredibly weak foundation to support breaching the privacy of millions of Americans. It's possible to use cash to evade taxes, so by this standard the IRS should be able to access the private records of everyone who uses cash with a single court order.

You can read the full editorial here. We will continue to voice our opposition to this request, watch this space for updates.

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The IRS is seeking the identities and transaction histories of all Coinbase customers in the U.S.

It has petitioned a court to let it serve what is known as a “John Doe Summons,” which requires a business to turn over information about any of its customers that match a specific criteria. In this case it is “United States persons who, at any time during the period January 1, 2013, through December 31, 2015, conducted transactions in a convertible virtual currency[.]” That is such a broad class that it could encompass millions of accountholders.

Often used on off-shore banks, a John Doe summons is a powerful tool that the IRS uses to identify tax evaders when there is “a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of the tax laws.” In its filing, the IRS cites a couple of instances in which virtual currency was used to evade taxes, as well as public perceptions about it, among other things, as its reasonable basis.

That the IRS is investigating possible tax evasion using cryptocurrency is not surprising. What is surprising is how low the burden is that the IRS must meet to acquire the identities and transaction histories of millions of Americans–identities and histories that Coinbase is obligated to record by the Bank Secrecy Act. Coinbase has responded:

We take user privacy very seriously and will work to protect the privacy of our users in broad information requests. We are taking a very careful look at this petition and the scope of the government’s authority as it relates to this request.

I’m not a tax lawyer, nor an expert on these types of petitions, but I can’t imagine that such a request affecting so many people can have many precedents, and I would hope that a court would want to see much more before it allowed the privacy of so many people to be affected. Stay tuned.

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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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The Treasury Department’s Inspector General just completed a review of the IRS’s virtual currency practices.

Bottom line, the report found that there has been little coordination within the IRS about ensuring virtual currency related tax compliance. The IG recommended that the IRS:

1) develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals, and an action plan with a timeline for implementation; 2) provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies; and 3) revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions.

The IRS has generally accepted those recommendations, but noted that “guidance allocation decisions are based on available resources and other competing organizational and legislative priorities,” and that “based on the IRS’s current fiscal climate, the IRS is faced with competing funding priorities requiring a need-based prioritization of information technology expenditures. Consequently, the IRS does not consider modifying information reporting documents to capture virtual currency amounts as a priority at this time.” The message there seems to be that while it probably can improve its coordination on digital currency matters, there are other higher priority vectors for tax non-compliance.

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What are the hurdles facing a blockchain enabled future?

Last week Coin Center director of research Peter Van Valkenburgh stopped by the Software Engineering Daily podcast to discuss the unique capabilities of open blockchain networks like Bitcoin and Ethereum, where this technology is today, and what needs to happen for a blockchain powered IoT future to take hold. In particular, he describes the regulatory hurdles that could hamper the robust development of the technology, what a regulatory scheme that actually encourages it might look like, and what Coin Center is doing to help get us there. 

Listen here.

By the way, you can learn more about the part open blockchains will play in the Internet of Things with this plain-language explainer

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If you weren’t sure if innovative fintech firms were having a hard time getting bank accounts, check this out.

The California Department of Business Oversight, which regulates money transmitters, has apparently found it necessary to issue certificates to licensees that they can show banks. From DBO’s October newsletter:

Some money transmitter licensees have reported difficulty maintaining or obtaining bank accounts. To help remedy this situation, the DBO has developed a Certificate of Licensure that money transmitters can use to show bankers and others that they are licensed and regulated under the Money Transmitter Act (Division 1.2 of the California Financial Code).

To obtain a Certificate of Licensure, please email the DBO Licensing Section at

This underscores the banking challenges we outlined in our report, “Overcoming Obstacles to Banking Virtual Currency Businesses.” While having some easy proof of licensure is a helpful step toward easing these challenges, it’s a small one. Regulators like DBO still need to make it possible for digital currency firms to become licensed, and banking regulators should reassess whether their strict oversight is leading to derisking that can stifle innovation.

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What does the OCC’s new innovation framework say about a national fintech charter?

Not a thing, but that’s not so bad. The framework, released Wednesday, is the culmination of the OCC’s “responsible innovation” process and, among other things, the OCC announced that it would will establish an office dedicated to innovation and work to be more flexible and collaborative in its regulatory approach–somewhat like regulators in Singapore and the UK.

In our comments to the OCC, we proposed a national fintech charter that would give digital currency firms a new federal alternative to state money transmission regulation. While the framework doesn’t mention chartering or any other specific new policies, the accompanying press release had this to say:

The OCC’s assessment of granting a special purpose national bank charter to nonbank financial technology companies, and under what conditions, continues. The OCC has made no determination regarding chartering of these firms. The agency plans to publish a paper later this year discussing the issues associated with establishing a special purpose charter and seeking comment on the topic.

That’s very encouraging, and we look forward to the paper.

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Video: Could your decentralized token project run afoul of securities laws?

That was the question Peter Van Valkenburgh had developers asking themselves during his recent presentation at Ethereum’s DevCon2 in Shanghai. For those who missed DevCon2, the recording has now been published by the Ethereum Foundation. 

Watch the full thing here: 

For a written summary of the presentation, see Peter’s blog post: “Could your decentralized token project run afoul of securities laws?

And for an in-depth look at the relationship between cryptocurrencies and securities law, see our Framework for Securities Regulation of Cryptocurrencies

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Poloniex yesterday filed a request for “no-action” relief from the CFTC.

This is the latest episode in what must seem to non-policy-geeks like a tedious and esoteric regulatory saga that began with Bitfinex’s June settlement with the CFTC. It’s important, though.

Basically, if you’re an exchange offering margin trading (like Bitfinex and Poloniex), then you are subject to the Commodities Exchange Act (CEA) and regulation by the CFTC unless trades on your platform result in “actual delivery” of the commodity in question (in this case cryptocurrency). In the case of physical commodities like corn, physical delivery of the commodity is a good indicator of actual delivery. But in the case of non-physical commodities like cryptocurrency, the CFTC has never put forth a policy statement explaining what qualifies as actual delivery. Tedious, I know.

The question, therefore, is something like this: Does the cryptocurrency have to be delivered to a blockchain address to which only the buyer has the private keys? Or is it good enough to transfer the cryptocurrency to the buyer’s account on the exchange platform as long as they have full right to withdraw, sell, or do whatever else they want with the cryptocurrency?

It’s important to underscore that this is not a metaphysical question about the meaning of possession in digital bearer assets; it’s a question about what path best furthers the policy goals of the CEA and its exemptions. Answering this question, therefore, is something that the CFTC can only do in an open and transparent rulemaking with public input as the Administrative Procedures Act requires. We urge it to do so.

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