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The Federal Reserve of St. Louis has published an excellent paper on payment systems and privacy.

Research Fellow Charles Kahn explains why financial privacy is important irrespective of concerns over illicit transactions, and how privacy is being actively eroded as electronic payment systems replace anonymous cash.

Not all of the privacy provided by cash is bad, and if cash disappears we will need new ways of providing that privacy. Because privacy needs are different in type and degree, we should expect a variety of platforms to emerge for specific purposes, and we should expect continued competition between traditional and start-up providers.

He goes on to offer two reasons why the private sector may be better poised to provide future cashless payment privacy than the government: technical expertise and trustworthiness.

First, it's hard to argue that the central bank will have greater technical skills in protecting privacy (at least in retail transactions; wholesale and infrastructure may be a closer call). The standard regulatory arguments for oversight of payments systems apply, however: There is an easy case for a regulator to be in charge of setting and harmonizing standards for privacy protection.

On the issue of trustworthiness, the answer is more difficult: … Every twist and turn in politics provides an opportunity to justify an examination of one or another aspect of individuals' transactions. And it is not clear in the current political environment that a central bank or a payments authority will be any stronger at pushing back on these intrusions than private institutions are.

Nor will transparency solve the problem. Paper money is transparent: The technology eliminates the ability of the issuer to monitor transactions, and "it is a truth universally acknowledged" that paper money does so. No computer technology can have this degree of confidence. Only an infinitesimal proportion of people on this planet can verify that computer code does what it advertises it does and only what it advertises. To believe that the CIA has imprinted paper currency with a technology enabling it to report hand-to-hand transactions is paranoia. To believe that spy agencies have backdoors to common computer programs is last week's news. Generating trust in the privacy promises of a public payments authority's new electronic money will be an extremely tall order.

He's also understandably wary of the trustworthiness of private sector payments providers given the lucrative incentives behind customer data collection and monetization. In light of that unfortunate reality, he offers an optimistic balance-of-powers prognosis for privacy:

All institutions, public or private, are likely to be untrustworthy—they are just going to be untrustworthy in different ways. Citizens are not really interested in an absolute guarantee of privacy; we simply want it to be sufficiently difficult to violate privacy that it can be done only in a publicly observed and generally agreed way. Using the differences in objectives of the private and public spheres becomes, it seems to me, a way of making this tension work for us: Public regulation with pushback by private providers seems to me the more hopeful formula.

That's a reasonable approach, but it also points to an alternative. Rather than looking for trustworthy institutions or pitting one untrustworthy institution against another, perhaps we can use open source software development and open blockchains to build private payment systems that don't require trustworthy administrators at all! This, it seems to me, is one way to describe the goal of privacy-protecting cryptocurrency projects like Zcash, Monero, and Grin, and it's why we at Coin Center are so keen on promoting a regulatory climate that does not deny these new technologies the room they need to grow into robust cash alternatives.

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SEC refusal to allow exchange to list Winkelvoss ETP “Dampens Innovation,” according to SEC Commissioner Hester Peirce.

The SEC rejected a request to allow the BZX Exchange to list and trade shared of the Winkelvoss Bitcoin Trust, a Bitcoin based Exchange-Traded Product (ETP). In order to allow the exchange to list the ETP, the SEC would have had to approve a rule change. The SEC refused to do so, largely because they felt that the BZX Exchange did not have sufficient safeguards in place to prevent market manipulation.

In her dissent from the decision, Commissioner Hester Peirce laid out the flaws in the SEC’s reasoning, and shone a light on the challenge to innovation that this decision poses:

By suggesting that bitcoin, as a novel financial product based on a novel technology that is traded on a non-traditional market, cannot be the basis of an ETP, the Commission signals an aversion to innovation that may convince entrepreneurs that they should take their ingenuity to other sectors of our economy, or to foreign markets, where their talents will be welcomed with more enthusiasm.

To support her point, Peirce lists some of the many benefits that decentralized cryptocurrencies offer:

For example, trading in bitcoin is electronic, which facilitates competition and price transparency. Bitcoin are interchangeable, so that a purchaser is sure to get exactly the same thing no matter where she purchases it. In addition, bitcoin mining is not geographically limited (except to the extent it migrates to places with cheap electricity), so it is not subject to geopolitical threats that plague other commodity markets.

Peirce voices serious concerns about the discord between the SEC’s actions and its mission. She warns that with this decision, the SEC has positioned itself as the “gatekeeper of innovation,” which, in Peirce’s view, is a role that “securities regulators are ill-equipped to fill.” Peirce argues that investors in the cryptocurrency space tend to have far more sophisticated knowledge of the technology and should be left to decide for themselves whether they wish to invest. She concludes by asserting that the SEC has overstepped its boundaries and is acting in interests contrary to the ones it was founded to protect:

I reject the role of gatekeeper of innovation—a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets Accordingly, I dissent.

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Despite criticisms, Fed agrees it won’t regulate cryptocurrency.

Last week, Federal Reserve Chairman Jerome Powell testified before the House Financial Services Committee, and while reports of his remarks on cryptocurrency have focused on his narrow and negative views of the technology, we think the real news is that he stated that the Fed doesn’t have jurisdiction over cryptocurrencies and isn’t seeking to provide oversight.

An exchange between Powell and Rep. Patrick McHenry, who understands cryptocurrency, basically restates Coin Center’s recent explainer on crypto and monetary policy: “Cryptocurrencies hold much promise to expand the range of monetary options available to all classes of people and secure a degree of security and liberty not offered by some of the world’s government-backed currencies. They currently exist in a small and experimental corner of the world’s financial markets, and are therefore unable to restrain central bank’s monetary policy levers.”

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Experts weigh in the the state of cryptocurrency regulation.

At a recent event hosted by Andreessen Horowitz and #Angels, Coin Center Senior Policy Counsel Robin Weisman joined former federal prosecutor and now lead of a16z’s crypto fund Kathryn Haun on stage to talk through recent movements in cryptocurrency policy and the effect they may have on the development of this technology.

The session was recorded. Listen here:

(Photo courtesy of @beLaura on Twitter)

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A top SEC official said that Ether is not a security.

Speaking today at a conference, the U.S. Securities and Exchange Commission’s Director of Corporate Finance, William Hinman, revealed in a speech that the SEC does not consider Ether, the Ethereum network’s native cryptocurrency, to be a security:

"Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions."

We are glad the SEC agrees with our long held analysis of how securities law applies to decentralized cryptocurrency networks like Bitcoin and Ethereum (See, in particular, our analysis of Ethereum here). We are thrilled to see it take strong pro-innovation approach to this nascent technology. With this guidance, the SEC is showing that taking a pro-innovation approach does not have to come at the expense of protecting investors.

Director Hinman’s analysis was based on an appreciation for the nuances of how decentralized technology really works, something we laid out years ago in our framework for securities regulation of cryptocurrencies. He used his speech to explain the Howey Test for determining whether a financial instrument is an investment contract and concluded that his analysis was that Ethereum failed the Howey test and, therefore, could not be considered a security:

When the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. ... the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.

It is a very good day for US policy toward the technology of innovation.

For more information on Ethereum, please see this explanation written by Ethereum’s founder, Vitalik Buterin, on Coin Center’s website: What is Ethereum?

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CFTC Commissioner recognizes the “transformative” nature of cryptocurrency.

During his speech at the United Nations last week, Commissioner Behnam spoke at some length about the potential value that this new technology can bring to the United States and other nations. He noted that cryptocurrency has the potential to be an effective runaround the problem of corruption in International Development:

Here is our chance to put money directly into the hands of those who need it, without bribery, rake-offs, graft, and shakedowns. Virtual currencies could transform the economic and social landscape. It could mean a massive, and equitable, shift of wealth. Technology could be transformational, without a military take-over, civil war, or political or religious creed.

Benham also spoke about sectors of the United States economy that have tremendous potential to apply this new technology. Here is what he said about agriculture:

Through blockchain technology, finding solutions to these challenges may become significantly more attainable. Food could arrive on grocery shelves faster, using an intricate system of measures meant to trace location from the farm to the table, with the additional bonus of providing abundantly more information about the product source… we could eliminate food waste and even improve distribution through networks domestically and internationally.

And about healthcare:

Blockchain could allow patients to create smart records that gather and harmonize information, leading to better continuity of care and even new models of care. Blockchain could also address medical fraud and waste. And, as a result, help contain the rising cost of health care.

In 2016, we published a report in which we explain why open, permissionless blockchain technology is essential for powering identity and digital cash use-cases that are inherent to addressing the supply chain and charitable aid issues Benham discussed. Indeed, we are cautiously optimistic about proclamations that imply these technologies are the skeleton key to unlocking greater equality and efficiency in global markets.

Behnam also spoke about the importance of pursuing legal action against fraudsters, and the challenge and importance of correctly categorizing specific tokens. Furthermore, Commissioner Behnam signaled that the CFTC was completely convinced that cryptocurrency is primed to permanently disrupt financial and economic sectors. In fact, he is so confident in cryptocurrency’s staying power that his rhetoric ascended from the analytical to the prophetic:

These currencies are not going away and they will proliferate to every economy and every part of the planet… We are witnessing a technological revolution. Perhaps we are witnessing a modern miracle.

We couldn’t agree more, Commissioner.

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Coin Center raises $1.2 million spurred by Kraken matching pledge.

Last week we announced on Twitter that we have reached and exceeded our goal of raising funds to match a generous $1 matching offer from cryptocurrency exchange Kraken (in addition to their already unprecedented $1 million donation), bringing our total fundraise in May to over $3 million.

This enormous outpouring of support from the cryptocurrency community is three times Coin Center’s annual budget, which will help us step up our education and advocacy work at a time when government interest in these technologies is the highest it’s ever been.

In addition to donations from the 100+ individuals, here are the companies that helped us hit our goal: 1Confirmation, Andreessen Horowitz, Ausum Ventures, Autonomous Crypto, Baroda Ventures, Blockchain Capital, Blockchange Ventures, Chia, Digital Currency Group, Dispatch Labs, DRW/Cumberland Mining, eToro, Hudson River Trading, itBit/Paxos, Kik, Medici Ventures, Polychain Capital, Protocol Labs, Ripple, SIG, SolidX, Steemit, Tlon, and Union Square Ventures.

Thanks to all of you who supported us. Your confidence in our work continues to humble us.

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The New York State Department of Financial Services just approved the trading of privacy-protecting cryptocurrency.

Gemini will become the first BitLicensed exchange to offer trading in Zcash.

The DFS press release summarizes Zcash in the following way:

The Zcash network supports two kinds of transactions, transparent and shielded. Transparent transactions operate similarly to Bitcoin in that the balance and the amounts of the transaction are publicly visible on the blockchain. Shielded transactions utilize z-addresses and are entirely private. Transactions associated with z-addresses do not appear on the public blockchain. Zcash is the digital cryptography-based asset of the Zcash network, similar to how bitcoin is the digital cryptography-based asset of the Bitcoin network.

Earlier this year, the Japanese Financial Services Agency (FSA) strongly encouraged the Japanese cryptocurrency exchange, Coincheck, to ban trading on privacy protecting coins. They claim that privacy protecting coins such as Zcash and Monero are more likely to be employed in transactions for illicit purposes.

We’ve previously explained why there’s no reason an exchange wouldn’t be able to compliantly deal in privacy protecting cryptocurrencies.

Financial institutions are legally required to comply with anti-money laundering and anti-terrorist financing laws and regulations. Can these institutions use a payment system and currency that leaves no record of individual transactions? Absolutely! That system is called cash and just about every financial institution in the world uses it. Cash transactions are still much more opaque than any cryptocurrency transaction, even a Zcash transaction from a shielded address.

And it is encouraging to see New York’s DFS resist much of the panic around privacy-protecting coins, and recognize the potential value they may bring to users. The forward thinking spirit of the decision is capsulated best by this statement by DFS Superintendent Maria T. Vullo:

"This action continues New York’s longstanding commitment to innovation and leadership in the global marketplace. With smart and thorough regulatory oversight, the development and long-term growth of the industry will remain thriving.”

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Photos from the 2018 Coin Center Annual Dinner now available

Thank you to everyone who came out for our most successful fundraising gala yet. It was a pleasure to host some of the best and brightest from the cryptocurrency world for a lighthearted night of fun.

Here are some pictures from the event.

A lot of you have been asking for a copy of the remarks made by keynote speaker Joe Weisenthal. Those are available here.

Stay tuned for next year’s dinner. Hope to see you there!

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SEC Commissioner doesn’t want to pick cryptocurrency winners and losers.

Commissioner Hester Peirce added herself to the list of SEC officials making sensible comments about the agency’s role in regulating cryptocurrencies. At the Medici conference in Los Angeles last week she revealed a nuanced view. Here’s some of what she said, per Axios:

“On a beach, you have a lifeguard…. but she’s not sitting with the sand castle builders,”

For years now many have pointed to the need for regulatory “sandboxes” wherein an innovator can obtain binding agreements from a regulator: e.g. “we (the regulator) will regulate you differently than the underlying law would otherwise require if you commit to sharing data or designing your project in a specified manner.” While that could lighten the compliance load for some folks in the ecosystem; it also creates risks that some projects will get prefferatory treatment and an unfair advantage over other projects or technologies.

Peirce’s preference to be a lifeguard over a sand castle architect is laudable. In general, it’s best that regulators only get involved in emergencies, when there are grave risks to consumers or investors that can only be addressed through the law. Regulators should avoid making legally binding pronouncements that dictate specifics about how consumer or financial technologies should be built. Cryptocurrencies are at a nascent stage where any action from regulators could create far reaching consequences for development and U.S. competitiveness.

We would like to see policymakers approach these new networks similarly to how the early internet was approached: hands off policy calibrated to encourage developer experimentation. We are glad to see Commissioner Peirce shares these sentiments. Be sure to read some more of what she said.

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