Hot Takes

Early bird tickets are now available for the Coin Center Annual Dinner.

Blockchain’s night out is back! Get your tickets to our annual dinner—a fundraising gala in support of our policy advocacy mission.

Get tickets now!

Coin Center Annual Dinner

May 14, 2018

The Plaza, New York City

Every year, some of the best and brightest of the cryptocurrency world gather after the first night of Consensus 2018 to meeting, mingle, eat, and drink. We’ll be announcing speakers soon but this is your chance to grab your tickets a little cheaper. Stay tuned for more information.

Here are some pictures from last year’s dinner.

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The ULC’s Model Virtual Currency regulation has been introduced in Hawaii & Nebraska.

Earlier this month, State Senator Mike Gabbard introduced the Uniform Regulation of Virtual Currency Businesses Act in the Hawaii legislature. We worked with the Senator on this initiative and are proud that he has taken the leadership on this issue. The model act was also recently introduced in Nebraska.

Last year the Uniform Law Commission, a private body of lawyers and legal academics from the several states, voted to approve a uniform model state law for the regulation of virtual currency businesses. We were highly involved in developing the model act’s language, which gives the states a clear path for updating their money transmission rules in a way that accounts for this technology’s unique characteristics such as shared custody over a multisignature wallet.

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The SEC and CFTC are taking the right approach to ICO scams.

The agencies clarified their strategies in a joint statement issued today:

"When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments."

We are glad both agencies will continue to target frauds and scams masquerading as initial coin offerings. As we’ve explained in our Framework for Securities Regulation of Cryptocurrencies, questionably marketed or designed cryptocurrencies may indeed be running afoul of securities law. This joint statement is important because the CFTC is the regulator with jurisdiction over digital commodities like Bitcoins and some other virtual currencies and the SEC is the regulator with jurisdiction over tokens that are securities. They'll need to continue to work together to draw distinctions between those fields of our technology, and are off to an excellent start.

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A new study finds less than 1% of Bitcoin transactions to exchanges are illicit.

Elliptic, a UK firm that provides blockchain analysis tools for law enforcement, has released an analysis of the global market for money laundering through Bitcoin. Based on available blockchain forensic data, their analysis found that only a tiny percentage of transactions to exchanges were from illicit sources:

According to our study, the total percentage of identified “dirty bitcoins” going into conversion services was relatively small. Only 0.61 percent of the money entering conversion services during the four years analyzed were verifiably from illicit sources, with the highest proportion (1.07 percent) seen in 2013.

Further, those transactions that were illicit tended to appear disproportionately in Europe:

Roughly a quarter of all incoming transactions went into Europe in 2015 and 2016, but 38 percent and 57 percent of all illicit transactions, respectively, went to European services during those years. Thus, Europe hosted a disproportionate amount of illicit activity.

One of the report’s recommendations for governments and cryptocurrency businesses to address this issue is through strengthening European AML practices and expanding them to include coin-to-coin exchanges, emulating the 2013 FinCEN guidance that applies in the United States. Read the full report here.

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We talked with the CFTC, Politico, and NPR about why cryptocurrency matters.

The CFTC has jurisdiction over the trading of futures on decentralized cryptocurrencies like Bitcoin and Ethereum . A critical part of Coin Center’s mission is to help regulators understand the nuances of these technologies. Our director of research Peter Van Valkenburgh did just that on the CFTC’s podcast by explaining in depth what decentralized consensus really means and what it takes for a cryptocurrency network to be truly open. Read the transcript here or listen here.

On the Politico Money podcast, Peter helped put the speculation driving cryptocurrency markets into perspective. It can be easy to forget that behind the excitement of cryptocurrency prices is the very real technology of decentralized networks. What is happening now may be a bubble, but like the dot-com bubble of the 1990s, some of its survivors will go on to be the next great internet platforms. Listen here.

Finally, on NPR’s 1A show, Peter went over the basics of cryptocurrency and answered questions from callers. Listen here.

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Coin Center statement on Long Island money laundering arrest.

All we have to go on so far is the unsealed indictment, which does not mention cryptocurrencies, and the statements of the prosecutor. Based on what we know so far though, here are our thoughts:

  1. Thankfully she got caught before she was able to move money to ISIS. This suggests that law enforcement has the tools necessary to deal with this sort of money laundering even when it involves cryptocurrency.
  2. The unsealed indictment doesn’t have enough facts in it to draw strong conclusions about how important Bitcoin actually was to the scheme. We know she bought it with fake credit cards and a bogus line of credit from a bank, but that’s about all.
  3. From the statement of the prosecutor, it looks like she still tried to use wire transfers and shell companies in order to get the money to ISIS. This may suggest that a simple bitcoin transfer didn't work to accomplish her ends, and that the old ways (wire fraud) remain the best ways when it comes to evading sanctions.

We await further information.

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Coin Center in the news: Bitcoin futures, Retail investors, CryptoKitties, and more.

Most of our time is spent engaging with policymakers in D.C. and around the country. However, our experts are often called upon to help the media get a handle on developments with this fast moving technology as well. Here are a few recent examples:

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Good news: Ethereum’s CryptoKitties are probably not securities.

Ethereum just got overrun with cats; the cats are literally slowing down the network with their feline machinations, their idiosyncratic personalities, and yes, their breeding… lots of cat breeding… on Ethereum. The cats are called CryptoKitties. Just like bitcoins or ether, CryptoKitties are peer-to-peer tradeable, provably scarce digital items that are accounted for by an open blockchain network. Unlike those cryptocurrencies, each item (each kitty) is unique with its own set of attributes: striped, droopy-eyed, slow (yes, slow is one), and many more.

Rather like some of the ICOs you might have read about, there is a company that is selling some of these digital items and financing its operation from those sales. From their FAQ:

The CryptoKitties team releases a new “Gen 0” CryptoKitty every fifteen minutes (up until November 2018). The starting price of “Gen 0” CryptoKitties is determined by the average price of the last five CryptoKitties that were sold, plus 50%.

There are complicated and controversial legal arguments about why some ICOs might be unregistered securities issuance while other might not be. The SEC has yet to offer a bright line test but has identified a few specific projects as securities and indicated that it looks to the flexible test for an “investment contract,” the so-called Howey Test, in order to determine whether any particular token sale is securities issuance. Our framework for securities regulation of cryptocurrencies has outlined the nuts and bolts of that standard and advocated for an innovation friendly approach since 2015.

CryptoKitties look less like securities under that flexible test for a few reasons. One important prong of the test is whether buyers are relying on the managerial efforts of others for profits. First of all, CryptoKitties aren’t marketed as profit-making investments, and ownership of a Cryptokitty doesn’t give you a right to dividends or revenue streams from the Cryptokitty team or anyone else for that matter. Sure people might hope that they can flip a kitty for a profit but people feel that way about other non-securities like real estate, gold, or (appropriately) beanie babies. And sure you can breed two kitties to get more cats which you could of course sell, but that alone certainly doesn’t make them securities any more than real life purebred pets.

This is starting to sound a bit like an actual case about securities law and real life animals, the case was SEC vs. Weaver Beaver (yes, that’s the actual name). Here’s Bob Davenport, a regional director of the SEC back in the 1970s:

The beaver case was a case called SEC versus Weaver’s Beaver Association. One defendant appealed to the U.S. Supreme Court, which denied cert. A fellow in the Salt Lake area started a company called Weaver’s Beaver Association. They sold pairs of beaver, all over the United States and in foreign countries. These were purportedly domesticated beaver. You would buy a pair of beaver for several thousand dollars, and these beaver would have little beavers, called kits. Then these little kits would grow up, and they’d have more kits. And you would end up with this large herd of beaver. The beaver were to be sold to other purchasers. They had a marketing arm, where they would sell your pairs of beaver. There was going to be a tremendous demand for beaver pelts in coats, beaver hats, and everything—it’s coming back. So they sold millions and millions of dollars of these beaver. The salesmen represented that you could take possession of your beaver, and you can raise them in your own backyard, but if you don’t have the capabilities, we have beaver ranches all through the West—Montana, Wyoming, et cetera.

It didn’t end well:

We’ll take care of your beaver for you for a hundred and fifty or a hundred seventy-five dollars per beaver per year, until you can sell it. Nobody could take care of beaver; you can’t put it in your bathtub. The purchasers would have to leave the beaver on the ranches. What happened was that all these beaver and their kits that was being sold to people could not be re-sold, because the Association was too busy selling their own beaver to take time to sell your beaver.

So these people ended up with a large number of beaver, and they’re paying all these ranching fees. It was just a disaster. They really weren’t selling domesticated beaver; instead they were flying the beaver down from Canada and purchasing them from trappers in Canada at approximately twenty dollars a beaver. They’d fly them into Salt Lake, put tattoos in their back foot, in the web, and start selling them. They’d sell them for three thousand a pair and up.

The SEC came after Weaver Beaver because it was clear that the economic reality of the scheme wasn’t just beaver sales! Weaver was selling shares of a “profitable” beaver farm. You weren’t buying a beaver to take it home with you; you were buying it to get rich, and you relied on Weaver to take care of your beavers, breed them, sell the kits and give you the profits. Nobody actually took delivery of their beaver (you are shocked, I know).

So why are CryptoKitties different? Because you can and do actually take delivery of your CryptoKitty. You don’t have to keep them in your bathtub, you just connect to the open Ethereum network and check up on the blockchain to find your cats. You don’t have to rely on the CryptoKitty team to take care of your cats or breed them for you, the cats don’t eat and “breeding” is just an ethereum transaction that you (and only you) can make by using any free and compatible Ethereum software client and by signing the transaction with your Ethereum private keys. And you don’t rely on the CryptoKitty team to find buyers for your cats, or buy them back from you, all sales are peer-to-peer and any ethereum user in the world can find you and offer to buy your little bundles of kitty joy (or breed with it!). Also there’s no sad beaver relocation, caging, and tattooing, just happy little bits of digital fur ball coursing over the world’s increasingly renowned global computer, Ethereum. That last one isn’t part of the Howie Test but it makes me happy to live in the future we got.

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Coin Center statement on IRS Coinbase order.

While the court granted a narrowed version of the IRS’s original request for Coinbase customer data, we remain deeply unsatisfied with the lack of justification provided by the IRS. Without better rationale for why these specific transactions were suspect, a similarly sweeping request could be made for customer data from any financial institution. It sets a bad precedent for financial privacy. This is a perfect example of why clarity in the tax treatment of cryptocurrencies is needed, such as reporting guidance the IRS would be directed to issue under the recently introduced bipartisan Cryptocurrency Tax Fairness Act sponsored by Reps. Schweikert and Polis.

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The Cryptocurrency Tax Fairness Act was offered as amendment to the House tax reform bill last night in Congress.

Video of the Rules Committee meeting is below and you can watch Rep. Jared Polis speak about the bill that he co-sponsored with Rep. David Schweikert. The amendment would have created a de minimis capital gains tax exemption for personal cryptocurrency transactions, and helped clarify how exchanges could offer third-party tax reporting.

While the amendment was not adopted, we applaud the bipartisan leadership shown by Reps. Polis and Schweikert. That they recognized this issue, introduced a bill, and got it this far means a lot and it shows the IRS that many in Congress believe that the existing tax treatment of cryptocurrencies needs to be updated. The bill’s language didn’t make it into the larger tax reform bill, but that doesn’t mean the bill itself is dead; it’s alive and well and we will continue to advocate for its passage by Congress, and we’ll continue to work to try to have the IRS adopt as much of it as it might be able to through rulemaking. For an ecosystem that is barely a decade old to get this far in Congress is remarkable, and we’re only just starting.

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