Hot Takes

ESMA issued their final DLT report but continues to underestimate open networks.

Our previous comment to the European Securities Markets Authority was referenced in the final report; it looks like we were the only commenter sticking up for permissionless blockchain networks:

For many respondents, appropriate governance frameworks will play a key role to ensure trust and provide legal certainty to market participants. Many of them agreed that permissioned-based DLT networks would be the most appropriate for financial markets. One respondent however disagreed that permissioned-based DLT networks were more appropriate. According to this respondent, all permissioned-based systems remain in the proof-of-concept stage of development. In contrast, permissionless systems have been running in public for almost ten years and are battle-tested.

But unfortunately the bulk of the report continues to prematurely identify permissioned systems as the only viable technological architecture for building-out future financial systems:

Importantly, ESMA understands that the DLT that would be used for financial services would differ from the Blockchain designed for Bitcoins in a number of ways. In particular, while the Bitcoin Blockchain is an open system where all can contribute to the validation process (‘permissionless’ system), the DLT that is likely to be used in financial markets would be a permissioned system with authorised participants only. Permissioned DLTs have a number of advantages compared to permissionless systems when it comes to governance issues, scale or the risk of illicit activities, which makes them more suitable for securities markets. Yet, some of the benefits attached to permissionless frameworks, e.g. ‘openness’, may be lost in a permissioned framework. In line with current market initiatives in securities markets, the rest of the report deliberately focuses on permissioned DLT.

As we point out in our recent report, the "benefits attached to permissionless frameworks" (e.g. privacy, security, and interoperability) shouldn't be underestimated. Even in the securities settlement process, "openness" may matter in the end.

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Great news for bitcoin and other blockchain startups from Switzerland today.

The Swiss Federal Council has proposed a simple plan that would exempt small fintech firms (accepting less than 1 million CHF from customers – or a bit over $1 million) from the requirement to seek authorization in order to conduct business:

the acceptance of public funds up to CHF 1 million should not be classified as operating on a commercial basis and can be exempt from authorisation

This is probably the simplest “sandboxing” proposal we’ve yet come across. A clear and easy to interpret minimum-dollar threshold for when you are and are not regulated is exactly what we’ve advocated for here in the US in the context of state money transmission licensing.

Again, as with the FCA in the UK and the MAS in Singapore, foreign jurisdictions are leading the way in offering reasonable and pro-innovation policies for these new financial technologies and the small start-ups that are building them.

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The price of bitcoin still doesn’t matter right now.

The new year began with a bang as the price of a single bitcoin rocketed up past $1,100 and quickly fell back to around $900, where it seems to be holding steady for now. With such dramatic price movement comes attention, especially from those who are excited about the investment possibilities for Bitcoin and similar decentralized blockchain-based assets.

The last time there was so much attention on the price, Coin Center executive director Jerry Brito made the case in Wired that focusing so much on this one fluctuating metric is a distraction:

Unlike the early Web, though, Bitcoin has a price ticker people look at daily, and so they wring their hands. Every dip and spike in the price gets a lot of attention and spells either doom or “irrational exuberance.” But as Marc Andreessen has pointed out, “the price of domain names didn’t determine the usefulness of the Internet.”

With a longer time horizon in mind, you can put the short-term drops and rallies in price of Bitcoin in perspective. So don’t worry so much.

The case holds true even today and should be referred to for perspective every time there is a sudden burst in bitcoin price news.  

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"Dear Mr. Trump: To ‘Cyber’ Better, Try the Blockchain."

As president-elect Trump prepares to take office he must develop comprehensive plans to address growing cybesecurity concerns. In a recent op-ed for WIRED, Coin Center director of research Peter Van Valkenburgh suggests a novel approach: embracing new internet infrastructure built on open, permissionless, blockchain networks that would be far more resilient than the vulnerable system in place today.

Trump’s team should know that open networks like bitcoin are a promising development in the otherwise bleak story of cybersecurity, even if while they sometimes present challenges to law enforcement and financial regulators. Just like the early internet, these tools may cause a policy headache or two, but they are well worth protecting.

Read the full op-ed on

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This academic study of digital currency businesses needs your help.

The University of Cambridge Judge Business School’s Centre for Alternative Finance is launching the first Global Blockchain Benchmarking Study. We’ve partnered with the centre to help create what will be a global empirical understanding of how cryptocurrencies and blockchain technology are being used today. 

But of course a study needs data! And that’s where you come in. If your company is building products in the areas of token exchange, wallet security, mining, wallets, and payments/money transfer then we would appreciate it if you took the time to fill out a brief survey

The results of this study will be published by the CCAF in early 2017. All survey participants have the option to be prominently acknowledged in the benchmarking report with their logo displayed. Please note that all identifying information from organizations that complete the benchmarking surveys will be removed from the research team's analysis, and findings will only be presented in an aggregated form (e.g., by country).

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Coin Center filed comments with the Federal Elections Commission on bitcoin political contributions.

We did so on Friday in response to a proposed rulemaking considering how to classify bitcoin and similar cryptocurrency contributions, and whether they should be subject to the same $100 cap as cash.

Citing Bitcoin’s scarcity and its classification as a commodity by the CFTC and property by the IRS, we recommend that the IRS treat bitcoin donations as “in-kind contributions” under the Commission’s regulations, which would require no amendment to the rules and have no lower contribution limits like cash. On that question of a low cash-like limit, we clarify some common misconsceptions present in the Commission’s notice. Namely that bitcoin transactions as untraceable and that bitcoin intermediaries are not BSA-regulated.

We hope the FEC will find these comments useful and let Bitcoin into the campaign trail.

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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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