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Coin Center Annual Dinner 2017

Hot Takes

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.

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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.

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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.

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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.

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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.

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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.

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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.

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We got a data dump of all the complaints about "virtual currency" filed with the CFPB.

This was thanks to a Freedom of Information Request filed by Muckrock News.

A first glance at the data left us scratching our heads. According to the CFPB response, there were a total of 5,177 complaints filed from 2011 to the end of 2015. Of those, the top ten companies complained about were:

  1. Western Union Company - 1,003 complaints
  2. MoneyGram - 784 complaints
  3. PayPal - 435 complaints
  4. Bank of America - 193 complaints
  5. Wells Fargo - 167 complaints
  6. JP Morgan Chase - 155 complaints
  7. Citibank - 71 complaints
  8. Ria - 42 complaints
  9. Walmart - 39 complaints
  10. PNC Bank - 11 complaints

Those are obviously not digital currency firms. So we took a look at the CFPB’s online complaint form and discovered that the agency has not yet developed a form specific to virtual currency complaints and therefore lumps in virtual currency complaints with complaints about traditional money transmission (see screenshot below). When the CFPB responded to the FOIA request asking for virtual currency complaints, the overwhelming majority of complaints they returned were therefore not related to “virtual currency”.

So, we went through the data, cleaned it up, and then marked all those firms that we could recognize as clearly related to digital currency. What we found is that there was only a grand total of 37 complaints against "virtual currency" companies over the five-year period.

Coinbase took pole position with 10 complaints, which makes sense given the large number of customers they have. “Bitcoin” itself had two complaints lodge against it. GAW Miners had four complaints, Bitcoin Trader three, and Butterfly Labs two. After those, the rest only had one complaint each, and they are as follows: Bitfinex, BitInstant, Bittrex, Blockchain, C-Cex.com, CampBx.com, CoinMX, igot, Local Bitcoins, minerslab, Moonasics, MtGox, PERBTC, Purse, and Terabox. Many of these will be recognizable as known scams, and we have previously explained why there are so many Bitcoin scams.

In August 2014 the CFPB announced that “consumers who encounter a problem with a virtual currency product or service can now submit a complaint with the Bureau.” No doubt the agency wanted to see how widely consumers were being affected by the risks it had previously identified with digital currency. It’s remarkable, then, that in five years of data there have been so few complaints, and that so many of the products and services in the space are completely absent. Let’s keep it up.

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A resolution calling for a pro-bitcoin national policy was just introduced in Congress.

The bi-partisan H.R. 835 was introduced by Rep. Adam Kinzinger and co-sponsored by Rep. Tony Cardenas. Its preamble cites bitcoin and blockchain innovation:

Whereas emerging payment options, including alternative non-fiat currencies, are leveraging technology to improve security through increased transparency and verifiable trust mechanisms to supplant decades old payment technology deployed by traditional financial institutions; and

Whereas blockchain technology with the appropriate protections has the potential to fundamentally change the manner in which trust and security are established in online transactions through various potential applications in sectors including financial services, payments, health care, energy, property management, and intellectual property management

It then calls for “a national policy to encourage the development” to encourage these technologies and their use.

It’s important to note that a House Resolution, if passed, only sets forth the sense of the House of Representatives (and not necessarily the Senate) about what kind of policy the federal government should adopt, either through future legislation or through agency rule-making. It’s not binding and it’s not specific, but it is a good way for the House to communicate in what direction it would like to see government policy move.

The proposed House Resolution from Rep. Kinzinger shows that many in Congress understand that the federal government should adopt policies that encourage blockchain innovations to flourish. That means a national fintech charter from the Office of the Controller of the Currency, as well as smart treatment of cryptocurrencies by the SEC, CFTC, FinCEN, and others.

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A law firm just filed a petition with the CFTC asking for a "comprehensive rulemaking" on Bitcoin.

Steptoe and Johnson, which has many Bitcoin industry clients, is asking that the commission clarify what constitues as “actual delivery” of bitcoins after a transaction.

As Houman Shadab, Andrea Castillo, and I explained in one of the first law review articles on this topic, this matters because if a trade results in actual delivery of bitcoins (rather than deferred delivery or simply receiving contract rights to bitcoins) the exchange is exempt from certain commodities futures regulations.

The recent CFTC order against Bitfinex has prompted this call for greater clarity. The petition explains:

In the Bitfinex Order, the Commission found that Bitfinex, a Hong Kong based online platform for exchanging and trading cryptocurrencies, violated certain CEA provisions by engaging in retail-financed commodity transactions in bitcoin that did not result in “actual delivery” under CEA … Specifically, the Commission found that the margin transactions were within the scope of the Retail Commodity Transactions provision because the transfer of cryptocurrency from one person’s account to another’s did not satisfy the requirement of “actual delivery” to exclude the transactions from the jurisdictional reach of the CEA.

If the Commission takes up such a rulemaking, we’ll be looking at whether “actual delivery” can be said to take place when ownership of bitcoin is changed on a third party’s books, or only when a transfer happens on the blockchain. And when does a transfer actually happen on the blockchain? Fun times ahead.

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