Hot Takes

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 licensing@dbo.ca.gov.

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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How does Coin Center advocate for sound Bitcoin policy?

That was the question columnist Laura Shin sought to answer when she invited Coin Center executive director Jerry Brito and director of research Peter Van Valkenburgh onto the most recent episode of her Forbes podcast, “Unchained.” She starts by explaining Coin Center’s policy philosophy:

When it comes to blockchain technology and cryptocurrencies, many people compare their stage of development to the internet in the early 1990s. Admiring how the internet flourished under light-touch regulation, Jerry Brito, in 2014, launched Coin Center, an independent non-profit research and advocacy center focused on the public policy issues facing cryptocurrencies. Brito says the organization represents the technology, and so is not a trade association representing the industry. His and Coin Center’s goal is to get the same mostly hands-off regulatory attitude the U.S. had toward the internet applied to cryptocurrencies and blockchains.

The conversation is wide ranging, covering the early history of Coin Center up through our most recent policy achievements, both defensive and proactive. The candid discussion looks inside the tactics we use in the service our education and advocacy mission, and offers a peek into the types of relationships we have built with policymakers around the country over the last two years. In her write up, Laura pulled out a quote that particularly captures our approach: 

When that happens, he says, Coin Center will say to regulators, “Here’s a gap, here’s an issue, here are the alternative ways you might fill that gap, and here are our preferred routes. It’s a route that allows you, the regulator, to meet your ends, but in doing so we don’t do any inadvertent harm and you do it in the most light-touch possible way that preserves the freedom to innovate.”

The full episode is available on Forbes.

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Coin Center gear is now available on OpenBazaar.

For the first time you can donate to Coin Center through the decentralized network for peer to peer commerce powered by Bitcoin. Find us with our Onename ID @coincenter, or navigate to our store directly with 211fc791cfe7f050b06a65164f1a470b4adb9fad.

Along with our classic “Bitcoin: Est 2009” t-shirt, we are celebrating the launch of this store by bringing back the limited edition designs “Moon Mission” and “Alpaca.”

Don’t have OpenBazaar? Get it here. And you can take a peek at our store with BazaarBay.

Coin Center is dependent on donations from the cryptocurrency community to support its important mission of promoting sound policy that allows these technologies to flourish. These shirts are a “Thank You” gift for your donation of .1 BTC, which will go toward our work.

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A new bill in Congress would create a “regulatory sandbox” for fintech innovators and folks have been asking us about it.

So here are our thoughts. H.R. 6118, introduced by Rep. Patrick McHenry seems to emulate the sandbox approach taken by governments like the UK and Singapore.

A sandbox allows a firm with an innovative product or service to petition a regulator to be exempt from the standard set of rules that would apply and instead enter into an enforceable compliance agreement tailored to the specific firm and product. This provides some real benefits to companies: for one, they can find more flexible paths toward financial regulatory compliance. Also, they get a single point of contact; not just a single agency to deal with but a dedicated contact person in that agency to focus on their particular regulatory issues.

Sandboxing is an approach that we’ve applauded in the UK and we’re happy to see Congress looking to replicate in the U.S. The McHenry Bill goes as far as it can to create a regulatory sandbox within the constraints of the U.S.’s federal system of government. The challenge it faces is that unlike the UK, the U.S. does not have a unitary government with a single financial conduct regulator. Instead, fintech firms are potentially regulated by 50 different state regulators and by a dozen federal agencies. The question is whether entering into a sandboxing agreement with one federal agency would clearly preempt all the other federal agencies and state regulators that may have a claim of jurisdiction over the firm.

We’re happy to see this approach being considered in the U.S. and impressed by Rep. McHenry’s leadership in pursuing it. And while we’re very optimistic about the approach, we recognize the challenges the approach will face in the U.S.

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