Peter Van Valkenburgh: Towards Sound Bitcoin Policy (Episode 182)



hello and welcome to epicenter the show is talks about the technologies projects and startups rallying decentralization and the global option revolution my name is francois ben Crane and my role today our episode is focused on regulation mostly focusing on the United States we shall talk to Peter one Vulcan full-width director of research and coin sentence chat about what coin Center is and what are some of the regulatory developments happening in the space in the United States so before we get into a show let's have a brief intro from Peter it is great to have you on the show thanks guys thanks for inviting me tell us a bit about yourself and how you came to be interested in this space sure sure so I was in law school in what 2011 2012 and I always wanted to focus on internet law so these are areas of law that have already been disrupted in large part you know expectations about what can and cannot be enforced were challenged by the internet especially with regard to copyright so because of BitTorrent and before that Napster and also digital privacy law became a big topic and the Snowden leaks came not too long after I graduated from law school and I moved to DC under a Google fellowship actually to work with a nonprofit here called tech freedom on telecommunications copyright policy digital privacy policy and not long after an old friend of mine from back then when I was an undergrad at George Mason studying economics we traveled in the same circles Jerry Brito who was at George Mason's Mercatus Center came to me and said hey Peter I see you know he graduated congratulations on your JD class here in New York I mean see how'd you like to come and be director of research at a Bitcoin sink tank and I think I think I laughed at him and I said that's ridiculous no such thing exists and then immediately said yeah absolutely where do I sign up and the reason why I didn't hesitate at all really is because as crazy as that sounds this is in many ways the new frontier of Technology law policy so we had disruption in the copyright space in the privacy law space and now we're going to have an are having massive disruption in the financial regulatory space and I had to learn a lot more banking law than I ever thought I wanted to to learn in law school because I took copyright classes primarily but that's been a hell of a ride in itself and and pretty enlightening as far as the way administrative law and the bureaucracy work and we've been around now for two years since that conversation and just making a go of it there's so much work to be done because it's really like Open Skies that there's so many open questions that need to be resolved and mostly we just want to find an equitable way forward so that people can as much as possible freely experiment with the technology without over overly burdensome regulation and regulators to the extent that they are already obligated under existing law to regulate an activity are able to regulate in a way that doesn't crush the technology so you mentioned a coin Center I think we all remember calling Center quite quite some attention when it started but maybe you can give us a little bit more background what was the thinking around when coins and they were started you know what what kind of mission does it have who were the backers of it and what was the early history yeah so like I said two years ago we got our start and around that time for those of you remember the Bitcoin foundation was going through a lot of issues with their board and with other things and some extended loss of credibility and there really wasn't a clear voice in Washington DC that was able to represent the technology so like one of my hero organizations is the tronic Frontier Foundation for those of you who are familiar with Internet policy or you know internet defense if you will you'll know the e FF they did amazing work back in the 90s and through the 2000s defending your civil liberties online essentially defending people who were arrested because they were running a server and relaying server traffic back in the early internet defending free speech all sorts of things and the internet needed a non-profit like the e FF to exist because unlike unlike a proprietary technology there was no company behind the internet that was looking out as a proxy for the interests of the user of the technology the internet was this public good it was this open system that anyone could join and participate in so you in many ways need a non-profit to help educate policymakers as to how the technology works defend the rights of users and developers in making the technology work better bitcoins the same and so is etherium and so is e cash so we're all the open you know decentralized computing systems the open blockchain networks as I sometimes call them they don't have single companies behind them even Z cash which you know has a company that did the majority of the development is an open network where they now just have people running it across the globe and and using it and who is out there speaking for those groups to some extent the developers if they're working with a company like MIDI block stream or something like that but their expertise isn't in law or policy and no individual private interest is actually capable for speaking capable to speak to the issues of the community at large and really so the goal of coin Center is to try and speak for the technology as an ecosystem as as a group of users and a group of developers who have certain issues with existing regulation because it's unclear how existing regulations and laws apply to people using the technology or because they're you know potentially and the horizon is a desire to regulate these things in a different way or in a new way and you'd like a voice and the in the process of figuring out how to reach that that future position from a regulatory standpoint because otherwise you worry that policymakers who are either against the technology although that's actually pretty rare but more likely poorly educated regarding the technology will do something that will actually make it difficult to use the system to develop the the tools to make the network work and that's that the outcome we're trying to avoid we believe these networks have a good chance of flourishing regardless of what governments do they're disruptive and powerful and inspiring and their ability to decentralize power but all the better if we can get to that future we want faster because there isn't undue government interference in these technologies so since since coin country's taking inspiration from the ef-s that he isn't also do both they worry about technology policy as well as in defending people who might not have been treated very well by the definitely definitely and and I'll say the EF F does some work here in DC the Center for Democracy and technology is another great nonprofit organization that's not like a trade association it's just a think-tank that's representing the rights of users on the Internet and the civil liberties issues when when speaking to to government yeah then you might say well why not just leave it to CDT and e FF I love those organizations I think they still do great work and do good work on these topics when they have time but they also have other big battles to fight especially regarding say the USA Freedom Act for that to take an example from last year issues with you know repealing some of the onerous parts of the Patriot Act issues with whistleblowing statutes like what Snowden ran into issues with NSA snooping efforts issues with copyright law and they have a large exit you know institutional expertise in those topics they have technologists on staff who know those things and they have lawyers who know copyright law who know digital privacy law it's hard to get people on staff who know blockchain networks there's actually not many of them there's certainly not all that many lawyers who know both financial regulation and how blockchain networks work and where the intersection gets muddy and dangerous so I think I think coin Center has a lot of value to add to the advocacy conversation by being an organization that's focused specifically on open blockchain networks and not on the larger Internet per se because we can specialize and we have three full-time attorneys on staff we have two other full-time employees a communications person an administration person so we have a lot of resources that we can dedicate just to this one issue area rather than spreading them sin across a bunch of other issue areas so have you guys done any any work on behalf of you know Bitcoin users or users of other blockchain systems to defend them against the you know prosecution that wasn't justified so we're not like a public defense organization we we don't do litigation primarily what we're really trying to do is head that off before it even happens so before the question of whether somebody is charged with something there's the question of whether the law even applied to what they were doing and that question is one of the most difficult questions in the space because you have this new technology that enables people to do something say send money to Mexico for example send bitcoins to a software from a software well in the US to a software wallet in Mexico key question right there to what extent is the developer of the software wallet whether it's blockchain comm or any of the other software wallets out there to what extent are they subject to regulations that generally regulate remittance providers so people who like Western Union operated business sending money for example to to Mexico to what extent are they subject to financial surveillance laws so laws that say you need to know the name of all of your users you need to record their transaction data you need to submit suspicious activity reports and currency transaction reports to the Department of Treasury at the federal government so that we have we the Department of Treasury have visibility into the flow of guns to stop illicit financing all that sort of thing it's a big question and in the old world pre bitcoin it was not a difficult question it was you're running a remittance businesses you look like PayPal you look like venmo you look like Western Union or MoneyGram of course you're going to be regulated under these things and in some sense there's always companies like that in the Bitcoin space so what's the difference really between a hosted wallet provider and exchange and PayPal and if they're holding your bitcoins for you as a company like zap Oh a coin base whatever they have these things they hold stuff for people why not regulate them the same way it makes it otherwise it's special pleading to say well it's just because the valuables are denominated in this thing called a Bitcoin instead of a dollar we're not going to regulate you for consumer protection purposes for example but there are also say the software wallet providers the people who just write software write an app put it on the App Store does it make sense to regulate them as a financial institution as a money transmitter I don't think so and I also think if you tried to regulate people who were purely writing software as money transmitters you'd really crush people's opportunity to use these technologies at least in the u.s. legally because it just doesn't make sense that if somebody is going to write a github repository they need to first get a license that's a disaster it's also a disaster for u.s. constitutional law where we you know treasure free speech and encode is actually speech there's actual Supreme Court Holdings and federal court holdings that reaffirm that position and so you can't put prior restraint on speech but explaining that to a regulator who wants to maybe regulate a software well at both explaining the constitutional law argument and the regulatory law argument and also explaining the technology why this is not the same as somebody running Western Union or MoneyGram that's a really difficult thing to do and so that's what we focus on we focus on making sure that those understandings are established before it comes to a situation where somebody's end going to end up getting arrested and going to court well maybe answer and yeah I I guess at least for me I don't you see the value proposition of an organization like coin Center so tell us like in the long run is data five or ten years from now how you judge the effectiveness of the success or failure of an organization like incentive yeah because education of regulators is a diffuse thing and this is one of the things we actually struggle with is we take a lot of meetings we take meetings with congressional staff we take meetings with regulators at Treasury and often times we can't take credit for those meetings because you know a congressman doesn't want necessarily it's a you know immediately hit the news that he's meeting with the Bitcoin people and there's maybe a marketing branding problem there that eventually will be solved so that would be part of it you know these networks become so legitimized that people are happy talking about them but the big thing honestly is so what do all of these networks do more than anything else they decentralize power they remove a centralized intermediary and they push the security on the network to the edge device to the user device they empower the edge now that means you lose the choke point for regulation because the choke point for regulation is the bank the choke point for regulation is the centralized intermediary and because of that you also potentially enable asset financing I mean just to brass tacks it is possible that people will use these networks to launder money it's possible that people already do that it's possible that one day somebody will use these networks in a meaningful way to finance terrorism just to get down to that right away and the question then becomes alright this is a tool this is a technology just like cash is a technology and cash is by far the best way to finance terrorism what will be the government response the day when this tool is used in a way that a lot of people get very upset about our metric of success I think truly would be a reasonable response to clear evidence of illicit uses of the technology like dangerous ility uses of the technology a reasonable response being not an instant push to ban the thing an instant push to arrest anybody who's distributing software to the extent that that would even be constitutional not an instant push to demonize the people who are using the technology more of a reasonable conversation in Washington because there were people like coin Center they're laying the groundwork doing education developing champions in Congress who know that the technology also is can be a major force for good in the world say for digital identity for financial inclusion for other purposes who will raise their voices in the event of a catastrophe and say look this is a technology just like all technologies that can be used for good and for evil and we are not as Americans in the business of banning technologies we're not in the business of banning speech and sometimes that has costs but these are costs that it's important to bear so that would be my metric for successes something bad happens in the future I don't want something bad to happen in the future but if something bad happens in the future there are reasonable voices that we helped become more reasonable I do it that's a fantastic answer thanks so much I think that's yeah it's very true that you know this is realistically right we know things like this are going to happen and we know that there is this tendency for give regulators to overreact in cases like that and I think we've seen that over and over again and you certainly right if we can get in this area reasonable response is reasonable ways of finding solutions to that that would be a fantastic achievement I mean what comes to my mind when you bring up this point is probably another absolutely crucial prerequisite to get it reasonable response if you know let's say Bitcoin was used for to finance terrorism would be that we just need like real applications that have mainstream success right yeah if because if yeah if you have software there is you know 50 million users and they they are like this thing is great it really makes something possible that I couldn't do before and it's a totally legitimate thing and you know this is amazing it would be so much harder as when it's still this kind of you know fringe thing yeah and you know to some extent we hope to be clearing away as best as possible in the more short and middle term for people to do that to make sure that it is easy to develop on the technology because I think you're totally right you need the legitimate use cases to emerge you need to show that you're making a positive impact in the world that it's not just a bunch of you know people getting rich off the token cycles or you know people you know using underground drug markets and the longer we go without more mainstream legitimate uses the more danger we're in I'd say you know and there are there are legitimate uses unfortunately one of our best stories when when people ask a XO like so so why should we defend this technology you know what is it good for one of our best real stories is WikiLeaks but now WikiLeaks is all politically charged because they may or may not be in league with the Russians I have no idea and no opinion on that subject but WikiLeaks was an amazing story of financial autonomy being important and cryptocurrency coming to the rescue so WikiLeaks during the Cablegate leaks were they were leaking information about you know assets on the ground in u.s. involvement in the Middle East they lost all their payment processing through Visa MasterCard American Express they suddenly weren't able to accept donations and WikiLeaks is a legally incorporated nonprofit in the United Kingdom and if I want to give money to WikiLeaks that's that's First Amendment protected political speech actually supporting an advocacy group or a non-profit like that that has a political purpose but suddenly because the credit card processors stopped servicing them I can't give money anymore and why did the credit card processor stop servicing them well it's not because the law was passed that said you're no longer allowed to donate to WikiLeaks in fact that law would be unconstitutional if it was passed it's that in a back room somewhere someone powerful in the US government talked to someone powerful at MasterCard Visa and American Express and said hey if you're a patriot you're not going to process those credit card transactions and they didn't so it's amazing how fragile art are you know electronic money is if it's not cryptocurrency you really rely on a few centralized intermediaries again to make that system work and that's an amazing amount of power to basically cut people offering financial autonomy and also to damage their financial privacy which is a related subject to autonomy and WikiLeaks ended up accepting donations in bitcoin instead and they've done so ever since now you've been at coin Center for a bit over two years I think and I'm really curious during that time and all your interactions with politicians policy makers how has number one you know their understanding of this technology evolved and how have their attitudes towards it evolved to be seen a more open approach or maybe you have people become more skeptical as they maybe understand more the potentially disruptive nature of it what was the kind of progression I think people have become a lot more open to it actually so it's pretty much a positive story right now so for example some of your listeners may be familiar with the blockchain caucus which is a group of representatives in the House and Congress who have come together to talk about and think about the potential need for legislation ultimately in the blockchain network space broadly it's a congressman polis and congressman Schweikert who were the co-chairs the founders of that caucus and we worked early on with them to you know impress upon them how important the technologies were and they were totally open to having this officious you know official forum within the House of Representatives to have discussions about it and now I believe there are eight or nine members of that caucus and it's growing so it you know hopefully will become a bunch of people in the house representatives in the House who are interested in the subject the only thing I would say is to some extent the evolution of you know a politician or a regulators thinking about the technology went from cryptocurrency to this thing called blockchain and blockchain is a really vague word I often say that like blockchain is a word that's a lot like the word vehicle except unlike the word blockchain rather no one's going to come up to you and say like hey how do you feel about vehicle man like oh we can solve this problem if we have vehicle you know it in vehicle technology to the extent like it's a thing is a really stupid broad topic like we should probably talk about specifically like a bus or uber or something like that but blockchain is like that right now it's like blockchain technology it could be everything and it's magic sauce it's going to fix things and it's also it's inspired by Bitcoin but it's really unrelated to that Bitcoin thing because that's you know the little sketchy so like if that's like a that's a sort of mean way to to express the evolution of thinking from like crypto currency like what is it it's crypto anarchy and all these things to blockchain as this like totally unoffensive completely perfect solution to all your problems that's a problematic evolution in our opinion I mean don't get me wrong I love some blockchains like there's a blockchain behind Bitcoin there's a blockchain of sorts in etherium and in sea cash but what matters to me is the consensus mechanism so I always do a thing there's peer-to-peer networking there's consensus mechanisms and there's block chains by which you mean hash link data structures and if those three technologies that Satoshi Nakamoto kind of combined to create this amazing innovation that was Bitcoin censorship resistant electronic cash and people have taken this one piece and made way too much of it it's just a data structure it's just a way of presenting information so computers can verify it easily what matters to me is the consensus mechanism it's what are the rules that allow computers to join or maybe not join a group and come to a reconciliation about the the single source of truth about what should go in to the blockchain whether this is valid whether this is invalid whether this is an attack on the network or whether this is actually you know honest part of the consensus it's that consensus mechanism that is amazing within Bitcoin it's proof of work driven and that was quite a revolution I mean proof of work was a thing before but the idea of putting it into a paxos like decentralized consensus mechanism was something fairly new and that's also what makes Bitcoin this open permissionless network that allows anybody to without paying anyone money with licensing any software from a company install a wallet on their device and get a payment address and be able to get paid you don't need to do anything with the centralized intermediary to do that you have to trust one person or another person's github repository but big deal we do that for all of our digital stuff and that's not going away anytime soon so that's radical and amazing the blockchain itself just a data structure that is one part of what powers that communicating that message that the open blockchain network is really a core innovation and one that's fundamentally important not just for electronic cash but also for machine to machine payments for identity on the internet so the stuff that like the block stack guys are doing or the people over at consensus working it with you port right so you work yeah yeah like those are use cases that matter deeply I think because they'll both make the web work the way it should have without all these centralized collages in between like the DNS system for example and because they enable individual freedom they enable individual autonomy and that's very important in a world where with cache disappearing and credit card companies and bank money replacing it we're putting on awful lot of trust in those centralized authorities and that Trust is fragile so if I understand you correctly you're a little bit worried that this interest around blockchain which I think you're completely right is this is a little bit nebulous right and and it does take on many different forms in different contexts so you're afraid that that kind of you know des lieux to distract the focus from from the core questions that need to be solved in order to have these public blockchain networks and things like digital cache and there's a little currency become really usable yeah so a few things on that the first thing I'd say is I don't I don't mean to suggest that all of the non open or closed blockchain products are bunk I think there's some low-hanging fruit in improving the technological back Offices of say big financial institutions and it's awesome that people were inspired by Bitcoin to do that that said I think there are some things that only open networks can do and those are things like electronic cash digital identity I'd also add in Internet of Things type applications for these networks because a closed network is going to be in many ways not all that different than some of the issues we have currently with IOT systems where there's there's one company that is the go-between between you and your light bulb and that's so that's a weird world in a world we don't really want to live on live in especially if it's not your light bulb it's your car it's your ability to drive around or it's your smart lock your ability to get into your house or not so I think the open networks are the only networks that can solve those important problems which means they are valuable for more than just underground drug markets and communicating that message to policymakers I think is very important that these networks will do very good things they will improve cybersecurity in certain areas like say the IOT ultimately and then the other thing I'd say is that the closed networks are developed usually by a single technology provider you know there's a bunch of these is AK Sony r3 they're great companies but there is a voice for that technology it's the company that developed it so it's not a public good like the internet or the cerium or what have you where there's no single voice that can speak for the technology to regulators so it's less the province of something you'd need a non-profit advocacy organization to to basically lobby the government on behalf of and the policy questions that closed blockchain networks raised are pretty there really aren't that many if it's a closed network it's identified parties like say six banks who decide to use this and they decide to use it they're already regulated institutions and their choice of what technology service provider they hire to provide their back-end is not really something that regulations have anything to say about now compare that with an open blockchain network where you now have this permissionless system that allows people to get paid or pay other people if you just take the naive case or the simple case of you know Bitcoin there are massive policy ramifications the big one being like what I was discussing earlier is like who do you regulate in that space do you regulate the still centralized intermediaries like the coin basis and the Zappos of the world probably they're not that different than PayPal do you regulate the software developers oh gosh I hope not because they I don't think they're creating the kind of risks to consumers or other persons that regulation is supposed to address and B I also don't think it's constitutional necessarily to regulate them and I also don't think it's very good for innovation it basically would just push people to other parts of the world to build the technology which I don't think anyone wants to see especially if people get hurt in the process so let's switch gears into into regulations and what is happening generally in the United States right and so comfort for people like me who basically consume regulatory news from sources like coin desk or reddit it seems like a big big patchwork quilt like this bring the circus versus this this and this and this and this and like we don't have a coherent way of connecting ordóñez happening so could you give us like an coherent model of thinking about how what are different kinds of regulations are there and how they matter so you can break it down into issue areas and for me there are there are three big ones that are most worth discussing there are some other secondary issues which you know you can go to coin Center org if you want really minutiae on them but the three big ones for me are consumer protection regulation here in the US which usually means business licensing so it's like the bit license and stuff like that that's the first one then there's financial surveillance law which if you're a compliance professional you don't call it financial survival surveillance you call it AML kyc you call Andy money-laundering appliance and the third one is investor protection instead of consumer protection our first one and that's something that is primarily the province of the SEC the Securities Exchange Commission here in the US and primarily the province generally of securities regulation so what do you have to do in order to sell equity basically kind of thing and these technologies touch all three of those areas they touch consumer protection because as we were saying there are companies out there who will hold people's money the worst example of them of course was mouth because if you hold other people's money you can lose it and mount lost a bunch of people's bitcoins and consumer particulate protection regulation exists to try and prevent that to try and keep consumers safe from bad companies out there it touches anti money laundering or financials Valence regulation because there's value moving through these channels and the federal laws are broadly drafted to say that certain people doing certain things with money or monetary value which certainly would include I think Bitcoin would be hard to argue that Bitcoin doesn't have monetary value or ether monetary value certain people doing certain things with those those valuable things need to surveil their users record information about their users and send it to the government now you know there should be a larger debate in this country about the surveillance state and it should actually start with financial surveillance I think because that conversation hasn't happened enough we talk about oh they're reading my emails but actually they see all your bank records all the time you have no choice in the matter you don't even a reasonable expectation of privacy under the current interpretation of the Constitution so big debate over that but I will say that the laws are broadly drafted right now and until someone's ready to challenge them and you know I'm not seeing the legacy financial institutions challenging them we got to play by the same rules otherwise there's some dire consequences for people in the space and I don't want to see that and then that third area how does cryptocurrency and decentralized tokens and such touch securities law well now in the last two three years with the rise of altcoins and bubbles around altcoins and then token sales now and I cos now which to me is like these I do but it's fun that we're having this again there's this question of whether somebody who develops tokens like a decentralized protocol like ether or like Z cash or like Mineiro or like any of the tokens that might be built on top of the cerium long term with the token standard whether when they build them and then sell them in a pre sell what they're really doing is engaging in an investment contract with investors which is something that you can't do in the US unless you first register with the SEC and do certain other things like make a prospectus for investor transparency and if you don't register there's some heavy penalty – there – so it's not a foregone conclusion that all token sales and all tokens would fit into securities law but it is an open area so those are the three big areas and then we can speak a little bit more specifically about each if you guys are interested sure let's do that but let me just there and tie in one point here you mentioned regarding the token sales it feels like deja vu to you can you expand on that deja vu in what way I just feel like we've had we've had a couple sequential alts that we used called malt coins and we don't really call them all coins anymore but like waves of enthusiasm about them and people making money off of them I remember counterparties proof of burn I thought that was awesome that was like a really cool way to do a distribution but that was now like what two years ago an hour it's like it's like dog years in this space I guess but now it seems like we're really in a new a new wave of enthusiasm over icos and I hate the word ICS or the deviation because it sounds just like initial public offering which is like it's like like we're going to paint a target on myself that says like hey suc come at me bro you know and because the SEC regulates initial public offerings that's what they regulate and now you're going out saying well this is not a security but we're having an IC o—- and it's like shake you if you like just speak more cautious man you're building a cool thing maybe or maybe you're maybe it's a scam but why would you pick the word so there's a lot of enthusiasm right now and it reminds me of some of the enthusiasm over like past waves like Oh counterparty is going to be awesome or Oh litecoin is the silver to bitcoins gold or you know and it's great stuff I don't mean to be derogatory but exuberance can be dangerous – yeah no absolutely well let's dive into some of these areas so the first one was consumer protection and in the US that's as I said briefly mostly a matter of business licensing law and that means the states do it instead of the federal government and that means that in order to basically run an exchange or a hosted wallet provider where you hold other people's money you're going to need to get registered in every state where you have customers and if you're an internet business you have customers probably in every state unless you're not doing well as a company so that's 53 states and territories well you're going to have to go to the regulator have a conversation and be like oh hey you already licensed people like PayPal who do you know online money transmission we're like that except we use Bitcoin and then you have to explain to them what bitcoin is then you have to hope that they don't laugh you out of your their office or basically just like clam up and be like I don't know that I don't know what that is and you're frightening me and to some extent that was the conversation early on you know these are state regulators they deal usually with like the local Western Union branch they're surprised by someone from Silicon Valley or wherever maybe Switzerland coming into their office and being like hey I do this with this and then there's this open question like all right well there's the statue on the books that says that money transmission is taking money or monetary value from one person and handing it to another what if it's a Bitcoin instead of a dollar does that count probably its monetary value right but the regulators aren't always ready to get on board with this because this is all new technology and frightening and the bigger problem is if you go to their office and they say not going to give you a license I don't know what you're talking about then you might ask alright well does that mean I don't need a license to have customers and you're in your state and then the regulator will usually come back and say Joe no I didn't say that at all and that means you're in this really uncomfortable position you can't get a license and you haven't been told by the regulator that you don't need a license so maybe we'll just operate anyway might be the response it's like well we talked with them it'll be fine right then we're cool problem is if you operate without a license you're in violation of federal law and also the state law potentially so if a federal prosecutor wants to come at you for doing money transmission in a state where a license was required and you are not licensed they can without proving very much other than the fact that you had customers in the state they can lock you up for five years and they're probably not going to do that they're probably going to leverage that threat of jail time for a massive monetary penalty like millions of dollars but it's very hard to defend yourself in that situation because the statutes written pretty clearly says you need a license and you didn't have one and so that's strict liability you violated the statute that sounds like the kind of thing that a huge number of cryptocurrency businesses would be vulnerable to that kind of prosecution do you see that the same way so a big threat for this industry exactly and that's why that's why you've seen the the big hosted wallet and exchange companies pouring money and rightly so I would do the same if I was running those companies into figuring out a compliance strategy into going state-by-state and getting licensed and of all the major exchanges especially the us-based ones not just the ones with US companies they've gone to every state that will give them a license and they've gotten a license and in a few cases they blocked customers whose IP address seems to indicate they're coming from a state where they don't believe they can operate legally like coinbase for a time blocked South Dakota I believe and SAPO for a time blocked North Carolina I don't know if they're still blocking them but it was one of those situations where they said like look we don't want to poke that bear we don't want to deal with the regulatory consequences there and you know we need exchanges we need hosted wall providers because not everyone's sophisticated enough to run a full node and people at the very least are going to need to be able to get on boarded until we get paid our wages and this stuff so we need these companies we need them to be able to operate without the threat of crushing liability you might say okay well then be an exchange based in a country that doesn't have these state-by-state licensing laws but there's a thing called extradition and unless you're in the Horn of Africa your government in your foreign country might be quite willing to cooperate with US authorities and have you extradited to be charged in the u.s. so like this is a big problem and then it gets even bigger actually the bigger problem is a lot of these state money transmission statutes that say you need a license are drafted so vaguely that the definition of money transmission is something along the lines of the transmission of money and the reason why they're drafted vaguely is because in the old days before Bitcoin the only way to transmit money was to like take possession of it from one person and hand it to another person that's a custodial act so what we should define it is having custody of other people's money is what needs the license but it's not defined that way it's just transmission so then you have to ask yourself somebody who's got a computer in their back room that's running a Bitcoin full node they don't take custody of course not that's not how these networks work they relay signed transaction messages that can only then be spent by the recipient but are they transmitting money if the definition of money transmission is the transmission of money I don't know you have potentially plenty of wiggle room in the way that statute is drafted to come at that person and say you violated that statute and then it gets even more complicated with say someone who's not running a full node or a minor but actually developing the core protocol software are they a money transmitter they're facilitating these activities but they're certainly not taking custody of anyone's money and then really complicated with software wallets like blockchain comm they don't take custody it's client-side JavaScript that takes custody on the user's device but they wrote the client-side JavaScript and they maintain the website and then it gets even more complicated with multi-sig providers like bit Co bit code is an amazing thing they make somebody pretty sovereign over their money but they keep a backup key so that a person's phone gets stolen hopefully they've got another flash drive and bit go combined they can move the money away multi-sig is great consumer protection but here's the question does bit go or a multi-sig provider need to be licensed in all 53 states where there's money transmission regulation huge open question they don't say custody but they do have one key out of three explaining that to a state regulator is really hard in fact Mike Bell she if it go ripped up a fifty dollar bill in front of a number of the assembly members of the California Assembly when we were doing like a Lunch and Learn it was pretty awesome and then he said like I can't put it together but with Bitcoin you can actually so we need clarity otherwise there's a lot of people doing some really cool things like developing multi-sig wallets core core protocol software software wallets running full nodes doing the infrastructure powering the technology the really innovative stuff that's important to making the network's work that are all in some ways in jeopardy because the legal gray area of what is money transmission could be stretched to apply to them and if it was they'd be on the hook for some serious penalties basically do you see any way around it it's not easy so there's a few we've worked with the uniform law commission the uniform law Commission is a group of academics who gather together to create model laws that all the states should pass in order to have uniformity so the Uniform Commercial Code governs commercial contracts between like big merchants and things and every state adopted the Uniform Commercial Code so that they all have the same regulation of contract terms so that there isn't disagreement the ulc is now also working on a different model Act different than the UL even the UCC that would be a model regulation of virtual currency businesses Act so it would be something that all of the states could pass into law that would clarify this specific gray area who needs to get licensed as a money transmitter except they're not a money transmitter they're a virtual currency transmitter and who does not and we worked carefully with them and they were really open to working closely with us to create a definition of money transmission and more specifically a definition of custody and control that excludes anybody who does not have the unilateral ability to execute or indefinitely prevent a transaction so that language was carefully conceived by us and the I'll see to exclude a minority key holder in a multi-sig arrangement to exclude an unlocked transaction so like what green address does for example with their wallet product to exclude people who actually don't have custody of funds to exclude by the way an intermediary node on the Lightning Network which is another huge open category of persons that would potentially be interpreted as money transmission if we don't get these laws right so the ulc has this model act they're going to finalize it this summer that means that the states would then have to pass it into law and getting 53 states and territories to all pass the same model Act into law is going to be difficult but the ulc at least has a good brand so they might be convinced to do so there are other ways around it that we're pursuing simultaneously from working with the ulc another one is federal preemption and so for people who aren't students of federalism we have a federal government and state governments if the federal government says the states can't do something then they can't do it it's the preeminent authority so normally preemption happens with like Congress comes in and passes a law and says hey States you can't do this Congress is not going to pass that law it's just too hard it's politically unviable for them they don't want to piss off basically the people who run the states that they get elected from the population of and you know query whether they'd even you know agree with our perspective on this but there's another route for some minor level of federal preemption and that comes from the Office of the Comptroller of the currency which is this very old regulatory body that actually began and I think like 1860 and basically they were the regulator of national banks and when the OCC decides to charter a new National Bank so there are a bunch of national banks like Wells Fargo as a National Bank for example they become the only regulator of that National Bank for consumer protection that bank doesn't have to worry about money transmission licensing or state banking regulations in all the various states so the solution that the OCC is presented with us which is quite interesting that they're interested in this area because they're worried about innovation and American jobs and things like this is why don't we start chartering FinTech companies as national banks and then they're not subject to state laws and that's pretty cool it's often that they're open to this and they a you know comptroller curry who's the the head he's the Comptroller of the currency who's the head of the OCC unfortunately is on his way out because the Trump administration is going to replace him but they might replace him with someone good we're not we're not certain yet the Comptroller curry was actually pretty into Bitcoin like you read his old speeches he's into digital currency so to the extent they're willing to charter a FinTech company like loaded what does FinTech mean I don't know I think they might also be willing to charter a company that's like an exchange or hosted wallet and that would be great for that company because then they don't have to get licensed in 53 states where some of them don't even know what you're talking about that would be really cool but notice that this only solves the problem for a company that wants to be regulated like I was either going to have to do this 53 times or once doesn't solve the problem for the company that doesn't believe they're subject to any of this the blockchain comms or the bit goes of the world the multi-sig providers are the software law providers they don't want to become a National Bank and they know they're not a money transmitter but it's hard to convince people of that for this we would need an actual safe harbor that would be an act of Congress that would say hey states you do a great job regulating custodial money transmitters but anyone who is non custodial in the digital currency space for example those are companies that you cannot regulate through licensing so it'd be limited preemption would be preemption just of that that one area it really would be a safe harbor kind of like there were some big laws back in the history of the internet that were safe harbors that made it possible for a company like YouTube to operate because we had copyright lawsuits that would have driven them into the ground without the Digital Millennium Copyright Act safe harbor or defamation safe harbors like the Communications Decency Act so there's a good history of these safe harbors and I think we have a good chance of actually convincing Congress that this sort of limited preemption through safe harbor is something that I could accomplish maybe two the blockchain caucus for example cool that would be that would be indeed fantastic what kind of timeline and what probability would you assign to you guys being able to get something like this through stuffs really slow right now primarily because of the political situation with the Trump administration and the freedom caucus and the Democrats still you know hanging out there and everything's in flux I think with the midterm elections coming up and you know any number of other political things that I'm not an expert in so moving legislation is pretty difficult right now but again I would say that this is nonpartisan so maybe it's something that could actually get pushed through before the midterms that's probably our policy counsel Robin Wiseman who's the real political expert is probably looking at this right now and saying Peter don't make those promises you're an idiot but but you know maybe we should be optimistic I don't know that one's an amazing amazing description Peterhead but so this is just one part of the regulatory areas all right so all of you have a number of election yeah that's just consumer protection right like businesses that they want to get self customers and want to get license to so good and all of this is just just that right and then this consumer protection but then there's also gradual anti money laundering in English and then their security signals right yeah and I can go through those a little bit faster and I was probably getting out in time but so federal anti money laundering regulations which I prefer to call financial surveillance law because that's what it is says that if you're a money transmitter and they kind of they kind of mirror the definitions of the states so we have some of the same definitional issues if you're a money transmitter you need to register with FinCEN a different branch of Treasury from the OCC there's a lot of branches and after you register you need to have a anti-money laundering compliance program which means you're going to have some high level people and then you have a big staff and they're going to do risk-based anti money laundering policies so they're going to like look for suspicious-looking you know transactions make sure that every customer has been identified and truly identified like no fake IDs things like that and then the big ones are you have to file suspicious activity reports to the Treasury to the federal government so if you have any reason to suspect that there's something fishy going on here and the transaction is two thousand dollars or more soon to be one thousand dollars or more actually to come in confirmation and conformity with the international standards like the European standards you need to send all the details about that transaction to the federal government you also need to do currency transaction reporting which is any transaction suspicious or no that's over ten thousand dollars in value that needs to be the details of that need to be shared with the government and then fin send the regulatory body that implements this whole scheme shares that information with all of the major law enforcement agencies in the US with some of their international partners and also with some of the state law enforcement or agencies so it's a lot of private information floating around and Bitcoin businesses theory and businesses if they qualify as a money services business or a money transmitter which is a subset of money services business under the federal statutes which as I said also mirrors some of the issues at the state level then they need to register and do that compliance work and share that information about their users big open question who exactly is a money services business and who isn't just the same as with the consumer protection space what if you're just a software provider again you don't actually like accept something from someone hold it and then give something to someone else do you fit the definitions at the federal level probably not now that's going to be interesting long term because I'm not sure that I'm not sure that all the financial surveillance regulators are going to be comfortable with not getting information from people who have a lot of information so like a software wallet providers still might have information about their customers to some extent you know if the transaction messages that the software well it sends are relayed through a server of some sort or could be monitored by the software on the user's device so the long-term equilibrium of that is open there probably need to be a rulemaking at the federal level to actually change who is and is not covered because pretty clearly in the way the regulations are drafted right now that software developers not covered it also be a constitutional site over that potentially because the software developer might be doing nothing more than writing code which is free speech protected activity and if you forced them to write a backdoor into that code to identify users and do things like that you're actually compelling speech which is also unconstitutional the government's in most cases not allowed to force people to say things that they wouldn't set on their own this actually came up in the San Bernardino iPhone case with the terrorist attack where they wanted to get into the iPhone and they tried to get Apple to write a backdoor into their into their OS and Apple said no that's compelled speech we have a good case here we're going to fight you on the constitutional grounds and then the government actually backed off and said okay nevermind we'll break the phone in another way and they probably did because they've got a lot of resources so that's a battle that's coming potentially another gray area in financial surveillance law is token sales so we'll get to more about token sales with the securities thing because most people think oh what are the regulatory implications of token sales the big one is is this an investment contract for the SEC but there's also this issue that most people aren't talking about of FinCEN regulation of financial surveillance regulation so there's guidance from FinCEN interpreting the Bank Secrecy Act with respect to virtual currencies the guidance is kind of unclear with respect to somebody who isn't taking Bitcoin from someone and giving it to someone else but is instead inventing something that's Bitcoin like a decentralized cryptocurrency crypto token and ICO whatever and then selling it to people they don't seem like a money transmitter they're inventing all you know out of whole cloth a new digital asset and selling it but as I said it's very unclear under the current statutes whether that activity tically would be regulated as money services business and if it was then you need to register with Vincent and for everybody who buys a token from you in the sale you need to collect their personal information and for every sale over $10,000 you need to file a currency transaction report and for any sale to someone suspicious you've got whatever that means you have to file a suspicious activity report and if you neglect to do those things you're in violation of the Bank Secrecy Act which again carries some really hefty criminal penalties and that's with every u.s. buyer potentially so another big problem and there really is almost no way currently to judge how the law applies to that activity it's very vague with something like this where FinCEN and you know this money transmission issue to an extent will they try to apply this to projects that are outside of the United States so especially with financial surveillance regulation with stopping illicit financing for example if that's what you're worried about or stopping terrorist financing the US has pretty strong track record of seeking to enforce its law abroad by asking for extradition of persons who are dealing with US customers so you get the jurisdictional catch by dealing with a US citizen even if you yourself are not a US citizen the other thing to say here though is you know a lot of these things aren't currencies not really they're not fungible in many cases they're great innovations that are inextricably linked to a protocol the protocol tokens is a good term for them much better than ICO and you know if it's really just a protocol token for say a distributed file system like what file coins building it doesn't seem like you have a money-laundering risk there I hesitate to say that because what if you do what if I just said you don't it doesn't seem like you have a terrorist financing risk who's going to finance terrorism with file coins like it doesn't make sense it simply doesn't make sense so I think there's good reason why the why the regulator's in this case have not said anything yet and it's because they're reasonable people and they're not interested in crushing innovation especially if all you get out of it is you know there's there's not actual bad behavior going on at any large scale so I think there's a lot of caution here I'm not concerned about an enforcement action coming down the pipe anytime soon but it is a gray area that's existed in many ways since 2013 when FinCEN first issued guidance but they did have an enforcement action action against ripple for selling XRP so that has happened already but ripples a little different and that that enforcement action settled so there was a settlement agreement between FinCEN and ripple to not prosecute them for certain activities described in the settlement agreement but that doesn't mean it's presidential that just means it's an agreement between the regulator and that one company so it's still an open space we'll see what happens I don't think anything's gonna happen soon I don't mean to be alarmist but it's an area that I think needs more legal certainty mostly because if you're not a bad actor you shouldn't have this sword hanging over your head so it's a legal gray area but if faison what – i will take this stance that doing an ICO or bootstrapping or token whichever they would also necessitate the tariff filing of kyc and defiling of all of these reports then potentially all of the ICO or protocol tokens and red boots type in the past two years all of these projects would be affected is that right in a way because that's actually how administrative law does work so it's not as if they come out and say this is how things are from now on what they do is they issue guidance or an interpretation of existing law and that means that that's what they're saying the law has always meant this is something that's hard to communicate to people who don't have a background in administrative law because it sounds a little strange but to the extent that your guidance interprets say an exchange dealing with Bitcoin and how they relate to the Bank Secrecy Act your guidance says that an exchange even in 2011 would have been regulated even though we're may be issuing this guidance in 2013 which is actually what what did happen in the more limited case of exchanges as I said the bat guidance that 2013 guidance is unclear with respect to token sales and we'll see if they take the opportunity in the future to clarify it but if they did it would apply basically retroactively Lee that's true now it wouldn't necessarily apply to all token sales either it might only apply to certain ones that look certain ways so they might make a distinction in the way the sale is actually orchestrated or the way that or what the thing is that's being sold is it a protocol protocol token or is it really just a currency and he says some limitation on that or you know it could it be that they go back in ten years and say okay now we're going to like sort of do this archaeological forensics and how likely is that kinda actually yes so so all laws except murder in some places have sets of limitations so you can't go back and and get somebody for something that was too long ago I actually don't know the statute of limitations for say the section of the Patriot Act that amended the Bank Secrecy Act that creates criminal liability for failing to register with Henson which is 18 USC 1960 you could probably Google statute of limitations 18 USC 1960 to find it but it's probably not it's probably shorter than 10 years but I don't quote me on that well we almost again but let's just very quickly talk about securities law that last million I think that the thing that has gotten the most attention of all all of these regulatory aspects what can you share about that so we were some of the first people to write about the subject back a year and a half ago and the reason why we wrote our framework for securities regulation of cryptocurrencies which we published back then was because of pay coin actually so I said earlier like there's these sort of sequential waves of people doing these things and that was the first ICO bubble if you will take point for those of you don't remember was the brainchild of Josh Garza who is a serial scammer before pay coin which was a fork of pure coin that he sold in a pump and dump basically before pay coin he had geniuses at work mining which was a cloud mining scam he was selling hash power in a warehouse but the warehouse was actually not full of any Bitcoin miners surprise surprise he was just paying old investors with new investor money which is called a Ponzi scheme and before GIW miners geniuses at work is what GA w stands for two unions and his work before that he actually got a contract to build high-speed Internet access in upstate Massachusetts and Vermont from the government and then didn't build it just ran away with the money so like this guy's a bad actor like we felt pretty comfortable saying in this framework like pay coins a good example of where there really is investor fraud because what he did was the forked peercoin said he was going to have Amazon integration and like a minimum $20 price floor for pay coins in the future so you should buy them now at the low low price of like whatever point whatever Bitcoin and he collected a lot of money and then he didn't develop a coin because he probably wasn't even qualified to develop a coin and then pay coin never went anywhere and people's money was gone they paid in Bitcoin for these tokens that eventually what went down to zero and value basically so that's a pretty classic pump and dump confidence scam and the sort of thing that the SEC has always regulated what's different about it is that what he sold was a token that was a decentralized cryptocurrency like pay coin would scam me but it was open source software that if run by computers all over the world would create a decentralized cryptocurrency it would work it probably wasn't very good because it was a fork of pure coin which had its own problems from the nothing at stake problem but it was the thing and he was selling tokens so this was the first time that there's this clear indication that the FEC might be interested in going after a guy who is doing nothing more than selling decentralized tokens and they had already gotten wind of him because of the cloud mining scam they were already investigating for that so we decided to write a big paper called framework for securities regulation of cryptocurrency that laid out various variables in the technology and matched them to the test for an investment contract or security in US law the Howey test and said look some of these things like pay coin fit that test perfectly you should go after them if you're going to go after anyone into space but other things like Bitcoin for example even like aetherium even like some other read more recent token sales don't fit that definition of an investment contract under the Howey test and these are also great innovations that help us finance public goods that help us finance open networks and finance open source development but do it in a way that doesn't involve basically putting investor money at risk of a common enterprise that doesn't make good on its profits on its promises router so that framework carefully explains the different aspects of the technology that make pay coins say different than aetherium and then goes through some of the case law on the subject to explain why something like etherion for example doesn't fit the cool thing just to give one example we probably can't go through the whole Howey test and framework as much as I'd love to one of the cool things that we found in that framework was that the best way to make a legal distinction of atheria MS to look at a line of cases that deal with condominiums so in New York City for example many people when they buy a home they don't buy a home they buy a share of a housing co-op it's a co-op apartment now if you sell that share are you in violation of securities law if you didn't like register with register with sense and register with the SEC if you sell a house as a co-op are you are you an unregistered issuer and promoter of a security the federal courts have actually said no the SEC does not have jurisdiction over that because what you're selling may be something that people invest in in a speculative way it's true people buy apartments in New York because they think they're going to go up in value but they also buy them to live in them and because it has that you tilt utility that real use value and because many people will actually buy a co-op to live in it it's not the sort of selling activity that we want to regulate for investor protection the way we regulate the sale of equity and ether is a similar story if the network really is a global world computer and if ether is a token necessary to run smart contracts on this world computer then it has this useful value yes people will buy it because they think that it's going to go to the moon price wise but they'll also many of them will also buy it for the same reason you buy a house to use it to write smart contracts to build the future of a decentralized web on top of this platform the same public policy concerns that say we don't want to regulate housing like we regulate stocks because we don't want to deprive people of housing the same public policy concerns come in here we don't write and regulate an open network like aetherium like we regulate stocks because we don't want to deprive the world of the benefits of this technology that has a real use value beyond mere speculative investment so I think that's a great story and there are a lot of these stories that come up in the securities law case and I'm glad to see that it's become a bigger issue in the community as I said I'm now worried more about in some ways about the the issue of financial surveillance regulation of these tokens but they're definitely two of the big air is that we have to think about hard and we have to make sure that there's good understanding on both sides so that good people don't end up on the wrong side of the law especially if there's not even a public policy benefit to putting them on the wrong side of the law cool well Peter thanks so much for coming on and thank you for being a so articulate in explaining all these important issues and I think you know regulations been such a recurring topic we've talked about this so many times you know even back then early Bitcoin I don't mean remember what we talked about then a lot of bitlicense for why we have so many episodes on bit license we filed three comments in that proceeding that was that when we got our start it was like welcome to your new job as director of research right to these people in New York again they can about this really complicated law thank you for having me yeah thanks so much and hopefully we can have you on again at some point in your future to talk about new development here will of course be linking also to the coin Center website and they have a lot of really nice in-depth paper many of them written by by Peter about different issues and different questions so I highly recommend those so we'll have we'll have links to those and yeah thanks so much everybody for for tuning in once again we are going to be back next week and if you want to support the show then you know you can do so by leaving us not to interview or or tipping show but we are a bit polina or Easter so thanks much it will be

4 thoughts on “Peter Van Valkenburgh: Towards Sound Bitcoin Policy (Episode 182)”

  1. excellent, well reasoned interview…. I s there anyway could organize a panel discussion with Olaf Carlson Wee, and Peter Van Valkenburgh covering how to analyze ICO technical, legal, and consensus frameworks ? Seems to me that thnd e coders are holding most of the cards when it comes to figuring out ICO value proposition. There must be an intelligent way for non techies to evaluate the merits and watchouts of ICO s beyond the use case itself.

  2. This is the first episode from y'all in years that I thought was worth hearing.

    I stopped listening long ago, because your show became an infomercial for blatant founder pump and dumps, which 99 percent of cryptoassets have proven to be to me.

    Even the Counterparty mentioned, which was released far more fairly than most "ICOs", and on top of Bitcoin, is a great example of what I mean.

    Shows like yours delayed by years the development of the most important cryptoasset technologies, by misleading the ignorant and newcomers into considering "investing" in tech whose obvious purpose is exclusively to make its purveyors wealthy.

    That in turn, created financial incentives that drew away a lot of competent developers into the nirvana of the founder pump and dump coin development.

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