Government and decentralized autonomy: a seemingly natural contradiction. To some in the crypto-space, those two concepts complement each other like parkas at pool parties. But as fun as maximalist thoughts of an immutable ledger are to entertain, the fact is the people in the blockchain space still live in the real world, where law – not computer code – controls, and online actions can have actual consequences. Throughout the ecosystem, an apprehensive air looms as to how the industry will be affected when these two forces collide. Will the SEC arrest everyone who runs a token offering? Will less-informed Members of Congress consider cryptocurrencies as a new tool in terrorism? Or will we see legislation in the US that empowers innovation of a technology that officials in other countries have called “schemes that only take advantage of the population by acquiring their money.”
One group is leading the charge to enlist regulators as allies to facilitate a US-based blockchain boom like that of the internet of the last several decades. Over the last six months, Coin Center – the independent, non-profit, public policy research and advocacy center based in Washington, DC – has been busy addressing blockchain’s national security implications with the congressional Terrorism and Illicit Finance Subcommittee, spearheading the Blockchain Caucus on Capitol Hill, and moderating recent panels on legal strategy and regulatory developments and how they affect the crypto-space. In an ETHNews exclusive, Peter Van Valkenburgh – Coin Center’s Research Director and self-described “Cryptolawyer” – chatted about Coin Center’s latest activities, its goals with lawmakers, and its view of how “it should be easy to follow the law if you want to follow the law” rather than allow for large gray areas of regulatory uncertainty.
Coin Center’s Primary Mission
Van Valkenburgh explained that Coin Center is fighting to keep public blockchain advocates (like the Bitcoin and Ethereum communities) free from governmental oppression and tyranny. Alluding to the roles of the Electronic Frontier Foundation and the Center for Democracy and Technology in the ongoing battles surrounding net neutrality and internet users’ freedoms, Van Valkenburgh said that it is Coin Center’s mission to be a similar force for public blockchains. He explained that Coin Center “has nothing against the consortia projects like R3 . . . But the technologies that we believe are both truly more disruptive and exciting as far as future betterment, [as well as] raise the biggest policy questions, are the open networks. So that’s what we focus on exclusively.”
Van Valkenburgh pointed to three areas in which Coin Center is fighting against poorly-informed legislation and oppressive new laws. First, it spends a majority of its time educating lawmakers, including giving classes to government staffers on how to send cryptocurrency transactions or informing congressional hearings of public blockchains’ potential to create a better society. Second, it provides research resources that explain relevant legal frameworks which may apply to blockchain technical nuances – such as a report clarifying that the government’s failure to issue clear rules is already hurting blockchain entrepreneurs and a 2015 prediction of upcoming confusion surrounding securities regulators’ classification of crypto-assets. Third, it advocates for governmental actions to promote blockchain’s success, such as calls to enact laws that give blockchain the same type of support as the internet had in its early days or to consider blockchain to meet the President’s stated goals of building an internet more secure against foreign attacks and generally “doing cyber better.” As Van Valkenburgh stated it, “it would be a shame if the US was left behind” other forward-thinking nations (like Switzerland or Japan) because of inaction or ignorance. Coin Center believes its focus on education, research, and advocacy will help avoid this outcome.
Coin Center’s Recent Activities
Coin Center maintains a streamlined staff of only five full-time team members, yet that group consistently produces a large volume of high profile interactions with key lawmakers. In the days leading up to the holiday weekend, Coin Center briefed four major DC organizations on how blockchains work and about important considerations for making decisions as they apply to public chains. Van Valkenburgh provided insight into what occurred in those meetings and what to expect from those organizations going forward.
- House Committee on Agriculture (HCA) – “Because they deal in agricultural commodities, [the HCA] is one of the major oversight committees for the CFTC,” Van Valkenburgh explained, “there’s been a lot of talk about automating some of those markets using blockchain networks.” However, most of these efforts have been focused on private or permissioned blockchains, without much information provided to regulators about public chains’ ability to perform similar functions. In its presentation to the HCA, Coin Center explained how public perceptions of cryptocurrencies focused on terrorism or crime are incomplete and how in some cases it is a superior technology. Van Valkenburgh hopes for continued discussions of how American farmers can use public chains to more effectively distribute food.
- American Banking Association (ABA) – Coin Center attended the ABA’s annual Payment Forum conference, where it gave insight on how the specific properties of public chains can promote their use in banking payment systems. Van Valkenburgh stated his belief that the ABA is generally friendly to public chains and “has done a good job keeping apace with [blockchain developments].” He expects that the ABA is a key force in keeping banking attorneys informed of regulatory developments.
- National Governor’s Association (NGA) – Van Valkenburgh was at the annual NGA event focused on cybersecurity, giving a “fifteen-minute Ted Talk-like presentation explaining open blockchain networks and why they matter.” He specifically focused on how decentralized internet frameworks built on blockchain – like the Interplanetary File System (IPFS) – can be used to avoid centralized attacks on consumer information, like the highly profiled leak of Target customers’ credit card information. Van Valkenburgh believed this aspect resonated with governors’ staffs, which are often instrumental in determining how their states approach cyber-security.
- World Bank – The World Bank created a blockchain lab to bolster its abilities to accurately identify individuals across an international landscape and to securely manage investments in the infrastructure of developing nations. Van Valkenburgh met with the lab to explain some of the legal issues that will face the group as they develop their new products, including his belief that only open networks like Ethereum will be suitable for the decentralized identity verification of refugees and borrowers.
The Blockchain Caucus and Future of Blockchain Regulation
While some in the industry believe that laws enforced in the crypto-space should be kept to a minimum, others recognize that sometimes it takes good, clear laws to restrain regulators from haphazardly enforcing their agendas in legal gray areas. Van Valkenburgh pointed to the Blockchain Caucus as “a focal point to organize educational briefing” and “as a great vehicle to discuss possible legislation,” providing the industry with a unified front for influencing governmental actions. He described the Caucus’s three specific requests to Congress that would provide a strong regulatory framework to promote blockchain innovation and prevent arbitrary backlash:
- A Congressional Resolution Identifying Public Blockchains as Beneficial to Society. This resolution would specifically mention Bitcoin, Ethereum, and Zcash as useful examples of the technology. The result would be both a priority to facilitate the technology’s development view as well as create definitions that “prevent bad changes in law that we hope to avoid.”
- A Clear Exemption of Small-Value Crypto-Transactions from Tax-Reporting Requirements. As it stands, you must tell the IRS of every time you realize a gain while exchanging a crypto-asset for another crypto-asset or any other type of service, good, or financial instrument. While this policy may make sense for larger investments, requiring taxpayers to report gains on small transactions – such as buying a cup of coffee with bitcoin or spending small amounts of Ether as “gas” to run an Executable Distributed Code Contract – is too tedious and confusing for either the IRS or taxpayers to track. Van Valkenburgh pointed to a similar exemption for foreign exchange value fluctuations – which allows you to make small travel expenditures without reporting slight gains due to a foreign currency being worth more a few days after you left the country – as a good model for this exemption.
- A “Safe Harbor” from Money Services Requirements for Blockchain Companies that do Not Hold or Control Customers’ Crypto-Assets. The definition of “money transmission” varies state by state, with some defining it as broadly as “the facilitation of the transmission of money or monetary value.” This leaves the possibility that virtually every person who builds on a blockchain in those states – including providers of client-side Ether wallets, contributors to Ethereum’s open-source GitHub depository, or even individual miners – must obtain a money transmitter license or face jail time. By providing this exemption to affect both state and federal governments, Van Valkenburgh believes the industry can avoid the threat of prosecution being used as leverage by regulators to force firms to agree to extraordinarily high fines. An example of this is Ripple’s 2015 $700,000 settlement with the Financial Crimes Enforcement Network for allegedly failing to register as a money services company.
Van Valkenburgh recognized that there is “a lot of accelerating interest” from lawmakers surrounding blockchain, both positive and negative. He hopes that Coin Center’s efforts will lead legislators to agree that blockchains are like the internet in that the technology is “a tool that will be wielded for good and for bad, [but that] on balance will be used for good.” He continued “we don’t take a strong hand controlling every interaction on the internet because on balance it’s more beneficial to mankind that the internet exists, that it is allowed to flourish, and we’ll still find a way to address the malicious use of the technology.” A future where blockchain innovators can create and thrive – without the fear of arbitrary retaliation from the government – is a concept that everyone in the industry (even the most hardcore maximalists and purists) can probably endorse.
Jason Civalleri is a law student and MBA-graduate passionate for blockchain and distributed ledger innovation. His first exposure to blockchain was his investment in Bitcoin in 2011, and he built his first miner for the Ethereum network in January 2016.