If U.S. crypto regulation seems incredibly convoluted, this is the episode for you. Perianne Boring, the founder and president of the Chamber of Digital Commerce, and its global policy director and general counsel Amy Kim, discuss why U.S. regulation calls crypto assets as currency, property, commodities and securities, and how that results in agencies enforcing their own laws without a higher level understanding of the technology. They also discuss what they call the “failure” of the regulatory regime that requires certain types of crypto companies to get licenses from 53 different states and territories and why no firms have so far even gotten close. They also advocate for the technology to be taxed more like currency than property, claiming that the current classification stifles usage of cryptocurrencies as currencies. We also dive into juicy questions like whether ether, which was sold in what we would now call an initial coin offering, is a security and what self-regulation of the crypto space could look like.
Chamber of Digital Commerce: https://digitalchamber.org/
Token Alliance: https://digitalchamber.org/initiatives/token-alliance/
Previous episodes on Unchained and Unconfirmed that touched on regulation:
Federal Prosecutor Kathryn Haun On How Criminals Use Bitcoin — And How She Catches Them: http://unchainedpodcast.co/federal-prosecutor-kathryn-haun-on-how-criminals-use-bitcoin-and-how-she-catches-them
Thank you to our sponsors!
Hi everyone and welcome to Unchained, the podcast where we hear from innovators, pioneers and thought leaders in the world of blockchain and cryptocurrency. I’m your host, Laura Shin. If you’ve been enjoying Unchained, pop into Itunes to give us a top rating or review. That helps other listeners find the show and be sure to follow me on twitter @Laurashin.
This episode is brought to you by Bitwise Asset Management. Last year, Bitwise created the world’s first cryptocurrency index fund. The Bitwise HOLD 10, which holds the top 10 cryptocurrencies and rebalances monthly. The fund has several hundred LPs and is currently accepting accredited investors. To learn more and invest in the Bitwise cryptocurrency index fund, visit www.bitwiseinvestments.com/unchained.
Unchained is sponsored by Preciate. Founded by Ed Stevens, Preciate is building the most valuable relationships on earth. In each episode of Unchained, Preciate sponsors the recognition of an individual or group in crypto for an achievement. Who in crypto will be recognized today? Stay tuned to find out.
Today’s episode is brought to you by Keepkey. The easy, safe, and simple way to protect your bitcoin, ether, litecoin and many other digital assets. There’s no time like the present to protect yourself from hackers, malware and viruses. Rest easy, knowing that your digital assets are protected. Visit keepkey.com to order your secure hardware wallet today.
Laura Shin: 01:28
Today’s guests are Perianne Boring, the founder and president of the Chamber of Digital Commerce and Amy Kim, the chamber’s global policy director and general counsel. Welcome Perianne and Amy. So let’s start with Perianne. Tell me about how you got into Bitcoin and crypto and how you came to found the Chamber of Digital Commerce?
Perianne Boring: 01:49
We launched the Chamber of Digital Commerce in July of 2014. I formally worked on Capitol Hill and I learned about Bitcoin through my work that I did on the JOBS Act. As an economist, when I first heard or learned that there was this currency out there that was not controlled or owned or operated by the government or corporation or any organization, to me that was just a fascinating concept and I wanted to understand it better and learn more. So that started the trip down the rabbit hole. And over the course of a few years I did just a personal study into the industry. And what came out of that was me being completely convinced that this is the most important thing I’ll see in my lifetime and was really excited about it and just wanted to work in the industry.
Perianne Boring: 02:44
So I had to spend a little bit of time doing a self study and understanding what I would have to contribute to this industry because that was in pretty early days. And at the time, most of the people in the ecosystem were software developers, cryptologists, those in the technical community. So, it became pretty obvious over time that the industry really needed an advocate, a team on the ground in Washington DC to work on the policy challenges. So 2013 was really kind of the wake-up call for me because that was the year where the Bitcoin industry had a handful of very public scandals. Everything from Silk Road and Mt. Gox and that had ripple effects around the policy community. So what came out of those two incidents were multiple hearings on Capitol Hill, scrutinizing the technology and dangers of it. We started seeing guidance come out from the regulators and there were a lot of talks in the general narrative in DC was that Bitcoin was being used to facilitate illegal transactions, but there were very few people that were able to articulate the positive benefits of this technology. And I felt like it was super important, that the industry was able to balance that out. So we founded the chamber to be an advocate for the blockchain ecosystem and we’ve been at it from almost four years and we’ve grown quite a bit and we’ve made a significant amount of progress in that approach.
Laura Shin: 04:15
Yeah, I think we saw in the recent hearings that it does seem our legislators, or at least some of them are a little bit more well educated on this topic then I think some people in the community expected. And, a lot of people were saying it’s because of the work that groups like yours have done. Amy, what is your role at the chamber?
Amy Kim: 04:38
I lead the legal and policy work here at the chamber. So, helping to try to do exactly what you just mentioned really, which is a lot of education and information and in some cases advocacy in some of the issues that are being raised in Congress and in the agencies and sometimes even in the state legislatures on some of the issues that are impacting blockchain and virtual currencies.
Laura Shin: 05:01
And how did you come to work at the chamber and what were you doing before?
Amy Kim: 05:06
I was a lawyer in private practice for many years and started working with virtual currency companies around 2010. Really when you have clients that come asking for advice in that area. So my background is in cross-border compliance programs. So, anti-money laundering, sanctions compliance, and then because of this industry, the state money transmitter areas and so I started then. I was in the audience when Perianne announced that she was creating a trade association and I thought that is such a great idea. It’s really needed function and went up to her and introduced myself and said how can I help? And so I helped her for a couple years, just in my spare time. And then last year she convinced me to join full time. And really it was just obvious to me that blockchain was going to have such an impact on our lives and in industry and everywhere else and I just needed to be a part of it.
Laura Shin: 06:04
Overall, what are the main functions of the Chamber of Digital Commerce? What is kind of your daily activity look like or your weekly schedule?
Perianne Boring: 06:12
Our mission generally is to promote the acceptance and use of digital assets and blockchain based technologies. And we do that through education, advocacy. We work very closely with the policy community, the regulatory agencies, the industry, and our goal out of all of this is to help develop an environment that fosters innovation, jobs and investment, and we very much believe that public policy is one of the biggest risk to the barriers of adoption of blockchain technology. So a big piece of our day and our time is working with the policy community, whether that’s on Capitol Hill, with law enforcement, regulators and the other side of that is working with the industry. Spending a lot of time with our members, really understanding the businesses who are utilizing blockchain, what their challenges are, and then providing a platform for those two communities to come together to discuss these challenges and to work together to build a policy environment that’s going to grow the ecosystem in a responsible way. So it’s a lot and we stay really busy and there’s a lot of different stakeholders. We built a really big community and a network of people and stakeholders who are all invested in the future of what this technology looks like. So a lot of what we’re doing is, is coordinating, collaborating, and bringing people together.
Laura Shin: 07:31
Before we dive into all the particularities around regulation in the crypto space, I actually want to get a big picture look. At a high level, what would you say is the current state of crypto regulation in the US?
Perianne Boring: 07:43
Well, it’s very complicated. There are a lot of different regulatory agencies who are all clamoring for jurisdiction over this technology. Just to give a super high level kind of intro, it really all started with FinCEN at the US Treasury’s financial crimes enforcement network in 2013, put out the first piece of guidance that said convertible virtual currencies would be treated like a currency. So you had that regulatory framework that started off there. And then shortly after, that the treasury decided that they were going to tax this as property. And then we saw the CFTC come out and said that Bitcoin meets the definition of a commodity and now we’re seeing a significant amount of activity from the SEC, applying securities laws to this technology. So that’s just four examples, currency, property, commodity security, of how regulators are looking at this technology and there’s more stakeholders in that because you have law enforcement, you have the consumer regulators, and then you have the states. So it’s very complicated. This is not something that volunteers can do in their spare time to navigate through this, it really takes a dedicated effort to truly understand the legal and regulatory landscape that’s developing and to also be able to help build an environment that is going to help the industry but also take into the unique attributes of blockchain. So it’s a little all over the place and it is a lot to manage and navigate through.
Amy Kim: 09:17
And Laura, I would just add to that if I could. Just building on what Perianne said, so what you can see is that it’s grown in a fragmented way with not as much collaboration and high level guidance from a policy perspective. So you see a lot of agencies enforcing their own laws. Sometimes in an enforcement role without a higher level understanding of the benefits of the technology and looking at it through that lens and then pushing that policy down into the agencies. And I think we’ll start to see more of that. We already are starting to see more of that collaboration and I think that we’ll continue to see that in 2018.
Laura Shin: 09:59
One thing I was curious about is if all these agencies are looking at it in these different ways, currency, commodity, property, security, does that create confusion for industry players?
Perianne Boring: 10:10
It’s very confusing. It’s confusing. It can be confusing for us. But for any company, especially a startup that doesn’t have a team of lawyers and compliance and regulatory experts on hand full time, it’s a lot for anyone to have to navigate. And it does create a confusion. One example of that is with tax law, where you have, the IRS who’s taxing this as a property. But then you have FinCEN who said this is going to be regulated as a currency. And there’s a number of different questions that community has about how to comply with that when there’s other regulations out there that have put this technology in other boxes. So there are a lot of areas where we could use greater clarity and that’s why it’s important to have an organization like the chamber that’s fighting for that.
Laura Shin: 11:01
So let’s actually put a pin in the taxation discussion because I think that right now, the biggest question on everyone’s mind is whether or not the Securities and Exchange Commission will regulate tokens as securities or initial coin offerings as sales of securities. Why has this become the big question? What are the issues?
Amy Kim: 11:22
Well, from our perspective, the SEC is certainly taking the view that certain tokens can be securities based on the facts and circumstances. That’s what we saw in the issuance of the DAO report. And, then you saw that evolve over the coming months and the Munchee case also kind of extended that into marketing. So certainly that is in our view a big frontier as far as how that landscape is going to evolve, in that enforcement environment, given that the market for token issuances has grown so explosively as well. So you have those two interplaying industries coming together. And so yes, how the SEC ends up regulating that will all ICOs be securities, like the chairman, he said that all that ICOs he’s seen so far are securities, I think what that really means has yet to play out.
Laura Shin: 12:18
And just describe what happened in Munchee there and what you meant about how it crossed over into marketing. Munchee was designed as what? Was it designed as a utility token?
Amy Kim: 12:29
Yeah, I think that was the intent is that they were issuing a token to enable users to use their platform in the food industry and restaurant industry. And so a lot was said about how that token would be utilized on that platform. What they also did though was it would say in their materials that the token would likely appreciate in value and making other statements like that, that crossed the line for the SEC.
Laura Shin: 13:01
And for listeners who have not yet learned what the Howey test is, that is the test that the SEC uses to determine whether or not a token offering in particular is a security. We actually had a previous, a couple of previous episodes that describe this, but I’ll just briefly recap. The definition is, “An investment contract in a common enterprise with an expectation of profits dependent upon a third party or promoter.” And so in this case, Munchee’s promise of profits. And then the fact that it depended on this company Munchee executing this project well, we’re probably the factors that tipped it over for the SEC and to being called a security. One other issue I wanted to talk about is that when you do a lot of these interviews, a lot of my sources will say something like, “clearly some crypto assets like bitcoin are commodities.” But then when I asked them which other tokens they would put in that bucket, they hem and haw a little bit and I had kind, I guess inferred from the DOA report that the SEC was going to put ether from the Ethereum network in that bucket. But Chairman Clayton, as you mentioned, has recently been saying that all the ICOs he’s seen are securities offerings. And, Ethereum did have what I guess we would recognize today as an initial coin offering. And so that sort of leads us to this question, does that make ether today a security? To my mind, if so, wouldn’t they have said so in the DAO report and if I really understand the Howey test correctly, to my mind ether as we know it today, does not pass the Howey test. But what is your sense of where line is being drawn about securities versus commodities? Do you feel confident that ether will not be considered a security?
Amy Kim: 15:06
Well, I think that it’s an interesting question. Certainly the SEC had the opportunity to make that statement in the DAO report and they didn’t. And, certainly ether is designed as a utility, as the gas of the Ethereum network. So, for the moment, I think really the focus is on some of these other tokens and whether they would be considered securities or not. And I think that platforms are looking at that closely because if you are trading a token that happens to be a security that triggers registration and other obligations with the SEC.
Perianne Boring: 15:44
Yeah. And we also had the opportunity to meet privately with the SEC after that hearing just to get a little bit more clarity on Chairman Clayton’s statements. Where he said every ICO that he has seen to him looked like a security. And we just asked them, could you just explain that in a little bit more detail what he meant by that? And they said, “This is based on every ICO that they have seen.” And, they also said. “That they haven’t seen every ICO.” And I said, “You know, there’s 1500 or more crypto tokens out there, so every single one of those is a security?” And they said, “No, it’s just the ones that have come to us and we’ve had the opportunity to examine.” So I think a lot of that is yet to be seen, and the dialogue is still in progress and that the SEC is still forming it’s position on this.
Laura Shin: 16:40
Did you ask them about Ethereum?
Perianne Boring: 16:48
We did, and again, my sense is that if it was going to go in the direction of a security that they’ve had the opportunity to do that and they have not so far. But, at the same time we couldn’t necessarily rule that out because there is still un-clarity in that question.
Laura Shin: 17:06
Yeah. One other thing that I wonder is there is this, I guess, maybe sentiment isn’t exactly the word, but a line of thinking in the community that promises of future tokens sold before the network has launched are definitely sales of securities. This is something I’ve both written about. And then Marco Santore, who was on my podcast earlier put out a white paper kind of promoting this line of thinking and so he and the other coauthors of that paper who are Protocol Labs, who did the Filecoin ICO. They were calling for what they call simple agreements for future tokens to be considered a sales of securities. And that’s when people buy the promise of tokens before the network launches. But they and some others also take the approach that once the network is live, the token is then a commodity. And so this I think kind of goes back to this Ethereum question. It’s sort of like, at the time of the sale would ether or the promise of the future ether be considered a security? But, then now that the network is live, is it a commodity? So I just wonder, do you get that there is a sense that there’s some magical line at which a security transforms into a commodity? And do you feel like there’s some consensus around when that happens?
Amy Kim: 18:34
My sense is that there isn’t consensus around when that actually happens. I think that even the regulators are trying to sort that out. I mean, you’ve heard some of the commissioners of the CFTC raise that very question. And I think they’re still working through that. I mean we’re dealing in a space where you have tokens that can represent something that can be traded and maybe even, like you’ve kind of suggested, it become one thing or be one thing and then become something else and that’s something that we may not have seen before and really need to think carefully about how to regulate that, if we regulate that and what those parameters should be. So, we’re all trying to work through that and find a way to help this industry move forward in a responsible way. Protecting investors of course. Protecting the markets, but still allowing some of these innovations to flourish, which I think they’re very important innovations and we need to think about all three of those things together.
Laura Shin: 19:36
Yeah. When you said it may not be something that we’ve seen before, that’s actually something that was going to ask you. Has there ever been anything in history that started off as a security that later transformed into a commodity? Or, could this potentially be the first time?
Amy Kim: 19:50
When you think about the traditional securities, things that are shares in a company, no. Whether it’s the very first time, I’m not so sure, but certainly it’s unique. I mean a lot of things about this industry are unique, they don’t fit well into laws that were written 10, 20, 30 years ago. Often you see that not just in the tokens space. And, we might have new sets of circumstances to be looking at here.
Laura Shin: 20:20
One other thing I wanted to discuss were the recent laws in Wyoming that were passed that create a category of blockchain tokens that are not securities. I think this is what we in crypto would recognize as a utility token, although they didn’t use that phrasing in the law. But, this is a token that’s not structured as the security but has a function beyond its investment value sort of the way that, for instance, a Manhattan Condo has a function beyond its value as an investment. And, one of the qualifications in their law for these utility tokens is that the network be live. So I was kind of curious to know, do you think that this is a stance we’ll see other states or the federal government take, that if the network’s live, then the utility token is not a security?
Amy Kim: 21:08
We’d like to see that. I think that’s what’s happening in Wyoming was very interesting for the industry, not just on utility token bill, but some of the others as well. It’s possible states could. I think some of the states… we’ll see. I think it’s going to be a different calculus in each state. But certainly, I think it was a helpful push. And I think what you’re seeing is when there’s this kind of uncertainty in the federal government or in some cases, inaction as far as guidance by the federal government, you’re seeing the states step up and try to encourage industry to come to their state and to promote it.
Laura Shin: 21:45
And is that a good idea for there to be separate state regimes or should there be one federal one?
Amy Kim: 21:52
I think it depends too on the issue. Certainly I think with respect to the money transmitter licensing regime. That really is not functioning well for this industry. And so, our position on that is we prefer a federal solution ultimately.
Laura Shin: 22:10
What about for the ICO regulation?
Amy Kim: 22:13
I would agree with that as well. There are some intricacies with respect to different state laws and things and how they regulate versus the federal government. So I think they’re going to have to. some of that will have to be worked out.
Perianne Boring: 22:28
Keep in mind this token and ICO landscape is still incredibly nascent and under development. And we’re going to continue to see a lot of evolution and tokenization over the near term and sometimes it’s really hard to put together a concrete regulatory framework for something that we know that’s going to evolve. And so what we have been doing at the chamber to address the issues and the activity we’re seeing around ICOs is to write best practices. So we created an initiative called the Token Alliance. We launched it last year with about a 160 participants. We’ve grown that to over 250 blockchain and token experts around the world. We’ve also brought in two former regulators to co-chair this effort. We have, Dr Jim Newsome, who’s the former chairman of the CFTC and Paul Atkins, who’s a former SEC commissioner, who’s overseeing this and what we’re doing is organizing the industry to write what we consider to be the best practices for token issuances and the listing of tokens on exchanges and the interaction between exchanges and token issuers. Now, what regulators are most concerned about and why you’re seeing so much activity from the SEC and our securities regulators because they’re very concerned about the retail consumer. A lot of these token sales are being marketed to just the average person and some of the activity we’re seeing is really exciting. There is a ton of innovation, new technologies starting to arise, but there’s also some not so great stuff out there to. There absolutely are fraudulent ICOs. And, it is in our interest, the entire communities’ interest, to be able to address that. And so while we are in the absence of regulatory clarity, we’re being proactive and writing these best practices to be able to regulate ourselves in a way and to be able to have a framework to be able to delineate the good from the bad and we believe that this will take at least 90% of the issues that securities regulators today are concerned about. Take a lot of that pressure off of them, and be able to take a step in creating a framework to oversee this activity.
Laura Shin: 24:54
We’re going to talk more about self regulation and also taxation which came up earlier and money transmitters, but first I’d like to take a quick break to tell you about our fabulous sponsors starting with Preciate. Founded by Ed Stevens, Preciate is building the most valuable relationships on earth. In each episode of Unchained, Preciate sponsors the recognition of an individual or grouping in crypto for an achievement. Today, Preciate is recognizing Chris Burniske, co-founder of Placeholder Ventures. Over the last year, Chris has been a thought leader in the area of crypto asset valuations. He has published several important works on Medium, so everyone in the industry can learn and contribute. Kudos to Chris for sharing his knowledge and helping others. Listeners, if you know someone in crypto who should be recognized in a future episode of Unchained, take action and go to preciate.org/recognize.
Bitwise is the creator of the world’s first cryptocurrency index fund. The Bitwise HOLD 10. The fund holds the top 10 cryptocurrencies by five year diluted market cap, rebalances monthly and takes care of secure storage and taxes. It’s an easy, secure way for long term investors to get diversified exposure. Bitwise is backed by Khosla Ventures, General Catalysts, Blockchain Capital, Naval Ravikant and several others. They’re a trusted partner to individual investors, wealth managers, family offices, and large institutions who are navigating the crypto space. The fund has several hundred LPs and is currently accepting accredited investors. To learn more about the Bitwise cryptocurrency index fund or download research, visit www.bitwiseinvestments.com/unchained.
Cryptocurrency is vibrant and exciting, but it’s not without its share of bad actors. Exchanges and personal accounts can get hacked. Computers can be infected with malware. Left unprotected, your digital wealth is up for grabs. Don’t let yourself be a victim. Keepkey is the safest and simplest way to protect your bitcoin, ether litecoin, and other tokenized assets. This hardware wallet is a separate device that you control. Brought to you by the pioneering team at ShapeShift. Keepkey works with the wallet software on your computer to manage your private keys and transactions. Your device is pin protected, which renders it useless even if it falls into the wrong hands. Its large display let’s you carefully view and approve every transaction, and if your Keepkey is ever lost or stolen, you can safely recover your device without compromising its private keys. The bottom line, you’ll sleep easier knowing that your digital wealth is safe and secure. Visit Keepkey.com to order yours today. Works on PC, Mac, Linux and android.
Laura Shin: 27:35
So in terms of self-regulation, that was something I wanted to ask about. Is that something that you think is likely to happen? There have been calls both within the industry and also from one of the CFTC commissioners himself. So what is it and how likely do you think we’ll go in that direction?
Perianne Boring: 27:56
Yeah. So just to give a little bit of history of how we got here and how this dialogue in a SRO got started, CFTC commissioner Quintenz made a statement calling for a SRO. Which was really just his kind of action item to the industry to get organized and start addressing some of this activity that we’re seeing. And so we’ve asked them to clarify that and a little bit more detailed what he meant by that. And so he came back to the DC Blockchain Summit, which is a conference we host at Georgetown every year and he gave a much more detailed presentation on his vision for an SRO. Now, a self regulatory organization is something that Congress would enact. So a law would be passed, Congress would vote on it and it would establish a self regulatory organization that would be overseen likely by another agency. Similar to FINRA or the National Futures Association. But what commissioner Quintenz elaborated on is that you could go that route and have a true SRO, this congressionally established organization or the industry could just get organized, create a set of best practices and standards and do this on their own. Now, the benefit of having a true SRO is that you would have the ability to enforce and you’d have the authority to do so. But, there’s no reason why we can’t set up a voluntarily structure today where people would volunteer to opt in and to adhere to a set of standards and best practices and that’s essentially what we’re doing with the token alliance. There are significant efforts underway to do this, so it is inevitable and I think it will evolve over time as the markets continue to mature and as regulators continue to call for efforts like this.
Laura Shin: 29:53
And so what does the chamber and the Token Alliance, what do you guys think are the best way to move forward in terms of… what are the best practices that industry should adopt? How do you think the SEC should regulate this area? Do you think that they should say, “Sales for initial coin offerings that happened before the network is live, should be called securities?” That once the network is live, that should be a commodity. Like what? What are all the different recommendations you both of your organizations make?
Perianne Boring: 30:24
The concept of what is a security in tokenization is not clear and companies want to be compliant. Our members, they want to follow the laws, but there is no official guidance on how to issue or operate a non security token today in any form. So that is what our best practices will cover. If you want to issue a non security token, how to do so in a responsible way. And we’re doing this with significant industry input from around the world. So bringing the industry together to agree upon of what those parameters would include.
Laura Shin: 31:00
So you haven’t decided those yet?
Perianne Boring: 31:03
We’re doing it in consortia. So this is not something we’re just sitting down and writing. It’s something that we have over 260 people around the world contributing to do so. So this is not something that we want just one person to sit down and control this by fiat. We want this to be an industry effort because ultimately we need the industry to adopt these best practices. So there is a great deal of collaboration underway. So the first draft of this document is done and it’s in peer review right now. So we now have all the members of the token alliance reviewing it, submitting their input, refining it, making it the best document we can possibly make it, and we’ll be publishing it shortly.
Laura Shin: 31:47
And does that first draft recommend the use of something like a SAFT for that initial sale before their network launches?
Perianne Boring: 31:56
So it’s a jurisdictionally neutral document. It really more covers the technological aspects of issuing a token or operating a token. So we do not get into the specific regulatory considerations and we’re doing this so you can use this anywhere in the world because this is a global movement. We wanted it to be relevant to all those who want to participate in this community so it doesn’t get into all the regulatory concerns, but we see that as the next step.
Amy Kim: 32:29
And what I would say on that too is we do first talk about the entire legal landscape applicable to tokens. So going through the SEC, the CFTC, anti laundering and sanctions compliance and even some of the tax implications first. Just having that kind of as a resource all in one place so that people are fully informed of the things that they need to be thinking about. And then, the best practices then go into, if you are issuing what is a true utility token, here are best practices to make sure that you’re doing this in an appropriate way for potential purchasers and that purchasers are fully informed of what the business model and the product is about.
Laura Shin: 33:13
Since you mentioned before that you are talking with the SEC, do you have any clues yet as to how they plan to proceed?
Amy Kim: 33:23
I think we can take some of the clues from some of the statements we’ve seen in the media. There are what we’ve seen publicly that there are investigations ongoing. There are these subpoenas that have been issued, some confusion over how many subpoenas and to whom. But, I would expect we’ll see more enforcement actions before we see less unfortunately. But, I think that can help provide some guard rails. I would hope some guidance to rather than purely enforcement as a tool to inform the industry. But, I would expect to see more enforcement actions this year.
Laura Shin: 33:59
So one thing that I also wanted to ask about, and this gets us into money transmitter territory, is… correct me if I’m wrong, apparently FinCEN also said that ICO issuers could be considered money transmitters. But, as far as I understand it, a money transmitter is a company more similar to Western Union where they take money from someone and pass it to someone else. So if that’s the case, what laws do ICO issuers have to comply with?
Amy Kim: 34:27
You’re talking about the letter that FinCEN sent to Senator Wyden. Since that’s a little bit of my background, what they said in there wasn’t surprising to me. They said what their law says, which is based on the facts and circumstances, companies may be considered money transmitters if they receive money for transmission or the value of funds for transmission to another person or another location. So then if you are going to issue a token, you have to kind of assess your business model, the way that your funds flow, how your virtual currencies or whatever the tokens are issued, however you’re characterizing those and make a determination on a case-by-case basis, if money transmission on the federal level applies. And then you probably need to look at the state laws as well. Each state does deal with it a little bit differently. Unfortunately, that’s what we’re dealing with today. And so you’d have to take a look at that and take position and probably involve some legal advice.
Laura Shin: 35:26
Is it possible to be both a money transmitter and also a security issuer at the same time?
Amy Kim: 35:37
The money transmitter, I think the FiCEN regulations exclude from the money transmitter definitions, SEC and CFTC registered entities and there’s some technical language in the Bank Secrecy Act regulations. So you’d have to look at that carefully to see if you actually did fit within that exclusion. Which really means you’re just excluded from the FinCEN portion, but it puts you into the equivalent on the equivalent coverages for securities or commodities.
Laura Shin: 36:01
Right. But I guess I’m just trying to get at the point that it doesn’t sound like you can be a money transmitter and an issuer of a security at the same time, right? Like it would be one or the other and then the laws would apply for whichever category you were put in. Is that correct?
Amy Kim: 36:19
I don’t know if that’s correct. I think it would depend on which part of your business. If its the same exact activity, that might be true. But again, I would seek legal advice on that question as well.
Laura Shin: 36:35
Yes. Actually, just for anybody listening, nothing we’re saying at all is legal advice.
Amy Kim: 36:39
I have to say that just since I’m a lawyer.
Laura Shin: 36:47
We have been discussing a few other really big topics, and a couple of them I definitely want to cover are taxation and money transmitters. Let’s start with taxation. What is the current state of taxation in crypto?
Perianne Boring: 37:00
So this is one of my favorite topics to talk about because I worked on tax policy when I worked on the hill and it’s just really fascinating where we are today in tax policy in the United States. So in 2014, the IRS issued guidance that convertible virtual currencies would be treated as property. So as all of us who in the blockchain and crypto space are very well aware. Your transactions anytime you use a cryptocurrency to purchase anything is subject to capital gains, which is a huge administrative burden. As we are all aware. The issue is that the IRS didn’t do the best job of explaining how to comply with this guidance. There’s a lot of areas that have not been clarified. For one, how do you calculate the fair market value of virtual currency when there is no standard exchange rate? So what exchange rate are you supposed to use? We don’t really know. What about for miners? If you acquire crypto through mining, what is the tax treatment of that? Another really big and important question. And also for merchants who are holding cryptocurrency, is that considered capital or an ordinary asset? Again, there is no answer for that. So there has been a very hard time for the community of following the laws of being compliant because we have a lot of questions. It’s been a frustrating process because the IRS actually accepted comments from the public in 2014 and the public submitted a lot of these questions over to the IRS and they didn’t answer any of the questions. They never responded to the public opportunity for comment. I’m not quite sure why they didn’t respond. So a couple years went by and then the IRS’s Inspector General issued… Well they did an audit on the IRS’s virtual currency program and they issued a report that really criticized the IRS’s virtual currency program. Saying, “There’s a lot of areas that you haven’t answered, questions. You received a bunch of comments. You didn’t respond to them.” And really, asked the IRS to follow up on these questions and they didn’t. Instead, the IRS issued a John Doe summons on Coinbase as I’m sure you’re aware of, asking for the records of about half a million of their users and they really seem to erroneously cast this perception that all cryptocurrency users are tax evaders. But really, I think most of us just need to better understand how to comply with this property guidance. So that’s where we are today.
Perianne Boring: 40:02
It’s a little bit of a mess. So in response to this, we at the chamber have developed a tax policy position to advocate for just a better way to tax cryptocurrencies or virtual currencies. We believe that virtual currency should be treated like currency, just like the US dollar, they should be allowed to function as currencies and I would argue that a big reason why we haven’t seen the coin or other virtual currencies really take off as a medium of exchange is because if you’re using it as a medium of exchange, you have this administrative nightmare having to calculate your gains or your loss on every single transaction. So we believe and we’re fighting to make virtual currencies, treated fairly like that of a currency or an alternative currency. And, in order to achieve that you can do this pretty simply by just excluding them from the capital gains and the investment income tax and all the reporting requirements that would come with that.
Laura Shin: 41:07
So I totally understand your point here. It completely makes sense. Obviously, if I am trying to pay for a cup of coffee and I have to calculate how much I paid for the money that I’m using. And then what the capital gain is when I buy the coffee. Obviously it’s pretty cumbersome, but at the same time when you hear people just talking about buying bitcoin, they don’t talk about it the way they talk about currency. They talk quote unquote “investing in Bitcoin” or “investing in crypto assets.” So when you have people thinking of it in that way, does it really make sense to tax these as currencies?
Amy Kim: 41:47
I think that people, we’ve been kind of pushed into that direction because, in part, the IRS treats convertible virtual currency as property and then you have the bitcoin futures contracts being offered and we’re seeing these price fluctuations. So I think that is where the market has gone due to both regulatory and then just some of the volatility. But, if you’re looking at the horizon, right? First of all, if you’re looking at the beginning and then looking at the horizon, this was originally created as a method of payment, a method of exchange, mechanism of value transfer. And that’s really where some of its amazing utility sits and we’re really not… this IRS tax treatment is really hindering that potential, in significant ways. And in our view is if that’s corrected, we’ll start to see some of this normalize in a way that makes more sense. And I know that this is a difficult, this is not an easy request. It’s a challenge. It’s going to be a significant challenge, but we think it’s worth it. It’s worth it to get this treated right. And, as close to the beginning as we can, so we’ll keep pushing on it and see what kind of progress we can make.
Perianne Boring: 43:03
Yeah. And also just to build on that is we also need to recognize and pay attention to other dynamics that are happening in this community and there’s many central banks around the world who are looking at ways to integrate blockchain technology to create their own digital currencies. So if central banks are looking to use this technology to issue currencies, it cannot possibly be a property at the same time.
Laura Shin: 43:35
That is a good point. But one other thing I wanted to ask was, the government does seem to believe that people are evading taxes with cryptocurrencies? Do you have a good sense of whether or not that’s true?
Perianne Boring: 43:47
I think people are having a hard time understanding how to comply with the property designation. Again, there’s a lot of areas where the IRS has not been able to clearly articulate how to comply with that designation. And so because of that it makes it very hard to be able to do so. So, I don’t think that’s a fair characterization. At the chamber, we represent over 160 companies, all of which adhere to our code of ethics and our companies, they want to follow the law, they want to do the right thing and they will do the right thing if you tell them how to do so.
Laura Shin: 44:28
So speaking of companies wanting to the right thing, let’s move to the money transmitter issue. I know that many in the industry feel that one of the obstacles to growth is the fact that a lot of crypto companies need to get licenses from 53 different states and territories. What kinds of companies need to do that and why is it 53 different licenses?
Amy Kim: 44:54
I think the classic example would be your exchange platforms, who have applied for those licenses. And the reason you have to do that is because money transmission, unlike national association banks who are regulated by the OCC, money transmitters are regulated at the state level, so through the state banking departments. And so if you’re engaging with customers or residents of those states,` you need to apply for the license, meet all the standards that the banking departments have and then also maintain those standards and go through exams. And so that applies to all 50 states and several territories, although they each apply it a little bit differently.
Laura Shin: 45:39
And do you get a sense of how much this is hindering growth? Have we seen any companies get all 53 different licenses?
Amy Kim: 45:49
No, haven’t. We’ve seen them get maybe 28 to low 30s as far as number of state licenses and that’s because the requirements in those states are designed to test the capital structure and the capitalization of these companies and make sure that the executives and other personnel are qualified to run that kind of a business that will take or transfer consumer assets. So they treat those categories of qualifications differently. And on way that can be an impediment is if the reserves that they require an exchange to maintain are required to be maintained in US dollars. So that would require a company to essentially maintain double valuation. Basically you’ll have for example, bitcoin that you would owe to your customers on any one day and then also have to back that up with a dollar. And so that can be quite burdensome and in some cases has forced companies to leave the state because of it.
Perianne Boring: 46:53
This is very much a regulatory failure, it’s unacceptable that in the year of 2018, we still do not have one company in the entire industry that’s been able to get licensed across the entire United States. Its sad and we are seeing many companies that are either closing up shop, cutting off customers in certain states or just moving overseas and it’s also really difficult for consumers and it hinders consumers because the people who want to use this technology, in some states they don’t have access to any exchanges. So they’re being forced to you services overseas. It’s a vicious cycle and we deserve something better. And, that’s something we are fighting for at the chamber to be able to address this. And, we believe we need a federal solution to truly fix this issue.
Laura Shin: 47:45
And what would that look like? The federal solution.
Perianne Boring: 47:49
That’s a great question. We’ve spent a lot of time talking about that and you also want to be careful what you ask for. We have seen this dialogue start to open up on the federal level. The office of the comptroller of the currency or the OCC tried to launch a Fintech charter. It’s been stalled, but they did go through several years of comments and deliberations and even put out the first draft of a licensing manual to establish a banking charter for Fintech companies. And it turned into a big political fight once the OCC went down this path. There were states that were very threatened by this and who are now suing the OCC. Saying the OCC doesn’t have the jurisdiction to do this. So the state of New York and the conference of State Bank supervisors have sued the OCC over this. So the dialogue is starting to open up and the OCC has lead that. But as of today, we still don’t have an option, but hopefully in the long run will be able to achieve.
Amy Kim: 49:04
The other thing I would just add to that is, one option is looking at it from a special purpose national bank charter at the OCC. The other way would be if there is some type of oversight over this, the spot markets that’s being suggested by the CFTC, that would have to specifically preempt state law, in order to work. So there are some alternatives and maybe there’s even more ways to think about that. I think whatever solution, whatever path we start to go down really needs to take into account the unique nature of virtual currency and tokens and how that differs maybe from the way we’ve traditionally thought about these types of licensing or chartering or authorizations.
Laura Shin: 49:51
An additional area of confusion I think that’s occurring around this state, federal divide is that I think some states have been issuing state specific legislation for smart contracts and I know you guys are opposed, the chamber’s opposed. What do these laws say? And why do you think state laws for smart contracts are a problem?
Amy Kim: 50:11
So I think this is actually coming from a good place. I mean, I think these legislators are trying to help the industry and we need more, we need more supporters like that. I think the issue is just that the very specific type of legislation that you’ve mentioned, which is state efforts to amend their uniform electronic transactions act to include specifically blockchain and smart contracts. So what these uniform acts do is recognize electronic signatures and electronic records. Where a written record is required or were written signatures required. But the way that they are already written, electronic signature, electronic record, it’s not a technology specific. So first of all, it’s not needed. First it’s unnecessary because it already should cover for that. Second, is that the states are also not creating these laws uniformly themselves. There’s anything from minor deviations to different types of authorizations that they’re putting into their statutes. So it equates to what you just mentioned, which is the money transmitter quagmire, which we may be heading down that road. And then the third is that the federal e-sign act. So on the federal level there is an electronic signatures and electronic records act that says that to the extent the state deviates from that standard or specifically references or calls out technology, that’s preempted. So now we’re creating a legal question as to, well does that preemption apply to what these states are doing and so now it’s actually opening up some questions. So unfortunately, we’re advocating more than we would like to have to, to reach out to these state legislators and try to explain to them the situation and, hopefully point out to them, here’s some other ways. Let’s think of other ways we can work together to promote the industry.
Laura Shin: 52:15
I also want to talk about anti money laundering. I know that that’s an issue lawmakers are worried about. Or rather they’re worried about money laundering with cryptocurrency. How big is that risk and how well are crypto companies complying with anti money laundering laws?
Amy Kim: 52:38
I think money laundering is going to be a risk in any agency, in any industry that you’re in. So we need to understand that that risk exists and people need to take precautions, but we need to understand the size of that risk. And there’s been reports that say that money laundering in this industry is less than one percent of the overall industry. Whereas reports beyond that, with respect to the US dollar estimate it to be vastly larger number. But we take it seriously. Money laundering is a significant concern. And, we have companies within the chamber’s membership that actually assist companies, assist financial institutions and government, in ways to identify trends, identify money laundering and ways to fight it.
Laura Shin: 53:25
Yeah. One thing I wanted to flag for listeners is that if you haven’t heard the episode with Kathryn Hahn from about a year and a half ago, she talked about tracking crimes with the blockchain and so I could understand why maybe there hasn’t been a huge amount of uptake of money laundering with cryptocurrency based on her remarks and I actually just also wanted to flag that I’m starting to realize there have been so many previous episodes where we’ve covered issues that are similar to the ones we’re discussing in this episode, so I will link to them in the show notes and you should check them out. Some of the ones that come to mind, I mentioned like the one with Marco Santore, but also there was one with Coin Center where we talked about the Howey test. There was also another episode about the Coinbase case, so there’s definitely a lot to dig into if you find this conversation fascinating. The last thing I wanted to ask you guys is I was curious to know how the US compares with other jurisdictions when it comes to regulation of crypto?
Perianne Boring: 54:30
Well, the United States federal government is organized very different than most other countries. So we have a very fragmented approach to regulation, especially on financial services. So we have the SEC, the securities and Exchange Commission. We also have a separate regulator for the futures markets, the CFTC. We have multiple bank regulators from the FED, the FDIC, the OCC. So one of the biggest challenges the United States faces is this fragmented approach. Where there are a lot of different stakeholders and they’re not necessarily very well coordinated either. And, in other areas of the world where they have less complicated markets and smaller governments. A lot of them will just have one financial services regulator. So for example, in Singapore, the monetary authority of Singapore is both their central bank and their bank regulator and all things financial services. So there’s just one entity you have to go to if you want to issue a product or work in the financial services industry in that jurisdiction. Or in United Kingdom is another example of that. They have the UK FCA, the Financial Conduct AuthorIty. So it’s kind of a one stop shop. So it’s a lot easier when you only have one agency or one entity that’s having to develop policy for this industry. So the US is very unique and it takes a lot more coordination and there’s a lot more stakeholders that you have to work with and get them to work together. It’s just different. So because of that, some of these other areas of the world, have been able to get to market faster or have been able to develop policy positions or sandboxes faster and easier than the US. And that really is working against us.
Laura Shin: 56:24
And when you say that, you mean like it’s hindering the pace of innovation in the industry here in the US?
Perianne Boring: 56:30
Yeah, because they’re such a lack of clarity in so many areas. And to get that clarity, you have to get multiple regulators to sit together and make this a priority and discuss it and come up with a determination. Where that’s a much longer process. And if you went to another jurisdiction where there’s just one office or one or two people overseeing the issue, then they can make a decision without having to go through the same process we would have to go through here. So like the idea of putting together a sandbox, we don’t have one in the United States, where would you even put it? So other countries have had a lot more success and been able to move a lot faster than the US because of that.
Amy Kim: 57:08
And I think the idea of the sandbox just shows that I think there are some countries that are capitalizing on this opportunity to make an advantage for themselves in technology industry. And so you’re seeing regulators working with industry in a regulated, in a controlled environment to help both parties, I think learning from each other. The regulators have the advantage of learning about the technology and the companies, the innovators have the advantage of gaining a better understanding of what might work and what might not work from a regulatory standpoint. So there’s definitely an advantage in that system that we’re not seeing here right now.
Laura Shin: 57:50
Well, I know that regulators at the SEC at least, and hopefully regulators at other agencies, do you listen to this show. So if they haven’t heard this message already from industry, I’m sure then they will hear it now. So it’s been fantastic having you both as guests. Where can people learn more about the chamber?
Perianne Boring: 58:12
So you can visit our website, digitalchamber.org. We did just publish two new white papers, one on cybersecurity and intellectual property. So, thank you for the conversation Laura. We’ve been able to get into a lot of topics. But we do have a prolific platform underway and we do oversee a number of issues. So we encourage you to visit our website to learn more.
Laura Shin: 58:35
Great. Well thank you both for coming on the show. Thanks so much for joining us today. To learn more about Perianne and Amy, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven’t already, rate, review and subscribe on Apple podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin with help from Elaine Zelby, Fractal Recording, Jennie Josephson and Daniel Nuss. Thanks for listening.