In a new interview with host Peter McCormack, producer of crypto podcast What Bitcoin Did, Peter Van Valkenburgh, director of research at advocacy group Coin Center, breaks down the maze of regulations that affect Bitcoin and cryptocurrencies, ICOs and crypto-related businesses such as Coinbase and Shapeshift.
Van Valkenburgh, who faced off against economist Nouriel Roubini at a congressional hearing on cryptocurrency in October, regularly meets with federal and state regulators about blockchain technology. Based in Washington DC, Coin Center works on relevant legal issues in order to grow the technology for many different applications, supporting innovation around Bitcoin and cryptocurrencies. Their primary goal is to educate policymakers about the rapidly developing space that has joined computer scientists, crypto entrepreneurs, e-commerce business owners, brick-and-mortar retailers and mobile Millennials all around the world.
But it’s not easy, he says, because the current regulatory framework is complicated.
In the US, money transmitter laws are broken down into two major subsets: state and federal. They govern, and were designed for, physical currencies.
It’s a system where borders are firm and geographical location is meaningful.
In the decentralized world of digital assets, “money” is not physical, transactions are borderless and blockchain networks are run on computers that span the entire globe.
How can the watchdogs from the last century police today’s emerging tech? Do they adapt and pivot, and apply entirely new strategies to new infrastructure and new systems, or do they restrict, limit and ban what falls outside of the old frameworks?
Key highlights from the interview
‘Money transmitter’ is a broad term because its definition varies from state to state.
“In several states, a miner or someone running a full node – and God help you if you start talking about multi sig wallets, and holding one out of three keys or something like that– you might be a money transmitter if you’re doing those things, which is silly, because the ill that money transmission regulation was meant to address is shady companies losing your money. And a miner, especially just someone running a full node, can’t lose your Bitcoin.”
Van Valkenburgh says the current laws weren’t designed for crypto mining. Companies involved in crypto custody solutions, however, are fair game.
“So the fact that you could interpret these laws to cover things like mining is a real problem, even though we haven’t seen states try to do that. Now, companies like Shapeshift, or companies like Coinbase or companies like Circle, we think, at Coin Center, that the heart of the matter generally should be, if you hold custody of consumer funds, then you’re in that position of trust. You could get hacked, you could have bad internal controls, you could have corrupt people working for you, or your systems could just fail massively, and you’d lose people’s money. And that’s the ill that state money transmission licensing was meant to address, because Western Union can lose your money.
So if you’re doing something that puts you in that position of trust, then it makes sense to treat you just like any other financial institution that’s in a position of trust.”
State regulators – how to address a technology that is decentralized
Van Valkenburgh says US policy tends to get reflected globally, which is why it’s so important for the development of the crypto space that US regulators have a firm grasp on the tech.
“So the next conversation is, ‘Okay, can we get away from this process, where you’re going to have to go state by state and explain your business,’ which is especially hard if it’s a Bitcoin business, because you’re running into a state regulator who doesn’t know what Bitcoin is, and you have to explain that, and why you’re different than Western Union, who’s the normal company they regulate.”
Since Bitcoin is distributed on computers around the world, Van Valkenburgh says the layers of complexity for regulators is high.
“And at that point, if I want to give them a real understanding of Bitcoin, I say, “Okay, hold on. We got to go back. First there are no Bitcoins. There just aren’t. They don’t exist. They are ledger entries in a ledger that’s shared, 10,000 or so computers across the country and the world. And so they don’t exist in any physical location. The ledger exists in every physical location essentially. And so geography doesn’t make sense here, and it’s not going to help you figure out your policy here.
What you want to focus on are the harms to people in your state, and the persons doing those harms. And so you want to think about the geography of the person selling the service to customers in your state, which would be a company like Coinbase, potentially, or Zap or whatever, and then the people in your state. And don’t start thinking about bigger issues of geography, because you won’t achieve any useful policy outcomes, either protecting consumers, and you’ll just make innovation difficult, because no one will know what the heck you’re talking about.”
State vs. Federal vs. Global
“Okay, so there’s state money transmission licensing, and that’s for consumer protection. You’ve got to get a license in all the states where you have customers if you’re holding their Bitcoins for them, maybe. Complicated. Then, there’s federal money services business regulation for anti-money laundering purposes – so not solvency –and making sure you don’t lose people’s money, but making sure you know your customer, and you’re watching out for people laundering money through your service.
So, the federal definition of money services business for anti-money laundering policy is slightly different than the state definitions for money transmission, again, because these are different regulatory bodies, and they created their laws at different times. And it says, ‘Money transmission, which is a sub category of money services business, shall be accepting and transmitting currency, or currency substitutes …’ So therefore, Bitcoin probably, right?
How could you argue it’s not? From one person to another or from one location to another. That predates Bitcoin, of course. That’s old, bank secrecy stuff from the 70s and the implementing regulations that happened in the 80s and 90s. The purpose of that was, what if you have a US person with a US bank account, who transfers their own money to a Swiss bank account, from one location to another, but same person to a person. And that was the purpose of that.
But it makes things rather confounding, or interesting, in the context of cryptocurrencies and Bitcoin, because we know when people send Bitcoin from one person to another – at least we can know quite easily.
But what does it mean when one sends Bitcoin from one location to another? And I think the only sensible way to interpret it is when you’re sending it from one institution that’s holding your Bitcoin to another institution that’s holding your Bitcoin. Not necessarily anything else, because no other interpretation really makes sense.”
Van Valkenburgh says Coin Center is focused on general rules that apply to all cryptocurrencies in an equal way. The organization has worked with the SEC, for investor protection purposes; the CFTC, which regulates derivatives; FinCEN, for financial surveillance and anti-money laundering; the CFPB, a newer consumer protection federal regulator that looks at lenders and financial institutions; and banking regulators, the OCC, the Fed and the FDIC.
“Coin Center’s vision longer term is to work towards good global policy, but as you can see, we’ve got an alphabet soup and a lot of work to do here just in the US.”