[Music]
but I'm welcoming I'm going to give a
quick introduction to the next speaker
who is uh coin centers Peter van
valkenberg and I I will speak for a few
minutes first because um as executive
director of the foundation I am also um
the main point person for compliance and
Regulatory and legal issues and we um
are very um we pay a lot of attention to
these things because it does make a
difference we live in a real world where
there are real concerns for any type of
blockchain company startup
organization and uh every jurisdiction
is different we operate in a number of
them so um something that I strongly
believe people should take seriously for
your own benefit for your own protection
and for to be able to further the
innovation technology that we all do
here that we all support
um we are not the that organization that
is more like a 501c4 we are truly a um
you know where a Swiss stiff which is
closer to 501c3 and we support research
and development and the education and
Outreach that surrounds it however we
still have to deal with um regulatory
considerations and I've personally
invited coin Center to come and make
this presentation so that we can um
address it and get it out of the way and
enjoy the rest of the the more the
technical uh presentations that we have
lined up for the uh next three days so
um Peter
yeah thank you so much
Ming thank
you so it is a tremendous honor to be
sharing the stage with all of you I
didn't know you'd still be here um but
honestly the work you all do is
incredibly inspiring to me uh a humble
uh regretting liberal arts graduate who
foolishly went to law school um
but uh thank
you so thank you Ming and thank you to
the ethereum foundation for inviting me
um my name is Peter I come from coin
Center I come from the government but
I'm here to
help um unfortunately I have to do
something super lame and give a
disclaimer uh because I'm a lawyer uh I
am a lawyer but I'm not your lawyer um
the following talk is for educational
purposes sorry um if you need a lawyer
you should hire a
lawyer does this clicker
work it
does okay so what the hell is coin
Center coin Center uh is a nonprofit
that's based in Washington DC and I'm
going to put our mission up here but
it's probably better if I just talk
about a little bit of my background so I
um as I said decided to go the liberal
arts route went to law school while I
was in law school I started becoming
very interested in Bitcoin this was
around 2012 I got very close to setting
up a pretty powerful mining rig and then
there were exams and other things and I
got distracted and it's one of my big
regrets in my life but
nonetheless um learning about the
technology while also learning about the
law uh gave me a unique perspective I
thought I always wanted to work in
copyright law or digital privacy um
because those are areas where the
internet has already disrupted a lot of
expectations as to what is possible to
enforce from a government Poli policy
perspective and what is not um but
Bitcoin came around and gave me an
opportunity to work in a very new area
that's being disrupted which is
financial services regulation which is
the internet as far as truly
decentralizing it and building it the
way it should have been built from the
beginning
so I uh I got a Google Fellowship to go
work in Washington DC in policy I worked
first for a think tank that was doing
copyright and surveillance this was
around the time of this doden links and
then a a a guy named Jerry breedo who I
share a number of mutual friends with
came up to me and said hey Peter do you
want to be the director of research at a
Bitcoin Think Tank and I laughed I
laughed at that and um I said that's
ridiculous nobody would do that and no
such thing exists but then I said yes um
and we've been around now for two years
so
our passion is defending these open
networks so in a nutshell Mission aside
we want to be to decentralized Computing
networks with open consensus mechanisms
to cryptocurrencies in general what the
eff was to the developers of the early
internet a point where you can find a
gobet with policy makers and DC where we
can communicate the value of the
technology where we can set uh an anchor
bias in some policy makers so that they
don't see this as just another way to
sell drugs or um subvert
authorities um we have a full-time
professional staff with three attorneys
on
staff we have support from a number of
key businesses in the space um some of
the big Bitcoin startups among them but
also some of the Venture Capital firms
that are financing a lot of the work in
this space but actually over half of our
support comes from individuals who are
passionate about this technology and
want to see it
flourish
um additionally I should point out that
like the eff we're not a trade
Association we set our own agenda we
don't represent specifically any of
these companies as I said we want to
help smooth the path to decentralizing
all the things and so if people want to
support us in our mission and believe in
the work we do we take their support now
what do we do we do education policy
resarch and advocacy education is sort
of the big part of this because
especially when we started two years ago
the amount of knowledge on the ground in
Washington DC and in policy circles
globally was very poor when it comes to
what a cryptocurrency is and how it
works and what it can do we also do
policy research where there is a
existing law that potentially applies to
something you're doing using the
technology and there is an open question
as to how that existing law should be
enforced because the existing law is
drafted in a vague or a broad way we
develop policy research that advocates
for a way to enforce that
law that allows Regulators to still meet
their statutory obligations because
that's what Congress put them there to
do that's what their legislatures and
their respective States put them there
to do but still provides the freedom to
innovate as much as is possible so we're
trying to find a peaceful Way Forward
basically we have we have a series of
plain language explainers of discret
topics in this space we have a fantastic
backgrounder by vitalic explaining
Bitcoin in a way I mean
whoa explaining ethereum in a way that
will make sense to policy
makers we deal with a number of
different topics also at the legal
intersection of these Technologies some
of these are also useful resources for
developers aside from policy makers
because they explain a difficult legal
construct like ofac which is us
sanctions
law we develop policy reports that deal
with bigger topics like Securities
regulation uh access to banking for
companies and consumer protection laws
particularly uh difficult in the United
States with the state-by-state money
transmission licensing
setup and periodically uh most of our
advocacy has done uh face-to-face
meetings with policy makers but we do
periodically uh file in regulatory
proceedings so just recently for example
we filed with European Securities and
markets Authority I don't know if any of
you have seen the paper they put out
they basically said something like we're
really excited about blockchain for
Securities but we understand that it
will only ever be closed or permissioned
ledgers that will be used in these
systems personally I think there is
value in permissioned ledgers I think
there is lwh hanging fruit in
reconciling Silo data structures even if
it's through a Consortium consensus
mechanism but I think that the
conclusion that only a closed consensus
mechanism is suitable for high-grade
financial services is premature so we
filed a comment in this explaining how
so many of the advances that are
essential to financial services uh are
being developed in the open space uh the
Pioneers here are the people working on
ethereum are the people working on zcash
for example with zero knowledge proofs
you mentioned ring signatures earlier
the only way that all be privacy for
financial services data is through the
things that are being developed in large
part on these open
networks we testify we've briefed
members of the European Parliament we've
had several different engagements uh in
our two
years and we love ethereum we really do
so in the early days we focused mostly
on bitcoin and there's a reason for that
um this was about two years ago it was
hard enough to get a meeting with
someone in Washington DC to discuss
Bitcoin but at least Bitcoin was
something they already knew about and
they already wanted some answers about
that is beginning to change now and we
start to talk more about just open
consensus uh mechanism driven networks
and what they can do and the idea I
think of having a general purpose
decentralized Computing system is
incredibly exciting so again thank you
for all the work that you do and
explaining that to policy makers is one
of the most worthy things I think I can
do with my time uh in
DC so with that I'm going to turn to the
less happy side of the talk uh and talk
about some regulatory considerations for
people who are developing decentralized
applications and that means this talk is
going to be about Securities
laws so why Securities laws first
because they're heavy duty regulation
these are laws that say Seek permission
do not seek forgiveness and if you
didn't seek permission there will be
strict
penalties additionally a lot of crowd
sales and pre-sales May subject
developers of these Technologies to
Securities
regulation several scams over the years
have drawn attention to this area
already um and several vocal pundits
many of them from the closed or
Consortium consensus mechanism um side
of the technology will freely tell you
that they think that all appcoin or
crypto crowd sales qualify as
unregistered Securities issuance and I
think that's
wrong and I think we need to correct
those
misunderstandings now why us Securities
laws there's a couple things here if you
have any purchasers for say an app token
in the US any of them you are
potentially subject to us Securities
regulations and if you're in a country
if you're based in a country that has
friendly relationships with the US
extradition could be possible
um so this is some serious stuff the US
Securities laws are by far the most
broadly applied of all Securities laws
and there's a couple reason for that so
in other jurisdictions there's generally
a statute a piece of legislation that
enumerates specifically which financial
products are regulated as Securities and
then usually which are not what are
excluded in the US there is no such
enumerated list in the statute there's
an undefined term that says investment
contracts and the federal courts have
interpreted that term and continue to
interpret that term to apply to various
different
schemes Additionally the US Securities
and Exchange Commission is already
investigating
the uh scammy cryptocurrency
paycoin paycoin fans and the Dow uh I
can say has gotten the attention of
staff at the SEC and they are actually
surprisingly well informed um we've
tried to help correct some
misapprehensions they had about it and
generally flesh out their information
but they are surprisingly well
informed so why are US security laws
broadly applied the definition of
security includes an undefined term as I
said the term has been defined by
federal courts courts have sought to
ensure that the definition is inclusive
in order to reach and this is a quote
from a case the countless and variable
schemes devised by those who seek the
use of the money of others for the
purpose
the promise of
prophets and that language comes from a
case called the SEC versus hoe and it's
from that case that we get the hoe test
for what is a security or not so in
order to really understand these issues
we need to quickly actually look at the
Howie case I think like a lot of uh
strange and vaguely alarming stories it
begins in
Florida Howie was a um he owned an
Orange Grove in a hotel and he would
invite uh Rich new englanders down to
flor is my mic this mic's working now
great I'm going to put this
here this is working and he would invite
Rich new englanders down to his hotel in
Florida and give them a tour of the
Orange Groves and he'd say look behold
the the beauty of Florida's orange
fields and then inevitably the New
Englander would say something along the
lines of oh the Orange Groves uh they're
so beautiful and how I would say w it's
funny you asked that the Orange Groves
are for sale and then he'd proceed to
sell him one acre of the many acre
orange groves that he that he owned
basically he was partitioning his
property into a number of
parcels into a number of parcels and um
and selling them uh as property now when
you bought this property you'd also be
pressured into signing a contract and
that contract would say uh
how how no I think now I'm
gone we'll just go with
this so you'd be signing
a you'd be signing a contract that says
um you look to hoe in order to maintain
uh the fields the soil to pick the
oranges to sell them at market for a
profit is this working now okay
good louder okay good so you look to hoe
to maintain the soil the trees pick the
oranges sell them for a profit and he
will give you the profits from the land
that you bought
so it needless to say the Orange Grove
turned out to be less profitable than
many might have expected there was a
lawsuit it went all the way up to the
Supreme Court and the Supreme Court says
this is the exact kind of thing that we
want the Securities and Exchange
Commission to have jurisdiction over so
that's why this is the formative case
and from that they created the ho test
which has a number of elements I won't
go into specifically but what's notable
is that it is immaterial whether the
shares in the Enterprise are evidenced
by formal certificates or by nominal
interests in the physical assets
employed by the
Enterprise and sales of such nominal
interests in physical assets have since
that case been extended to all manner of
things sales of uh beaver pelts sales of
condos sales of minks of gold bullion of
golf course memberships and Condominiums
all of these has been have been
interpreted as issuance of Securities
rather than just sales of a physical
object or asset and with the sec's
interest in paycoin it is not
unreasonable to assume that
cryptocurrencies or some
cryptocurrencies may be added to that
list of sales of nominal assets or
transfers of nominal rights to assets
that qualify as securities and it's
because of their interest in paycoin
that we created a framework for
Securities
regulation so if you are interested in
this area I highly recommend you go to
our website coin center.org and you look
at the whole framework it's posted there
and you read it if you're a developer
you will not need to read the first two
sections which explain these
Technologies to policy makers you can
skip to the third which draws legal
conclusions based on the applicable
legal tests and the aspects of the
technology that are s into that test so
I'm going to skip through
this here are the key findings for
people who are developing appcoins or
dap tokens the following are less likely
to be treated as
Securities if the token was purchased
for its use value rather than merely
with the expectation of profits so the
line of cases here that build on the hoe
test uh deal with Condominiums actually
so in New York for example plenty of
people will buy a share of a housing
Co-op now is the person issuing those
shares issuing a
security the Supreme Court and uh some
of the federal circuit courts have found
no that is not the case because while
people may expect the condominium that
they buy to go up in value they also may
be buying it to live in it to rent it it
has utilitarian value and those are not
the things we regulate as
Securities another Factor the token was
purchased after oh by the way on this
previous one the utilitarian value
ethereum or ether is a very good example
of this so yes lots of people speculate
as to the price of ether why isn't
ethereum a security well one reason is
that ether is essential to using the
ethereum virtual machine you can't run
contracts unless you fund them with gas
basically and there's this utilitarian
core value proposition that saves it
potentially among other factors from
being a
security token was purchased after
application is already up and running so
words pre-sales are going to be more
suspicious and the line of cases Here
Comes actually from golf courses and
Country Club memberships so basically if
you were a developer and you were
building a golf course and you wanted to
sell memberships to the golf course but
the the golf course wasn't built
yet you were actually going to likely be
found uh as an issuer of a security on
the other hand if the golf course is
already built and you were selling
memberships in those cases courts have
said that that is not a security
so I don't know if this is interesting
to other people or if it's just my being
a huge dork for the law but these are
two things that the community actually I
think would agree on as far as ways to
prevent scams or as ways to judge what
is real and what is a scam so if you
haven't built anything if you have no
hope of necessarily proving anything but
you're asking for money more likely to
be a scam and if you are um selling
something that is purely speculative
that has no obvious use case more likely
to be a scam so the law actually lines
up pretty well finally the token's value
is dependent on the purchaser's own
efforts or the efforts of a large number
of other unaffiliated investors users or
developers the intuition here is that if
I buy gold
bullion from an open
market I am not buying a share of the
gold bullion industry or the gold
industry there's multiple people who
make gold valuable people who dig out of
the ground people who find industrial
uses for it people who find jewelry type
uses for it so if there's really a
widespread community that gives value to
the thing less likely to be a
security and then the last thing I want
to talk about is some things to
avoid so one big one is just using
language that suggests that this is a
Securities issuance this shouldn't ever
happen initial coin offering that comes
from initial public offering it's almost
like you're playing a joke on the SEC
which is funny to some people I guess
but as a community I think we should
find it more uh frustrating or
annoying um profit sharing is another
term that commonly comes up in
Securities issuance so if you're using
this language to describe your
application and the tokens that you're
going to be giving for that application
or selling for that application you're
basically asking for scrutiny from the
SEC and that's fine you know I I think
freedom is freedom I love the open
internet I love the emergence of amazing
things and Technologies and I'm not here
to tell you not to do things I just want
to say you should consider the
regulatory risks when you do them and
not including language like that is one
easy way to hedge some of your
regulatory risk and this is the big
one endorsing risky Ventures or claiming
endorsements
so the Securities laws penalize people
who are promoters of unregistered
Securities just as much as they penalize
issuers so if you're thinking should I
um endorse should I put my face on this
particular decentralized application
think carefully consider your appetite
for regulatory risk and then more
importantly if you are building
something and thinking of putting
someone else's endorsement onto some
public materials think very carefully
have a conversation with them make sure
they understand what they're potentially
signing up for
it's sort of it's it's sort of be a
mench because these have potentially
dire consequences and so an endorsement
should only come when there's truly been
an
endorsement so in conclusion please
please please please um think about your
regulatory risk appetite when you
develop these things when you
contemplate having a crowd sale or a
pre-sale and please feel free to contact
me personally at coin Center um if you
have questions related to this um we'd
love to learn what you're building and
talk about the path forward because
there are definitely legal ways to go
forward um by structuring the way you
actually develop your technology from a
a issuance point of view thank you very
much Peter Van valkenberg of coin Center