my name is Jerry burrito I'm the
executive director of coin Center and
first just want to say how grateful we
are to the etherion foundation for
having us here today to give you a
little regulatory update I think the
first thing I'm gonna do is tell you
about coin Center what we are so Point
Center is an independent nonprofit based
in Washington DC that's focused on the
public policy issues that affect crypto
currencies and open blockchain networks
like Dario and Bitcoin Z cash and we
really do three things we engage in
education public policy research and
advocacy education stories spend a lot
of our time and what that means is we
seek to educate policymakers whether
they're members of Congress their staff
folks at different agencies so they
understand the technology so much of
what can go wrong with regulation is not
out of malice but out of ignorance we
want to make sure they have a good
understanding the second thing we do is
policy research so we engage in the
policy thinking to develop what
regulatory frameworks could exist that
help regulators meet their ends because
they're gonna you know find a way to do
what they want to do hope to meet their
ends while preserving as much as
possible the freedom to innovate and to
avoid unintended consequences and then
the last thing we do is we advocate for
the solutions we try to get them into
law or we try to get laws not passed so
I guess I should get the clicker from
you Peter so today I'm gonna give you a
little year in review of what we've done
over the past year so the first thing
I'm going to talk about is state money
transmission licensing which really is
one of the biggest regulatory hurdles or
impediments for the growth of this
ecosystem and that's for two reasons
number one it's looking at these laws
which are written in the 50s and 60s
it's really difficult to know whether
you
need to get a license in each state or
not and number two if you need to get a
license it's very difficult to comply
with those rules and so we're very happy
that over the past two years we've
worked with the Uniform Law Commission
to develop a model state act for
regulation of virtual currency
businesses and so this would supplant
the existing money transmission licenses
in the states this would supplant
something like the bit license and we're
excited about is that we've been able to
include in the Scindia model act a
definition of control which is very
important only if you have control only
if you take control of others
cryptocurrency do you need to get a
license if you never take control of
somebody's cryptocurrency you don't need
to get a license under this act and we
define control as the power to execute
unilaterally or prevent and definitely
in virtual currency transaction and the
next thing that we're excited about is
we're able to get a bunch of exemptions
into the act and among them is something
that is a personal exemption so anybody
who is using virtual currency on their
own behalf or for personal family or
household purposes or as for academic
purposes are completely excluded from
any kind of licensing requirements and
so what does that get you if you do not
have control you don't need to get
licensed that means that wallet
developers validators de channel notes
exchanges are non-custodial all excluded
and with the personal exemption it means
that if you're an individual holder of
course but also of your corporate
institutional investor and academic or
even if you are creating and selling a
new token and so they're your tokens
that you're selling you would be
excluded from licensing this was not
clear at all under the existing law so
now our job over the next coming year is
to try to get this model Act passed
there's many states this makes sense and
what you mean think to yourself look
this is just parochial us stuff it
actually has a global implication this
definition of control which creates a
line about who is regulated or who is
not is going to be valuable going
forward so if you think about as Europe
looks to amend its fourth anti-money
laundering directive they're going to
need a definition of
was an intermediary that should be
regulated who was not and our definition
of control
helps you get there when China is
looking to regulate exchanges it's gonna
help there as well the next thing I
wanna talk to you about is tax so we
worked with the blockchain caucus over
the past year to develop and introduce a
bill in Congress that will create a de
minimis exemption for capital gains tax
of cryptocurrency so as you might know
if you buy a cup of coffee with Bitcoin
or even potentially if you use some
ether to run a smart contract those
events are taxable dispositions of
cryptocurrency and technically you're
required to keep track of each of those
dispositions report it to the IRS and
pay taxes on that which obviously
creates a lot of friction so this bill
that we helped introduce creates a de
minimis exemption of $600 any
transaction below $600 you don't have to
report it you don't have to keep track
of it you don't have to pay taxes on and
so we're hoping we can get this
attribute passed as law it's gonna be
difficult but we're optimistic next
thing we talked about is securities so
last year at this conference Peter
explained to you our framework for
securities regulation of crypto
currencies and we think that having
produced that and having spent a lot of
time with the SEC explaining to them
what our framework is how we think
tokens how some tokens are and how many
tokens are not securities and having
spent a lot of time with them explaining
the technology and how it works has
borne fruit so recently they produced a
dau report which you all may have seen
and we think that it was a very
thoughtful and very deliberate approach
that didn't bring an enforcement action
and it really echoes a lot of the policy
thinking that we've been advocating over
the past year and again this isn't just
it sounds seems like this is just us
based but what we see is that once the
us Act once the Securities and Exchange
Commission in the United States acts
other countries follow on so we saw
immediately after the Dow report the UK
FCA issues
a advisory on tokens that echoed the sec
and we've seen other places with even
tougher language the final thing I'm
going to talk about is terrorists use of
cryptocurrency sort of potential for
that so over the summer there was just
this really strange surge of interest in
this potential there were a couple of
reports published one by the Center for
a New American Security there are a
couple of convenings and most
importantly there was there's a nuke
subcommittee in Congress called the
illicit financing to terrorism and
illicit financing subcommittee of the
House Financial Services Committee and
they decided that their first thing they
were going to really work on was the
potential for terrorists using
cryptocurrency because we have built
over the past three years strong
relationships with Congress we were
invited to help them with that
investigation and so we navigated them
through the space we brought experts to
town to talk to them we put on a demo
day where we showed them technology and
demoed it we put on a full member
briefing for the members of Congress and
the committee and finally we had a
hearing they had a hearing which I was
asked to testify and I testified at that
hearing and the conclusion at this point
they're satisfied that this is a serious
you know potential threat but one that
at the moment there's only anecdotal
evidence of it's something that law
enforcement has the tools to address it
and I think we may see legislation at
some point soon related to this but it's
going to be focused on fact more
fact-finding so that's the state of that
and funny thing
while I was testifying at that hearing
across the hallway in a different
hearing and this never happens at the
same time
Peter was testifying and much happier
subject about how open blockchains
can help the economy and he was asked by
a member of Congress what was the most
exciting thing that he'd seen since the
last time that we had been in Congress
testifying and Peter said well it was
the launch of new networks like
aetherium and Z cash
heeey you should go look up this video
if you haven't done so in two minutes
explained a theorem and Z cache master
for later so it's really remarkable so
with that I'm going to turn it over to
Peter who is going to talk to you about
some issues thanks Jerry so I just want
to I just want to generally characterize
some big issues on the horizon and of
course that means most of this second
half is gonna be about tokens because
that's where a lot of the regulatory
attention and maybe attention in general
is right now so there are two regulatory
hotspots to look out for with respect to
tokens one is securities regulation of
course which I talked about in Def Con
last year and the second is anti money
laundering or financial surveillance
regulation so AML in a nutshell boils
down to two questions first does AML law
applied to your token or your
cryptocurrency
well the question that answers that in
the US and this will be echoed elsewhere
is is the token being used as a currency
substitute not is it designed as a
currency substitute is it being used as
currency somewhere in the world then AML
law is something you have to think about
then the second question says okay if
it's used as a currency substitute who's
regulated this gets to our definition of
control but right now the question with
tokens is is there an issuer who can
also withdraw the the tokens from
circulation so it's centralized it's
like eagled or Liberty Reserve if there
is an issue or who can also call them
back out of the network because they
keep the ledger well then that issuer is
a money services business if there's no
issuer because it's a proper
decentralized cryptocurrency like
aetherium or Bitcoin well then there is
no issue or for there to be an MSB as an
issuer so it's the exchanges companies
like coinbase with G Dax or Polonia X
those are the MSBs those are the
entities who need to effectively surveil
their customers who need to do
anti-money laundering compliance
suspicious activity reporting and things
like this it's very important to coin
Center that we draw this line clearly
between decentralized cryptocurrency and
centralized ones securities law I'm
to far from my device securities law
boils down to two questions as well the
first question is is the thing being
sold as an investment and the second
question is is there a person upon whom
investors rely for the profits of their
investments this is a simplification of
the Howey test i presented last year but
this is pretty dead-on I'd say now you
can think about this like this gold is
sold as an investment of course but
there's no one person re rely on to
create the value of gold it's a network
of buyers and sellers miners and people
using gold there is someone we rely on
if you're buying a share of Apple stock
his name's Tim Cook and his management
team a share of Apple stock is a
security gold that you actually take
delivery of is not and so we can have
this two question classification
exercise to figure out dimensions in
order to categorize any token is it more
of a utility or a useful commercial item
or is it sold more as an investment and
what's backing up that token is it a
decentralized network like gold or is it
somebody like Tim Cook and this is how
we present this to regulators this is
far too pedantic and descriptive you
understand this money goes in more money
comes out it's an investment money goes
in a service comes out could be cloud
storage compute cycles could be a number
of things that's something that's more
useful a vote to decide where the
cumulative funds should be invested is
not a use that's that has to do with
profit making and pooling money and
growing it but cloud storage or
something like that makes sense as
something that's useful and then this
issuer versus Network distinction again
this is how we explain it to regulators
so I'm gonna rush because you understand
if you have PayPal as the service
provider money goes in you get a service
PayPal's doing a few things they're
checking passwords they're keeping a
record of transactions and there's a
corporate oversight role that makes sure
the other functions are being performed
well that's how PayPal works what if we
want to decentralize PayPal have an
electronic cash for the Internet
well we have a network of computers we
network them together we use public key
cryptography so that every node can
verify passwords effectively we use a
distributed lead
like a blockchain so that every nodes
keeping track of valid transactions but
where's the oversight there is no
corporation so who's doing this
nobody every participant in the network
is directly incentivized because they're
awarded tokens for doing their job well
to actually help provide the service
that's how mining works that's how
Bitcoin works this is still pretty
radical although everyone in the room is
pretty comfortable with it at this point
that's more of a networked token rather
than an issuer backed token and we can
do the same thing with something else
like cloud storage again this is how we
explain it to Congress the only
difference is now every node is adding
their spare hard drive capacity so
something like swarm or file point or
SIA or all the effort projects trying to
make this work and every node is
incentivized to behave honestly because
of the tokens so now that we have these
two dimensions we can graph them maybe
to get a geometric handle on the issues
at hand with respect to tokens will put
useful tokens on the bottom of the graph
and we'll put investment tokens on the
top will put Network backed tokens on
the left and we'll put issue or back
tokens on the right now I'm not going to
put specific projects on this graph
because that's none of my business
really what I am going to do is show you
the background case law so here's Tim
Cook this is a security we know that
upper right quadrant backed by an issuer
and sold as an investment shares of
Apple stock here's where gold would be
some people use it some people want it
to invest but it's a decentralized
network that makes gold valuable here's
real estate oil gas things that are
valuable commodities where there's a
decentralized network and markets
effectively that create the value up
here our member managed LLC's so
corporations that could be for-profit
where every individual shareholder is
actually deciding the ultimate fate fate
of the enterprise here we have loyalty
cards Country Club memberships things
like that we're relying on the person
who built the golf course to make it
valuable but it really is something you
use you go in your golf usually these
have restrictions on transferability as
well though two two
put a put a stop into speculation about
their value and here we could have
theater tickets where there's a group of
artists that provide the value and here
this is kind of interesting and I put
this here because there's a line of
cases that talk about this fact pattern
where somebody sold someone something
like a barrel of whiskey and said we'll
store it for you and it's really good
whiskey don't worry about it and we'll
find people who will want to buy it in
20 years when it ages and it's sold as
an investment and all you get is a
receipt for the warehouse and it's
always claimed like oh well you can get
it take it and drink your whiskey at any
point but nobody does that
and everybody knows what's going on here
the whiskey distillery is selling shares
of its profit-making whiskey enterprise
and now we have tokens that basically do
all of these different things
we definitely have electronic gold
tokens we definitely have electronic gas
tokens we have real estate tokens that
are digital which would be digital real
estate or gigabytes we have member run
enterprises for profit that may be
member run or may actually have
centralized control and here basically
is the SCC's possible jurisdiction the
security is regulated in the u.s. they
have a flexible test so this is an
amorphous geometry it could be like this
now what's interesting about this well
if you sell a token that is actually a
revenue stream from a corporation like a
share of Apple stock the tokens of
security it doesn't matter if it's a
token rather than a stock certificate if
you are selling warehouse receipts for a
speculative good that that is being sold
as an investment and no one's actually
taking delivery of it or the
functionality is never realized that's
probably a security now where things get
really tricky and interesting is the
upper left quadrant and the lower right
quadrant you have a member run for
profit organization if it's really run
by the members it's out here if there's
a few centralized parties that are
really promoting it and making it
function it's in the securities area I
think you all know what I'm talking
about
and this area is interesting if you pre
sell golf course memberships before
people can go in golf then it starts to
become more of a speculative investment
because people can't realize the utility
right away and it creeps up into the
securities realm so this edge is very
interesting and very dangerous with
respect to token projects that are
analogues of these old cases and that's
all I'm gonna say about securities law
other than the fact that the SEC has a
flexible test so that could be their
jurisdiction that could be their
jurisdiction but coin Center advocates
for this to be their jurisdiction where
we really have an issuer that people are
relying on for the profit of their
investment if we can help them get
comfortable with this I think we can
have a much freer and more open and
innovative community but we worry about
investor protection so where this line
gets drawn is very important and that's
why coin Center has spent time working
on frameworks for security regulation
which I presented last year but also on
consumer protection and also on any
money laundering and we appreciate all
the support we get from your wonderful
community we'll be here all week
so please come and see us and please
consider supporting coin Center and
thanks again to the theory founders for
having us
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