Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Bryan Skarlatos, Estaban van Goor, Jerry Brito & Luis Cuende: Regulation Series by Siân Jones

Episode Date: July 12, 2014

This episode is part of our coverage of the Bitcoin 2014 Conference which took place in Amsterdam from May 15 to 17, 2014. These interviews were conducted by Siân Jones and focus on the area of regulation. Topics covered in this episode: Bryan Skarlatos, Partner at Kostelanetz & Fink Estaban van Goor, Indirect Tax Lawyer at PwC Jerry Brito, research fellow at the Mercatus Center at George Mason University Luis Cuende, hacker and European Commission advisor This episode is hosted by Siân Jones. Show notes and listening options: epicenter.tv/bitcoin2014-07

Hello and welcome to Epcenter Bitcoin, which talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution. My name is Sebastian Kutjoum. And I'm Brian Fabin-Ferain. As you know, back in May, we were in Amsterdam for the Bitcoin 2014 conference. While we were there, Sean Jones conducted a series of interviews with a number of people on the topic of cryptocurrency regulation.

We think that given the recent European Banking Authority opinion paper, warning financial institutions to stay away from virtual. currencies. This is an extremely appropriate time to release those very valuable opinions by these people and dive more deeply in this topic. This is the first episode of two episodes covering these regulation and amuse. First, Sean talked to Brian Scarlados. He's a tax lawyer based in New York and he discusses the IRS tax position and how it compares to the regulatory situation in certain European jurisdictions. Then, Esteban van Gogh, a Dutch tax lawyer specialized in VAT and gaming, talks about VAT rules in the Netherlands and Europe.

Sean then talked to Jerry Brito. He's a research fellow at George Mason University. He's also the director of the technology policy program. He talked about the regulatory situation in the US and also discussed a recent paper he wrote on Bitcoin regulation. The last interview is with Lewis Gwende. He's a young hacker and activist. He's an advisor to the European Commission and discusses the position of the EC with regards to Bitcoin and cryptocurrencies. So this is Sean Jones still in Amsterdam, Bitcoin, 2014. I have Brian Scarlatos with me.

He's a tax lawyer, partner in Costalarnets. Have I pronounced that correctly? Costalarnets and Fink. You did. That's a mouthful. I can't promise to do that if I've had a few drinks. I'm sorry. And you're going to be talking this afternoon about tax.

I'm going to ask you in a few minutes to tell us a little about the theme of that talk. but I know that the tax has been a challenge for regular, well, tax authorities in pretty much every jurisdiction. They don't know how to classify this thing, that's cryptocurrency, that's Bitcoin. And it's only been in the last few months that tax authorities have started to come out with opinions in the UK that I'm familiar with. HMRC came out with a briefing on the subject. and broadly speaking, considered that for VAT purposes,

European sales tax, that it operates like money, so it should be considered like money, but in all other respects, it's like an asset. Now, was it in March or April even that IRS came out with their statement? It was in March when they finally got around to telling us what they're going to do with it. But of course, C and you knew it had to happen, right? It's the same goes. Oh, absolutely.

It's like two things certain in life, death and taxes. We knew the taxes were coming. And I suppose it's a good thing that taxes have now being clarified because a lack of clarity tends to make running a business very difficult. Right. Running a business or even just handling your personal affairs, if you've made some money on Bitcoin, for example, you didn't know what to do with it. And that's exactly why the IRS came out with this position in March because people had to file

their tax returns in the United States by April 15th. So a lot of notice, plenty of time. Yeah, a lot of scrambling around in the last four weeks, that's for sure. I guess that there's also a difference in approach between the U.S. and European approach, certainly in the U.K. In the U.K., they said, okay, we have thought about this now, and we've published our position, and that is the position as it is going to be now. Technically speaking, that's how you should have treated it since the year dot of Bitcoin. But we'll look favorably on any reasonable excuse

why you might have treated it differently since we hadn't previously come out with an approach on our tax treatment. I understand that in the US it might not be quite so sympathetic. Is that right? Well, you know, it may not be so sympathetic, but if you hire a good tax lawyer. Do you know, any?

As a matter of fact, I do. So the point here is that if you say, listen, you just told me how you were going to tax it four weeks before my return was due, you know, you have to give me a break. I think that in most cases the IRS will. I think what they really expect you to do, though, is go on extension for your April 15th tax return,

get an additional six months, which you can do until October 15th, and then get it right for October 15th. But you know, the real question is, is not, that's for your 2013 return. The real question is not what are you going to do for 2013, but what if you made some money in 2011 or 2012? You know what they're going to want?

They're going to say you have to go back and amend your return and pay the taxes plus interest. So they're not being quite so lenient then. They're expecting their pound of flesh. You should have known that this was going to be their position. And you should pay the taxes with the interest. Yeah, they're going to want the money, even in 2012 or 2011. Does the new IRS publication, their statement on tax treatment,

does that have some implications for the way in which you keep your records? Because I've heard here in Europe that they're quite onerous in terms of capital gains, as we would call them in Europe, the profits that you've made on buying and selling, that you've got to have pretty comprehensive records. to know how to file your tax return? I think that's one of the real issues here. It's extremely complicated to keep the records that you need to file your tax return.

And it's not just when you buy and sell the Bitcoin itself. One of the unusual things about the way the IRS treated it is they said every time you use it to get a cup of coffee, for example, that's treated as a sale of the Bitcoin, so you're going to have gain for just buying a cup of coffee. And so every time you transact, you're going to have to keep records of how much you paid for that portion of the Bitcoin

and what it was worth at the time you converted it into the cup of coffee. And so the record keeping is actually very onerous. And very much against the sort of ethos of micropayments that is one of the potentials for Bitcoin. And it really creates frictions around that. Now, at the same time, it creates opportunities. There are companies that are coming up with programs that will keep track of the spending of your Bitcoin

and do the automatic conversions and produce the records. So as fast as the IRS can come up with regulations, the technology is following in place to do what they need. So they're going to be wallets that you pay your Bitcoin from that will keep track of what you spent it on and provide you with the information you need for your tax returns. Exactly. There are companies that have add-ons to those wallets that will just keep track of it all and then I guess spit out all the data, which, as I say, again, will be a headache then for the accountants to go through. So it's almost like if you're engaged in day trading in and out of stocks, in and out of stocks,

they will be able to track the in and out of Bitcoin on a daily basis as you make all your micro purchases. And is that going to make adoption less attractive, do you feel? Adoption of the currency, of cryptocurrencies? If the technology is really good, I think it will help. But certainly I think any friction like that will make it somewhat less attractive. But again, if the technology can keep pace and make it easy to keep track of, then it'll be a little bit easier. You know, so you can keep track of it perhaps, but now you have the accounting fees in the United States. Most people have an accountant to prepare their tax returns.

That accountant, if you purchased a lot of things with Bitcoin over the year, he may charge you $5,000, you know, dollars to go over and track everything. So that's a real friction. So we've got away from paying the rich bankers, and we're now going to pay the rich accountants. There you go. I think it's the full employment for Accountants and Tax Lawyers Act. Oh, right. So tell me a little bit about the presentation that you're going to make later on this afternoon. Well, what I want to do is I just want to give people a sense of how the IRS approaches tax principles.

And the bottom line is, is because it is the IRS and they need all the money for the schools and bridges and roads and whatever else they spend money on, they try to get taxes from wherever they can, of course, like every country. And there's some interesting concepts in the United States. For example, if you find gold in your backyard, that's going to be taxable to you. or if somebody, you win the lottery, that's going to be taxable to you. And so those types of analogies could carry over into Bitcoin, whereas if you're mining Bitcoin and you get Bitcoin, now that's going to be taxable to you. You've received something of value.

And so they said when you mine it, it's taxable to you. And then when you spend it, it's taxable because you've now essentially sold it. And of course, if you sell it for cash, that's taxable. And if you receive Bitcoin for the payment of services, you're working and you get paid, that's going to be taxable, and the government says the person who pays it has to withhold withholding taxes. And also, a little known fact about Bitcoin is it is subject to back up withholding. So if you're paying somebody from the United States and you're paying somebody in another country for services that were performed in the United States, you have to withhold 30% of the value of

that payment. And so there are these frictions on the transfers of Bitcoin that, you know, is such a special thing about Bitcoin. And there are very few frictions and you can transfer around the world. Now, you can still do it, but you better track it, and there may be a lot of tax due because you do it. Do you feel that that's likely to drive Bitcoin underground, or do you think that folks will just get on with it, they'll use their super apps that will keep track of all of their spending and so on? Right. So I don't know exactly how people are going to react. I think what they'll do is they'll get on with it and use their super apps, but maybe in the end that would be better for Bitcoin. As it gains more legitimacy, maybe it loses some of the enthusiasm

that's caused it to grow so fastly, so quickly. But with the legitimacy comes a more widespread acceptance. Right. So you see positive rather negative features of the IRS approach. In the end, it was going to be regulated and it was going to be taxed. So just knowing how it's going to work and having the businesses and the software develop around it to make that easy is positive in the end. That's a very nice note to leave it on. Tax is positive, I am. Coming from a tax lawyer. Well, yes, of course. Well, that's your, that's the bone.

I suppose just to wrap it up, now that things are clearer in the U.S. from a tax perspective, does that make the U.S. an attractive place for, Bitcoin startups, or can you see some other jurisdictions that you would perhaps point a startup towards? Well, I think the United States is an attractive place for the reason I just said. Once you're going to have regulation no matter what, and once you know what it is, that creates stability, and you need stability for any startup, for any business. And so you do have the stability in the United States. However, there may be certain jurisdictions that adopt a more lenient attitude, which would then have a lower tax rate.

So if you know what the tax rate is going to be and you know what the system is and it's going to be less expensive in the United States, that may be a better jurisdiction because you can combine the stability with the lower cost. But for now, the United States is a good place. That's an interesting thought. Well, Brian Scalatus, thank you very much indeed

for sharing your thoughts with our listeners today. Appreciate it. So this is Sean Jones, still. at Bitcoin 2014 in Amsterdam, day two. I've got with me at the moment, Esteban Van Gogh, who's a tax lawyer, or is that right? Tax lawyer here in the Netherlands, in Holland.

And if I understand correctly, you specialize in VAT and gaming as well. Yeah, yeah. I'm a tax lawyer here working in Netherlands. My specialization is digital, so everything, what has to do with digital, and also connects with VAT. I'm interested in that and I have a focus on that.

So I'll always look for VAT implications occurring and try to look what could be done to solve problems for my clients. Well, that VAT has been an interesting challenge for most of the EU member states. I mean VAT itself is very much a European phenomenon. and VAT is in principle set at a Europe-wide, it's a Europe-wide tax in that sense and flows down into the individual member states.

But the different member states have not necessarily applied Bitcoin VAT in the same way. I know in the UK, which I'm familiar with, we had a very positive announcement about two months ago, which clarified the situation and meant that VAT wasn't due. But what's the position here in the Netherlands? I think first to elaborate a little bit on VAT, VAT is in principle based on the European law, so it's secondary European law, which is applicable throughout the European Union.

It is not, it's based on a regulation. So it's not direct law. So member states are allowed to interpret certain things differently. So what you will see is currently, of course, there's no particular provision with respect to Bitcoin. So member states are really looking into this and have different positions on that. So the UK had a good position, in my opinion,

are very practical. VAT technical, I wouldn't agree with it all. But here in the Netherlands, yeah, there isn't that much said about VAT. They are comparing VATVB Bitcoin with local exchange chain trade system,

which is applicable here in Amsterdam. And that local exchange trading system is exempt from VAT most of the times. But they do say, okay, as soon as you have a barter, you must look at the economic value and still need to apply for that. And if you look within Bitcoin here in the Netherlands,

currently there aren't any guidelines with respect to VAT, except for that comparison, which in my opinion is not correct. I mean, you should look a bit broader and should really look within Bitcoin itself. So what do you have? You have miners. You have exchanges.

You have Bitcoin transactions. And if you have a Bitcoin transaction, is that a Bitcoin to Bitcoin, or is it a Bitcoin conversion? in VAT, those types of distinctions you can make within VAT in order to look at like what is the typical VAT treatment for this. Now, are you saying that here in the Netherlands, if you buy a cup of coffee with Bitcoin, you have VAT applied to the cup of coffee.

Do you also have VAT theoretically applied to the Bitcoin payment? So is it a BAT transaction according to? to the Netherlands tax authorities? No, they aren't really arguing about that. I can be very honest, the tax authorities, they filed their view on Bitcoin and maybe it's like half a page

and they refer to the LED system, so the local exchange trading system. I read through it, of course, but still, not enough guidelines, and Bitcoin is totally different. Yeah, if you look at the normal taxis, treatment if I buy a cup of coffee and I paid in Viet money, of course there's that on it. If I consider to pay it in Bitcoin, it might have been still VATs on it because I'm selling

coffee for example. Oh yes. On the coffee, yes, of course. But what about on the exchange, the mode of payment, the Bitcoin? In the UK, before HMRC came out with its briefing, they were saying, although it wasn't fully clarified at the time, but they were saying that there was VAT on the Bitcoin that was used in payment.

So it was a BAT transaction, and there was VAT on both sides. But you're saying that's not the case here in the Netherlands. So that's also pragmatic then. Here in Netherlands, yeah, we have tax authorities which are really pragmatic. So in case they don't give any guidance, I always advise my clients to take a position in that,

take a good position with some good arguments and then go to the tax authorities to rule. And yeah, with respect to exchanges, if I would have an exchange as my client, I would say that an exchange is almost comparable to a normal money exchange. Every financial service is VAT exempt. So if I then look at it within the Bitcoin space, I think it isn't different. I mean, you're exchanging Bitcoin into other cryptocurrencies or you're. you're exchanging Bitcoin into Viat money. In my opinion, you're still providing for a financial service as an exchange, even though

Bitcoin is not a legal tender yet. And that's where the pragmatism comes in, because I know again in the UK, they say that the HMRC tax authority in the UK says that it isn't money, but it works like money. because it works like money, for the purposes of VAT, it's treated like money. And that's pragmatic. That's a sensible position. I don't know whether that were last. And maybe the situation in other member states, for example, here in Netherlands, might well change. Do you feel that the Netherlands is a good place for Bitcoin startups from a tax perspective? Is this a good startup location? Yeah, I think from various type of perspective, so not only from tax.

Yeah, I work a lot with startups. And normally startups come here to the Netherlands, specific to Amsterdam, of course, because the environment, you have a lot of well-educated people here. Everybody speaks English. And of course, the tax authorities are very open to discussion. So, yeah, it's a good place to be established here. And I mean, you have a lot of investors, which also, interested in analysis is a clear gateway to Europe. So it's, yeah, besides the tax-related aspects,

there are also a lot of extra. You make a very good advertisement for Holland, for startups. And presumably the tax position is also very encouraging. Certainly the VAT one is on the right side. There are still other jurisdictions that make VAT a problem at this point in time. I mean, that might change. Do you see a situation where we will. get a harmonized approach to VAT and taxes within the European Union? Yeah, interesting question because my PhD is about European VAT and digitalization. What I will include in my PhD is look broader. I mean, the digital area is not only Europe, it's internationally.

And if I look at Bitcoin in one of my articles, I call Bitcoin a super currency, meaning our current digital needs and in my opinion it's still what it is so if we look at legislation of course we can look within Europe whether we can harmonize it but it will be better if the OECD

would like go have a look at more global treatment on digitalization and part of it is Bitcoin and they're already looking into it so virtual currencies even though I don't like to call it the currency but I just call it the currency for this

for this interview virtual currencies are already included in some research done by the OECD, and I hope they will give clear guidance internationally on this topic. So that not only Europe is harmonized, but it would be on a global level, and that would really help Bitcoin cryptocurrencies going mainstream. Of course.

So which other jurisdictions would you say are particularly good for Bitcoin startups, apart from Netherlands? Yeah, apart from Netherlands. Yeah, really like within Europe you can also also look at maybe some other non-EU considered from a fat perspective country, such Isle of Man or Gibraltar, other typical member states. I mean, Germany, they have some clear guidance. I mean, in Germany it's not considered to be a legal tender, but they treat it equal

as e-money. And that's good because then you can have, you can, you can, you will need to apply for a license for financial, for providing financial services. That can give you some certainty, but you will need money because that's around 700K to get that license. VALP perspective there, it's that it's exempt, so they give clear guidelines. But, yeah, really within Europe, I think more on like the,

like I already said, like Gibraltar or Al of Man, but I would rather advise people to look at the member state and not only like from a tax perspective or regulatory perspective, but really what can you do there? Because tax and regulatory can be solved if you have a good lawyer. But I mean, business growth, that's the most important thing. So do you have a lot of people around you which can help you with innovation? You have a lot of developers walking around there.

And if you're flying in developers, are they willing to live there? So, yeah, I think that those are also considerations which you will need to take into account. Actually, it's very practical advice, not just to take into account. the tax and regulatory aspect. Well, I'd like to thank you very much for sharing those thoughts with us and our listeners on Epicenter Bitcoin. No problem. Thank you, Esthervan.

Thank you. So, Sean Jones, still here in a very sunny Amsterdam for Bitcoin 2014. We're into day two. And I have Bitcoin's leading academic, well, the leading academic on cryptocurrencies sitting opposite me now, Jerry Brito, Jerry is Senior Research Fellow at the Mercatus Center, which is, as I understand it, part of George Mason University, which is which part of the States? It's in D.C., so it's actually in Virginia, right across the river from D.C. Where it all happens, government city.

And you're a professor of law at George Mason? An adjunct professor. Oh, I'm so sorry. That's quite all right. That's quite all right. No, no. You've overstated me. Oh, that's fine.

We'll leave that one stand, then. you're a podcaster yourself you are a blogger and definitely an opinion former you've written on well you wrote a wonderful primer about a year and a bit ago for policymakers that I think was then used and you were taken up on it and invited to was it I've got the expression right testify yeah before you sound so sound so criminal yeah so The primer was important, I think, because at that point in the States, the regulators were starting to ask questions. And there was no one document, no easy place where they could go to for some level-headed sort of discussion of the technology and its potential implications for policy. And so we wrote it.

I'm glad that it got a great reception, but there wasn't much to it except explaining. in a sort of levelhead and manner for a layperson, what Bitcoin is, and sort of pointing out the obvious places where policy would touch. And it did the job. And of course, in this, you co-wrote it with Andrea. With Andrea Castillo, yeah. And you've recently written a new paper, and we'll come on to that in a few minutes. But tell us about that when you were asked to testify.

to the U.S. Senate, because this was the first thing, wasn't it, that happened in the States? So this was after FinCEN, which is the Financial Crimes Enforcement Network, which is an agency of the Treasury Department, which deals with money laundering regulation and terrorist financing regulation. They had already issued their guidance. So that was really the first major regulatory action on Bitcoin. But the Homeland Security Department, Department, the committee in the Senate has sort of taken the lead at looking, basically having oversight over the agencies that are regulating Bitcoin. And they decided to have investigation, and the report of that investigation should be released soon as part of that investigation. They interviewed a lot of people.

And I was one of them. And I think having to primer out there, you know, sort of got us in the door, as it were. And then I was asked to testify. Which, again, by the time you're testifying, you've already shaped a lot of the opinions you probably imagine. Did they read it beforehand and then have questions for you, or did they wing it? I guess what I mean is that by the time you have the actual hearing with the testimony, you've met with the committee staff many, many times. And so you've already had long discussions about the implications. And so the testimony kind of gets it on the record. I see.

So you actually have a dialogue beforehand and they were getting to understand, getting to grips with it, as we would say. I think so. Yeah. There are very few surprises at these hearings. And did you find the Senate receptive? Absolutely. I think that Senator Carper, who is the chair of the Homeland Security Committee,

has shown great leadership on Bitcoin. He understands that there are challenges that the government's going to face, especially law enforcement is going to face with Bitcoin. But more importantly, there are a lot of potential benefits to Bitcoin. And it's very refreshing to see policymakers focus on the benefit side of the equation, not just on the cost side of the equation. And I think that's very good because at the outset, there were some rhetoric coming from other senators that only focused on the cost side. And so it's good that Senator Carper has shown that leadership. and I think he has brought along some of his colleagues who today, you know, they sort of want to say that they've never been skeptical about Bitcoin, which is fine. We'll believe them.

Well, we have a kind of view in Europe, I think, that in the States, it's a sort of shoot first and ask questions later approach. And in Europe, we have a more measured approach and we consult and we find out. And especially in the European Union, there's an awful lot of consultation. before we say anything. You know, you can't, but you just simply can't draw anyone in any official position or any legislator to say anything about it because they don't know about it. They don't want to be seen to be. Whereas you've had some fairly vocal.

Sure. So I think it has to do with the different structures of our governments, right? And in the U.S., of course, you have a party system, but ultimately it is individual members, individual politicians who people are voting for. And so they have their own grant that they have to burnish. And so some folks want to make a name for themselves. And so, yes, they will speak out even when they don't know all the facts. So a regulator who is a civil servant probably won't do that kind of thing.

Exactly. But an elected official probably would. even when you have appointed officials who have other aspirations in the future, they might still talk about. We wouldn't be thinking about New York here, would we? Well, I think it's interesting what happened in New York. So the banking regulator there, when he entered, who, by the way, if you think about back to who was it that had this harsh rhetoric about Bitcoin only being good for illegal transactions, something good for money laundering, it was Charles Schumer, who's a senator from New York. And the banking regulator in New York is a protege of Mr. Schumer, who's formerly on his staff, et cetera. So it's interesting that this is Benjamin Lossky, who is a banking regulator.

When he came out, he came out pretty aggressively announcing an investigation. And it was aggressive because rather than saying we're going to have an investigation, we'd like to meet with all these folks here, some letters inviting you to our office. He issued subpoenas, which are your computer. compelled to respond, which was a bit aggressive. Did you get one? No, no. So it was basically companies that were involved in the Bitcoin space.

Also, interestingly, investors in the Bitcoin space, which is really, really dangerous, I think. Because think about it, if you are investing in GE, and then GE comes under investigation for something, you're just an investor. You did not direct the company. So it really would put a chill in the capital markets if you were going to get a subpoena for investing in a company. But let's put that aside. He was very aggressive at first. Since then, I think he has moderated a lot.

And I think that he's understood. There are two ways you can make a name for yourself related to Bitcoin. One could be, I'm going to be the tough law and order type who is going to put an end to money laundering and whatever else it's happening. Or you could say, I'm going to be the first to complete. normalize Bitcoin and bring that innovation to New York State. So it got everybody's attention with the headline grabbing stuff at the beginning with the subpoenas and that's maximum impact. I can't read his mind.

And so I've never spoken to him about it. But I wonder if he thought that this was a clear-cut case of, really, this can only be used for not the best of things. And then once he started learning about it, he said, oh, you know, the play here. here is to become the first state to make this, you know, sort of embrace this innovation and bring all of that. So he switched story part way through, but it looks like it's part of something that's sort of continuous.

You know, I couldn't say that, right? So I don't know what his story ever was. Okay. Okay. I won't draw you more on that. But it is interesting. The proposal I understand is for something called a bit license, or is that just a nickname that's being given to this thing?

So, yeah, that's the name that he has used. In fact, I think people have been invited to apply for a bit license, even though there is no application process. But yes. So in the U.S., if you're going to start a money transmission business, right? So you're somebody who is helping customers send money from point at point B. You have to be licensed. And it's not just one federal license. You have to get a license in each of 50 states, not really 50 states.

It's actually 48 states that require. license, which is a real hurdle if you are a small startup, because before you can begin operating on day one, you have to have acquired 48 licenses, which is very expensive, very time-consuming. And today, it's not clear how Bitcoin fits into the licensing schemes. And so the different states are looking at these and developing new guidance, sometimes even new laws, legislatures are going to have to. Gable Gave. And so in New York, what they're thinking about is rather than try to issue

guidance that tells you how the existing money transmission licensing applies to a Bitcoin business, we're going to create a whole new thing called a Bit license, which is an interesting choice of name because it sounds like Bitcoin. Of course, Bitcoin is not the only cryptocurrency. And so there are certain things, but there's good and bad to that. So the bad is, why are we creating a new scheme for a technology that ultimately does the same thing? It sends money from point A to point B. Why are we regulating this thing in a specific way? This is a technology-specific regulation.

And when you do that, that could be dangerous because if you want to kill a technology, there's no better way than to make it impossible to operate in a space. So that's the fact that we see a technology-specific regulation as opposed to technology-neutral regulation, just regulation on money transmission. It doesn't matter what technology you're doing. That's worrying. On the other hand, they might have a good point for why they want to do a bid license. The money transmissions law in New York, from what I understand, is very antiquated.

And it would be very difficult. And there would take a lot of time to try to modify that law. So, for example, as a money transmitter, you have to – there are only certain number of permitted – permissible investments that you can make with the money that you have in custody for your customers. So these are very highly secure bonds, cash, etc. Well, what about Bitcoin? Is Bitcoin a permissible investment? It's not.

If you look at the law, you can't hold Bitcoin. But of course, if you're a Bitcoin business, you have to hold Bitcoin. So you're sort of put in this catch-22, creating a bit license might alleviate some of that. So from your point for you, it's a pragmatic. a potentially pragmatic solution. I think that's what they're doing. It's interesting. Is there any precedent for a technology-specific regulation?

There are, but they're not happy ones. Go on. So I'm thinking of voice over Internet protocol. If you think about VoIP, when VoIP first began to be developed, the FCC, which is the Federal Communications Commission, the communications regulator, didn't know what to do with it because it did not fit into any of their existing buckets.

It allowed for telephonic communication, but it was impossible for this technology to comply with some of the requirements of telephony. So, for example, having an emergency call number, having number portability, all these things that have been written to law, never imagining that there would be this new technology that allowed for telephony without, you know,

And so the FCC sort of undertook a proceeding to try to figure out what they were going to do and how they were going to squeeze this new technology into their existing. And the bottom line is that the companies who wanted to develop VoIP technology but sort of waited for the FCC to issue guidance or rules on how to do this, basically they're still waiting. The FCC has never done that. And the companies who decided we're just going to build it, like Skype, built it. And it exists. And then on a case-by-case basis, they have made determinations about what requirements.

So I don't know that answer to your question, but it's not always helpful. No. So you've written a new paper in conjunction with Andrea as well. Andra Castillo, yes. And somebody else's time. Humann Shadab, and Human is a professor at New York Law School. and he's an expert on financial markets regulation. Ah, so the focus of your new paper is on Bitcoin financial regulation.

So the first wave of regulation related to Bitcoin was about Bitcoin as a payment system. This is what we've been discussing. So that includes the consumer protection aspects of it, which is what Benjamin Lossky and the state level licensing deals with, and that also has to do with anti-money laundering, and terrorist financing, which is what FinCEN and the Treasury Department deal with. So that was the first wave. Oh, this is a new way of transferring money, new way of making payments, consumer protection, anti-money laundering.

The next wave regulation that I see coming forward has to do with Bitcoin securities, Bitcoin derivatives, but then also Bitcoin denominated securities, Bitcoin denominated derivatives. and then more interesting to me personally are prediction markets and also gambling and any other kind of decentralized markets. This is going to be quite some of it is pretty easy. I think it's going to be easy work for regulators to look at a Bitcoin forward's contract. I think the commodity futures trading commission is not going to have a difficult time dealing with that. Because you're not talking about the Bitcoin itself. You're talking about the instrument.

Correct. And so the rules will exist. The rules will exist, right? But then when it comes to a decentralized market or a Bitcoin denominated instrument or something like a prediction market, I think it's going to get much more complex and it's going to be very interesting

for those of us who find these kinds of things interesting. And I guess also the whole idea of decentralized anything I'm thinking perhaps beyond Bitcoin to smart contracts, distributed autonomous, corporations, or organizations, and so on. Admittedly, we're at a very early stage of that, but they're going to present some very interesting challenges because there's no issuer, there's no legal person, there's no organization in the traditional sense. So there are no intermediaries. This is the important thing. So regulators have depended on intermediaries to enforce their rules. They enforce their rules against the intermediaries.

And if you take away their intermediaries, where are you left to enforce against? It's the parties and the users of the contracts. And the issue there is that that's much more costly. Just arithmetically, it's going to be more costly because before you could have regulated or enforced against a handful of intermediaries, Now you've got hundreds or thousands of end users that you would have to go after. I think the relative comparison there, or the comparison there might be something like what happened after BitTorrent. So Napster was an intermediary that facilitated file sharing.

It was easy to go after Napster and shut it down. But within months, you had peer-to-peer decentralized file sharing emerge, culminating in BitTorrent, which is what we use today. And there's no shutting BitTorrent down. So if you couldn't go after an intermediary, who did you go after? And we saw the recording industry go after end users. And they sued thousands of end users, but that didn't work. And I know in the UK there's attempts to control the ISPs, the Internet service providers,

as the gatekeepers of the Internet. There's some interesting analogies there, aren't there? I think so. Going for the gatekeepers and making them responsible, liable, for managing other people, their customers, file sharing, interesting times. And there, of course, new technologies on the emerging, we saw just two weeks ago, I think,

fundraising for Madesafe, a kind of distributed, internet, I maybe making that over, over simplifying that, but just, you know, the idea is certainly, then there is no sort of central point. So you now

haven't even got users anymore in the conventional sense. Interesting times we face. So as you like prediction markets, because you got, you smiled when you were talking about something our listeners weren't picked up on, but you obviously very excited by

them. So how about some predictions for the regulation of Bitcoin. Where are we going to be in 12 or 36 months? I don't think we're going to be, I don't think it's going to be much more movement. We might see some more clarifications related to tax treatment. It's hard for me to predict, right? Ultimately, the beauty of prediction markets is that you can bet with your, you know, You can put your money where your mouth is, and if everybody does that, you can get a gauge a good probability of different outcomes.

But if I had to bet money, I don't think the CFTC, which is a commodities regulator or the commodities contract regulator, is going to do much there. I think the SEC, I think we will see more enforcement actions. We've already seen some. This is the Securities and Exchange Commission. That's correct. And today you see some... Essentially, what our initial public offerings denominated in Bitcoin. And so companies are making RPAs, issuing shares, in a completely unregistered way.

And that's against the law. Whether you like that to, you know, whether you hope that's a case or not, you know, let's put that aside. The fact is it's against a law, and I think we will see more enforcement actions. So the trend in Shavers case was an obvious Ponzi scheme, it seems like. But there are others where we may see some enforcement of what really maybe are completely legitimate companies, but just did not follow the rules. So you've done a very good job of not sort of laying your name down to a specific prediction there. Because we always love that because we can come back and revisit it with you and then say,

ah, but you said this. Thank you very much, Jerry Brito, for sharing your time with us this afternoon. That's been really lovely. and I'm sure our listeners have enjoyed that. My pleasure. Thank you. So this is Sean Jones, still at Bitcoin 2014 in Amsterdam. I'm on day two, and I'm sitting next to Luis Coende, who is perhaps a very different kind of regulatory interviewee for me

because Luis comes from HackerSpace. and I think you were awarded the best hacker in Europe under 18 when you were only 15 years old. Yeah, that was great, yeah. And how did you get into Bitcoin? What took you there? So I'm a big deliver of free software. So I got to know Bitcoin like three years ago or four years ago, almost when it was kind of born. Well, a bit later.

And first I was kind of skeptic. But then I got through the protocol and the peer-to-peer network, and I love peer-to-peer. I love free server. So it was my natural love. That was your sort of natural place to be, and you engaged with it. Yeah. So you have a rather unique space in European institutions, and I presume because of your award when you were only 15, you've got some visibility and the European Commission reached out to you and I believe you're

an advisor to Neely Cruz who's one of the commissioners and I believe vice president of the commission at the moment. I'm kind of interested in and I'm sure our listeners will be in finding out from you a little bit how receptive the European Commission is and the sort of rather stuffy foundation, you know, an institution of Europe, the bureaucracy of Europe. How that's engaged

with Bitcoin and maybe you can give us some insight on that. Yeah, well, it's kind of complicated because Bitcoin is a space that's moving really fast and the European Commission isn't moving that fast, to be frank. But I think that

Nili really likes, you know, the internet really likes startups and Bitcoin is in the startup space. So, see kind of, like said, the problem is that, you know, the European Commission has any government in this planet has some very intrinsic roots with the banking system, the financial system right now. A big part of the financial system is not kind of understanding

that Bitcoin is an opportunity and not a dangerous thing. So I think we have to wait two through three or five years, I don't really know, to see the European Commission and Europe totally open to Bitcoin. Because right now they are kind of seeing it as an opportunity but also as a year. And when everybody starts seeing need only as an opportunity, then the European Commission will be more receptive, I think. So I think what you're saying is they're interested, but they're not fully engaged yet at this stage. Yeah, yeah, it's just like that, yeah.

Do you think that Europe sees, or the European institutions, see an opportunity for what's known as regulatory arbitrage? You know, if other jurisdictions, perhaps most notably the U.S., take a... more restrictive approach in their regulation, that this actually is an excellent opportunity for Europe? I think it is. Also, if you have been following all the laws about Bitcoin in the US, they have a very complicated situation right now. We're here in Europe.

We got a lot of legislations, but we can, I mean, you can operate using a bank. license for example for a bank partner you can operate in the whole Eurozone and that's really cool I mean in the US you have to get a license from each of the states that's kind of crazy so that's a huge advantage that we have here in Europe but we have to exploit it obviously and we have CIPA transfers as well that are way better than the HCH transfers and they have in the US so yeah we have we have the tools so Europe is going to be and some people already think think it is a better area in which to start a Bitcoin business.

Yeah, indeed. And long may it continue, I would say. Do you have any predictions for Bitcoin in the EU? Do you have any insight into how that's actually going to pan out? You said three to five years? Do you know something we don't know? Yeah, well, I think three to five years is like mass adoption maybe and, you know, thinking about Bitcoin as something good and not something risky as some of they think right now. But I also heard that they are working on a document with some, let's say, not laws, but propositions of how to regulate Bitcoin in all of the Eurozone.

And that will be out, I think, in June. This is the European Banking Authority, the EBA that's planning that. Yeah, that's it. That's it. Yeah, we had one of the panelists on the first day of Bitcoin in 2014 was from the European Banking Authority. And yes, I think they're saying within a couple of months they will have published their Yeah, so that's really cool.

And also, not only from the law perspective, I think from the startup perspective, we will start seeing more and more ventures. Because, I mean, when the US VCs get in and invest serious money, then the European embassies will follow. And the VCs from the US are investing serious money already. You only have to see BitPays $30 million. 30 million, yes. Yeah, 30 million.

So that's odd. So European VCs will follow and, you know, more money, more startups, more invasion. So that's really cool. Now, if I understand correctly, you're starting up something new yourself and you're moving to Switzerland. So you're moving out of the European Union into an EEA country, so sort of a half and half. Yeah, yeah. So I think one of the things we lack here in Europe is a serious exchange. I want to be saying names, but the two most uses change in Europe,

that have more than the 70% market share are in a grey zone. They are not compliant. One of them is kind of illegal. And we want to fix that. So we just raised 1.3 million euros from the biggest Italian VC. And we are moving to Switzerland to start something serious that makes Europe. Because we think that an exchange is the base of all the Bitcoin economy. I mean, then you can build wallets on top of it.

can build, you know, European bid pay, for example, on top of it. So, so we want to get the basis right. We want to make something perfect and very serious. And is Switzerland a better place to do business from at the moment? Yeah, yeah, I think so. Mostly because of the laws there and because of the financing innovation they have there. I mean, it's the length of money and that's pretty clear and they live off financial sector so so that's that's a place i think and they also have a very strong relationship with the european union so so i think that's a place you have the best of both worlds when you yeah yeah exactly in switzerland indeed and does your project have a name yet or is that something you're not releasing right now it is called bit syrex that means bitcoin serious

exchange so that's yeah that we are launching in the end of the year so i think so i think I think our listeners will be watching this space and watching out for you and your new exchange from Switzerland. Towards the end of this year, watch this space. Luis, thank you very much for sharing your time with us today. Thank you, you, welcome. So we hope you enjoyed this episode about regulation. We'd like to thank Sean Jones for her excellent work in capturing these very valuable opinions. If you enjoy this episode, please consider tipping us at Epicenterbidcoin.com slash tips.

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