Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Jerry Brito: The Case for Electronic Cash in an Open and Free Society

Episode Date: July 16, 2019

We’re joined by Jerry Brito, Executive Director of Coin Center. Having discovered Bitcoin in 2011, Jerry was among the first lawyers to talk about crypto in the U.S. capital. In 2014, he founded Coin Center, a leading research and advocacy center focussing on cryptocurrencies. In this enlightening conversation, we talk to Jerry about his paper titled “The Case for Electronic Cash,” in which he articulates why private peer-to-peer payments are essential to an open society. We also discuss Libra and the possible regulatory challenges the proposed private cash system may face. Finally, Jerry explains the recent FinCEN guidance on cryptocurrencies, which broadly follows the recommendations of Coin Center. Topics covered in this episode: Jerry’s background as a lawyer and his crypto beginnings in D.C. Coin Center, it’s mission and the primary battles which the organization is fighting “The Case for Electronic Cash” paper and why cash is vital for a free and open society The main dysfunctions of cashless societies Jerry’s high-level views on Libra How Libra is different from other cryptocurrencies and electronic payment systems The backlash immediately following the announcement and how it was received by governments Ways in which Libra could be regulated The recent FinCEN guidance and how it affects cryptocurrency users and companies Episode links: Coin Center Jerry Brito's website FinCEN’s new cryptocurrency guidance matches Coin Center recommendations The Case for Electronic Cash The differences between Bitcoin and Libra should matter to policymakers Jerry's thoughts on Libra (tweetsorm) Jerry response to Libra Association's Head of Policy on sanction's list (tweetsorm) Buidl Asia HackAtom Seoul DappCon – 20% off with the code “EpicenterDappcon2019” Announcing the Chorus One Podcast Cosmology – A newsletter about the Cosmos network Sponsors: Vaultoro: Vaultoro - Trade gold to Bitcoin instantly and securely starting at just 1mg Azure: Azure - Deploy enterprise-ready consortium blockchain networks that scale in just a few clicks This episode is hosted by Sebastien Couture & Meher Roy. Show notes and listening options: epicenter.tv/296

This is Epicenter, Episode 296 with guest, Jerry Brito. This episode of Epicenter is brought to you by Voltoro, the gold hedging platform for the crypto community. Trade gold to Bitcoin instantly and securely, starting at just one milligram. Go to Voltoro.govol slash Epicenter to get early access to their V2 platform and to start trading. And by Microsoft Azure. Do you have an idea for a blockchain app but are worried about the time and costs it will take to develop? The new Azure blockchain dev kit is a free download that brings together the tools you need to get your first app running in less than 30 minutes. Learn more at aka.m.m.s.comsacenter. Hi, welcome to Epicenter. My name is Sebastian Guzio. And I'm Neher Roy.

So today our guest is Jerry Brito. Jerry Brito is the executive director at Coin Center and previously was at the Mercatus Center at George Mason University. So Jerry has been in the crypto space since, I believe, 2011, and he's been quite vocal as a lawyer and speaking with lawmakers and regulators for quite a long time about crypto and blockchain in general, but mostly cryptocurrencies and Bitcoin and how U.S. regulations apply to these new cryptocurrencies and asset types. It was a great interview. I mean, I think that guy is so sharp and so on point. And so we talked about a whole, a bunch of things. We talked about this paper that he wrote recently called the case for digital cash. We also talked about Libra and everything that's been going around there

and some of the legal implications and regulatory implications with Libra. And Jerry only had an hour with us, so we had to cut it a bit short, but we did talk also about the recent FinCEN guidance around digital currencies and whether or not, you know, exchanges and digital currency issuers are or not money services businesses. So it's a fascinating interview and we hope we will have Jerry on again in the future to talk more about this kind of stuff. Also, while preparing for the episode, I read through Jerry's blogs and his paper on the case for electronic cash. Jerry has a certain eloquence with words.

And I found like so many sentences that I found like, oh, let's copy it into my email. And I'll read through them, read through these sentences someday. And so do check out his writings as well. I find they're so well written and so beautifully crafted. Yeah, so I'll have all the links to everything that we mentioned in the show in the show notes. So we've got a couple of things that we want to mention. So first, you guys are doing a podcast. Corus is doing a podcast.

Tell us a bit more. Yeah. So, yeah, we've started this podcast. We're calling it the Corus 1 podcast. It's going to be quite different to Epicenter. And our thinking here is like when we founded Corus 1, one of our key objectives was to create a community of engaged token holders that work together to shape the future of decentralized networks.

You know? So if you think of a network like Cosmos or Solana or any of these networks, it's ultimately a network of people. And it is important that the people that are holding the tokens that are delegating, that are using these networks, they are really engaged with it. They're informed about what's going on in the network, informed about the governance that's happening there. And so we are now involved with three networks in a production capacity and four networks in a test capacity.

And we felt that we have a lot of insight onto how these networks are being shaped by the decisions that the people in these networks are taking. And you felt that podcasts could bring out what's the internal chatter of these networks very well. and that we were uniquely suited to bringing out that internal chatter. So that's what KORUS podcast seeks to do. It's to improve the conversation around these networks and improve the decision-making in these networks. It doesn't have a defined format.

Some of the episodes will be interview only, but they will be shorter than epicenter. Others might cover, others might be educational covering certain topics. some might have governance debates and things like that. We are still playing around with the format and we would love for you to check the episodes out and give us feedback on the direction you would like that podcast to go. That sounds great.

I haven't listened to it yet. I know there's, I think, three episodes out, but I'm looking forward to hearing it. So I think you can get it pretty much anywhere you get podcasts, right? So like iTunes and I added it to my pocketcast. It's on Spotify. I'm not too sure where you can get it either. I'm pretty sure. I'm pretty sure you can get it like just about anywhere you get a podcast.

So yeah, yeah. Subscribe to the chorus, the course one podcast in your podcast app. Just search for course one and you'll find it. And well, yeah, we'll link to the show notes in the show notes as well. With regards to events, there's a couple of things happening in the next. couple of weeks. So first, you guys are, you and Brian and Sunny are all going to Korea for the Biddle Asia conference. Yes. I'm kind of regretting that I didn't plan to go to this conference now. Yeah, you're missing out a lot of ramen and Bibimbab and kimchi. Yeah, but I get to enjoy

Paris in the summertime when there's nobody here, which is priceless. Yeah, so tell our audience about about what you'll be doing there. So there are two main events. So one is a hack atom, which is a hackathon organized by the Interchain Foundation. And the second is a conference called Biddle Asia 2019. And KORUS is a sponsor of the hack atom and Epicenter is a media partner for Biddle Asia 2019.

We have a session in the hack atom as KORUS. And we have featuring on a panel, we have an epicenter panel at the Biddle Asia 2019 conference. So you can grab, you can meet with Sunny, Brian and myself in both of these events and catch up about epicenter as well as course. Okay, so the hackathon is, I'm looking here Friday and 19th to Sunday the 21st of July and you can get more info at Biddle B-U-I-D. L. Asia slash hack Adam. I'll link to that in show notes. And the conference is just biddle. orgia.

And the panel is happening on the 22nd. So Monday, it's motivated by Brian, and it will feature Adrian Brink of Cryptium Labs, Sunny, Harriet Cowell or Chow of Iris Network, and Liang Liu of Scale Labs. So if you're in Asia in Seoul for Biddle Asia, you should definitely attend and check out the panel and let me know how it went because I will not be there, unfortunately. But yeah, hopefully it will be recorded and we'll be able to release it as a bonus episode. As an epicenter live episode.

Yeah. We'll try to get that organized. And lastly, and I will be here at this event. It was mentioned last week. There's DapCon happening in August, I believe. It is on the 21st to 23rd of August in Berlin. And I will be there with Federica and Sunny and will also, I think, be doing an Epicenter Live episode there

and probably a meetup in Berlin if there aren't too many events competing with our meetup. So you can get 20% off by going. to DAPCon.io and entering the code epicenter DAPCon 2019 that will also be in the show notes. And the last thing I want to mention, I'm not sure if I mentioned it on the show or not. I've been talking about it on Twitter quite a lot is that I started a Cosmos newsletter about two months ago or so. And I've been trying to keep it regular like once every two weeks or so. and the newsletter basically just kind of covers everything that's been happening in the cosmos space over over that period.

So you'll just get a bunch of links to interesting articles, software updates, product updates from all the different wallet apps, validator updates. So it's just basically a bird's eye view of everything that's been happening in the ecosystem over the last two weeks or so. And so to sign up for the newsletter, I would love you to sign up. It's at cosmology.com. email. It's really simple. And you can sign up there and get my newsletter in your inbox. So with that, here's an interview with Jerry Brito. Hi, so we're here with Jerry Brito. Jerry is executive director at Coin Center and previously was at the Mercatus Center at George Mason University. And today we're going to be speaking with Jerry about a whole lot of things, including CoinCenter,

a paper that he wrote titled The Case for Electronic Cash. We'll also talk about Libra since it's on everyone's minds. And finally, we'll talk about the recent FinCend guidance with and how it relates to cryptocurrencies, exchanges, wallets, and things like that. So, Jerry, thanks for joining us today. Thanks for having me. So to start off, why don't you tell us a bit about your background and how you got involved in the crypto space?

Sure. So, you know, I'm a lawyer and my whole career has been in technology policy. I was, as you say, before Coin Center is the Mercado Center at George Mason University, and there I directed the technology policy program, so focused on all kinds of tech policy issues. So old school telecom issues, but also copyright privacy, and increasingly towards the end of my time, they are emerging technology issues. So sharing economy, drones, 3D printing. And then Bitcoin.

So I sort of chanced upon Bitcoin in 2011. and when I saw it, I just fell down to rabbit hole as so many people do. And I think what I saw, just from my vantage point, was all of the regulatory questions that Bitcoin raised. And at the time, nobody was really, certainly not in D.C., nobody was thinking about these questions. That you had people, sort of the main question people were asking on Bitcoin talk, I remember, was, how can this be legal? Because only the federal government has the power to coin money. And, you know, that's not actually correct. And so nobody was really thinking about this.

And I was just very lucky to be right place, right time, and start writing about it and talking about it and publishing about it. And pretty soon just sort of became the person in D.C. The folks on Capitol Hill and that the agencies would go to to ask questions about Bitcoin early on. And as an early lawyer in the space and in D.C. talking with lawmakers and regulators, what were some of the questions that they were asking you at that time? Very early on, they just didn't understand it at all. And so it was very much just how does it work? Then you started getting the questions of, is it anonymous?

That was a question that we would get a lot. And then you started to have things like Silk Road. And so you started to get questions around illicit use. And so early on, I was part of a task force that the Center for Missing and Exploited Children put together with law enforcement, folks at different think tanks, and folks in the crypto community. And it was good because the report that came out from that task force ultimately pointed out that, hey, while there are illicit uses, there are a lot of positive uses here. There are ways to deal with the illicit use, et cetera. and eventually that led to the first congressional hearings on cryptocurrency that were, I think, really good for Bitcoin

because essentially with law enforcement and the feds said that the hearing is that they had it under control, that it's fine. So, yeah, that's kind of what the questions we're always about early on. And what led you to start Coin Center? It sort of became up. So this was sort of after those hearings, actually. Those hearings were in 2013, in late 2013. And just as the amount of attention and interest from government on Bitcoin was at its peak,

right after that, you had Mount Gawks collapse and you had the Silk Road bus. And so you had a lot of attention, a lot of it was negative. And at the same time, really the only institution that Bitcoin had, the Bitcoin Foundation was also kind of falling away. And so there was no institution to really basically answer the basic questions of policymakers needed answers and to develop policy thinking here. And so there was just an obvious gap. And so it was just a confluence of events where different people sort of recognized that gap at the same time. So Alex Morkos, who I think you've had on the show before, who now is a Bitcoin Core developer, Bologis Rinavasin, who at the time was in Dresen Horowitz, myself, our co-founder Robin Wiseman, who runs our lobbying for us. We all kind of saw this and we just saw that this needed to happen.

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To learn more and to get access to Voltoro's brand new V2 platform, which includes an interface overhaul and trading in dash, like coin, ether, and silver, go to Voltoro. That's V-A-U-L-T-O-R-O-D-Gol-E-S-E-Center. We'd like to thank Vulturo for their support of the podcast. Maybe, like, just an update around Coin Center. So what are some of the key battles that the organization is fighting today from a policy perspective? So it's interesting. We have, I think, been pretty successful on the different policy initiatives that we've been focused on for the past.

that we've been focused on for the past four years. So, look, big policy issues that I think you probably have talked to Peter about in previous episodes before was securities regulation. And so there, after all of the, you know, it was, I think for lots of folks, they felt it was a pretty slow process, but actually, I think relative to how the SEC usually operates, it was pretty quick. We got some pretty good clarity on how they view cryptocurrencies, as far as, securities law. So they have stated clearly that Bitcoin, Ethereum, and things like them are not securities. So for us, that's just a huge victory. There's still some outstanding questions that I think affect a lot of folks. But for us, that, I mean, that was something, you know, Bitcoin, Ethereum, are these securities or not? That was an open question just a little bit over a year ago. And it's

not anymore. So we're very happy with that there. With anti-money laundering and Bank Secrecy Act regulation. We, you know, FinCEN came out with guidance in 2013 that explained how they applied the Bank Secrecy Act and its regulations to cryptocurrency and the ecosystem. But there were still a lot of open questions about them, and we thought that they were sort of continuing to interpret it right. But as we'll talk about in a minute, they issued guidance a couple months ago where they've kind of clarified that the way that we've been interpreting and suggesting to be interpreted is the way that they interpreted. So that's a huge. victory. And on the money transmission side, which has been a perennial issue for cryptocurrency,

we've worked with the Uniform Law Commission to develop a model act for state regulation of cryptocurrency money transmitters. That's now making its way to different states. California, cross your fingers, might be adopting it soon, which would be a huge one. And we've also worked with some members of Congress to introduce legislation that would preempt state money transmission licensing for non-custodial users. So if you're running some service that does not take custody, you wouldn't be subject to money transmission. So we're pretty happy where we've been. And so it's like, well, what battles do we have? It's a pretty good position to be in.

The two big battles, and I wouldn't call them battles, but the two big challenges I still see, one is tax. The IRS unfortunately has continued to drag its feet and issuing guidance about cryptocurrency, and so there are a lot of open questions related to de minimis transactions, related to how do you do hard fork accounting, lots of different things. So there we've worked on a report that highlights what are the open questions. We've delivered this in briefings to Congress. to the Treasury and to the IRS. And we've worked members of Congress to introduce a couple of bills that would try to get at some of those problems.

So tax is a live issue for us. And the other is it's not so much a battle that we're fighting. It's just a battle that we think could come. And we want to be prepared for it. And that has to do with privacy. So to date, cryptocurrencies have tended to be very public and transparent. And so that's been a very simple thing to explain. But of course, that's not a good solution for anybody.

You want to have individuals to have privacy in their financial transactions. And that increasingly we're going to see an upgrade to cryptocurrency so that they're private. It's kind of like when we went from HCTP to HCTPS, right? And that's a good thing. But we want to make sure that policymakers understand it. So this is this paper I think that we'll discuss. We've sort of taken a two-step approach. One is my paper where I sort of make the case to policymakers

so that they make sure to understand why we call digital cash, which is digital currency that is peer-to-peer, censorship-resistant, and private, which is what a dollar bill is, why that's important for a liberal open society, which I think we can all agree we want to have. So that's one paper that I wrote, I think I was published in January or February this year. And then the second paper that we published was why Peter. And there he sort of explains, if you wanted to put regulations to curtail digital cash,

you would find that there are constitutional barriers to doing that. So it's sort of two. One is we're saying, hey, this is a good thing and you shouldn't regulate it. And number two, but if you are trying to regulate it, understand you're going to be limited in that. Right. I mean, we've also had Peter Van Valkenberg, also from Coin Center, a number of times on the podcast. And so, you know, we're not going to spend too much time digging into Coin Center because we've covered that organization at length. And there's so many things to talk about.

But those who are interested in learning more about Coin Center and sort of diving deeper into what that organization does, I would invite you to listen to our two episodes with Peter Van Valkenberg, which are 182 and 227. And feel free to go to coincenter.org where you can look a lot more. Of course. It's also interesting to me that when I go through the old blogs of Coin Center, 2015 mostly,

many of these blogs are about how law enforcement uses the transparency of Bitcoin. There's a blog on that. Yep. And I think like some of the early arguments that Coin Center made was around leveraged Bitcoin's transparency to, you know, embellish its position in front of law enforcement.

But it feels as if in 2019 that that plank, because of the technology developments, that plank is going to get weaker for coin center, and therefore there has to be a different thrust, a different way of arguing for the development of these technologies. But I think that's right. I think that's definitely what happened. But I also think that those positions are completely consistent.

So in 2015, when a member of Congress would come and ask us and say, hey, is Bitcoin anonymous or can police catch bad guys? The correct answer is, no, it's not anonymous. And let me explain to you how, indeed, law enforcement has used the blockchain with forensic analysis to catch bad guys. And that satisfies a member of Congress. Of course, you know, in the back of my mind, I might think, it might speculate, you know, but I can also imagine that. in the future, it's not always going to be anonymous. And so we always knew that at some point we would have to address that. And so that time has finally come.

And so that's what we're doing. Very interesting. So I think we've never covered this topic with Peter, so it would be nice to start with you. Tell us about this paper, which is the case for electronic cash. What's the main trust and the argument of this paper? Sure. So the paper is actually not completely about cryptocurrency. Cryptocurrency kind of comes in at the very end.

And the paper is actually just a case. Takeaway electronic. It's really just a case for cash. Because I was telling you before, when I write a paper, I usually try to imagine a reader that I'm writing for. And in this case, my reader was a mid-level official at a law enforcement agency or at a regulatory agency. somebody who maybe instinctively thinks cash is something that maybe could be eliminated or that is problematic because they're always dealing with bad guys.

And you have to say, no, actually. Cash is essential to a liberal open society, which is the preservation of which is a reason that many folks in government who are true patriots go into government service and law enforcement service. to protect, right? They want to preserve an open liberal society. They care about the values this country was founded upon. And that's what they're dedicating their lives to preserving. And I need to explain to them that cash is an essential component of that. And so that's what the paper tries to do. And the argument is pretty straightforward. And I think it's one that I think it's pretty intuitive to cryptocurrency enthusiasts. But I think regular folks, Folks in government probably don't think about it.

And it's this. We are moving to an increasingly cashless society. And I describe how we're seeing more and more transactions moving to basically credit cards or mobile payment systems. And you can look at certain countries, Nordic countries, for example, Korea, where cash at this point is really a relic, right? It's something that is very rare. ATMs are rare.

Bank branches don't carry cash. And everywhere you go, you basically pay with a credit card and they'll look at you weird if you pay with cash. And what I point out is in that world, that a cashless society is an intermediated society. Because if you remove cash as an option, that means every single transaction that you do is going to be intermediated by some bank or some corporation, some payment provider. And what that means is that every transaction is going to be, A, surveilled, it's going to be seen by a third party, and B, the transaction can be blocked, or either selectively or you can be blocked completely from the ability to transact.

When you have that, that is a real challenge to a liberal open society. where, and then so then I basically give some examples of how, for example, in China, this is being used. And China is really a remarkable case study because in the span of really just a few years, cash has been almost eliminated. People have just moved completely to using AliPay and WeChat Pay. And those two account for, I think, like 90% of all mobile payments. in China. And so what you have there is a world where all transactions are visible by these two companies,

which are basically means they're visible to the state. And they will block you if you're trying to do things. You're not, in the words of what an executive from Alley pay are not healthy. The other thing that they'll do is that this feeds into the Chinese social credit scoring system. And this means that, you know, what you buy and what you do is going to feed into your social credit score that then will go into what schools you can send your kids to, what lights you can take, etc. So really, this is kind of having an intermediated society really opens up a door for a more authoritarian. in control of one's life. That's the state control.

You also have corporate potential misuse. And the example I give is Target. There was a case study that I highlight where there was a, this happened, I think, like five years ago. There was a father of a teenage girl who walked into a tariff. This is in the New York Times related this. Walked into the store and basically chewed out the manager. He had a mailer in his hand that was for baby products and said, what are you trying to do? This was sent to my house addressed to my daughter and she is 16 years old.

What are you trying to do? You want her, you think she should be pregnant? What is this, right? The manager looked at it. He didn't know what it was. apologized, he says, I don't know, father went away. A couple days later, the manager called the father and said, hey, I'm just calling to apologize again.

And then father said, no, actually, I owe you an apology. Turns out there's been some activity in my house I didn't know about, and my daughters do in a couple months. How did Target know that that girl was pregnant? they know because every time you buy something at Target, Target is tracking you and making a dossier on you. And so what they would do is when you use, you don't even have to opt into this, by the way. This is completely not, you don't have, there's no opt into this. Whenever you shop at Target, you are assigned a customer number unbeknownst to you.

and this is tied to, for example, whatever credit card you use that is associated with you. And they keep a list of everything that you buy. And so what Target did is that they had a program for expecting mothers where they'd give them discounts and stuff. And so they knew that this cohort of people who had opted in were pregnant. They then basically just correlated the purchasing activity of those people who they knew were pregnant with their wider just universe of customers and just using data mining, they could figure out quite specifically who was pregnant and even when they were probably due, right, based on just the shopping habits, what you were buying.

It's not you're buying diapers. It could just be that you're buying, you know, aloeberry lotion and chocolate, right? That might be a trigger. And so this girl was, uh, deprived of her privacy, and she was deprived of her autonomy, right? She was deprived of her ability to tell her father about her pregnancy on her own terms. And she didn't opt into anything. So what is the only option that you have if you don't want to participate in that? It's cash, right? She could have paid in cash. So as we move to an increasingly cashless world,

we need to preserve a form of cash. And that's, as we all know, that's cryptocurrency, right? That's cash that is, you know, to me, cash does not just mean money. Cash means a very specific kind of money. It's money that is person to person. It's bearer. It is censorship resistant, permissionless, and it is private. And so that's important.

I mean, cash is one option. another option is like having companies that don't like exploit data and especially for something as sensitive and touchy as like a possible pregnancy like I mean that just feels totally unethical and I mean if you from the European perspective just seems like completely absurd that this one actually you know happen there's something kind of paradoxical though but when you're talking about the the idea that money that sort of a cashless society tends more to towards surveillance and payments potentially being blocked. Of course, this is rampant in China.

I saw a video recently. I don't know if this was real or not. I always sort of questioned these videos, but there was a video of someone seemingly in China paying just with like a face ID, so with no phone looking at a camera and someone, like there's some sort of facial recognition and their account is being debited. I don't know if this is true or if it's not. I'm sure it's coming soon.

But this idea obviously makes sense to us. But if you're addressing your paper to a law enforcement officer or a lawmaker, it seems like these are things that they, I mean, from my perspective, these are things that they would probably want, right? Like a law enforcement professional say, hey, yeah, it's great that I can track the bad guys and a lawmaker. Of course, yeah, we want to block people that are not, I don't. know, like paying their taxes or, you know, it seems like these are tools that, you know, given the regulatory landscape and sort of FinC and all the AML and KYC and et cetera, like it seems that those directives go in the sense. No, I don't think so, actually.

Yes, I think that's their initial instinct, right, is to say we do want to be able to track. We do want to be able to block. I want to be able to do my job well and more efficiently. And so that's her initial instinct. And so, but what this paper tries to do is to point out to them what, you know, if we eliminated cash that your job could be very easy and you got all the tax cheats, what are you giving up? And when you point that out to them, people who work at Fence and people who work in law enforcement, they're, again, as I say, the reason they're in those jobs is because they're patriots who care about this country and the values that this country was founded on. And if you point out to them, do you want to be more like China? Or do you want to be more like what the U.S. is meant to be?

They get it. They don't want to be like China, right? They want to be able to surveil people with a court order, right? They understand that with a court order is important, right? They're not for getting rid of court orders, right? So I think that's what you have to point out to them. And so, look, I point out to them, you know, in the past, there's another sort of case study that that I point out that I think for a policymaker,

they should understand. So I explain what's happening in New York with a National Rifle Association. Right. So the NRA, whatever you think about the NRA, whatever you may think about gun ownership or whatever, the NRA is a, what is it, it is a free association of people. It's a nonprofit. So it's a re-association of people that engages in what? It engages in free speech. All the NRA does is publish papers, they lobby Congress, right? So they're engaging in constitutionally protected activity to do what? To stand up for another enumerated constitutional rights, which is a right to bear arms. So what they're doing is basically just a nonprofit engaging in free speech. That's the NRA, whether you like him or not. The governor of New York, Andrew Cuomo, after a school

shooting, he put out a press release where he announced that he was directing the Department of Financial Services in New York, DFS, to basically tell all financial institutions that do business in New York, which means all financial institutions in the world, to essentially stop doing business with the NRA. Or their, basically, their licensing would be in jeopardy. If you cannot get a financial institution that does business with New York to service you, you're dead. You're out of business completely, right?

So what is this? This is governor of New York using his power to basically silence and shut down a political opponent because he doesn't like their political views. Not because they're doing anything wrong. It's just shut them down completely. And so today, that's Andrew Cuomo and the NRA. Tomorrow, it could be Alabama and Planned Parenthood. Right.

We don't want that in this country. That's a very U.S.-centric view, as I must say. Because, I mean, from this side of the pond, it just seems, of course, of course, you'd want to stop the NRA. But, yeah, I mean, I understand from, like, a U.S. perspective, like, under the constitution in free speech, that yes, this does seem absurd. And you're right. So we're definitely making U.S. centric arguments here, right?

These arguments may not be very persuasive to people in China, maybe not to people in France either. But yeah, so what is the NRA engaging in? It's engaging in free speech. You know, like four or five years back, I would have had difficulty empathizing with this argument, but I empathize with this argument

ever since I've founded a cryptocurrency company and have had to search for bank accounts in the US. Trust me, it's like a huge challenge. Even after you get a bank account, every three months, there'll be an

email from your banker asking you a bunch of questions and you'll wonder, oh, am I going to be shut down now? You're paying all the taxes, you have all of your legal documents, in order. You have lawyers in your team, everything. But still, it's a constant worry that one of these few banks

that are willing to give a bank account is going to shut it down. And then we can completely ostracized from the American financial system. This is a possibility we live through as a law-abiding member of the US society. I live through this possibility. And then you realize,

well, if I'm living through it, maybe there have been other people that are also living through situations like these. And then you realize that like, oh, the cryptocurrency is actually a tool for freedom because like there are people like me, they might be doing other things, not doing cryptocurrency, but they have this risk and this tool set serves to alleviate that risk. I think that's right. And look, you understand from that position, if you use, you understand from that position, if you don't have a bank account, you can't do business. And you're not doing anything wrong. You're

doing everything by the book, as you say. And because you're perceived as a risk, you're just shut out. Like, basically, you can't engage in business. We can then query whether you should be seen as a risk or not. But put that aside. In the case of, you know, the case with New York, the reason the NRA is being targeted is for their political views. Period. Like, there's no, risk or not, they're not doing anything except publishing books and videos. And the governor is deciding to single them out unilaterally and say, we're going to just turn you off. Right. And so pointing that out to folks who otherwise might say, yeah, this is a great tool for law and order is to be able to track and shut down people when you point out to them. Yeah, but then somebody

could just use that and for a political purpose. you know, they might begin to understand. And look, we don't say, I don't think the cryptocurrency, for it to be a tool for freedom, as you say, people have to switch completely to cryptocurrency. It just has to be an option. It has to be an escape valve, right? So that if you're engaging in activities,

it might be politically incorrect, and somebody wants to shut you down, where you don't want to be observed, you're this girl, you don't want to, in a cashless society where we no longer have paper notes, you need to have that option, right? The people need to retain that option to transact privately and to transact in a censorship-resistant fashion.

Yes, this I absolutely agree with. And wholeheartedly, I mean, think that, like, of course, we need to have that option. And there are still strongholds like Germany, for instance, is a place where, although it frustrates the hell out of me every time I go there. I have to remember to take out a bunch of cash before I go there. And I'm there quite often.

I still forget to do it. But yeah, it is after a while. It does feel sort of satisfying to be able to say, hey, like, I, like, people here sort of hold this, this very dearly. Like, they hold this right to pay with cash very dearly. And it is disappearing because even the European Union is our passing directives to, you know, try to make card payments easier, cheaper, faster, and at some point, you know, like, even here in France, like, it's illegal to pay for anything in cash for more than a thousand euros, I think. So we do see this clamp down on cash, sort of. Oh, totally. It's Germany is very interesting because, as you say, it's sort of the opposite. It's a country that until a couple years ago, you could not pay in anything except cash at Aldi or IKEA. They did not accept anything except. cash, which is just amazing, right? So I don't have to tell you this, right? Many places in Germany are cash only. What's interesting about that is, is why is that? And I, you know, I don't know.

You know, we should ask some of our German friends, but my intuition is that it has to do with Germany's experience with two kinds of authoritarian regimes, right? They, Germany was subjected to both communism and Nazism. And they're very sensitive to the kind of control that you can experience that way. And, you know, they're trying to always retain that option. It's interesting you point out that in France you can't pay in cash for certain things above. Something that I discovered in my research for this paper is that the reason you had a 500 euro note, which is something that so many members of the European Union are trying to get rid of

is because Germany insisted on it. And Germany would have had a thousand euro note, but we're talked down to just having a 500 euro note. And that I think is ultimately going to get phased out. Yeah, of course. And the 500 euro note is, in fact, used quite a bit for organized crime. So I think it probably will get phased out just because of sheer, like, numbers.

All right. Like, nobody uses a 500-Euro note. I've never even seen one. This episode of Epicenter is brought you by Microsoft and the Azure Blockchain Workbench. Getting your blockchain from the whiteboard to production can be a big undertaking. And something as simple as connecting your blockchain to IoT devices or existing ERP systems is a project in itself. Well, the folks at Microsoft had you covered.

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We'd like to thank Microsoft and Azure for their supportive Epicenter. So moving on to our next topic today, which is Libra. Of course, Libra was announced a couple of weeks ago, about mid-June, and it's generated a whole lot of buzz and acclaim and anger and a whole lot of opinions from a whole lot of different angles and perspectives. I'd like to, yeah, ask you, what are your thoughts on Libra at a high level? At a high level, it's just very interesting what they're doing. I think bottom line, it's a net positive for cryptocurrency if it launches and it gets adoption where people begin to get used to having a mobile wallet where they have a token that is not denominated in their country's currency, right?

If they get used to that, you can imagine that that opens up the idea space for other cryptocurrencies. And so that's all a net plus. On the flip side, I'm a little concerned on the regulatory front or on the policy front that, you know, cryptocurrency has been sort of a minor policy issue in D.C. And again, very U.S.-centric, but I can imagine this is the same in capitals all around. You know, cryptocurrency is an issue that policymakers pay attention to, but it's not the top issue. and there isn't any major player that is sort of like the base of crypto.

You have lots of different folks building lots of different things. And so you have this vibrant ecosystem. And you have Facebook coming in with a project like this. I think there is a possibility that, number one, cryptocurrency all of a sudden gets a lot of attention from policymakers. And number two, Facebook becomes the base of cryptocurrency, even though what the project that they're building is, I would say, not a cryptocurrency and completely unlike any of these other things.

And so we've begun to see folks who reach out to us a little confused about the distinction between something like Libra and Bitcoin or Ethereum. And so part of what we've been trying to do is explain. these things are completely different. There are some similarities, but they're very different. And what's important is that those technical differences drive different policy outcomes. Explain then how, in your view, Libra is different for Bitcoin? And is Libra cash?

No. I would say Libra's not cash. I'll tell you how it's different. Number one, Bitcoin does not have a, company that issues it and redeems it, right? Bitcoin's emerge from a network of peers who join together and validate transactions for each other. So there's no company that controls or runs or issues the Bitcoins, right? Bitcoins do not have a reserve of quote unquote real world assets that back the token and that are redeemable, right?

That is what Libra is, right? So Libra has a company that runs it. It's called the Libra Association. That company issues the crypto, I wouldn't say a crypto. It issues the digital currency and manages a fund of assets that back that thing. These are completely different things. One is a company issuing a token. The other is a network that is open, permissionless, and nobody owns.

controls. And again, these have, you would think would have completely different regulatory regimes. Yeah. Whereas because in one case, there are no intermediaries. And because there are no intermediaries, it poses fewer risks. And because there are fewer risks, there's less regulation as necessary. With the other, there is a major intermediary, the operator, the administrator, of the network that also custodies and manages a fund of real world assets. And so that's a risk and that's where regulation might be appropriate. So you're saying then that the Libra Association, which is this consortium of companies, you know, among which we see Uber, Facebook, you know, some Iliad and a whole, a whole bunch of

others, are essentially the administrators of this cryptocurrency. Because they issue the currency. So based on this basket of currencies and real world assets, the currency, the labor currency will get its value. And then presumably there will be issuance and sort of, I don't know if you want to call it quantitative easing on the other side, but like some whatever, like the destruction of the currency in order to assure like a stable price. At which point do you think, because the paper does say that they want to make it more decentralized. But, you know, should that logic then become, I don't know, like a smart contract, you know, like, or governed by a smart contract that is administered by the Libra blockchain

and the different companies part of the consortium are merely validators? So, you know, something akin to Cosmos, at which point do this, this association cease to become an administrator and just, you know, another cryptocurrency that just happens to have a mechanism that adjusts based on, you know, oracles that fetch the sort of price of other assets? I think the main sticking point for, as you know, as you know, the Libre Association and its documentation, they make a commitment to move towards a permissionless network within five years. I think that's fantastic. I really struggle to see how that's going to be possible while maintaining everything else that is true about Libra.

I think that there are technical challenges about how you do on-chain governance, but I think those are probably solvable. I think that there are incentive problems because you've got a couple dozen companies at the moment who have paid $10 million to be investors in Libra, and they are going to be paid back based on the interest of the reserve, right? In order for this to become permissionless, they're going to have to grow the number of validators to hundreds, thousands, infinity, right? Well, that means that they are going to just voluntarily give up their shares in the ownership

and dividends of the reserve. So query what incentive they have to do that. But putting all that aside, assume that they just decide. of their goodness of their heart, they just want to give that up. The last thing that I think makes this kind of impossible is if you have a reserve of real-world assets, those real-world assets are going to be kept where? They're going to be kept at financial institutions. Financial institutions do not open and maintain bank accounts for Dow's. Right? There has to be a person, a legal person's name, who own.

the assets that backs the currency. That's going to always be a company run by people. Maybe those people want to always abide by the decisions of the Dow, of the network. But what if they get a court order? So as long as this is backed by real-world funds kept in financial institutions, it's not going to be permissionless. I don't see how, let me take it back, I don't see how you're permissionless. One way you might see it is if you can imagine completely permissionless central bank coins being issued, then you can imagine something like what they're doing. But we don't have that yet. Q David Altaudovato on this one.

Yeah, that's right. It's almost as if like to be permissionless to avoid the regulatory regimes. You need to have assets that's untethered to any of the fiat money systems like Bitcoin, like Z-Cash. If you tether it, it will reside in some financial institution, and then they can be court orders, and they'll always need to be like these people that have that bank account, and that will always be this point of centralization, control, trust in that system, and you can't get rid of it. I think that's right.

And I think that that brings up basically two types of regulation. One is control in a sense of being told you can't, you know, you have to freeze these particular address in these funds or you have to block these transactions or, you know, whatever, that kind of control. But I think also if you are managing, you don't have this in Bitcoin, right? In Libra, there is a company that has a fund of billions of dollars potentially, right? Hundreds of billions of dollars, this is very successful. of whose money, the public's money. And they're managing it for the benefit of the public and to keep a promise that they're going to manage it

to have a stable valley. That's a big responsibility that they're taking on. And I think most governments would see that as an activity that probably would be regulated. And then the interesting question is, well, who's the right regulator? What's right regulation? What is Libra, I think, is a very interesting question.

What's the U.S.-centric answer to who regulates Libra in the U.S.? Yeah, it's not clear. So you might think, you know, is it a bank? It looks like a shadow bank, right, in some sense. It's not a bank because it doesn't have a bank charter, right? Is it a money transmitter? Or in the European sense, is it an e-money company? I'm not sure it can be because state money transmission.

So number one, it would mean that the Libra Association would have to go state by state and get money transmission licenses, which is not doing. Calibra, the subsidiary Facebook, is. Libra Association is not. But if they did, money transmitters are only permitted to keep their customer funds and very specific specified permissible investments. This is a problem that Coinbase had in Wyoming and Washington State in Hawaii where Bitcoin was not one of the permissible investments listed.

And so they would have to hold like a 200% reserve requirement. So they just got out of those states. So these are very, very limited things that you can keep the money in. As far as I understand, foreign currency and foreign issued, government debt is not one of the things that's permitted. So I'm not sure how they could be a money transfer. So what are they? The thing that just jumps out to me is if you take away all of the blockchain and crypto and tech lingo from what they're doing and you just look at the activity, what is the activity that they're doing? What is the activity that they're doing? They're

taking money from the public and they are investing it in a fund of foreign currencies and government debt so that everybody has a share of that basically and they're actively managing this fund to maintain its value. What is that? I mean, it sounds to me like a mutual fund. So that's a security, right? And if you look at the definition of security in the Securities Act, it's, you know, there are a lot of broadness like debt instruments just plainly are securities. So this is, you know, it could be that this is a security. And if it's a security, how does it work as a currency? Because securities can only be traded on national security exchanges. So anyhow, there's a lot of questions there to be sorted out through. Well, you heard you hear folks. Libra is a security. No, I'm not saying it is. I'm saying I don't understand

I want to, I'm saying, tell me why I'm wrong. No, that's really interesting. I don't know. I mean, The most interesting part of that is in how do you use a security is money. And I think that's a question that lawmakers will struggle with and Libra probably will struggle with for a while. There was one point that I wanted to bring up, which is interesting. And you sort of touched on it. And that's how Calibra is going actually on getting all these money transmitter licenses, but the association is not.

And you tweeted in response to an interview on the Unchained podcast with Laura Shen, where she interviewed Dante Desparte, who is the head of, policy at Libra. And she asked him, okay, well, then Libra, if Libra is regulated and they have to abide by OFAC sanctions lists, then there's the whole question of, okay, well, what if the U.S., for instance, wants to sanction Iran and Europe doesn't? And his answer was, well, you know, that's not up to the association. That's really up to the companies that are operating as money services businesses. So, for instance, Calibra and presumably others that are operating wallets and applications like user applications. But the association isn't concerned with this sort of thing.

And you argued that people were probably wrong about that. Could you break that down for us? Sure. And look, I mean, I hate to be this guy. But it's not so much that I'm arguing against it. I'm just asking questions, as they say, because I don't understand how it could be otherwise. So look, you've got to Libre Association. Libra Association is, again, the company that is issuing the coins and redeeming them.

Under FinCent's guidance, a company that issues and redeems digital currency is a money transmitter. Is an administrator of a centralized virtual currency? And so would be subject to BSA Bank Secrecy Act regulation. So I don't see how they are. that. If you look at, I think what Libra, what Libra Association is saying is that the on-ramps and the off-ramps to Libra will be regulated. And that's absolutely true. This is the same thing as Bitcoin. Right. So Bitcoin, the network, is not regulated, but Coinbase or BitFinex or whoever it may be, these are regulated. And they do have to know their customers. And they do have to do

suspicious activity reports and the rest. And so Libra is right when they say that the honors and the off-rams, the exchanges that trade in Libra will be regulated. But they sort of, the question is, what about the Libra Association? Right. And so with Facebook or sorry, with Bitcoin, OFAC a few months ago added a few Bitcoin addresses to the sanctions list, right? Just the addresses themselves.

And so this means that regulated parties have an obligation. In fact, not just regulated parties, everybody in the world has an obligation, or everybody in the U.S. anyway, all U.S. persons have an obligation to not do business with those addresses. And if they happen to do by mistake, they need to report it immediately, right? So that's the kind of thing that Coinbase and Bitfinex and the rest will block transactions with those addresses. But there is no company. There is no Bitcoin company that can do that at the network master level, right? With Libra, there is.

And so I don't see how they escape a cord order or just having to comply with OVAC and block sanctioned addresses. Does that make sense? Yeah, that really makes a lot of sense, actually. Because they have the ability, right? As the validators, they could push a software update that blocks particular addresses that they've been told to. And then they would have the obligation to. Yeah, if they have the ability, then they have the obligation. With Bitcoin, there's no ability, right?

So that's why there's no obligation. Right. So very quickly, again, on this topic of Libra, before we move on to FinCend, we're conscious of your time here. So there's been a lot of pushback by regulators and lawmakers in the U.S. and Europe. Particularly in the U.S. there was this committee on financial services who wrote a letter to Mark Zuckerberg,

Cheryl Sanders, and David Marcus, asking them to stop all development of Libra. What does this letter mean, in your opinion? I think this letter means that politicians, members of Congress, from both parties, really, really don't like Facebook. And, you know, different parties have different reasons to be upset with Facebook, but that's just a political fact that members of Congress from both parties just, you know, do not trust Facebook, do not like Facebook. And so when they are confronted with this announcement of we're going to build a new global currency, you know, I have.

think that they are, you know, kind of scoring political points a little bit. But I think also, you know, expressing their distrust of Facebook. Member of Congress can send you a letter and ask you to stop doing something that carries no weight, obviously. And I think it is actually a little bit un-American to use a phrase, that without any legal process, you'd be told to stop until Congress can think about what you're doing. That's not the way things work here. That said, I think it kind of highlights the political reality of Facebook bases. Very interesting.

I think the Libra experiment is going to teach all of us so much about how these systems are going to work. And I suspect maybe the conclusion in the end might well be. That's why Bitcoin is designed the way it is. I think you might be right. Yeah. So moving on to the FinCEN.

So, so FinCEN recently, the FinCEN, which is the Financial Crimes Enforcement Network, they recently issued some guidance on how the Bank Secrecy Act applies to cryptocurrencies and its users. So we'd like to unpack this guidance. But before we unpack this guidance,

perhaps it's nice to know about, like, what is FinCEN, what is its role, and what does it regulate? Sure. So in the U.S. you have the Bank Secrecy Act. The Bank Secrecy Act is a financial surveillance statute. It requires financial institutions to know their customers, to register with FinCEN, and to provide information such as the suspicious activity reports to FinCEN. And so FinCEN is the regulatory agency within Treasury that basically manages the bank secretivety Act, right? And so it makes sure that all financial institutions are doing KYC, reporting to them, et cetera. And so when you have cryptocurrency, the question is what obligations and to which actors in the cryptocurrency space does the Bank Secrecy Act apply, right? Who has what obligations?

And FinCEN in 2013 was the first federal agency to come out with any sort of official pronouncement on cryptocurrency on Bitcoin at the time. What it said is basically the network itself has no obligations because there's nobody running it, right? But on-ramps and off-ramps, exchangers of cryptocurrency have basically our financial institutions, there are money transmitters, and so therefore they're financial institutions that are regulated. It basically had three categories of people, right? It said there were users of cryptocurrency, and users of cryptocurrency have no obligations. There are exchangers of cryptocurrency, and they have regulations. And then it has a third category, which does not apply to Bitcoin, but only applies at the time to things like Egold and Liberty Reserve, called administrators. And administrators are those who administer a centralized virtual currency and put into circulation and redeem from circulation, digital currency, and they are also.

BSA regulated. So they put this guidance out in 2013, and it's a pretty, I think, fair settlement for who has what obligations in crypto. But there were all kinds of questions that once you start applying that to what people are doing in the real world, they're kind of open questions that remain, right? So is a Dex a money transmitter, et cetera? And what they did just a few months ago with their new guidance is nothing changed, right, from the existing guidance. They just restated the guidance as it was in 2013, but answered a lot of the questions that have sort of been bubbling up since 2013. And the way they did that is by taking the original guidance and applying it to fact patterns from business models that have emerged and say, okay, well,

how does it apply to this? How does it apply to this? And we were very happy to see that, that the approach that they took matches what CoinSenter has been advocating for since 2013. So what have you guys been advocating and what are some of the major points in this guidance? So the big headline takeaway is that if you are simply building software, writing software, and deploying software, you're not regulated, right? it is if only if you're engaging in money transmission that you're regulated and money transmission means receiving and sending and that making that super clear I think is the big takeaway. There's still some ambiguities that kind of remain because so imagine that you build a

decks. Building and deploying the decks may not be money transmission but then if you use it, that might be money transmission. So that's interesting. But look, I think it's, again, a pretty fair settlement of where we've got to things. And I would encourage our listeners to go to CoinCenter's article detailing the contents of this guidance. We'll link to that in the show notes and a whole bunch of other content that Jerry and CoinCenter have written, including Jerry's tweetstorms about Libra. which are always great to read. Jerry, thanks very much for joining us today.

Hey, my pleasure. Thanks for having me. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google Home or Alexa device, you can tell it to listen to the latest episode of the Epicenter podcast.

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