Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Siân Jones: Bitlicense and the Regulatory Straitjacket

Episode Date: July 20, 2015

In this episode, we revisited the perennial topic of digital currency regulation with Siân Jones, our regulatory correspondent and founder of the regulation-focused virtual currency consultancy COINSULT. With the final version of the BitLicense, what may turn out to be the most influential document for digital currency regulation, is now out. Besides diving into many different aspects of the onerous BitLicense, we talked about California’s coming rules, how Bitcoin startups will be affected and the implications of Ripple’s fine. NOTE: Since the episode was recorded the advocate general at the EU Court of Justice recommended that Bitcoin be exempt from VAT. Topics covered in this episode: A brief primer on BitLicense and the process by which it emerged What the key aspects of BitLicense are and how they changed through the revisions Why BitLicense will stifle innovation by dramatically increasing the cost and bureaucratic burden of running a digital currency startups How different companies are responding to the rules Why California’s virtual currency draft bill got a lot of things right What Ripple got fined for and why FinCEN could go after most cryptocurrency startups for the same reasons The status of the European Court of Justice case on VAT Episode links: NY BitLicense rules and regulations California's virtual currency draft bill FinCEN fines Ripple Labs Inc. What Ripple's FinCEN fine means for the digital currency industry Canada Senate digital currency report ECJ official proposes Bitcoin VAT exemption Siân's company COINSULT This episode is hosted by Brian Fabian Crain and Sébastien Couture. Show notes and listening options: epicenter.tv/088

This episode of Epicenter Bitcoin is brought to by Voltauro, the gold to Bitcoin Exchange. Trade gold to Bitcoin instantly and securely, starting at just one milligram. Go to Voltoro.com to deposits in Bitcoin and start trading today. And by Shapeshift. With no account or sign-up required, it's the easiest way to buy and sell gems, dash, new bits, Minero and other leading cryptocurrencies. Go to ShapeShift.I.O. to instantly convert your altcoins

and to discover the future of cryptocurrency exchanges. Hi, welcome to Epicenter Bitcoin. The show it talks about the technologies, projects, and startups driving decentralization and the global cryptocurrency revolution. My name is Sebastian Quirio. And my name is Brian Fabin Crane. We're here today with an old friend of ours,

Sean Jones. She's been on the show quite a few times. to talk about her favorite topic, which is regulation. And it's been a while that we did the last episode on regulation, but quite a few things have happened since then. So we wanted to have her back on to dive into these topics. Thanks for joining us today, Sean. Well, you're very welcome.

It's always huge fun being on the show with you guys. You're making me start to feel like an old piece of furniture. I mean, I'm comfortable and you're used to. Indeed, indeed. I'm not sure that I would describe regulation as my favorite topic. Nice t-shirt, by the one I know about. Nice t-shirt, by the way. Oh, yes, my epicenter Bitcoin one, yes.

Thank you. Couldn't wear anything else. Right, yeah, I think it's interesting because when we got started, we kept talking about regulation. It came up again and again and again, and then I think it's sort of faded a bit into the background in our programming. I'm not exactly sure why. I think there was a lot of news at the time,

and maybe the news has decreased a bit, although there would be a whole lot to talk about today. And maybe also it's just the same story over and over, and there's a lot of repetition, right? I was going to say, you know, you just get bored of listening to me talking about. I mean, it's just often when you have some, for example, with these guidances,

like someone makes a statement, then the next person makes a statement or next bank or central bank or something and it tends to be pretty much a word by word copy of the previous guy. There's a lot of that, that's for sure. But there have been things that we talked about in the past, some of them have come to fruition of late

or coming to fruition. And so it's kind of, I won't call it exciting because I don't think that's quite the case, but it's certainly having an impact on the industry. Right, but so today will be a bit different because there are, I think, a few really big news that aren't just sort of statements about some opinions or something. And the most importance, of course, is a bit licensed, which was announced. When was that two years ago?

No, it would say, believe it or not. It was only a year ago. It was June last year. And there was all this huge commotion at the time, right, a lot of interest in the Bitcoin community. and now it's actually enforced, and it seems to have sort of gone without much attention that's happened. But for people who aren't too familiar,

can you give a sort of a very brief description of what the bit license regulations are? Sure. So this is New York State's own set of regulation. They were first out at their start. block by first of all having hearings on this new stuff of digital currency. And that started at the beginning of last year. And by the summer of last year, 2014, they decided to issue some draft regulations.

And I say some, if I remember correctly, the first version of it had about 40 pages of regulation and undoubtedly incredibly wide in scope and really in most people's opinion burdensome and rather too vague in ways that sort of it tried to catch absolutely everything and surprisingly went over and above a lot of federal regulation so it seemed on the face of it to duplicate certainly some of the money laundering provisions and indeed make them more onerous so that you had to do them sort of for federal authorities. The FinCEN is the government agency that deals with that. And also for New York State. So it was very costly, very burdensome, very wide in its terminal.

and extremely vague in some areas so that it, you know, when you've got definitions that are broad, very all-encompassing you, but somehow not precise enough. So they put it out for consultation or for feedback. Initially, there was a 45-day period that ran, if I remember correctly, until September last year, and they extended it because they had, I believe, well over a thousand items of feedback coming in, some quite long, some quite short, some very sort of academic and some just generally from members of the public who just didn't like it. And so they extended that and that ran into about October time, into the autumn.

and they took a lot of that on board and came out with a second draft, if you like, and that came out at the beginning of this year, 2015, and there was a further period of feedback, and as a result of that, they did some fine tuning. And in June, they published June 2015, they published the final, version, this is the regulation, this is the rule, or set of rules, it's still something in 40 odd pages, so it's still pretty extensive. They tightened up on a lot of the, a lot of the provisions in there, a lot of the detail, and the result is that it's on the kind of, on the book since

the end of June. So we're recording this in July. And folks have 45 days, so only until the first part of August, to get their applications in if they're caught by the regulations. So that's the background. And I think one of the key takeaways,

but what you just said is the cost and burdensomeness of this regulation is just, I mean, It is very wide, encompassing and vague in what it talks about in the document. And it just seems like there's no way that this is going to allow any type of innovation within the space. I mean, I don't see how anyone is going to be able to build anything if they're going to be regulated by license by bit license or want to play. in the regulated space? It is burdensome.

It's very broad. It's quite, in spite of the number of iterations it's gone through, it's still not as precise as a lot of people would like. There's been a fair degree of criticism at some of the definitions. the scope is still quite willy. They've been more precise in the first version. They took out, they had, or it could have been construed that they were including, say, software companies that were developing applications for virtual currencies.

And they clarified that and took out the, took out those kind of provision. So they did a bit to narrow it down. but it's still extremely broad and vague. I think if you look at the sort of larger picture, right? The United States likes to call itself the land of the free, and this is a strong idea of like free markets and capitalism and competition and all that stuff. And then if you read this thing, it's just a complete joke.

Like this is like you could easily have seen a country like North Korea writing something like that. Because there's just like nothing of that in there. because it essentially gives complete power to this superintendent to say who's allowed to do business, how are they allowed to do business? And there are clauses in there. It just made me incredible that there's one, nothing in this part shall be construed as limiting any power granted to the superintendent under any provision. So there's something I gave.

And then another one is, I think, a crazy provision as well. well, that, you know, one has to get permission if one ever changes the product or makes a new product or any material changes. And then, of course, the question is, what are material changes? And then there's this definition there. So a material change may occur when a change is proposed to an existing product service or activity that may cause such product service or activity to be materially different. So material change is making something materially different. Of course, that does not limit at all, like what Mr. Superintendent can call the material change. So I think it is quite crazy.

For example, any merger and acquisition has to be approved by the superintendent, and he has to judge that somehow this is in the interest of the public. Of course, there's no standard for saying what it is, so he can do whatever he wants. I mean, I am quite frankly, I think this is just crazy. And this is just the beginning, right? Because if other states start adopting regulations like this, then you potentially face with a situation where you have to be licensed in everyone in the states. And different states might have different provisions like this,

which may vary material change may mean one thing in one state or another. Yeah, well, let me think. throw in another one, which I also thought was sort of crazy. So, right, one of the things is when you get regulated, you have to, each employee has to, like, submit, like, 10 years of their work history and the criminal record and the fingerprints and the photographs and the FBI, etc., etc. And then the superintendent is going to judge whether you seize the qualities in that person to run such a business.

I mean, that is just crazy. So this person is going to look at one's record and says, you know, do you have the necessary character qualities to do business? That is, that is, I find that so absurd. And I think it's so, what are we left with here? I mean, either one has to say that this narrative of the United States as this free market capitalism, liberty-loving country is just complete bogus. Or maybe there's something big that I'm missing here.

Well, one of the problems is for us in Europe is that we have an entirely different system that is based on legislation that comes from the top and regulators just execute it. And there tends not to be anything like the sort of the discretionary powers that are granted to our regulators in Europe. Whereas in the states, a lot of power is devolved to regulators as supervisors. So the New York Department of Financial Services, the superintendent who was Ben Lorski, who kicked this thing off, he's now actually just moved on. His sort of final act was to announce the final version of Bittliz. And this is correct that what he has moved on was to advise. companies how to comply with this crazy regulations, no? I mean, I think in any democratic country,

that should be illegal. Well, of course, we don't exactly know, you know, exactly what he's going to be doing in his new role, but he's certainly gone into private practice. If you talk about the conflict of interest, I think we have a wonderful example of a conflict of interest here. Well, I've heard all sorts of things said about his old. ultimate ambitions. In the USA, you have to remember that a lot of these appointments are political in nature, and sometimes it's a pathway to a political career. So I think you might extrapolate from that some thoughts about the direction that this has gone in and is going in might sort of be borne out of some of that. I'm not suggesting for one moment that this is a subject that has to be looked at. Everywhere in the world is looking at it.

And indeed throughout the US, but let me pick up on. one of Sebastian's points. The reality in the states is it's 50 jurisdictions plus the federal government. So each state makes its own

laws and so far as its own sort of domestic arrangements are concerned is perfectly free to do that. So here we've got New York as a major global financial center. Interestingly enough, a smaller jurisdiction

in sort of global terms, say, California. But, you know, it's a global financial center, and so it's got a lot of responsibility. This superintendent's role is responsible for banking and insurance and financial services, and that accounts for businesses that I believe controlled somewhere around about $6 billion, dollars of assets or something of that order.

I mean, a very significant... Six trillion. Oh, six trillion. Sorry, forgive me, yes. You're absolutely right. Sorry, six trillion, which is a lot of, a big telephone number. And, you know, a lot of focus is on, on it as a financial, a financial center, and it's perfectly right that they should consider it.

the reality is that each of the different states will take a different view. So New York's first out of the starting block, California, maybe we'll have a moment to talk about that later on, but California are doing something, but on an entirely different scale. And other states have started to address the subject, and most of the states are looking at it, and some of them are looking at what might now become the New York model

and may decide to follow New York. Others may prefer to take a more lighter touch approach and be competitive with New York, actually use this as an opportunity to take some financial business away from New York. And I think that's a consequence we're going to see from what's going on at the moment. There are some notable businesses that have said that they are going to quit New York and either move to other parts of the USA or move overseas. So this is a trend we'll see. One of the questions that are, that's very interesting when you talk about exactly that question, you know, is there a competition between different jurisdictions, between different regulatory frameworks is what's the scope?

of this bit license and I think that's also one of the one of the aspects that I personally find so offensive like living not in the US that you know something like the license really has that sort of understanding that well this is applies anywhere in the world as long as there may be in your resident or customer or something like that so can you speak a little bit about what does that actually mean, does that mean only it's not, because it's not just startups in New York, right? It's also startups somewhere else that have New York customers. Will it work to just block IP addresses?

Do you have a view there? Yes. You raise an extremely interesting point. The definition of a virtual currency business activity, which is basically what, if you conduct any of these, you need to get a bit licensed. And what it actually says is that this term virtual currency business activity means the conduct of any one of the following types of activities involving New York or a New York resident. So there's already a pretty wide scope because it's not just about New Yorkers in the sense that they're people who are resident there, but in any other way involving New York. And this is very wide, and as far as I'm aware, has never been tested. It's a very broad term.

So any one of the following types of activities involving New York or a New York resident. One, receiving virtual currency for transmission or transmitting virtual currency, except where the transaction is undertaken for none financial purposes and does not involve the transfer of more than a nominal amount of virtual currency. believe that nominal is sort of defined anywhere. So that's going to be an interesting one. Are we talking about, you know, a dollar's worth or a hundred dollars worth or a thousand dollars worth? What's nominal? And the second activity is that of storing, holding or maintaining custody or control of virtual currency on behalf of others. So that's actually quite a good one in a way

because it's essentially talking about a virtual currency, a digital currency business that's looking after other people's money or holding other people's money, if you want to think of it in those terms. And it's probably right that there should be some standards for that, if you think about losses that have occurred, whether through fraud or through just inadequate protection measures or being managed by people who just didn't understand the extent to which they were going to be responsible for other people's assets.

If you think about some of those cases over the history of Bitcoin to date, then that's probably a good thing. And then the third thing is that of buying and selling virtual currency as a customer business. So that's essentially exchange activities, I guess, if you think about it. And the fourth case is where it's actually mentioned that it covers exchange services of customer business. I suppose there are some differences there. I suppose trading might be different. And this is the really quite worrying one in one sense.

And that is controlling, administering or issuing a virtual currency. So there's this question of who controls it, who administers it, who issues it. Well, issue is probably quite easy in decentralized world. Nobody issues it, but controlling is a little worrying. Will that defect miners? There's a strong possibility, yes. I think that that is one concern, and indeed at least one of the major mining pools announced that it was closing on the back of that particular provision. So at the moment, the feeling is that yes, it does include minors.

I want to point out that regarding what you just, the statement, New York resident, let's read what it says about New York resident. So a New York resident is a person that resides, is located, has a place of business, or is conducting business in New York? So you could simply be a tourist in New York because you're located there, from what I understand. Or you could be conducting business in New York on something completely unrelated. So you could be perhaps a Canadian.

and living in Canada, I've never set foot in New York, and have a digital currency business and conducting business with someone in New York on something completely unrelated, maybe you're just, I don't know, buying shoes on some website. I mean, this is the point. We don't really know how extensive this involvement provision is. But you're quite right. It's generally felt that involving New York is. extremely broad and will capture an awful lot of people who are engaged in virtual currency

businesses even though they are not in New York and even though the people that they're doing business with are not New Yorkers but where there might inadvertently be some unrelated relationship with New York. Consequence of that of course is what you end up being, right, is that no business will be able, or almost no business, will be able to be totally sure that they're not violating the license, right? So every startup in this space will have maybe some, even if it's small, some risk that they could be actually falling on to the license. And of course, it's always cases like, well, if they don't like somebody,

they can go and look very closely at that specific company, find some way they're violating the license, or they should actually be regulated, but they didn't, and go after them, which I think is extremely, extremely worrying. Can we just point, can we just make the point that this regulation was written for exactly that purpose? Can we agree on that? I mean, for the most part, I think that the fact that it's so vast and so, uh, vague in its terms, specifically will make it possible for New York regulators to go after people

that they don't like or that they perhaps don't agree with political ideas or business ideas or what have you? It is common in U.S. financial regulation and in the laws affecting finance, money, payments, to be global in scope. It's a particular perspective that is taken by America. It has a number of other laws that are effectively global in nature. There's been a lot of emphasis in the last three or four years over a piece of legislation about money that Americans might hold in banks

anywhere else in the world and making those banks in other parts of the world responsible in various ways. So it's an outlook. It's a particular outlook which certainly those of us in Europe are unfamiliar with. We tend to think about jurisdictions as looking after their own and not trying to reach globally. It's an imperialist outlook. I couldn't possibly comment. Some people might consider that those are acts of a –

of financial imperialism or thereabout. Modern imperialism, certainly. Today's show is brought you by our friends at ShapeShift. Shapeshift is the fast and easy way to trade altcoins, and they now support over 30 of the most popular alt coins, including Dash, Swarm, Piercoin, vert coin, Doge coin, gems, and so many others. The list just goes on.

When you want to trade some alt coins, forget about using exchange. What, do you still use a Walkman? No, that's so 20, like, not that's not I mean 20. That's like 1995, man. Just go to shapeshift.io and get it done in less than one minute with no account or signup required. Here's how it works. You head over shapeshift.io. You choose the currency you want to sell.

Let's say you want to get rid of some bitcoins. And the currency you want to buy, let's say you want to buy a doge coin. You then simply send the big points to the shape shift address. They change it for you and put the those coins directly into your wallet. Super easy, boom, done. No account, nothing required. By the way, ShapeShift has just been running an equity crowd sale campaign, so you were actually able to buy equity in ShapeShift, unless you're American. And you can check that out if you're interested at Banktothefuture.com.

That's BNK, do thefuture.com. We'll put a link in the show notes. So thanks so much for their support, and you can give it a try and trade some altcoins, trade some coins on Shapeshift.com. I'd like to also touch on the cost of becoming licensed under bit license. So it says that each applicant must submit an additional application fee in the amount of $5,000 to cover the cost of processing, blah, blah, blah. And so these license fees will not be reimbursed in the event that the license doesn't go through, if the application process is rejected.

So if we look to the future and perhaps California has a regulation and who knows like next Texas and other states and next thing you know, I don't know, some country in Europe starts having licensing as well. And as a company, you now have to upfront all this money to become licensed in all these jurisdictions because they are so vast. And in any case, you need to be, ensure that you're abiding by law in each of those jurisdictions. Wouldn't that just make it completely impossible for any startup to even come to existence? But the real cost is not the $5,000. The real cost is hiring the lawyers and hiring the staff that's going to write those manuals and policies and complying with that.

I mean, that is going to be, I mean, I don't know if you have any estimates, but I mean, it seems like to do that probably it will cost hundreds of thousands of dollars in year. You see, you don't need me on this show. You know all about regulation and the implication. You're absolutely right. The cost, the $5,000 is the smallest item of expense. Some people think it's a pricey application fee. and indeed, you know, you've got annual renewal fees and you've got when you get your periodic examinations and they come and check you out, you have to pay fees for that and so on and so forth. But all of those are the smallest part of the cost. Some of the requirements have very expensive implications. You're required to have competent, compliance professionals, you've got to have a compliance officer, you have to have anti-money laundering

professionals, people who are experienced in that field, and you have to have a chief information security officer and have, although they've lightened up a little bit on the security provisions, it's still very heavy on cyber security requirements. And so when you total up all of those kind of costs and let's bear in mind that compliance is not something that's just in the crypto world. Financial services generally have had to beef up on their compliance staff in terms of numbers and so it's become very much the job du jour. It's the it's a good profession to be in and the top professionals command very high salaries. So when you start adding all those costs up,

you're probably looking at quarter of a million to half a million US dollars a year would certainly, to my mind, not be far off the mark. Obviously, it depends on your business model, and it does depend on your business. it depends on your business and on your scale and various other things as to quite where that costs it. But it certainly will penalise the small businesses, although there has been some concession there. In the first draft, it was like it was all or nothing. And there was a lot of criticism and they have given a sort of version, I like to think of it as sort of a bit

license light, a sort of provisional license for startups. But there's a sort of a bit of a The costs are still going to be hefty. There's no doubt about it, certainly for a very small startup. One of our sponsors, ShapeShift, they were, I think, the first company or maybe the best-known company to announce that they're leaving New York. Of course, it makes perfect tense, no, with their product, because their product is very easy to exchange cryptocurrencies. If you start to have to do K-Y-C on every person, they would make an awful product. So first of all, how can startups avoid being effective by Bid License? Is blocking IP addresses, is that going to be effective or is that going to be insufficient?

And do you see that, do you have some insight in other startups, how they are reacting, other companies, how they're responding to the Bid License? Well, in spite of the fact that we've been talking about it on two or three shows and others, of course, it's received a lot of publicity in the, in the, in the, in the, in the, in the, in the, in the, in the, in the virtual currency media, I don't think enough businesses have really been considering the implications. You're very right.

I mean, companies like Shapeshift, who are a crypto-to-crypto business, they are also caught by these provisions. So this isn't just about fiat to crypto or crypto-to-fiat. It encompasses crypto-to-crypto. and and so, you know, it becomes very difficult to comply with some of the provisions at all. It just isn't possible.

So it's going to cover people globally because you really don't know if the person you're dealing with is a New York resident or some way involving New York. So you could be, you know, if you geo-blocked New York IP addresses, well, what happens if someone from New York happens to be visiting Los Angeles when he or she performs a transaction? So your IP address is a California IP address. So, you know, you've got, blocking, geo-blocking isn't going to be sufficient. But I guess the question would be then, is that enough of, can you then say, well, I tried, right?

Oh, no. No, no, that's not good enough. No, it's an all or nothing. It's absolute. And if you inadvertently breach one of these provisions and you perform a transaction when you should have been licensed and you weren't licensed, then I'm afraid they'll, you know, it's an offence. And as far as I understand it, it's potentially a jailable offence and certainly a finable offence.

And, you know, USA is quite aggressive at trying to make examples of people outside its jurisdiction, outside its territory, I should say, but within what it treats. as its jurisdiction. Well, yes, and in gambling, there have been cases where folks have been indicted and they've tried to have them extradited from other countries or when they were passing through the US and didn't even realize that they'd fallen foul of some law or regulation have then arrested them on landing in the US. This has happened a number of times. If you remember in the case of Liberty Reserve, so that's kind of a related industry.

They close down businesses and their bank account all over the world and sought to arrest people in a number of jurisdictions and sort the cooperation of those other jurisdictions, law enforcement and so on and so forth. So ignoring this stuff or thinking that, you know, I'm too small and I'm not in America and I'll do my best by just geo-blocking New York IP addresses or even US IP addresses may not be sufficient. Today's magic word is Imperial. I-M-P-E-R-I-A-L. Head over to Let's TalkP-P-P-C-Coin.com to sign in, enter the magic word and claim your part of the listener award. One topic that hasn't, wasn't discussed or mentioned in the BITLICCISN,

and of course multi-sig makes this whole thing a little bit more complicated because, you know, for example, a custodianship is a regulated activity, but what happens now if you split that custodianship among several parties and none of them can actually use or access the customers fund with a lot of permission about one of the other parties. So what do you think this means for multi-sick providers? Well, this is one of the areas of vagueness that when, you know, those of us in the compliance and colleagues in the legal profession are a bit concerned about because if you look at the terminology of New York's bit license, it seems to be suggesting that any measure of control,

So if you're just one signatory and you're based in New York, then you're caught by it. Or indeed, if one party is involved with New York or is a New York resident and so on. And so you'd be caught by it. Whereas this is where we start to see all these little subtle differences. The California legislation, which is not yet enacted but getting close, has taken a different approach. and has been more precise and refers to full control. So full control means we believe it's probably to be interpreted as being total control. So a single signatory on a single sig wallet.

Whereas on a multi-sig wallet, you know, that's not, no one party has full control and so you would fall outside of the provision. So New York looks very much like it doesn't take any regard to being multi-sig or single-sig, whereas other jurisdictions are starting to differentiate. Now, on the topic of control, I mean, it brings to my mind the idea of smart contracts. And if you have smart contracts that initiate machine-to-machine payments or in the area of Internet of Things, for example, you have a software, smart watch, which is a smart watch, but maybe like a washing machine sending

money to a service provider or repair facility, then who's to be break-related? I mean... Well, I actually, I saw a provision that applies to exactly that which says a

a licensed company is not allowed to do business of anybody that doesn't have a physical location somewhere. Yes. I mean, you're touching on something that will become increasingly interesting over the coming years, Sebastian. That is the whole question of the capacity, if you like, of devices, the legal capacity of devices to enter into binding contract. you know, are they agents of the people who own them or who possess them or if they're free thinking? And I suppose you could take this, extend this to the whole concept of artificial intelligence and so on.

These things that are free thinking would be free thinking or independently thinking is perhaps a better way of putting it. I mean, not even thinking. It's just the fact that they're in automated and autonomous. actor. I mean, they could not be thinking at all, just be completely autonomous. I mean, you have a very simple program that doesn't necessarily have any intelligence, but is autonomous and can interact with other. Well, and so is it the agent of the person who's sort of set it up because they take responsibility for what it is going to do? But of course, it's impossible to identify. So then does it have some, well, that's of course another matter entirely. We're

absolutely right. There's a lot of academic debate at the moment on this very topic. And it's going to be very interesting. I think the law will do what it always ends up doing eventually, and that is catching up with technology. Technology is changing how things are transacted, and eventually the law will have to catch up and decide how to treat it. At what point does a device in the Internet of Things take responsibility. Can it, of course, take responsibility? Of course, it can't in the sense that

we know it today. So in a world where everybody is accountable, how do you make someone accountable for the actions of a device? Who knows? I mean, this is new territory and it will keep lawyers very busy. I'm sure it will. So you mentioned the California license, which is currently in It's going through the legislative process. Right, so it's in, I guess, in a draft process right now. Well, it's a proposed piece of legislation. So an assemblyman in California has drafted, he's actually the committee chair of, I think, the banking and finance committee, something like that.

And he has drafted a piece of legislation that was published around February time. February this year, 2015, and has been working its way through the various stages. So it's passed through the Assembly, which is the lower house of the legislature, and it's already had its first reading and a committee reading and some amendments in the Senate, the upper house. So it is probably, I guess, somewhere about three quarters of the way through becoming law. it's been it was considerably

lighter in volume than the New York equivalent so we're talking about if New York's was something like 40 pages I think when it first came out the California one was about four pages it doesn't attempt to address most matters

it's more about trying to bring virtual currency businesses into the same realm as money transmitter businesses. So trying to find the parallels and bring them into a similar licensing system. So essentially that's for consumer protection purposes. It doesn't really address any issues of cybersecurity and anti-money laundering. There are other provisions for dealing with some of those things in other pieces of legislation. It doesn't attempt

to duplicate things that are addressed by federal agencies, so things like the money laundering issues that are addressed by FinCEN. It's not trying to duplicate those things within the state in the way that New York has done. And some of the revisions, as it's gone through, the legislature have been to sharpen it up. So, for example, this reference that we just talked about to full control is really very helpful in a virtual currency world.

Absolutely deals with the situation of multi-signature in a good way and says basically, you know, you're not actually responsible for somebody else's money if you haven't got full control of it. So that's good. It dropped the provision for exchanges. So it's basically just as a separate activity. So it's only about whether or not a business is holding other people's money.

That's just the issue. And whether that entity is doing it in the state of California. So it did start life by referring to residents of California, not nearly as wide as New York's involving California, but involving California residents. Even that in the latest draft has been taken out and it's been replaced by simply the activities being carried out in California. So the business has to be in... It's for Californian businesses.

I mean, that sounds a lot more reasonable. Yeah. Much tighter, much clearer, much simpler, much more appropriate, not trying to be all things to all people, but rather just saying, Other similar types of business have to be licensed, and there are obviously provisions for minimum capital and keeping money, either bonding other people's money or providing surety for it, or putting it in a certain kind of account that is fairly safe. But these are kind of common sense things that you would expect to see in most where there are financial intermediaries. So yes, much, much more pragmatic and much better, much more appropriate.

One of the interesting things about California is that it's a very large jurisdiction. You know, California is the largest GDP of any of the U.S. states. and you know it ranks somewhere around approximately around number 10 if it were a country in its own right so it's you know out of 180 190 jurisdictions around the world if you were to insert individual US states in there

California would be in the top 10 New York comes up at around about I don't know somewhere around about India or somewhere like that number 14 15 16 something like that. Our show today is brought to you by vultura.com, the gold to Bitcoin Exchange. Now, when you live in Berlin or in France or in a lot of comfortable places like the U.S., etc., we often forget that when you put money in the bank, you don't actually control

it anymore, and it's not really yours. So when things go wrong, do you still have access to it? Maybe, maybe not. And I think the Greece thing has that really illustrated that. And it's illustrated that some forms of money are protected from that. And Bitcoin's one of them and gold is one of them. That's right. If you want to start buying some gold, you can do that very easily with Voltoro.com.

You can start trading as little as one milligram of gold. And you don't even need to do any KYC if you're buying less than $5,000 worth of Bitcoins per day. So that just eliminates all barriers to entry. And the gold that you buy on Voltoro belongs to you. It doesn't belong to Voltoro. it doesn't belong to some third party. You own the gold legally. So go to Valtoro.com and start trading some gold today.

And we'd like to thank Valtoro for their support of Epicenter Bitcoin. What's interesting is just the contrast between New York, which is traditionally a financial sector, and California, which has a history of tech startups and innovation, and the depth in which this regulation goes and tries to either control or not, people's activities. Absolutely. Imagine the complexity with all those Silicon Valley startups and all the Silicon Valley-based VC companies

that have invested in Bitcoin and blockchain companies. Think about all the people who are now employed in California in this industry. It would be really complicated and foolish. And foolish, yes. They'd be shooting themselves in the foot and sending loads of companies away, although some have even on the basis of this lightweight regulation, perhaps not entirely because of California, but because of things that are going on in the US generally,

have up sticks and left. And the most notable one of those is Zappo, who a month or two ago announced they were upping sticks and relocating to Switzerland. I think it would be very interesting to see where all of this is going. I think we're starting to see jurisdiction becoming an issue so far as regulation is concerned. So when you've got a startup and you've got a startup that's just getting off the ground, it has to think carefully about where the costs are going to enable it to innovate freely and without being burdensome. You know, you want your money for development,

your startup money for development and marketing. You don't want to spend it on getting licensed. And then when businesses are starting to scale up, they're thinking about which jurisdictions are going to allow them to operate in a very cost-effective way. And they've got to balance the considerations of where it's possible to operate cost-effectively with where the markets are.

And at the moment, the biggest markets for Bitcoin and Bitcoin-related services, that market is without question the USA and North America generally. So touching again on light-touch regulation, not to spend too much time on this because we do have other topics to cover, the Canadian Senate issued a report on virtual currencies, which proposes a lighter touch at, at cryptocurrency regulation. And perhaps this light touch is most notably illustrated by the wonderful Canadian humor on the front cover, which is digital currency, you can't flip this coin.

Yes. And there's a lovely contrast between the seriousness of the US and New York in particular and this tongue-in-cheek approach from north of the border with Canada, yes. Well, you know, as Canadians, we don't take herself too seriously in any case. Well, and what's really interesting is that Canada came out very early on with sort of concerns about money laundering and sort of set up some enabling provisions and has, as far as I'm aware, yet to do anything with it. Meanwhile, I think it was a referral by the government to the Senate, asking it to one of its committees, its banking committee,

to take a look at virtual currencies, digital currencies. And it did so for about three or four months and came out very recently with a report. And the conclusion on that report was that this stuff is basically, the innovation, it has a lot of benefits, it can improve not only the financial system, but probably also the way that government functions. And essentially, whilst recognising that there are some money laundering concerns, it essentially recommends to government that it should take a very balanced approach and give some breathing space.

And there's a kind of implication of about three years breathing space to do this. We have those messages as contrast as well. If I had a little Canadian flag, I'd be waving it right now. Well, of course, it's only a committee's report, albeit senators are important people,

but they're not the executive. But one imagines that the government, will probably, is likely, I think, to follow that and give more breathing space. Let's move on to talk about Ripple. Because Ripple is kind of interesting in this sort of cryptocurrency context, right, because a lot of Bitcoiners don't like Ripple too much. And Ripple's often thought of as sort of, you know, building things for bank and being sort of very regulatory friendly and being a different system.

I don't know if these some of these accusations are so true, but regardless, Ripple is also a large company, right? I think they have about 100 people. They've raised a lot of venture capital from top tier venture capital firms. And it's quite interesting that even though they've sort of always explicitly been very regulatory friendly, very government friendly, that they have been fined by Finns. for $700,000, what do you make of that?

I think it's what I would call a kind of shot across the bowels. They're setting a FinCEN, which is the money laundering regulator, federal money laundering regulator, think of it in those terms, making a point.

They're making a point because Ripple is arguably the second largest virtual currency after Bitcoin, so it's something that people will sit up and pay attention to. And they're saying, do not treat our regulations and our laws lightly. If you look at the detail of this fine, what the background is to it. It goes back to, I think, 2013. team. So you had, FinCEN was one of the first regulators to issue some pronouncements on virtual currencies.

And basically said, you know, it's like money transmission. So treat yourself as a money transmitter. And effectively the, effectively the so called Bank Secrecy Act applies. Now, Ripple started engaging in what would be caught by that money transmitter law, or the money transmitter provisions of that law, back in, I think it was around March 2013. And a couple of weeks after it started doing that, FinCEN actually came out with this announcement of its interpretation. And patently, Ripple did take note of it because about six weeks later, it stopped those activities.

So these infringements of the law, these breaches actually took place in March and April 2013. Ripple Labs set up a separate company, XRP2, and started, sort of restarted its activities in the summer, I think July or August time, and clearly had the intention of doing it properly, but started engaging in the transactions before it had a money laundering system in place, its procedures in place.

which not having them in place was a breach and before it had appointed a compliant chief compliance officer and so on and so forth and in fact I think it took several months to hire someone in that role so all the while even though it was in on the face of it was its intention to sort of follow the law it kind of thought that you know it didn't really matter or at least that's the way that it comes across in those early days and there's a salutary lesson in that for other start-ups in this space so yeah they did react to the to the to the to the to the FinCEN ruling it did react appropriately and stop its

activities but not fast enough and when it restarted in a different guise it obviously had the intention of doing it right but instead of getting the things in place first, didn't do it. And along comes, Finson, a couple of years later, and said, hey guys, we found you were in breach here. And had a couple of other issues that they should have dealt with in a particular way, transactions that they refused to do because they look suspicious. The implications of that, of course, are because, you know,

Ripple do this exactly the right way, although they were trying to do it the right way. if you look at the space of Bitcoin cryptocurrency companies, I am quite sure that a bide number, certainly the vast majority, if not all of them, have committed similar infringements. Does that mean we can expect FinCEN to start going after a lot of other companies with similar fines and similar charges? I certainly don't rule out the possibility. Obviously, it has less impact the second and third time than it does the first time. It's had a lot of impact, and it's made serious businesses sit up and think about it.

This is why I say I think it's really, and they're trying to set an example. They're trying to get the message across that you need to follow the rules, and you need to do it before you start engaging in any transaction, and so you need to think about all of these things and be properly advised before you start operations. I agree with you a lot, don't. Yeah, the other thing I was wondering about, so it seemed like one of the things Ripple was doing,

they were selling XRP, right? So one of the things, for example, they sold some XRP to Rocha Ver. Roger Ware didn't send them the identity document, of course, they knew who was, but regardless. and they got fine for that, right? That's like an infringement.

Now, one of the things that was done quite a lot in 2014, and to some extent also this year, were these coin sales, right, where companies started at some point, Ethereum, Factam, gems, and others, and then they sold them to whoever wanted to buy them for Bitcoin, right? There was no KYC done on any of these.

Does that mean we can expect Vincent to go after these companies for failing to do KYC during those proud sales? Well, of course, it's not just KYC, and I need to make this point very clear. Or not having an anti-money loan. Yeah, the provisions are much broader than just checking who you're doing business with at the start. There are a lot of ongoing obligations and a lot of procedural obligations and indeed having correct personnel. So all of those things come into into play. You're trying to draw me out on whether or not I think FinCEN will go after others. I think there is a strong possibility that they may attempt to go after some of the larger, better known names in order to make a point.

I think there's a strong risk of that. They may take the view that they've got the message across with, with, ripple and so so long as people pay heed to that and do it differently from now on they might they might not invest so much time in investigating other infringements but it's generally believed that they certainly have investigations underway facts before them that are that that suggests that they might or could go after other people I think one worrying point here is that if you subsequently are, say, registering with FinCEN or any of these other agencies, particularly in the

US, you of course opening your books on all the things that you did in the past, and by definition you're kind of exposing yourself to the risk of being fined for past infringements, even though you're doing it right now. It's generally felt that Ripple were only for or find only as much as $700,000, which with somebody like FinCEN is actually considered a light fine. There were some other provisions that they had to follow, including making some changes to the ripple system and also to the procedures in relation to ripple trade. Exactly. I forgot to bring that out because I saw that as well. It said enhancement of the protocols. Do you know anything about the specific nature of those? I don't think they've been published in any detail, so I think we can speculate.

There have been one or two observations about changes that have been made, but essentially you have all sorts of rules about the information that needs to flow with a transaction and about linking transactions to individual parties. So one of the observations has been that Ripple trade was quietly sort of stopped for, certainly for new business. This is the non-institutional, the sort of personal lines trading, individuals. And I think they just put out a statement of quite recently indicating that they were suspending new sign-ups whilst they improved their systems.

So I guess you can kind of put two and two together and say that that's connected with, that may have been one of the detailed requirements. And certainly that's something that I think we should be more concerned about because here you have a regulator who's saying you've got this stuff that's decentralized. Well, of course, there are questions about the extent to which ripple meets the sort of decentralized, decentralized approach. So, you know, Ripple is a good one to go after.

It would be much harder to do this with Bitcoin and others. And is trying to influence the nature of the protocol, the nature of the system, the anonymous or pseudonymous nature of it, by getting it changed in order to conform to, the anti-money laundering frameworks that already exist, bring it, if you like, into line with the existing controls that, say, banks and other financial institutions have to follow. So let's, before we wrap up, move on to a topic

which is a bit closer to home for us, which is the case of BAT. A few months ago we mentioned this on, I think, I believe it was the last time you were on, the European Court of Justice is currently, I mean, there was a case at the European Court of Justice that was brought on, I believe, by a Norwegian or a Swedish gentleman. A Swedish gentleman. And the question is, will Bitcoin transactions be subject to VAT? That is, will you be charged VAT when you buy Bitcoin?

And will the commissions that exchanges make also be subject to VAT? Can you give us an update on that? Just very, very briefly. the case is a very specific case about whether or not there's VAT on exchange commissions in Sweden in relation to a particular business that was run by a single guy, David Hedkrist. And he and the tax authority in Sweden couldn't agree. It went to the Swedish courts and they couldn't work out whether or not it was subject to the kind of financial services and payments exemptions that exist in the VAT rules which apply throughout

the whole of Europe, the whole of the EU. And so they referred the case to the highest court in Europe, the European Court of Justice, for a decision on interpretation of these exemptions. This case started nearly a year ago and has gone through various stages. It's significant now because it had an oral hearing. So the Swedish tax people and Mr. Henquist's lawyers and other interested parties. So a couple of European states, Germany and Estonia gave some input. And the European Commission, which is kind of the civil service and government in that sense of the European Union also made a submission and put these what it believed was the case or they

individually believed were the case to the judges. Now what's interesting about the European system is that a single advocate general issues and opinion shortly after the case is heard and this opinion is going to come out three days, is expected three days after this is being recorded. So by the time it goes out, there likely will be this opinion on the table. It's not binding. The judges then consider that opinion and they can take many months sometimes to do that. So it's not definitive, but statistically the opinions are more. often followed than not. And why this is interesting is that in order to decide whether or not it's subject to VAT,

one may have to decide what is this stuff in the first place. You know, what is Bitcoin, what are virtual currencies? Because they obviously don't fit. They weren't thought about, dreamt about, even when VAT laws were made and when these exemptions were written. And there's a strong possibility that out of this case will come the unintended consequence of defining what in law virtual currencies are. And that may go beyond virtual currencies to other blockchain fuel for want of a better expression. So that has obvious potential implications. And of course it could be that they say, well, this stuff is just like a commodity.

And if it's like a commodity, then it's subject to VAT itself. So then you could have a situation where when you buy a cup of coffee and you pay for it with Bitcoin, you're engaging in some kind of barter transaction. So, you know, I'll take my cup of coffee and pay you in a carrot. And so there would be VAT on both sides of the transactions. So if you think there are 28 member states, the European Union is the largest economy in the world at the moment. It would have a very significant impact if it were decided that this stuff was commodity or goods.

And even if it was decided that it was like financial type instrument and therefore, you know, not goods, not subject to a Bata transaction, they might still rule that the, and exchanges commissions or margins are subject to VAT, and that would make European exchanges highly uncompetitive in a global market. So there are all sorts of significant implications that might be coming down the highway soon. Yeah, so well, Sean, thanks so much for joining us today.

It was a pleasure talking about all these topics. I think it was very interesting, very important. It's not the most uplifting topic to cover, but it's certainly important as participants in this cryptocurrency, Bitcoin, blockchain movement to understand where things are going and how they'll be affected by these various regulatory attempts. No doubt the real world is catching up with innovation. and may constrain it in some way or may help it.

We shall see. Absolutely. So to listen, thanks so much for joining us. So we put out new episodes of Episandah Bitcoin every Monday. You can subscribe to it on your favorite podcast app, Android or iOS,

or you can subscribe to it on SoundCloud. You can also watch the YouTube videos on YouTube.com slash Epicenter BTC. and if you like the show and you're sort of a loyal listener and you want to help us then you can do one thing which is leave an iTunes review that helps new people find a show

and that helps us produce more and etc etc so thanks so much and we look forward to being back next week Thank you.