Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Siân Jones: Regulatory Update – The Brexit, the EU and the DAO

Episode Date: June 27, 2016

With recent news surrounding The DOA and the Brexit vote causing a stir in the blockchain world and beyond, it seems like a regulatory update is due. So we called up our favorite regulatory affairs specialist Siân Jones to enlighten us on some of the recent developments in Bitcoin and blockchain regulation. Topics covered in this episode: The Brexit and it’s potential impacts on the Blockchain and Fintech space in the UK The Bank of England opening its doors to more than a thousand financial institution and payment service providers Some of the initiatives by the UK government to potentially adopt blockchain technologies The recent European Parliament plenary sitting on virtual currencies and the Distributed Ledger Technology Task Force An update on BitLicense and its impacts a year and a half after being adopted in New York The potential regulatory implications of DAOs Episode links: European Digital Currency & Blockchain Technology Forum Coinsult This episode is hosted by Meher Roy and Sébastien Couture. Show notes and listening options: epicenter.tv/137

This is Epicenter Bitcoin episode 137 with guest, Sean Jones. This episode of Epicenter Bitcoin is brought to by Jax. Jacks is the user-friendly wallet that works across all your devices and handles both Bitcoin and Ether. Go to JAAWX.io and embrace the future of cryptocurrency wallets. And by Ledger, makers of the best hardware security devices. Half piece of mind in knowing your private keys are protected by industry standard physical security. Go to ledgerWallet.com to see the full range of products and use the code Epicenter checkout to get 10% off your first order.

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 Sebasti Inkutua. And I'm Meheroy. Today we are joined by Sharon Jones, who is a regulatory correspondent and currently the head of Edcap, which is the European Digital Currency and Blockchain Technology Forum. This episode is a regulatory update episode.

We'll be talking about this kind of... regulatory themes going on in the European Union, the United States and the rest of the world. Before we start, let's have an introduction from Sharn. Sharn a bit about your background. Oh, hi there guys. Nice to be back. It's been a long time, about a year now, I think. So, lots to catch up on. Yes, so I'm a regulatory compliance specialist, and I've been working in the virtual currency in the blockchain space now for about three and a half, four years. seen it through the various phases. And the last year and a half, I spent a lot of my time working in EDCAB, which is a public policy

platform based in Brussels, focused on the European Union, trying to help legislators and policymakers understand what virtual currencies are, what distributed ledger technology is. and I suppose hoping that and I think we're succeeding as well in getting those policymakers and regulators to understand how to approach regulation and the whole policy issues around the subject so that's what I do. And can you tell us a bit about some of the members of Ed Cab and who who? Who's part of this? Well, so we'll take on anybody. At the moment, we're fairly informally based. I'm pleased to say, but as the activities have been growing this year,

we're going to have to formalize it a bit more. But if I give you an example, we ran an expo inside the European Parliament building. So that was focused on the members of the European Parliament, all 751 of them and their staff and they, representatives from the different EU institutions. And that included a set of roundtables that we had three roundtables, one on virtual currencies, one on blockchain, the other on regulation. We had about 70 people there representing all kinds of traditional and new finance world.

So not only large banks, but also. start-ups, new folks in the virtual currency and in the blockchain space. And we also had folks from the World Bank, the International Monetary Fund, the IMF, OECD, the Bank of International Settlement, from academia. We had folks from Harvard, from Sorbonne, from various universities in the UK. We had folks from the European institutions such as ESMA, the European Securities and Markets Authority and from the European Commission, as well as MEPs and their assistants. So very broad church participating in EDCAB at the moment. We'd like to try and keep it that way because that fosters a very free and frank exchange of views, which right now is.

is important. No, I definitely agree that it's important to have that sort of representation, at least at the European level. Now, on the topic of Europe, since you are here, in a pretty, well, I guess timely, it's quite timely since last week. Britain's went to vote and decided that there would be a Brexit. I'm not sure if it's the UK or just England, but can you, let's not spend too much time on this, but maybe tell us a bit about what impacts this might have on the blockchain space in the UK,

and perhaps as well in Europe. Okay. So just to clarify, what's happened is there was a referendum in the UK. So that's the whole of the UK. That's made up of England, Scotland, Wales and Northern Ireland. And the outcome of that referendum was that I think it was 52% of the electorate. And there was a high turnout voted. to leave the European Union.

So up till now and still today, the United Kingdom is one of the 28 member states and one of the largest member states. It's been part of the European Union for 45 years or thereabouts, approximately 40 or years. And now it's decided, or its electorate has decided, that it wants to separate from the Union. So a very significant,

probably one of the most significant events in my long 63 years. So that's what happened. The outcome of a likely impact, I should say, is probably too early to say. First of all, it's a non-binding referendum. So it doesn't force our legislators in the UK to press the exit button. There is an exit button in the current European Union Treaty, the Treaty of Lisbon. there's a provision in Article 50 that says, you know, press this button and you start a two-year

process to leave the European Union. That exit button hasn't been pressed yet, and our Prime Minister, who was campaigning for Britain to stay in, has announced his resignation in the autumn, and he says that he'll leave to his successor to do whatever is necessary. So we're now in very much a state of limbo. It's never been done before. And nobody quite knows what the real impact will be. It's going to be profound. It's going to have a huge impact on the economy of the United Kingdom. And it's probably going to have a knock-on impact on the economy of the whole of the EU. And in this intervening period, that's until the exit button is pressed and then during the period of negotiation,

that uncertainty is certainly not good for any business generally. In terms of blockchain and virtual currency businesses, my guess is that it's going to have some slightly different impacts, but probably not as profound as in other sectors of the economy. I think FinTech generally will is always very adept. Most startups are very good at pivoting and changing and adapting and being very versatile and agile. And I think that will mean that they'll be able to deal with this situation quite well. For technology companies, pure technology companies, probably not going to have much impact.

In fact, staying in an exited UK, which tends to be very supportive of innovation, of fintech generally, very supportive of light regulation and so on. It's probably going to be a good place to stay or still to come. But for businesses that are focused on payments who are in the regulated space or expect to be in the regulated space, that's going to be problematic. And the reason there is that in the European Union, most regulated financial service providers are able to passport what amounts to their license to do business. That means that they get a license effectively in one of the 28 member states and that entitles them, in general terms anyway, entitles them to passport that to the other 27 member states, without having to get relicensed in every one of the EU jurisdictions.

But it's obviously a big advantage. A lot of companies have come to set up in the UK because of that passporting capability. And of course, the prospect is that that passporting facility might not exist in a couple of years' time. And that means they'll have to start in another EU member state. For those who aren't dependent on the regulated space, I think probably the UK will still be a very good place to be based. We have things like the Financial Conduct Authority's Sandbox, which is very novel, allows small start-ups and challenge of businesses, Bintex, to operate in a regulated space, but without having to apply all the regulations. to try out if you like and the UK has that as probably more advanced than anywhere else there are a couple of other jurisdictions Singapore Netherlands have plans

along those lines too but the UK is is already open for business and so it will be it will be different for different players okay and you mentioned like before the show that the Brexit news has kind of overshadowed some really positive news coming out of the Bank of England. So yeah, let's get into that. Well, very quickly, the governor of the Bank of England. So the Bank of England is a central bank in the United Kingdom. And so it's the issuer of pounds. And it's governor who's their head of the UK's central bank. So anything he says carries a lot of significance. And he had a speech prepared for a week ago.

just over a week ago, that he was to have delivered in the city of London, a centre of, if you like, the financial hub of the country. Unfortunately, there was a political assassination in the UK, I think was that earlier that day or the day before. And so the speech was switched at the last minute to a tribute to the MP who lost a life, Joe Cox, but the speech was nevertheless published and it had some really good news, especially for virtual currency and blockchain businesses. Particularly, probably there were three things of significance, I believe.

One was an announcement that e-money institutions and payment institutions, so these are the regulated entities that can operate in the payment space. so they're effectively licensed to operate in the payment space, but they're non-banks, would be entitled to open settlement accounts at the central bank. This is very important because in any payment system, to fully participate, you need to be able to settle with other payment institutions with other banks. and in the UK, it's been limited to only those banks who provided them, availed themselves of that facility.

There are only 40 of them. And of those 40, only three encouraged handling the settlement, the daily sort of settling between banks that goes on. Only three of those banks acted on behalf of all the other payment institutions and smaller banks and challenger banks and so on. So small banks that have been actually very supportive of virtual currency businesses and other fintech businesses have not been allowed effectively to open accounts for, say, Bitcoin exchanges and other virtual currency businesses and even some blockchain businesses

by association. Because the three big banks were very risk-averse in that. space. So it basically meant we had a wonderful, wonderfully encouraging landscape for innovation in the UK, for FinTech, but those businesses couldn't get bank accounts or found it really hard to get bank account. And in fact, the UK was, I mean, it's difficult everywhere in the world, but it was particularly bad in the UK. And what Mark Carney, the governor, announced in that speech, was that he would open accounts at the Bank of England for the over a thousand e-money and payment institutions.

So that's, if you like, the non-bank payment institutions if they wanted to apply. So that's now opened it up. It means all the challenger banks, all of the payment institutions that were beholden to these three megabanks and their risk-averse policies can now be more

more challenging. And that's good news. That's really good news. I believe once the necessary laws have been changed, that may take some months. And of course, Brexit may change the whole legislative timetable in the UK. But once that's enacted and all these thousand-odd companies can do this,

it will change the whole banking landscape in the UK and make it a very attractive place for Bitcoin and virtual currency. businesses to be based. That sounds like really, that's really great news. I mean, are there any other jurisdictions in the UK, in the, in the EU, where, where smaller financial institutions and payment service providers have access to the central bank directly? Actually, yes, it is less restrictive in some places. Germany, for example, has a much more decentralized approach to banking. There are local banks and regional banks and cooperative banks and a much broader network of banks. And so small banks can participate in the settlement system. And that's then supported by SEPA and other infrastructure, it makes it a lot easier.

So in Germany, for example, there's a small Munich Challenger bank called FEDAW that's been really supportive of virtual currency businesses. They've been, you know, it doesn't mean that they have just opened accounts without performing all the proper due diligence, but nevertheless, they haven't opened accounts for virtual currency businesses. I think we'll see the UK probably leapfroft Germany in that. So it's really good news. There have been some other jurisdictions where Bitcoin businesses have been able to open

accounts, but this is the first big, big nation, I think, that... that's going to make it easier. So I'm particularly upbeat about this. I think it's great news for the industry. There are a couple of other things that Mark Carney mentioned. I'll just touch on. One was he announced more detailed work that's been done around the so-called digital pound, around a fiat-based digital currency based around the pound.

The Bank of England, see this is as an important part of the future. and they've been researching this for a couple of years now. It's fair to say, the Fed in the States and the European Central Bank have been doing similar work. But the Bank of England was well ahead, and it's now up its game. It's now called its governor talking about it. They've recently done some work with PWC on a proof of concept around this, and they're really serious about coming up with a digital pound. This could be really exciting news.

and certainly a shot in the arm for the industry. It's not a pure virtual currency, certainly not a decentralized currency by its nature that's issued by a central bank, but it's certainly good news. And the other thing that Mark Carney talked about is the Bank of England using blockchain technology for some of its core activities.

So it's not just looking at using blockchain in some of the peripheral areas, but using it in its core activities. Now, it's still early days. It's still researching this, but it's obviously got some serious use cases it's looking into. And the fact that it's talking so openly about it, that its head is talking about it is, I think, amazingly significant. It's good news for blockchain, good news for virtual currencies. a lot of stuff that we should be very pleased about in this community. All sounds like really big news, right?

So our listeners might want to check out our episode with David Andolfato, where he kind of explains two-tiered structure of how the conventional banking system works and why a virtual currency issued by a central bank is such a big deal. Like as Sean said, right now only three big banks have really access to the, let's say, the ledger of the Central Bank of England. Now they're extending it to 1,000 and like a central bank bank, digital currency, would extend it to millions of people, right? Yes, absolutely. Effectively, every single person who holds pounds will have a central bank settlement account because that's what it is. It's profound.

If you think of this in sort of waves where it's opened up to new kinds of institutions and at some point in the future a digital fiat currency, then that, well, there is a population of 60 million in the UK, potentially every one of them and then everybody abroad would have a central bank account. It's brilliant. It's phenomenal. It's profound. Let's take a short break to talk about Jax.

Jacks is a cryptocurrency wallet designed by the people at DeCentral. Maybe even thinking of buying Ether, but haven't gotten around to it because he didn't know what wallet to use, which one is easy, which one is secure, etc. Well, there's an easy way now, and that way it's Jacks. Jacks easily and securely stores both Bitcoin and Ether. Not only does it store those currencies, you can convert them right in the app. So with built-in Shapesh integration, you can, for instance, transfer Bitcoin into the wallet and directly convert it into Ether or vice versa. And since there's only one seed, it's easy to backup and it's easy to sync. Jax's wallets for literally every platform, every device for Mac, Windows, Linux, iOS, Android,

or extension wallace for Chrome and Firefox. Jacks is made by the people of DeCentral, and they have a proven track record of awesomeness. In 2013, they created Cryptokit. That was the very first browser extension Bitcoin wallet at the time. And the way to think about Jax is that it's cryptocurrency. it on steroids. If there was doping controls for cryptocurrency wallets, Jacks would be illegal, highly illegal. Fortunately, they're not. And a great thing too about the DeCentral team is just they keep putting out new features and new features for

Jack and it just keeps getting better and better at a disturbing pace I would like to add. So go to jacks.io, that's j-a-xx.io to download your wallet and you'll understand what it's like to use a next generation cryptocurrency wallet. We would like to thank Jacks for their support of Epicenter. From my background there, there's like two observations. So once you have a country like the UK issuing pounds on a blockchain and accessible on a mobile device in the developing world in India, I just think lots of people in the developing world are just going to switch to the pound from their conventional money.

And it just might be a big, you know, geopolitical, it could be a big geopolitical move as well, in addition to just. Totally agree. Yeah. I couldn't agree more. I think about this over the long term. Let's say that, you know, the top tier currencies in the world all start doing blockchain-based, ledger technology-based currencies, then all of the, you know, 100, whatever, over 100 currencies

that are sort of the low-ranking currencies, they cease to have any purpose in the real economy. And then the other thing, I guess, is also once you have direct access to a central bank, what role do payment service providers play then? I mean, banks are still there to loan money, but if you have direct access to the central banking, you have basically a payment system embedded onto your local currency. why would you need to use PayPal?

Why would you need to use a visa? Why would you need to use any type of payment service provider, at least within the boundaries of your own country? But then if you can extend that outside of the country using some sort of interconnection like interledger or something like that. Absolutely. It has a, it's going to be hugely impactful on the whole payments industry.

I'm actually speaking to you today as we record this from Liverpool and I'm attending the emerging payments. Payments Association sort of annual conference and I know they're running it, some panels today. And we were talking about this because obviously this is new news. And it's still thinking in so that the challenges to the traditional banking and payment system, those sort of challenger providers are generally speaking members of the emerging payments association. And now they are being challenged by what might yet come in a few years' time. it's enormous.

And there's also going to potentially bring about that notion of Austrian economics that's all about complementary currencies, competing currencies, because if ordinary people anywhere

in the world might be able to just hold central bank money very easily without going to get it exchanged or stored in a bank or whatever, but just interact with digital or digital dollars or digital euros or other currencies, there will be real competition. I mean, yeah, this is like big news.

And who knows, maybe the future of our industry might just be, you know, writing smart contracts on the ledger operated by the Bank of England for all we know. And that might just be a way bigger market than we have at our hands today. But let's see. I'm not sure we can use the word smart contracts at the moment, can we? I mean, it's a bit taboo, right? now as we record this no come on it's I don't think it'll ever be taboo at a piece of Bitcoin I'm I'm only teasing it's we're we're still reeling from what the

impact of the Dow hack and whether or not it is even you know as some call it a theft and others say no just availing so as the contractual terms and conditions oh let's not go in that that's another discovery for another So let's go into the regulatory update. So let's first focus start on the European Union and then we'll move to the United States. For the European Union, can you give us a very short overview on how regulations are made in the European Union? What bodies do it? And what are kind of some of these things they have been up to in the past year?

You can't use the word short update and charm change in the same sentence. I'll do my best. Right. There have been some significant things, particularly in the last six months, so the first half of 2016. The European Parliament started talking about virtual currencies in the latter part of 2015 and decided that one of its committees, a very influential economic and monetary affairs, should undertake some research and come up with a report which it has now done. I was very honored to have been one of the few people asked to give evidence and make an address to the Parliament back in January. It's public hearing and it published a draft report in February. It went through various stages of revision and was finally published in April.

And that was then adopted by the Parliament in its May plenary session, the end of May. And so that is now, you know, that's now official. That is the European Parliament's the legislature's report. And it basically, it's not a long report, but it's significant a number of ways. Firstly, it started life being a virtual currencies report, and by the time it had worked its way through the final draft, it was about 50-50 in content between virtual currencies and blockchain, by which I mean the non-payment-related blockchain use cases. And I think that itself is quite profound because it then went on to explain that although there are some public policy challenges and other challenges, possibly obviously around anti-money. laundering and terrorist financing that are of concern generally, especially in the wake of the horrible heinous attacks in Paris and Brussels. These are obviously of concern to politicians

and probably that sense rightly so, but they at least should be thinking about them, those kind of issues, but also around prudential regulation and this kind of thing. So they were looking at there being some issues that needed addressing, might need addressing, on the one hand. But on the other hand, saying that, you know, blockchain and distributed ledger technology was hugely powerful, has massive potential for being transformational and being used in ways that at the moment it's too soon to fully evaluate.

In other words, the takeaway from the report was, you know, don't stifle this stuff with regulation, but rather allow innovation to flourish. And so it proposed what it's termed as smart regulation rather than light regulation. And by smart regulation, it's saying the Parliament endorses the European Commission, which is the kind of civil service, the administration of the administrative branch of the European Union. It's planned, its action plan to bring in some measures around the anti-money laundering that will affect virtual currency exchanges and also custodian. wallet providers, and leave that, if you like, as the extent of any regulatory measures. At the same time, not turn a blind eye to blockchain, but let it flourish, but at the same time, keep a watchful eye in case it becomes systemically important.

What they're saying is, as legislators, unusually, they don't want to create some new laws around the technology, not just yet, but equally they don't want to turn a blind eye and find that in five years time or whatever, blockchain's are running three quarters of the financial services world, and it's become systemically important, and they didn't, if you like, keep that under review. So they've proposed a task force to be set up under the European Commission to watch over virtual currencies and blockchain

and keep it under review for a changing risk profile, make sure that they don't miss a beat if that profile changes. As it happens, I don't believe that there will be a dedicated virtual currencies task force. I think what will happen is that the commission's task force that was already being initiated to deal with fintech generally will have its mandate to manage. to include virtual currencies and blockchain technology. I had lunch recently with the, it happens to be the UK's Commissioner, who, European Commissioner, who is the Commissioner for financial services, financial stability and capital markets union. and he is certainly of the mind to include virtual currencies in the in the fintech task force.

However, there is an impact already from Brexit, and that is that Jonathan Hill, the commissioner, has just tended his resignation as a result of the referendum result. He has been obviously of one mind. it doesn't mean that his successor will necessarily be of the same mind. So this all might change. And in fact, this whole approach to regulation of virtual currencies and blockchain technology might be different in a year's time because someone who's been extremely influential, if you like a kind of minister of financial services, if you want to think

of it like that, is changing. And he's been very, he's been very much someone who has supported fintech. and someone who has been one not to support regulation just for regulation's sake. So that could all be different in a few weeks' time. Today's magic word is Brexit, B-R-E-X-I-T. Head over to let's-stock bitcoin.com to sign in, enter the magic word, and claim your part of the listener award. Regarding this planarist sitting and this task force on distributed ledgers and virtual currencies and blockchains, it seems sort of ill-advised to, I mean, I certainly wouldn't lump together Bitcoin as a virtual currency.

and the use cases that you can make of Bitcoin. Bitcoin as a store of value, Bitcoin as a means to notarize information using Opperturn, which is something that Stratum does. And then blockchains, in terms of digital, distributed ledgers with consensus, it seems that the issues that may arise around regulation for all of those different use cases

of blockchain technology technologies may be different and some of the risks also may be completely different. Do you think that it is a good idea for the EU to consider all of those technologies and all the different use cases that you can make out of them to consider those in one body where I mean, in reality the use cases are completely different than the outcomes as well? Yeah. Actually, I do think it's a good idea that they should all be considered together,

but I don't think that they should be regulated together. The reason that I think they should be considered together is that it is very easy for there to be spillover from one regulation that is designed for one particular use case, especially if it's built up around, say, definitional. and then spill over into other kinds of use cases that might still have, for example, a token as its fuel or as its fuel. So if poorly defined because of a lack of understanding of these non sort of Bitcoin type use cases, if if it's not. properly understood and the definitions are poor, then you could find unintended consequences that you drag non-payment-related use cases into regulation that wasn't actually meant for them. So I think it is a good thing that the technology is reviewed as a whole, and I think as it happens,

I think the EU have approached it very well because they clearly, Parliament, and I believe the commission as well in my discussions with various commission officials, I think it's well understood the distinction between these different use cases and that one rule doesn't necessarily have to apply them all and that they have to be very judicious in the way that things are defined when when there is some regulation in the future. So I think it's right that they do look at the whole picture and understand it. And I think it's obviously right. Their conclusion is that they should regulate differently for different types of things and be very careful about how they define, say, what is a virtual currency. And what are some of the conclusions, if any, around things like

smart contracts and decentralized autonomous organizations? I don't think there are any conclusions at the moment. Probably the organization who's looked most at smart contracts is ESMA, the European Securities and Markets Authority. It's been following blockchain and distributed ledger technology for two or three years now. It put out a call for evidence in 2015, and it's just very recently, so this has been recorded in June. So I'm a guess it was probably earlier in June. put out a discussion document, which you can get on the ESMA website, ESMA, European Securities and Markets Authority. And they, that's a very well thought through and reasoned discussion document that invites feedback. And anyone with an interest in the use of blockchain distributed ledger technology for securities,

or any markets-based activity is invited to give feedback by the beginning. I think it's the 2nd of September. There's a couple of months to consider it. Definitely a recommended read. So I think there's good understanding where the understanding needs to be. But in terms of if you're implying, you know, has much thought gone into things like the Dow and the sort of problems, only to the extent that these kind of problems could arise. But I don't think there's been any deep thought about what the implications are.

One thing I would say is that as a consequence of the Dow hack, a lot of securities regulators are definitely looking at this stuff far more closely. I know that the Swiss regulator is looking at it because the Ethereum Foundation is based in Switzerland. I know that the SEC is looking at the implications and I think we'll see a lot more regulators, you know, dusting off files around smart contracts and really trying to see what is a security and what isn't a security and what the implications might be. So probably over the next six to 12 months, we could see a lot of attention around this area. I hope that some people haven't found themselves in trouble as a result of what's happened over this Dow Hack. But I fear some are on a very fine line.

But time will tell. So one question I had about the plenary sitting in the European Parliament is that after the report was issued by the Committee on Economy of Economic and Monetary Affairs, I think. There was a vote on whether to adopt this report as a guiding document or not. So in that sort of vote, do you feel there's a difference in the approach, different political parties across the European Union take for this technology? That's a really good question and there wasn't. There was amazing unanimity across the eight political groups that are represented in the European Parliament.

very little, very much broad agreement, very little disagreement. There were, okay, the original draft, I think was about eight pages and it gave rise to 62 pages of amendments, but they were fairly trivial in that there were more detailed textual changes. And there were some compromises made in committee about the precise words, but there was nothing profound in that. and in the debates, in the open debates in the Economic and Monetary Affairs Committee, in the Internal Markets and Competition Committee, which also reviewed the report, and in the main parliamentary hearing, sadly, it was at 11 o'clock at night, with about very few MEPs actually in the Parliament, which is a great shame.

Didn't get a lot of time for debate, and in fact there were more MEPs wanting to talk and there was time allotted, so it was popular. But, you know, broadly speaking, not much political disagreement at all. We spent a lot of time on the EU. Let's now take it over to the Americas. It's been about a year and a half since a bit license was passed in New York. And since then we haven't really, well, we haven't really talked about here on the show. Can you give us an update about what?

what has been happening there in New York? What have been the impacts of Bitlicense? Remarkably few applicants for a bit license. So my understanding is that only two have been issued, and the second one was only issued quite recently. What has happened is that a lot of the startups have left New York State. it's not been a very good environment for them and so they've walked they've gone so essentially that license that bit license is pretty much stifled all all innovations around

bitcoin there in new york certainly the you know the small startups that are you know the lifeblood of new new innovation they it's not been a good environment for them because it's very expensive to operate there Right. Because you've got all of the regulatory implications, which have huge regulatory costs, complexity, which they don't need to face in either many other parts of the United States or indeed elsewhere. So we've seen a number of small businesses, startups move to other locations. And very few companies, but really only some of the best funded ones.

able or wanting to sign up to Bit License. So it's had certainly more of a negative effect than a positive effect in my personal opinion. And what are some of, well, I guess, yeah, that's, you know, who depends on who you ask. But are there any other states in your knowledge that have tried to pass similar regulation to license or perhaps regulation but with a lighter touch or a different approach and are startups going to those locations as opposed to New York? Well, there certainly are other states in the U.S. that have had a much more encouraging environment for startups.

The obvious one that comes to mind is California because it's home to Silicon Valley. that's where so much, so much development in blockchain has happened and it continues to happen. California in 2015 tried to try to pass a much, in my opinion, a more pragmatic piece of legislation. I think bit license regulations were when they were first published around 40-something pages long and the California bill was, I think, around six or seven pages, something like that. Did grow a little over time, but it was much, much more pragmatic,

much more limited in scope, affected much fewer businesses as well. The New York regime is very broad in its scope and the range of activities that are caught by it. It passed the lower legislature in California, and was partway through being debated and discussed in the upper house. So that was in the Senate. And then by some political maneuvering was kicked into the long grass and has yet to reemerge.

So they never quite made it. But it was certainly the, if you're going to have a regulatory regime that was encouraging, on the one hand, light touch. pragmatic and all at the same time, then California's was certainly probably a good model. But it never happened. There are others, but I think it's gone off the boil a lot in the US since a lot of the emphasis moved from Bitcoin to blockchain over the last 12 months. So I think it's been less urgent. Having said that, now that we've seen things happen in the, with Ethereum and the Dow,

I rather suspect there will be renewed interest in that area. So I suspect we may see some new things starting. I was just going to ask if that was your impression that because we've sort of moved from Bitcoin to currency to now, much more of an emphasis on blockchain, whether that had an impact. And I mean, I think you're right. I think that now that we're seeing applications emerge around smart contracts and decentralized autonomous organizations, and specifically after what happened in recent weeks,

that sort of this wave of scrutiny on public blockchains that we had back in 2013, 2014, might start to reemerge now, but around things like smart contracts and specifically Ethereum. As I say, I think the emphasis is changing, and we will see renewed interests from regulators. Let's take a short break so we can go to Paris. I stopped into La Maison of Bitcoin, situated in the heart of Paris's startup scene,

and I met with Eric Larchaveg, Ledger CEO, to talk about the Largen Nano. The Lager Nano is a Bitcoin hardware, wallet based on a secure element. It is on a USB form factor that you plug directly inside your computer and it will manage all your private keys. The signature of transactions will be done inside the secure element, thus never revealing the private keys to the host computer.

It is compatible with our own ledger wallet Chrome app, which you can also use for multi-signature with Copay or Coin Kite. a large range of third-party applications such as mycelium, electron, green bits, green address, and so on. The Nano also exists as a cool bracelet wearable, so you can always wear proudly your Bitcoins on your wrist. The Ledger Nano is an easy-to-use hardware storage option, which doesn't compromise on security.

If you want to get a secure setup for storing your Bitcoins, go to ledgerWallet.com and use the offer code Epicenter to get 10% off your order. Thank you, Roger, for their support of Episcenter Bitcoin. Like, you mentioned that the Swiss regulators were looking at specifically the Dow episode and perhaps the SEC would also investigate into it. Are you aware, like, what, specifically what features of the Dow they would be investigating? Like, for example, like one aspect of the Dow that I have my doubts about is the way in which investments were solicited, like on Facebook, targeted at all kinds of people, maybe even

young people, without maybe even proper disclaimers as to what it was. So you could have investigations directed on the crowdfunding site. You could have it. I guess it's exactly that. They'll be looking to see if this was an unregulated and therefore unauthorized security. and if it was in their opinion then we're likely to see some action taken. I think it's very early days, but people have potentially lost money and regulators get very interested when something in their space means that the people they're supposed to be protected or whose interests they're supposed to be protecting. So if citizens lose money on investments, then they get concerned.

So early days. I mean, the other aspect, obviously, that's now interesting is, like, does the DAO form give any protection, any protection against personal liability for the people who are involved in it, right? So like we see like in this episode, you have the authors of the court, the curators of the DAO, the people that solicited these investments where you know put their ads on Facebook and Slack and etc. So they're all publicly known and do they get any any person like any protection against personal liability from from this whole episode? Should things come to that level? No. Now, the whole point about a DAO and any of these virtual organizations, if one wants to call them that, is that they haven't got the benefit of a jurisdiction's limited liability, corporation type structure.

and as such they are unassociated, sorry, unlimited associations. So groups are people like a partnership. And essentially, the partners, the members of the association, are all jointly and severally liable in most jurisdictions. That's going to be very interesting, as we may see a number of lawsuits around the Tao. It's all very well that this brave new world of Daos and acts is not encumbered with the structures

of the state and these wonderful protections of limited liability and so on, so long as everybody's making money, when folks start losing money, then you start to find out. that actually it really does matter and there will certainly be I think some folks who will who will take out lawsuits and potentially you know for the full limit of their their losses we show you know these are early days but this is of some obvious concern probably shows that in the long run pure pure DAWS and DAX won't be the be-all and end-all that what we'll need probably is some kind of hybrid. That's my personal opinion as to what's likely to happen over the next few years. But these are very, very early days.

It's interesting that the main proponents see this is something. that's above nation state laws and something that's very separate and then and and and and then they'll be looking to those very self-same laws to to to cover their financial losses we shall see I don't know early days I mean like what I've kind of become aware of is that it is certainly possible to merge the the structure with a traditional corporate structure like the example I've come across in Switzerland is one of one of my associates was trying to kind of create a company and he wanted to build a Dow and he consulted with multiple lawyers and

what they said is you could have a traditional Swiss corporate structure the are gay and maintain all of your shares on these helium blockchain and enter into smart contracts on the Ethereum blockchain as long as you comply with the incorporation requirements of the AG in Switzerland. So you could have basically defense against personal liability as well as benefit from whatever you want to benefit from on the Ethereum blockchain. So these kinds of structures are definitely possible, right? I believe so, yes.

I think that kind of hybrid is a much more practical way of operating. So the idea of a distributed autonomous corporation, I think is unlikely really to take hold. A traditional corporation that where the shareholders exercise their rights through a Dow-type mechanism and where the operation of certain things in a company happens within a consensus system, I think those are feasible.

They're not without challenges, though. For example, the moment you have a traditional, Arge is a Kien-Gersel Shaf, that's a company with limited liability, there are similar structures in most jurisdictions. The moment you have an entity like that, you have to have people who are responsible. So typically they're directors.

And those directors have duties to the shareholders as a whole. and responsibilities. Now, that will be quite interesting because then you say, well, you know, someone is accountable for the actions of this entity. If the actions are automated through smart contracts

that are not directly controlled by those directors, how can they be fully responsible? And so there are a lot of areas of challenge, But if a Dow was properly constructed with, I don't know, forms of kill switches and overrides that allowed directors to fulfill their legal obligations under the law, then I think it will, you know, it is possible. And that's why I say I think in the future, the pragmatic approach is probably going to be a hybrid.

I mean, yeah, like, I think this kind of conclusion is something that, let's say the crypto anarchist in me doesn't like that much. But on the other side, like what this Tao episode has clearly shown to me is, it has raised this question in my head that if I have like a pure organization just based on code on Ethereum, and something like this episode happens, which code, right, our technology is very mature. Even with good intentions, it could happen. then and I'm involved with an entity like that then the problem is that I might be liable in a jurisdiction in which I've never set foot so let's say let's say you know I am

I'm the creator of a purely code based down and some it goes belly up some some person in Finland let's say ends up losing a hundred thousand dollars now that guy could sue me under Finnish local law and then I would be liable inside Finland even though I have probably never stepped foot inside it and I could be liable in so many jurisdictions by so many local standards that it might be just impossible for me to to survive if a tragedy like that happens right we want this brave new borderless world that is facilitated by by crypto that transcends traditional jurisdictional boundaries.

But in the real world, those borders exist, those jurisdictions exist, and laws exist within those jurisdictions. And it's amazing, you know, people and businesses are still subject to those laws. The place you really don't want to mess people around in is the USA, which is why even in the, because the laws are very, very, much wider in scope and also their jurisdictional reach. So you're often in, particularly in the financial space, laws are designed or written in ways that they don't only affect the people who are in the

US. And so even in the traditional financial services world, you often see disclaimers that say, you know, this is not for advertising in the United States or this, that check your IP when you connect to a website and say, sorry, you can't access the information about it, this investment because you're, you know, in the USA. Or you have to, you know, tick a box and confirm that you're in no way connected with the USA and you're not a US citizen, those kind of things before you can get into the detail of the investment. So definitely, avoid anything in the US because they have an endless supply of orange jumpsuits and some very wide legislation wide reaching so before we wrap up here let's let's

sort of come back full circle and and perhaps talk about some of the jurisdictions that are more more enlightened than others that aren't ready to put you in an an orange jumpsuit if you do something that seemingly, you know, doesn't warrant that type of punishment? Are there any jurisdictions right now in the EU or outside of the EU that you feel are particularly open and where they're thinking about blockchain technologies and whether they be public or permissioned, where they're thinking around the evolutions of those technologies are more advanced than others? There probably are.

Yes, I think they probably are. I don't necessarily think that enlightened should be thought to mean where there's little or no regulation because there are lots of places where there's little or no regulation around blockchain and virtual currencies, but that doesn't mean that they want to encourage it.

So places that are encouraging of innovation and giving us good. They may have, for example, some light touch regulation or they might be planning some, but where they're doing so in order to foster innovation, give it some stability and credibility. They would include places like the Isle of Man, which is one of the first jurisdictions,

a small jurisdiction, but actually has been very successful in encouraging new technology and e-gaming and space and biofarmor and so on. They're definitely very encouraging of crypto. In the more traditional world, well, the UK itself has been very encouraging. It's been talking at the highest levels of government about encouraging. It had lots of reports and high-level ministerial backing and money that's been poured into it,

government money that's been poured into, say, research in the space, where they've had, you know, positive statements around regulation. So giving clarity as to regulation without necessarily introducing any. So UK has definitely been one of those places. And I guess in a post-EU world, that might well be accelerating. outside there, Singapore has been very encouraging, and Australia. I'm not saying that's an exhaustive list, but those are definitely jurisdictions that would like to see how virtual currencies and blockchain,

distributed ledger technologies prosper and flourish. I definitely agree that having a light-touched regulation, or at least it gives the technology some means to be recognized by the state, but also by large companies that may want to invest in building on these technologies. And I mean, for instance, you mentioned the UK, Isle of Man, etc. And those are, I think we all agree, are pretty, you know, are places that foster innovation around a blockchain. Here in France, we've seen recently the Macron of the Aonan government and specifically

the economy minister encouraged the use of blockchains for the issuance of debt obligations for equity crowd lending. Now, it is encouraging, but it's still, how do I say, I mean, this is so news like this is sometimes it can be interpreted in different ways because, well, for instance, they had to translate blockchain to like some French equivalent of blockchain because in French law, you have to have everything in French and proper French. And so the translation of blockchain is like this six-word term that, you know, could be interpreted as so many other things. And do we think it's a Bitcoin blockchain, like a public blockchain or do we think it's, you know,

distribute the ledger, more like a permission blockchain? So it does, it does, definitely, have some advantages and that it gives the technology some legitimacy, but on the other hand, it can be sometimes a little frustrating reading through some of these opinions and not really knowing what it is that, you know, it's very subject to interpretation. And it's mostly, I think, in my opinion, because of a lack of understanding of the technology by these people. And I think that highlights another point, which is that it takes time for the world to catch up So, you know, three of us have been immersed in blockchain for a number of years. We're the pioneers, if you like.

But the mainstream world takes time to catch up. And one has to factor in that it will take time for the rest of the world to catch up and to understand this stuff and to be able to see what it's place. in the world and what actually what benefits there are to understand better the challenges and the risks but also to see those benefits and opportunities and that takes time so I know we would all like it to have happened already and we should all be using Bitcoin by now in our daily knives and the whole world should be run on blockchains and the referendum in the UK should have been carried

out on a blockchain and and so on and so forth. We would have all loved that, but realistically, we have to have a more, a more, well, yes, a longer time frame in mind. So five, ten, fifteen years is a, is a time frame for the rest of the world to catch up. I certainly hope it doesn't take that long, but let's say that's a good note to end on. To be patient. We have to be patient in this space. Well, you see, I'm old. That's All I do is just wait for God's waiting room. Well, it's great to have you on again, Sean. Thank you for coming on, and hopefully we'll have you on again soon,

and maybe not in a year. We'll hope that there's some interesting regulatory updates that we can pool your knowledge and intelligence of the space and have you come back on the show at that point. Well, it's always my pleasure. I love doing these shows with you guys. And I look forward to many more of them, even when you have to wheel me in in my wheelchair. Is there anything you want to add any?

Well, if folks want to know a little bit more about what's happening in the EU, they can go to the EDCAB website, edcab.EU, that's edCab.E.U. And there's loads of information there about what's happening in the European Union. and sort of more general commentary else on the regulated space outside of the EU. You can always look at my personal website, Coinsalt, C-O-I-N-S-U-L-T-C-Salt.E-U-L-T-C-E-U-Salt. So loads of information, and I'm sure you guys will have some show notes as well. We will. We'll add also those things to the show notes. So thanks again, and thanks you to our listeners for tuning in.

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