Unchained - The Chamber of Digital Commerce's Perianne Boring and Amy Kim on Why U.S. Crypto Regulation Is Complicated and Confusing

Episode Date: April 17, 2018

If U.S. crypto regulation seems incredibly convoluted, this is the episode for you. Perianne Boring, the founder and president of the Chamber of Digital Commerce, and its global policy director and general counsel Amy Kim, discuss why U.S. regulation calls crypto assets currency, property, commodities and securities, and how that results in agencies enforcing their own laws without a higher level understanding of the technology. They also discuss what they call the "failure" of the regulatory regime that requires certain types of crypto companies to get licenses from 53 different states and territories and why no firms have so far even gotten close. They also advocate for the technology to be taxed more like currency than property, claiming that the current classification stifles usage of cryptocurrencies as currencies. We also dive into juicy questions like whether ether, which was sold in what we would now call an initial coin offering, is a security and what self-regulation of the crypto space could look like. Chamber of Digital Commerce: https://digitalchamber.org/ Token Alliance: https://digitalchamber.org/initiatives/token-alliance/ Previous episodes on Unchained and Unconfirmed that touched on regulation: Live from SXSW: Michael Casey and Paul Vigna, Co-Authors of The Truth Machine, on Why the SEC Has Issued Subpoenas to ICOs http://unchainedpodcast.co/live-from-sxsw-michael-casey-and-paul-vigna-co-authors-of-the-truth-machine-on-why-the-sec-has-issued-subpoenas-to-icos Caitlin Long on How 'Utility Tokens' Are Now Legal In Wyoming http://unconfirmed.libsyn.com/caitlin-long-on-how-utility-tokens-are-now-legal-in-wyoming SXSW Episode: Former DOJ Prosecutor Kathryn Haun on What the SEC Subpoenas and FinCen Letter Likely Mean http://unconfirmed.libsyn.com/sxsw-episode-former-doj-prosecutor-kathryn-haun-on-what-the-sec-subpoenas-and-fincen-letter-likely-mean The Tax Rules That Have Crypto Users Aghast http://unchainedpodcast.co/the-tax-rules-that-have-crypto-users-aghast How Crypto And Blockchain Technology Should Be Regulated http://unchainedpodcast.co/how-crypto-and-blockchain-technology-should-be-regulated Is The IRS Justified In Demanding Information On Millions Of Bitcoin Users? http://unchainedpodcast.co/is-the-irs-justified-in-demanding-information-on-millions-of-bitcoin-users Federal Prosecutor Kathryn Haun On How Criminals Use Bitcoin -- And How She Catches Them: http://unchainedpodcast.co/federal-prosecutor-kathryn-haun-on-how-criminals-use-bitcoin-and-how-she-catches-them How Coin Center Is Helping Define The 'Big Fuzzy Gray Area' Of Blockchain And Cryptocurrency Law http://unchainedpodcast.co/how-coin-center-is-helping-define-the-big-fuzzy-gray-area-of-blockchain-and-cryptocurrency-law Thank you to our sponsors! Bitwise: https://www.bitwiseinvestments.com/unchained Keepkey: https://www.keepkey.com/  Preciate: https://preciate.org/, make a suggestion for who to recognize in a future episode at https://preciate.org/recognize/      Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, welcome to Unchained, the podcast where we hear from innovators, pioneers, and thought leaders in the world of blockchain and cryptocurrency. I'm your host, Laura Shin. If you've been enjoying Unchanged, pop into iTunes to give us a top rating or review. That helps other listeners find the show. And be sure to follow me on Twitter at Laura Shin. This episode is brought to you by BitWise. Last year, BitWise created the world's first cryptocurrency index fund, the BitWise Hold 10, which holds holds the top 10 cryptocurrencies and rebalances monthly. The fund has several hundred LPs and is

currently accepting accredited investors. To learn more and invest in the Bitwise Cryptocurrency Index Fund, visit www.bitW.bitwiseinvestments.com slash unchained. Unchained is sponsored by Precce. Founded by Ed Stevens, Precheet is building the most valuable relationships on Earth. In each episode of Unchained, Precate sponsors the recognition of an individual or group in crypto for an achievement. Who in crypto will be recognized today? Stay tuned to find out. Today's episode is brought to you by KeepKee, the easy, safe, and simple way to protect your Bitcoin, Ether, Lightcoin, and many other digital assets. There's no time like the present to protect yourself from hackers, malware, and viruses. Rest easy knowing that your digital assets

are protected. Visit KeepKee.com to order your secure hardware wallet today. Today's guests are Perry Ann Boring, the founder and president of the Chamber of Digital Commerce, Kim, the Chamber's Global Policy Director and General Counsel. Welcome, Perian, and Amy. Hi, Laura. Thanks, Laura. So let's start with Perian. Tell me about how you got into Bitcoin and crypto and how you came to found the Chamber of Digital Commerce. Yeah, no, thank you. And so we launched the Chamber of Digital Commerce in July of 2014. I formally worked on Capitol Hill and I learned about Bitcoin through my work that I did on the Jobs Act. So as an economist, when I first heard or learned that there was this currency out there that was not controlled or owned or operated by the government or corporation or any organization, to me, that was just a fascinating concept.

And I wanted to understand it better and learn more. So that started the trip down the rabbit hole. And over the course of a few years, I did just a personal study into the industry. And what came out of that was me being completely convinced that this is the most important thing I'll see in my lifetime and was really excited about it and just wanted to work in the industry. So I had to spend a little bit of time doing a self-study and understanding what I would have to contribute to this industry because that was in pretty early days. And at the time, most of the people in the ecosystem were software developers, cryptologists, those in the

technical community. So it became pretty obvious over time that the industry really needed an advocate, a team on the ground in Washington, D.C. to work on the policy challenges. So 2013 was really kind of the wake-up call for me because that was the year where the Bitcoin industry had a handful of very public scandals, everything from Silk Road and Mount Cox. And that had ripple effects around the policy of community. So what came out of those two incidents were multiple hearings on Capitol Hill scrutinizing the technology and dangers of it. We started seeing guidance come out from the regulators. And there were a lot of talks in the general narrative in D.C. was that Bitcoin was being used to facilitate illegal transactions. But there were very few people that were able to articulate

the positive benefits of this technology. And I felt like it was. was super important that the industry was able to balance that out. So we founded the chamber to be an advocate for the blockchain ecosystem. And we've been at it for almost four years and we've grown quite a bit. And we've made a significant amount of progress in that approach. Yeah. I think we saw in the recent hearings that it does seem our legislators, or at least some of them, are a little bit more well educated on this topic than I think some people in the community expected. And a lot of people were saying it's because of the work that groups like yours have done. Amy, what is your role at the chamber? I lead the legal and policy work here at

the chamber. So I'm helping to try to do exactly what you just mentioned really, which is a lot of education and information and in some cases advocacy and some of the issues that are being raised in Congress and in the agencies and sometimes even in the state legislatures on some of the issues that are impacting blockchain and virtual currencies. And how did you come to work at the chamber? And what were you doing before? Yeah, I was a lawyer in private practice for many years and started working with virtual currency companies around 2010, really, when you know, when you have clients that come asking for advice in that area. So my background is in cross-border compliance programs. so anti-money laundering, sanctions compliance, and then because of this industry, the state money

transmitter areas. And so started then, I was in the audience when Perri-Anne announced that she was creating a trade association. And I thought that is such a great idea. It's a really needed function and went up to her and introduced myself and said, how can I help? And so helped her for a couple of years just in my spare time. And then last year, she convinced me to join full-time. And really, it was just obvious to me that blockchain was going to have such an impact on our lives and an industry and everywhere else. And I just needed to be a part of it. Overall, what are the main functions of the Chamber of Digital Commerce? What does kind of your daily activity look like or your weekly schedule? Well, our mission generally is

to promote the acceptance and use of digital assets and blockchain-based technologies. And we do that through education, advocacy. We work very closely with the policy community, the regulatory agencies, the industry, and our goal out of all of this is to help develop an environment that fosters innovation jobs and investment. And we very much believe that public policy is one of the biggest risk to the barriers of adoption of blockchain technology. So a big piece of our day and our time is working with the policy community, whether that's on capital, Hill with law enforcement, regulators. And the other side of that is working with the industry, spending a lot of time with our members really understanding the businesses who are utilizing

blockchain, what their challenges are, and then providing a platform for those two communities to come together to discuss these challenges and to work together to build a policy environment that's going to grow the ecosystem in a responsible way. So it's a lot. We stay really busy and there's a lot of different stakeholders. We've built a really big community. in a network of people and stakeholders who are all invested in the future of what this technology looks like. So a lot of what we're doing is coordinating, collaborating, and bringing people together. Before we dive into all the particularities around regulation in the cryptospace, I actually want to get a big picture look. At a high level, what would you say is the current state

of crypto regulation in the U.S.? Well, it's very complicated. There are a lot of different regulatory agencies who are all clamoring for jurisdiction over this technology, just to give a super high level kind of intro. It really all started with Fenson at the U.S. Treasury's Financial Crimes Enforcement Network in 2013 put out the first piece of guidance that said convertible virtual currencies would be treated like a currency. So you had that regulatory framework that started off there. And then shortly after that, the Treasury decided that they were going to tax this as property. And then we saw the CFTC come out and said that Bitcoin meets the definition of a commodity. And now we're seeing a significant amount of activity from the SEC applying

securities laws to this technology. So that's just four examples, currency, property, commodity, security of how regulators are looking at this technology. And there's more stakeholders than that, because you have law enforcement, you have the consumer regulators. and then you have the states. So it's very complicated. This is not something that volunteers can do in their spare time to navigate through this. It really takes a dedicated effort to truly understand the legal and regulatory landscape that's developing and to also be able to help build an environment that's going to help the industry, but also take into the unique attributes of blockchain. So it's a little all over the place and it's it is a lot to manage and navigate.

through. And Laura, I would just add to that if I could. You know, I do think, I mean, just building on what Perri-Anne said, so what you can see is that it's been somewhat, it's grown in a fragmented way with not as much collaboration and, I guess, high-level guidance from a policy perspective. So you see a lot of agencies enforcing their own laws, and sometimes in an enforcement role without a higher-level understanding of the benefits of the technology and looking at it through that lens and then pushing that policy down into the agencies. And I think we'll start to see more of that. We already are sharing to see more of that collaboration. And I think that we'll continue to see that in 2018. One thing I was curious about is if all these agencies are looking at it in these different

ways, currency, commodity, property, security, does that create confusion for industry players? It's very confusing. I mean, it's confusing. it can be confusing for us, but for any company, especially a startup that doesn't have a team of lawyers and compliance and regulatory experts on hand full time. It's a lot for anyone to have to navigate. And it does create confusion. One example of that is with tax law, where you have the IRS who's taxing this as a property. But then you have Fenson who said this is going to be regulated as a currency. And there's a number of different questions that can.

community has about how to comply with that when there's other regulations out there that have put this technology in other boxes. So there are a lot of areas where we could use greater clarity. And that's why it's important to have an organization like the Chamber that's fighting for that. So let's actually put a pin in the taxation discussion because I think that right now, the biggest question on everyone's minds is whether or not the Securities and Exchange Commission will regulate tokens as securities or initial coin offerings as sales of securities. Why has this become the big question? What are the issues? Well, from our perspective, you know, I mean, the SEC is certainly taking the view that certain

tokens can be securities based on the facts and circumstances. That's what we saw in the issuance of the Dow report. And then you saw that evolve over the coming months. And the Munchy case also kind of extended that into marketing. So certainly, That is, I think, you know, in our view, a big frontier as far as how that landscape is going to evolve in that enforcement environment, given that the market for token issuances has grown so explosively as well. So you have those kind of two interplaying industries coming together. And so, yes, how the SEC ends up regulating that will all ICOs be securities? Like the chairman, you know, he said that all the ICOs he's seen so far, a security. I think that what that really means has yet to play out.

And just describe what happened in Munchy there and what you meant about how it crossed over in a marketing. Munchy was designed as what? Was it designed as a utility token? Yeah. I mean, I think that was the intent is that they were issuing a token to enable users to use their platform in the food industry and restaurant industry. And so a lot was said about, you know, how that. token would be utilized on that platform. What they also did, though, was say in their materials that the token would likely appreciate and value, you know, making other statements like that

that crossed the line for the SEC. And for listeners who have not yet learned what the Howie test is that is the test the SEC uses to determine whether or not a token offering in particular as a security, we actually had a previous, a couple of previous episodes that described this, but I'll just briefly recap. The definition is an investment contract in a common enterprise with an expectation of profits dependent upon a third party or promoter. And so in this case, Munchy's kind of like promise of profits and then the fact that it depended on this company, Munchy executing this project well were probably the factors that tipped it over for the SEC into being called a security. One other issue I wanted to talk about is that when I do a lot of these interviews,

a lot of my sources will say something like clearly some crypto assets like Bitcoin are commodities. But then when I asked them which other tokens they would put in that bucket, they'd hem and ha a little bit. and I had kind of, I guess, inferred from the Dow report that the SEC was going to put ether from the Ethereum network in that bucket. But Chairman Clayton, as you mentioned, has recently been saying that all the ICOs he's seen are securities offerings. And Ethereum did have what, I guess, we would recognize today as an initial coin offering. And so that sort of leads us to this question. Does that make Ether today a security? to my mind, if so, wouldn't they have said so in the Dow report? And if I really understand the

highway test correctly, to my mind, Ether, as we know it today, does not pass the Howey Test. But what is your sense of where the line is being drawn about securities versus commodities? Do you feel confident that Ether will not be considered as security? You know, that's, I mean, I think that's a, it's an interesting question. You know, certainly, this SEC had the opportunity to make that statement in the Dow report, and they didn't. And certainly, ether is designed as a utility as the gas of the Ether network, so Ethereum Network. So, you know, for the moment, I think really the focus is on some of these other tokens and other tokens, really, that and whether they would be considered securities or not. And I think that platforms

are looking at that closely because if you are trading a token that happens to be a security, that triggers registration and other obligations with the SEC. Yeah, and we also had the opportunity to meet privately with the SEC after that hearing, just to get a little bit more clarity on Chairman Clayton's statements, where he said every ICO that he has seen to him looked like a security. And we just asked him, you know, could you just explain that in a little bit more detail what he meant by that. And they said, you know, this is based on every ICO that they have seen. And they also said that they haven't seen every ICO. And I said, you know, there's 1,500 or more

crypto tokens out there. So every single one of those is a security. And they said, no, it's just the ones that have come to us. And we've had the opportunity to examine. So there, I think there, there's a lot of that is yet to be seen. And in the dialogue is, it's, it's, it's, it's still in progress and that the SEC is still forming its position on this. Did you ask them about Ethereum? We did. We did. And again, my sense is that if it was going to go in the direction of a security, that they've had the opportunity to do that and they have not so far. But at the same time, we couldn't necessarily rule that out because there is still unclarity in that question.

Yeah, well, one other thing that I wonder is there is this, I guess, maybe sentiment isn't exactly the word, but a line of thinking in the community that promises of future tokens sold before the network has launched are definitely sales of securities. This is something I've both written about. and then Marco Santori, who was on my podcast earlier, put out a white paper kind of promoting this line of thinking. And so he and the other co-authors of that paper, who are Protocol Labs, who did the Filecoin ICO, they were calling for what they call simple agreements for future tokens to be considered sales of securities. And that's when people buy the promise of tokens before the network launches, but they and some others also take the approach that once the network is live, the token is then a commodity. And so this, I think, kind of goes back to this Ethereum question.

It's sort of like, oh, at the time of the sale, would ether or the promise of the future ether be considered a security? But then now that the network is live, is it a commodity? So I just wonder, do you get that there is a sense that there's a magical line at which a security transforms into a commodity, and do you feel like there's some consensus around when that happens? Laura, my sense is that there isn't consensus around when that actually happens. And I think that even the regulators are trying to sort that out. I mean, you've heard some of the commissioners at the CFTC raise that very question, and I think they're still working through that. I mean, we're dealing in a space where you have tokens that can represent something and be

traded and maybe even like you've kind of suggested, it become one thing or be one thing and then become something else. And that's, you know, something that we may not have seen before and really need to think carefully about how to regulate that, if we regulate that, and what those parameters should be. So, you know, we're all trying to work through that and find a way to help this industry move forward in a responsible way, protecting investors, of course, protecting the markets, but still allowing some of these innovations to flourish, which I think they're very important innovations, and we need to think about all three of those things together. Yeah, well, so when you said it may not be something that we've seen before, that's actually

something I was going to ask you, has there ever been anything in history that started off as a security that later transformed into a commodity, or could this potentially be the first time? I know when you think about, I mean, the traditional securities, things that are shares in a company, you know, no, whether it's the very first time, I'm not so sure, but certainly it's unique. I mean, a lot of things about this industry are unique. They don't fit well into laws that were written 10, 20, 30 years ago often. You see that not just in the token space. So, and we might have new, new sets, you know, circumstances to be looking at. here. One other thing I wanted to discuss were the recent laws in Wyoming that were passed that create a category of blockchain tokens that are not securities. I think this is what we in crypto would recognize as a utility token, although they didn't use that phrasing in the law, but this is a token that's not structured as a security, but has a function beyond its investment value, sort of the way that, for instance, a Manhattan condo has a function beyond its value as an investment. And one of the

qualifications in their law for these utility tokens is that the network can be live. So I was kind of curious to know, do you think that this is a stance will see other states or the federal government take that if the network's live, then the utility token is not a security? You know, I mean, we'd like to see that. I think that's, you know, what's happening in Wyoming was very interesting. And for the industry, not just on that utility token bill, but some of the others as well. It's possible states could. You know, I think some of the states, we'll see. I think it's going to be a different calculus in each state.

But certainly I think it was a helpful push, and I think what you're seeing is when there's this kind of uncertainty in federal government or in some cases inaction as far as guidance by the federal government. You're seeing the states step up and try to encourage industry to, come to their state and to promote it. And is that a good idea for there to be separate state regimes or should there be one federal one? Well, I think it depends, too, on the issue. You know, certainly I think with respect to the money transmitter licensing regime, that really is not functioning well for this industry.

And so our position on that is we prefer a federal solution, ultimately. And what about for the ICO regulation? I would agree with that as well. I mean, it's a little bit, you know, there are some intricacies with respect to different state laws and things and how they regulate versus the federal government. So I think they're going to have to, some of that will have to be worked out. Yeah, and keep in mind, this token and ICO landscape is still incredibly nascent and underdevelopment. And we're going to continue to see a lot of evolution and tokenization over the near term. And sometimes it's really hard to put together a concrete regulatory framework for something that we know that's going to evolve. And so what we have been doing at the chamber to address the issues and the activity we're seeing around ICOs is right best practices. So we created an initiative called the Token Alliance. We launched it last year with about 160 participants.

We've grown that to over 250 blockchain and token X. around the world. We've also brought in two former regulators to co-chair this effort. We have Dr. Jim Newsom, who's the former chairman of the CFTC, and Paul Atkins, who's a former SEC commissioner who's overseeing this. And what we're doing is organizing the industry to write what we consider to be the best practices for token issuances and the listing of tokens on exchanges, and then the interaction between exchanges and token issuers. Now, what regulators are most concerned about and why you're seeing so much activity from the SEC

and other securities regulators is because they're very concerned about the retail consumer. A lot of these token sales are being marketed to just the average person. And some of the activity we're seeing is really exciting. There's a ton of innovation, new technologies starting to arise. But there's also some not-so-great-great stuff. out there too. There absolutely are fraudulent ICOs. And it's in our interest, the entire community's interest, to be able to address that. And so while we are in the absence of regulatory clarity,

we're being proactive and writing these best practices to be able to regulate ourselves in a way and to be able to have a framework, to be able to delineate the good from the bad. And we believe, that this will take at least 90% of the issues that securities regulators today are concerned about, take a lot of that pressure off of them, and be able to take a step in creating a framework to oversee this activity. We're going to talk more about self-regulation and also taxation, which came up earlier, and money transmitters. But first, I'd like to take a quick break to tell you about our fabulous sponsors,

starting with Appreciate. Founded by Ed Stevens, Prichite is building the most value. relationships on Earth. In each episode of Unchained, Appreciate sponsors the recognition of an individual or group in crypto for an achievement. Today, Appreciate is recognizing Chris Berniske, co-founder of placeholder ventures. Over the last year, Chris has been a thought leader in the area of crypto asset valuations. He has published several important works on medium so everyone in the industry can learn and contribute. Kudos to Chris for sharing his knowledge and helping others. Listeners, if you know someone in crypto who should be recognized in a future episode of Unchained,

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do you think will go in that direction? Yeah. So, and just to give a little bit of history of how we got, here and how this dialogue of an SRO got started. CFTC Commissioner Quintens made a statement calling for an SRO, which was really just his kind of action item to the industry to get organized and start addressing some of this activity that we're seeing. And so we've asked him to clarify that and a little bit more detail what he meant by that. And so he came back to the D.C. Blockchain Summit, which is a conference we host at Georgetown every year, and he gave a much more detailed presentation on his vision for an SRO.

Now, a self-regulatory organization is something that Congress would enact. So a law would be passed, Congress would vote on it, and it would establish a self-regulatory organization that would be overseeing likely by another agency, similar to Fenra or the National Futures Association. But what Commissioner Quintends elaborated on is that you could go that route and have a true SRO, this congressionally established organization, or the industry could just get organized, create a set of best practices and standards, and do this on their own. Now, the benefit of having a true SRO is that you would have the ability to enforce,

and you'd have the authority to do so. But there's no reason why we can't set up a voluntarily structure today. people would volunteer to opt-in and to adhere to a set of standards and best practices. And that's essentially what we're doing with the token alliance. But there are significant efforts underway to do this. So it is inevitable. And I think it will evolve over time as the markets continue to mature. And as regulators continue to call for efforts like this.

And so what is the chamber and the token alliance? What do you guys think are the best way to move forward in terms of Like, what are the best practices that industry should adopt? How do you think the SEC should regulate this area? Do you think that they should say sales for initial coins offerings that happen before the network is live should be called securities? That once the network is live, that should be a commodity. Like, what are all the different recommendations you, both of your organizations make? Right. So the concept of what is a security in tokenization is not clear. And companies want to be compliant. Our members, they want to follow the laws.

But there is no official guidance on how to issue or operate a non-security token today in any form. So that is what our best practices will cover. It's if you want to issue a non-security token, how to do so in a responsible way. And we're doing this with significant industry input from around the world. So bringing the industry together to agree upon of what those parameters would include. Oh, so you haven't decided those yet? Well, we're doing it in consortia. So this is not something we're just sitting down and writing.

It's something that we have over 260 people around the world contributing to do so. So this is not something that we want just one person to sit down and control this by Fiat. We want this to be an industry effort because ultimately we need the industry to adopt these best practices. So there is a great deal of collaboration underway. So the first draft of this document is done, and it's in peer review right now. So we now have all the members of the Token Alliance reviewing it, submitting their input, refining it, making it the best document we can possibly make it, and we'll be publishing it shortly. And does that first draft recommend the use of something like a SAFT for that initial sale before

the network launches. With Amex Platinum, $400 in annual credits for travel and dining means you not only satisfy your travel bug, but your taste buds too. That's the powerful backing of Amex. Conditions apply. So it's a jurisdictionally neutral document. It really more covers the technological aspects of issuing a token or operating a token. So we do not get into the specific.

regulatory considerations. And we're doing this so you can use this anywhere in the world, because this is a global movement. We wanted it to be relevant to all those who want to participate in this community. So it doesn't get into all the regulatory concerns, but we see that as the next step. And what I'd say on that, too, is we do first talk about the entire legal landscape applicable to tokens. So going through the SEC, the CFTC, and to money laundering and sanctions compliance and even some of the tax implications first. You know, just having that kind of as a resource only one place so that, you know, people are fully informed of the things that they need to be thinking about.

And then the best practices then go into if you are issuing what you, what is a true utility token, here are best practices to make sure that that you're doing this an appropriate way for potential purchasers and that purchasers are fully informed of, of, of, of what the business model and the product is about. And since you mentioned before that you are talking with the SEC, do you have any clues yet as to how they plan to proceed? Well, I mean, I think, you know, I think we can take some of the clues from some of the statements we've seen in the media.

You know, there are what we've seen publicly or that there are investigations ongoing. There are these subpoenas that have been issued some confusion over how many subpoenas and to whom, but, you know, I would expect we'll see more enforcement actions before we see less, unfortunately, but I think that can help provide some guardrails. And, you know, I would hope some guidance to rather than purely enforcement as a tool to inform the industry. But I would expect to see more enforcement actions this year. So one thing that I also wanted to ask about, and this gets us into money transmitter territory, is, and correct me if I'm wrong, apparently FinCEN also

said that ICO issuers could be considered money transmitters. But as far as I understand, a money transmitter is a company more similar to Western Union, where they take money from someone and pass it to someone else. So if that's the case, what laws do ICO issuers have to comply with? Well, I mean, I think, yeah, you're talking about the letter that FinCEN sent to Senator Wyden. You know, I don't think, I mean, since that's a little bit of my background, what they said and there wasn't surprising to me. I think, you know, they said what their law says, which is based on the facts and circumstances.

Companies may be considered money transmitters if they receive money for transmission or funds of the value of funds for transmission to another person or another location. So then if you are going to issue a token, you have to kind of assess your business model, the way that your funds flow, how your virtual currencies or whatever,

the tokens are issued, however you're characterizing those, and make a deterrent. determination on a case-by-case basis if money transmission on the federal level applies. And then you probably need to look at the state laws as well. Each state does deal with it a little bit differently. Unfortunately, that's what we're dealing with today. And so you'd have to take a look at that and take position and probably involve some legal advice. Is it possible to be both a money transmitter and also a security issuer at the same time? Well, the money transmitter, I think The FinCEN regulations exclude from the money transmitter definitions, SEC and CFTC registered entities,

and there's some technical language in the Bank Secrecy Act regulations. So you'd have to look at that carefully to see if you actually did fit within that exclusion, which really means you're just excluded from the FinCEN portion, but it puts you into the equivalent, the equivalent coverages for securities or commodities. Right. But I guess I'm just trying to get at the point that it doesn't sound. like you can be a money transmitter and an issue of a security at the same time, right? Like it would be one or the other and then the laws would apply for whichever category you were put in.

Is that correct? You know, I don't know if that's correct. I think it would depend on which part of your business. If it's the same exact, if you're talking about the same exact activity, that might be true. But again, I would, yeah, yeah, that's what I meant. Yeah, I would seek legal advice on that question as well. Yes. And actually, just for anybody listening, nothing we're saying at all in this discussion is legal advice.

I feel like I have to say that just since I'm a lawyer. Okay. So we have been discussing a few other really big topics. And the couple of them that I definitely want to cover taxation and money transmitters. But let's start with taxation. What is the current state of taxation in crypto? So this is one of my favorite topics to talk about because I work. worked on tax policy when I worked on the Hill. And it's just really fascinating where we are today

in tax policy in the United States. So in 2014, the IRS issued guidance that convertible virtual currencies would be treated as property. So as all of us who in the blockchain and crypto space are very well aware, your transactions, anytime you use a cryptocurrency to purchase anything, it is subject to capital gains, which is a huge administrative burden, as we are all aware. The issue is that the IRS didn't do the best job of explaining how to comply with this guidance. There's a lot of areas that have not been clarified. For one, how do you calculate the fair market value of virtual currency when there is no standard exchange rate? So what exchange rate are you supposed to use? We don't really know. What about for miners? If you acquire

crypto through mining, what is the tax treatment of that? Another really big and important question. And also for merchants who are holding cryptocurrency, is that considered capital or an ordinary asset? Again, there is no answer for that. So there has been a very hard time for the community of following the laws, of being compliant, because we have a lot of questions. And it's been a frustrating process because the IRS actually accepted comments from the public in 2014, and the public submitted a lot of these questions over to the IRS, and they didn't answer any of the questions. They never responded to the public opportunity for comment, which is a little not quite sure why, you know, they didn't respond. So a couple of years went by.

and then the IRS's Inspector General issued, well, they didn't audit on the IRS's virtual currency program, and they issued a report that really criticized the IRS's virtual currency program, say there's a lot of areas that you haven't answered questions, you received a bunch of comments, you didn't respond to them, and really, you know, asked the IRS to follow up on these questions, and they didn't. Instead, the IRS issued a John Doe summons on Coinbase, as I'm sure you're aware of, asking for the records of about a half a million of their users. And they really seem to erroneously cast this perception that all cryptocurrency users are tax evaders. But really, I think most of us just need to better understand how to comply with this property guidance.

So that's where we are today. It's a little bit of a mess. So in response to this, we at the chamber have developed a tax policy position to advocate for just a better way to tax cryptocurrencies or virtual currencies. And we believe that virtual currencies should be treated like currency, just like the U.S. dollar. They should be allowed to function as currencies. And I would argue that a big reason why we have, haven't seen Bitcoin or other virtual currencies really take off as a medium of exchange is

because if you're using it as a medium of exchange, you have this administrative nightmare of having to calculate your gains or your loss on every single transaction. So we believe, and we're fighting to make virtual currencies treated fairly like that of a currency or an alternative currency, and they should be, in order to achieve that, You can do this pretty simply by just excluding them from the capital gains and the investment income tax and all the reporting requirements that would come with that. So I totally understand your point here. It completely makes sense. Obviously, if I'm trying to pay for a cup of coffee and I have to calculate how much I pay for the money that I'm using and

then what the capital gain is when I buy the coffee, obviously it's pretty cumbersome. But at the same time, when you hear people just talking about buying Bitcoin, they don't talk about it the way they talk about currency. They talk about, quote, unquote, investing in Bitcoin or investing in crypto assets. So when you have people thinking of it in that way, does it really make sense to tax these as currencies? You know, I think that people have been, we've been kind of pushed into that direction, in part because the IRS, you know, treats. convertible virtual currency as property. And then you have, you know, Bitcoin Features contracts being offered and you're seeing these price fluctuations. So I think that is where the market has gone due to both regulatory and then just some of the volatility. But if you're looking at this,

if you're looking at the horizon, right, first of all, if you're looking at the beginning and then looking at the horizon, this was originally created as a form, a method of payment, a method of exchange, a mechanism of value transfer. And that's really where, some of its amazing utility sits. And we're really not, this IRS tax treatment is really hindering that potential in significant ways. And our view is if that's corrected, we'll start to see some of this normalized in a way that makes more sense. So, and I know that this is a difficult, this is not an easy, this is not an easy request. This isn't an easy, it's a challenge. It's going to be a significant challenge, but we think it's worth it. It's worth it to get this

treated right and as close to the beginning as we can. So we'll keep pushing on it and see what kind of progress we can make. Yeah. And also, just to build on that is we also need to recognize and pay attention to other dynamics that are happening in this community. And there's many central banks around the world who are looking at ways to integrate blockchain technology to create, create their own digital currencies. So if central banks are looking to use this technology to issue currencies, it cannot possibly be a property at the same time. That is a good point. But one other thing I wanted to ask was do you, so the government does seem to believe that people are evading taxes with cryptocurrencies. Do you have a good sense of whether or not that's true?

I think people are having a hard time understanding how to comply with the property designation. Again, a lot of areas where the IRS has not been able to clearly articulate how to comply with that designation. And so because of that, it makes it very hard to be able to do so. So I don't think that's a fair characterization. I mean, at the chamber, we represent over 160 companies, all of which adhere to our code of ethics. And our companies, they want to follow the law, They want to do the right thing, and they will do the right thing if you tell them how to do so. So speaking of companies wanting to do the right thing, let's move to the money transmitter issue. I know that many in the industry feel that one of the obstacles to growth is the fact that a lot of crypto companies need to get licenses from 53 different states and territories.

What kinds of companies need to do that? And why is it 53 different licenses? Well, so the types of, I mean, those would be, you know, I think the classic example would be your exchange platforms who have applied for those licenses. And the reason you have to do that is because money transmission, unlike National Association banks who are regulated by the OCC, money transmitters are regulated at the state level, so through the state banking departments. And so if you're engaging with customers or residents of those states, you need to apply for the license, meet all the standards that the banking departments have, and then also maintain those standards and go through exams. And so that applies to all 50 states and several territories, although they each apply it a little bit differently. And do you get a sense of how much this is hindering growth? I mean, have we seen any companies get all 53 different licenses?

No, we haven't. We've seen them get maybe 28, maybe the low 30s as far as number of state licenses. And that's because some states, you know, you see some states, the requirements in those states are designed to test the capital structure and the capitalization of these companies and make sure that the executives and other personnel are qualified to, run that kind of a business that will, you know, take or transfer consumer assets. So they treat those categories of qualifications differently. And one way that can be an impediment is if the reserves that they require an exchange to maintain are required to be maintained in U.S. dollars. So that would require a company to essentially maintain double valuation, basically.

You'll have, for example, Bitcoin that you would owe to your customers on any one day and then also have to back that up with a U.S. dollar. So that can be quite burdensome and in some cases has forced companies to leave the state because of it. This is very much a regulatory failure. It's unacceptable that in the year of 2018, we still do not have one company in the entire industry that's been able to get licensed across the entire United States. It's sad. And we are seeing many companies that are either closing up shop, cutting off customers in certain states, are just moving overseas. And it's also really difficult for consumers, and it hinders consumers because the people

who want to use this technology in some states, they don't have access to any exchanges. So they're being forced to use services overseas. So it's a vicious cycle, and we deserve something better. And that's something we are fighting for at the chamber, is to be able to address this. And we believe we need a federal solution to truly fix this issue. And what would that look like, the federal solution? That's a great question. We've spent a lot of time talking about that.

And you also want to be careful what you ask for. So there was, you know, we have seen this dialogue start to open up on the federal level. You know, the office of the comptroller of the current. or the OCC tried to launch a Fentec charter. It's been stalled, but they did go through several years of comments and deliberations and even put out the first draft of a licensing manual to establish a banking charter for Fentec companies. And it turned into a big political fight.

Once the OCC went down this path, there were states that were very threatened. by this and who are now suing the OCC, saying the OCC doesn't have the jurisdiction to do this. So the state of New York and the conference of state bank supervisors have sued the OCC over this. So the dialogue is starting to open up and the OCC has led that. But as of today, we still don't have an option, but it's something hopefully in the long run we'll be able to achieve. other thing I would just add to that is, I mean, one option is looking at it from a special purpose national bank charter at the OCC. The other way would be, if there is some type of oversight over the spot markets that's being suggested by the CFTC, that would have to

specifically preempt state law in order to work. But there, you know, so there are some alternatives, and maybe there's even more ways to think about that. I mean, I think whatever whatever solution, you know, whatever path we start to go down really needs to take into account the unique nature of virtual currency and tokens and how that differs maybe from the way we've traditionally thought about these types of licensing or chartering or authorizations. An additional area of confusion, I think that's occurring around this kind of like state-federal divide, is that I think some states have been issuing state-specific legislation for smart contracts And I know you guys are opposed, the chambers opposed.

What did these laws say and why do you think state laws for smart contracts are a problem? So, you know, I think this is actually coming from a good place. I mean, I think these legislators are trying to help the industry. And for that, you know, we need more of, we need more supporters like that. I think the issue is just that the very specific type of legislation that you've mentioned, which is state efforts to amend their uniform electronic. Transactions Act to include specifically blockchain and smart contracts. So what these Uniform Acts do is recognize electronic signatures and electronic records,

where a written record is required or where written signature is required. But the way that they're already written is electronic signature, electronic record. It's not technology specific. So first of all, just by doing this, it doesn't, it's not needed. I mean, first, it's unnecessary because it already should cover for that. Second is that the states are also not creating these laws uniformly themselves. There's, I mean, anything from minor deviations to, you know, to different types of authorizations that they're putting into their statutes. So that's kind of, it equates to what you just mentioned, which is the money transmitter quagmire, which we may be heading down that road.

And then the third is that the federal E-Sign Act, so on the federal level, there's an electronic signatures and electronic records act that says that to the extent a state deviates from that standard or specifically references or calls out technology, that's preempted. So now we're creating a legal question as to, well, does that preemption apply to what these states are doing? And so now it's actually opening up some doors, some questions. And so, so, yeah, so unfortunately, we're, we're becoming, you know, we're advocating more than we would like to have to, but, you know, to reach out to these state legislators and try to explain to them this situation and, you know, hopefully point out to them, here's some other ways.

You know, let's think of other ways we can work together to promote the industry. I also want to talk about anti-money laundering. I know that that's an issue. Lawmakers are worried about anti-money laundering with crypto-cund, or rather they're worried about money laundering with cryptocurrency. cryptocurrency. How big is that risk and how well are crypto companies complying with anti-money laundering laws? Well, I think what we've seen said publicly so far is, I mean, I think money laundering is going to be a risk in any agency, in any industry that you're in. So we need to understand

that that risk exists and people need to take precautions. But we need to understand the size of that risk. And there's been reports that say that money laundering in this industry is less than one. percent of the overall industry, whereas reports beyond that, you know, with respect to the U.S. dollar, estimated to be a vastly larger number. But we take it seriously. Money laundering is a significant concern. And we have companies within the Chamber's membership that actually assist companies, assist financial institutions and government in ways to identify trends, identify money laundering,

and ways to fight it. Yeah, one thing I wanted to flag for listeners is that if you haven't heard the episode with Catherine Hahn from about a year and a half ago, she talked about tracking crimes with the blockchain. And so I could understand why maybe there hasn't been a huge amount of uptake of money laundering with cryptocurrency based on her remarks. And I actually just also wanted to flag that I'm starting to realize there have been so many. previous episodes where we've covered issues that are similar to the ones we're discussing in this episode. So I will link to them in the show notes and you should check them out. Some of the

ones that come to mind. I mentioned like the one with Marco Centauri, but also there was one with Coin Center where we talked about the Howie Test. There was also another episode about the Coinbase case. So there's definitely a lot to dig into if you find this conversation fascinating. The last thing I wanted to ask you guys is I was curious to know how the U.S. compares with other jurisdictions when it comes to regulation of crypto? Well, the United States federal government is organized very different than most other countries. So we have a very fragmented approach to regulation, especially on financial services. So we have the SEC, the Securities and Exchange Commission.

We also have a separate regulator for the futures markets, the CFTC. have multiple bank regulators from the Fed, the FDIC, the OCC. So one of the biggest challenges the United States faces is this fragmented approach where there are a lot of different stakeholders and they're not necessarily very well coordinated either. And other areas of the world where they have left complicated markets and smaller governments, a lot of them will just have one financial services regulator. So for example, in Singapore, the monetary authority of Singapore is is both their central bank and their bank regulator and all things financial services. So there's just one entity you have to go to if you want to issue a product or work in the

financial services industry in that jurisdiction. Or in the United Kingdom is another example of that. They have the UK, FCA, the Financial Conduct Authority. So it's kind of a one-stop shop. So it's a lot easier when you only have one agency or one entity that's have having to develop the policy for this industry. So the U.S. is very unique and it takes a lot more coordination. And there's a lot more stakeholders that you have to work with and get them to work together.

So it's just different. So because of that, some of these other areas of the world are, have been able to really get to market faster or have been able to develop policy positions or sandboxes faster and easier than the U.S. And that really is working against us. And when you say that, you mean like it's hindering the pace of innovation in the industry here in the U.S.? Yeah, because there's such, you know, a lack of clarity in so many areas. And they get that clarity. You have to get multiple regulators to sit together and make this a priority and discuss it and to come up with the determination where that's a much longer process. And if you went to, you know, another jurisdiction where there's just one office, there's, you know, one or two people overseeing the issue and they can make a decision. And without having to go through, you know, the same process we would have. have to go through here. So like the idea of putting together a sandbox, we don't have one in the United States,

where would you even put it? So other countries have had a lot more success and been able to move a lot faster than the U.S. because of that. And I think the idea of the sandbox just shows that I think there are some countries that are capitalizing on this opportunity to make an advantage for themselves in technology industry. And so you're seeing regulators working with industry

in a regulated, in a controlled environment to help both parties, I think, learn from each other. You know, the regulators have the advantage of learning about the technology, and the companies, the innovators, have the advantage of gaining a better understanding of what might work and what might not work from a regulatory standpoint. So there's definitely an advantage in that system that we're not seeing here right now. Well, I know that regulators at this SEC at least, and hopefully regulators at other agencies do listen to this show. So if they haven't heard this message already from industry, I'm sure, then they will hear it now. So it's been fantastic having you both as guests.

Where can people learn more about the chamber? So you can visit our website, digitalchamber.org. We did just publish two new white papers, one on cybersecurity and intellectual property. So thank you for the conversation, Laura. We've been able to get into a lot of topics. But we do have a prolific platform underway, and we do oversee a number of issues. So we encourage you to visit our website to learn more. Great.

Well, thank you both for coming on the show. Thank you, Laura. Thanks, Laura. Thanks so much for joining us today. To learn more about Perri-Anna and Amy, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday. If you haven't already, rate review and subscribe on Apple Podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn.

Unchained is produced by me, Laura Shin, with help from Elaine Zelby, fractional recording, Jenny Josephson, and Daniel Ness. Thanks for listening.