← The Peter McCormack Show
The Peter McCormack Show
Beginner’s Guide #8: How is Bitcoin Legal with Peter Van Valkenburgh & Jerry Brito - WBD189
01:11:11
Location: Skype Date: Monday, 27th January Project: Coin Center Role: Peter Van Valkenburgh & Jerry Brito Welcome to the Beginner's Guide to Bitcoin. Bitcoin can be intimidating for beginners. The protocol is complicated, the community can be...
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- [00:01]
Peter McCormack
Welcome to the what Bitcoin did podcast. Hi there. How are you all? Welcome to the what Bitcoin did podcast, which is brought to you by the mighty Kraken. The best place to buy and sell bitcoin. I'm your host, Peter McCormack, and today I've got part eight of my beginner's Guide to Bitcoin, an interview with Jerry Brito and Peter Van Valkenberg from Coin center, looking into how all this bitcoin stuff is legal. But before that, I do have a message from my amazing show sponsors. So, first up, today's show is brought to you by Dropbit, the only mobile wallet I use for sending and receiving bitcoin. And when I head out to South America next month, I will be taking it with me. I'll be loading up my wallet with sats for when I'm out and about and when I need a little bitcoin. I also caught up with the team today discussing their plans for 2020. Some very, very cool things coming. Can't wait to tell you all about that. But why do I love the Drop Bit wallet? Well, it just is the easiest way to send and receive bitcoin. It is like a Venmo for bitcoin and they've added so many cool things. Yes, you can send it to an address, you can send it to a QR code. We all expect that, right? But you can also tweet bitcoin to your friends. You can send bitcoin to your friends. You can do it over Lightning. They've done this very cool implementation of the Lightning network. And you can also buy bitcoin directly from within the app. If you haven't downloaded Drop it. Seriously, what are you doing with your life? It's available for the iPhone and Android. Just head over to Drop Bit app, which is D R O P B I T app. Also, today's show is brought to you by Kelman Law, the only law firm I would use if I get myself into some bitcoin bullshit. If I need some help or some advice, these are the guys I'm going to be talking to. They are Bitcoin OGs. They're based out in New York. And unlike other crypto lawyers, these guys understand both bitcoin and fintech. And guess what? You can pay for them in bitcoin. You can pay for your services. Wilcowing Law. You using bitcoin? Pretty cool, right? One of the partners, Zachary Kelman, is known for drafting a bill submitted to US Congress in 2014 aimed at exempting on chain Bitcoin transactions from US regulations. The other founding partner, Daniel Kelman was on my show as part of my Mount got series helping me understand the complexities around civil rehabilitation. So listen, if you operate in a fintech business or have a dispute with someone involved in bitcoin, maybe someone owes you some bitcoin or, or you just need some legal advice related to bitcoin or fintech, open up your email and send a message to Infoelman Law. That's K e l m a n dot law kalman with one l not two or just head over to their website which is www.kelman.law. okay, so now onto the show. Rattling through this beginner's guide. We're over halfway through and now we understand what bitcoin is, how it came to exist, what are all the technologies that make it happen. It's time to dive into the regulations which cover bitcoin. And a big warning first. Regulations will always be jurisdiction specific. So my audience is mainly US based and the US tends to leave regulation, people tend to follow them. So I got on Jerry and Peter from Coin center who are both based out of Washington D.C. so the focus on this interview is US specific is based around US regulations but the categories of things we're discussing probably exist within every market. So make sure if you're not US based and you're thinking about one of the topics we discussed today that you check out your local regulations. Also it gets pretty complicated at times. I'm not gonna lie, this is one of the most complicated shows so far. It's just the legal stuff. It's all the bullshit legal stuff that we have to deal with. So I'm sorry, we get into some tricky subjects, we cover some tricky things. But listen, there's stuff in the show notes to help you and you can always flip up Google search for some of these topics if you want to find out more. Anyway, I hope you enjoy the show. You got any questions, do reach out to me. My email address is hellohatbitcoindid.com.
- [03:53]
Peter Van Valkenberg
Jerry, Peter, how are you?
- [03:55]
Jerry Brito
Very good, thanks for having us.
- [03:57]
Niraj
Great, thanks.
- [03:58]
Peter Van Valkenberg
First time to get Jerry on Peter. You've been on a couple of times but great to have you both on. So I've been running this beginner's guide to bitcoin.
- [04:05]
Peter McCormack
I've done seven recordings now.
- [04:07]
Peter Van Valkenberg
I've covered the pre history of bitcoin.
- [04:09]
Peter McCormack
Why it's important, what it is.
- [04:11]
Peter Van Valkenberg
We've gone up the technical detail but now we're going to cover how is this all legal which actually was an idea from Niraj. So we have to say a big thanks to Niraj, but we're going to.
- [04:20]
Peter McCormack
Cover why this is, this is all legal.
- [04:22]
Peter Van Valkenberg
But like for people who don't know who Coin center are, I think as a good tee up it'd be just very useful to understand who you are and what it is, the work that you guys do.
- [04:31]
Jerry Brito
Well, thanks for that. So Coin center is an independent Nonprofit based in D.C. and we're focused on the public policy issues that affect cryptocurrencies and open blockchain networks. So things like bitcoin, Ethereum and the like. So these are open permissionless networks. They're unowned by anybody. And so as a result there's a bit of a collective action problem where who's going to stand up for these networks that nobody owns. And so that's what we are. We're sort of self appointed lobbyists and advocates for these networks when it comes to policymaking. So an easy way to think about it is if you're familiar with the Electronic Frontier foundation, what the eff is to the open Internet we aspire to be to open blockchain networks.
- [05:13]
Peter Van Valkenberg
Okay, great. All right. So one of the complications of this.
- [05:18]
Peter McCormack
Show that we don't have with other.
- [05:19]
Peter Van Valkenberg
Shows is that legislation will be jurisdiction specific. So I've been out to Bolivia recently, found out that bitcoin is illegal there. When I was there, we know certain uses of it is illegal in China. We also know the likes of Estonia.
- [05:33]
Peter McCormack
And Malta is quite open minded.
- [05:35]
Peter Van Valkenberg
So I think we need to just set the position for anyone listening. To begin with, we're going to base this on the US and we're going to base it on the key areas that you guys look into, the key areas of policy and legislation.
- [05:47]
Peter McCormack
But if anyone is based out of.
- [05:48]
Peter Van Valkenberg
The US they really need to do the research in their own country. Is it a fair starting point?
- [05:53]
Jerry Brito
I think it's absolutely right. I mean it's regulation, like all laws, jurisdiction by jurisdiction, even though the US has a habit of being extraterritorial in nature, which means that the long arm of law in the US extends globally sometimes.
- [06:08]
Niraj
Yeah. So it's not a bad idea to get an idea of what US laws are, even if you don't think you're subject to them because surprise, you never know when you are.
- [06:18]
Peter Van Valkenberg
Okay. And just another note on this is that it is a bitcoin show and usually I don't ever cover altcoins, but I think it might be difficult to talk about this show and not talk in reference to some altcoins with regards to specific things, for example, when we get into the area of security. So that's absolutely fine if you feel like you need to refer to altcoins in explanation of any error.
- [06:41]
Niraj
Okay, so, and Peter, so on the altcoin subject, you know, Coin Center's work is generally coin agnostic. Most of the work we do is on Bitcoin. But from a regulatory policy standpoint, it doesn't matter as much as you might think, because regulation when it's good and most of the time is activities based. So it's about what you're doing, it's not about the technology you're doing it with. So if you're moving money using Bitcoin versus Litecoin for example, the same laws are going to apply.
- [07:12]
Peter Van Valkenberg
Okay, great. Okay, so quite a broad first question to kick off with, but what classes of regulation does Bitcoin fall under?
- [07:21]
Jerry Brito
So you know, as Peter was just saying, it's not Bitcoin itself that falls under regulation. The U.S. anyway, Bitcoin itself is not regulated. It is activities that you might perform with Bitcoin that are going to be the regulated activities. And we think about four main areas of law that we sort of focus on. And those are investor protection, consumer protection, anti money laundering and tax. Those are kind of the four big broad areas.
- [07:49]
Niraj
Yeah. And so the corresponding activities there for investor protection, the activity that's regulated is usually raising money. Hence the question about pre sales or about secondary markets where people trade Bitcoin or other cryptocurrencies. The area of consumer protection, the activity that might be regulated would be a company that helps you move money using cryptocurrency like a money transmitter would. And so that's like when Coinbase or somebody else holds your Bitcoin for you. And then you know, tax is tax tax. If you make money, that's an activity, you've made money, you might get taxed, you're probably going to get taxed.
- [08:26]
Jerry Brito
And then the last is anti money laundering, which again that tends to apply to people who are engaged in what Peter said before, which is the transmission.
- [08:33]
Niraj
Of funds, maybe especially in the cross border context or things like that though.
- [08:39]
Peter Van Valkenberg
And I guess it depending on whether you are just a regular retail user who's buying and holding or using Bitcoin.
- [08:46]
Peter McCormack
The things you need to be aware.
- [08:48]
Peter Van Valkenberg
Of are going to have to be slightly different for whether you're running some kind of business, whether that's an exchange or a wallet. There's different considerations.
- [08:56]
Niraj
Exactly. And we'll probably get into this later. But one of Coin Center's big focuses is making sure that regulators understand the difference between someone who say, runs a node on a network and doesn't actually hold other people's bitcoins, they just help the network run, versus a custodian who holds other people's bitcoins and therefore puts them at risk and is more reasonably a target for regulation. Unlike the guy who's just running a node who shouldn't be regulated.
- [09:22]
Peter Van Valkenberg
And what are the various regulatory bodies that you have to work with, liaise with, based out there in the us?
- [09:29]
Jerry Brito
Yeah, so I mean you obviously have legislative bodies like Congress at the national level and different state legislatures. But then going down the line and thinking through those broad areas, treasury is the Treasury Department here in the US is a big one because treasury houses both the IRS for tax policy, but also houses FinCEN, which is the, what's called the Financial Intelligence Unit, which basically administers the anti money laundering laws. Then on investor protection that is going to be the SEC and the cftc. On the SEC it's going to be for securities regulations, obviously and on the CFTC side it's going to be for derivatives regulation and potentially also for just market regulation of commodities markets, spot markets. So that could be just bitcoin trading.
- [10:20]
Niraj
Yeah. So for example, if you have questions about is the price of Bitcoin being manipulated and things like that on various exchanges, that's something that in the US the CFTC might look into.
- [10:31]
Jerry Brito
And then what am I missing? Consumer protection, that's mostly done on a state by state basis. So that would be either the state banking or money transmission authorities. But then you also have federal legislation there as well. So you've got the Consumer Financial Protection Bureau, you have the occ and you know, there are more.
- [10:50]
Niraj
It quickly gets to be an Alphabet soup. So especially your non US listeners are probably tuning out now. But these things are of course relevant because there's usually a counterpart agency in any EU member state. In most East Asian nations all around the world there's usually something similar, although usually there's fewer of them per country. Whereas in the US we've got an oddly large number of regulators who all have jurisdiction.
- [11:17]
Peter Van Valkenberg
Also, like my other shows, I just did one on monetary policy and then previous to that I covered the Bitcoin.
- [11:22]
Peter McCormack
Protocol, technically how it works.
- [11:24]
Peter Van Valkenberg
And my advice to everyone in every one of those episodes is, look, this might be a bit complicated, it might go over your head a bit. Just bear with it. If you've got any further questions, go into the show notes get into Google, you know, there is further information out there if you need it. I mean, I will be linking to the Coin center website so they can find out more information. So I would say to them, just bear with it. Also, it depends on someone's experience. You know, this might be somebody who's a complete beginner, who has never even bought Bitcoin, or might be somebody who's, you know, got a little bit of experience. We've got a wide range of people potentially listening to this. But one of the things they might not realize when they first get into Bitcoin, that Bitcoin is both a currency and a protocol. Do you have to consider them both separately with the work you do?
- [12:08]
Niraj
Yeah, absolutely. So as we were saying, regulation is always activities based. And when you think of Bitcoin as a currency, you're talking about people who might be performing activities that move money, that do payments, that do store of value. The things that we would use a currency for traditionally. And those regulations then are going to be focused on things like anti money laundering example, because if it's a currency, people are going to use it or a currency substitute as FinCEN, the anti money laundering regulator, uses the term, they're going to use it to move money. And maybe that means violation of sanctions, maybe that means support for crime, maybe that means any number of things. And so at that point, FinCEN takes an interest. Now, the question of Bitcoin as a protocol, yes, it's true that Bitcoin, the protocol is helping to move the money at some level, but it's doing it in an information technology way. And so just to give one example, Even before Bitcoin, FinCEN would make a distinction between a money transmitter like Western Union and a telecommunications provider like AT&T. And they'd say, look, AT&T might be the backbone of the telecommunications infrastructure that Western Union is using to move money. But AT&T is not a money transmitter. It's a facts and circumstances limitation to the money transmitter definition that if all you're doing is providing information throughput, you're definitely not a money transmitter. And we need to make the same arguments and we've been very successful over the last five years making the same arguments about someone running a node on the Bitcoin network, that Bitcoin, the Bitcoin as protocol is not a regulated thing, whereas Bitcoin as currency, depending on whether you're using it to move money around, might be regulated.
- [13:52]
Jerry Brito
And it's also further than that. It's not just that the Bitcoin protocol is unregulated is that it must be unregulated in the US anyway, because in the US we have the First Amendment and the First Amendment protects freedom of speech and freedom of assembly. And we haven't had to make these arguments, even though we've prepared, prepared to make these arguments. But certainly developing open source software that makes up the Bitcoin protocol and running the software that basically listens for and repeats transactions is all speech.
- [14:27]
Niraj
Yeah. Even publishing a block, if you were a successful miner, there's a good argument that that's just a speech activity.
- [14:33]
Jerry Brito
And so not only is unregulated, it would be basically very, very difficult for the government to overcome the barriers that it would have to in order to regulate.
- [14:43]
Peter Van Valkenberg
And does blockchain itself, which we know has become a marketing term for protocols, but does blockchain itself have any consideration under regulation? Is it governed by anything? Or is it something that is still just a marketing term?
- [14:58]
Jerry Brito
So, you know, I think it's a marketing term as you say. But look, to the extent you want to think about blockchains as basically databases, there's really no, again, there's no regulation of databases, but it's. To what use do you put these databases? So let's say that you are the New York Stock Exchange and you decide you're going to move away from whatever your infrastructure is today and you're going to move over to using a blockchain. I imagine that the SEC and whoever else in FINRA and whoever else your supervisors are, are going to want to be involved in that process. But that's not so much about the technology, it's about what you're doing with it.
- [15:34]
Niraj
Yeah, it's more like there's a regulated institution which might be, say the New York Stock Exchange and then they just need to convince their regulator that they can use certain software vendors or protocols for their back end. But that's much different than the back end being the regulated entity.
- [15:50]
Peter Van Valkenberg
And then there's two other things I want to ask you about before we get into the detail. So something that's come up regularly, even though this is a Bitcoin show, but something relevant to Bitcoin as an, you know, as like a complementary tool is stablecoins, specifically tether. And more recently we are starting to hear a lot more about central bank issued digital currencies. Where do these fit into the whole picture? Is tethered considered just like Bitcoin or is it different? And where do the central banking, the central bank digital currencies, Come in.
- [16:22]
Jerry Brito
So those are two very different things. Let's take them one in turn. So stablecoins as tether is and as others traditionally are, it's a company that takes custody of consumer funds and issues you a token. That token then travels from freely on a permissionless network and it can always be redeemed for the dollar, let's say.
- [16:45]
Niraj
Usually from the issuer.
- [16:46]
Jerry Brito
From the issuer, right. So this is a kind of a novel product and I'm not sure that there has been previously a very clear way that these are regulated. And so what we've seen is different firms who are doing this, pursuing different ways to comply with law. Some for example, like Paxos and Gemini have created New York trust companies which are basically bank like firms that basically through their charter are able to do this. Others like USDC have done it through money transmission. I'm not sure how tether does it. I think they probably just don't have customers in the US that brings up one big question about these stablecoins is that maybe it's regulated at the point where a customer deposits dollars and gets a stablecoin and maybe it's regulated at the point where somebody comes with a stablecoin and retrieves dollars. But in between I'm not sure what the law that would apply would be.
- [17:53]
Niraj
Yeah, and this is a hard question. So you know, unfortunately the stablecoin topics are extremely popular right now. So while Coin center primarily exists to defend permissionless cryptocurrencies and really bitcoin at the heart of it, we get a lot of questions about stablecoins because Facebook's launching one, China's talking about a government run stablecoin potentially and the consumer protection risks are completely different. And this is a point we often have to stress when we go into meetings on the Hill. For example, Libra, Facebook's proposed stablecoin would have a reserve that a company holds and you have to trust them to hold that bitcoin. Of course there's no reserve that backs it. It's backed by people's trust in the stability of the number of the supply, which is something that's determined through the protocol, through math and thus far effectively impossible to change. So we're usually at pains to make that distinction because the laws that apply are different, if you understand that distinction and should be different because you don't have to worry in the same way you have to worry about a company keeping a reserve with bitcoin.
- [19:00]
Jerry Brito
And just briefly, on central bank digital currencies, the one distinction, one major Distinction with a stablecoin is that whereas with the case of Libra or Tether, there's a reserve of consumer funds that backs it, with central bank digital currencies, there's no such reserve. It's just that the issued coin is central bank money. And to me, the thing that's interesting there is. Look, I think that there are a lot of benefits, certainly for central banks and potentially for consumers to central bank digital currencies, but I think they're kind of marginal. We already have, certainly in the developed world, we already have digital money. Digital dollars. Right. So what advantage would you get from having it be tokenized? I can imagine that the advantages that I would be interested in probably wouldn't exist in what ultimately is launched. It would probably be a much more tightly controlled tokenized government currency. And so I guess I would have to wait and see that people are very, I guess, on their edges of their seats about the Chinese digital yuan. You know, I think it's kind of crazy to be so excited about it until we see what the design is. I think once we see it, we're going to be less excited by it.
- [20:20]
Peter Van Valkenberg
Okay, right, so let's get into the detail. Now, the first area we're going to cover is payments. But as we go through these different classes of regulation and different areas of regulation, it would be good to just start out by explaining who it impacts, you know, and how it impacts them differently if it is consumers or if it's businesses, and if it's both, how it affects them differently. So let's start with payments.
- [20:41]
Jerry Brito
Sure. So when you're thinking about payments, you're mostly thinking about money transmission regulation. And so what that means is that if you are a company that as a business you are taking custody of consumer funds in order to help consumers complete a transaction, whether that is sending money from point A to point B or helping a merchant accept funds from a consumer, you are going to be licensed. Right. And again, as Peter was saying earlier, the reason for that licensing, the theory behind it is if you're holding consumer funds in custody, you are, even if it's for a moment, putting those consumers money at risk. Because you could run away with the money. You could lose it, you could be hacked. And so what's required of you is a license. So you have to go and get permission to operate your business. And that permission is going to be dependent on a background check making sure you're not a criminal. You're going to have to post a bond of some kind. You're going to have certain restrictions on what you can keep, the funds that you've taken from your consumers, what those can be kept in, etc. So it's pretty straightforward. I think the biggest issue that the industry has faced is two things. Number one, in the US this is a state by state regulation. So if you open an exchange, you've got 50 plus different regulators that you have to get a license from. So that's very onerous. And secondly, especially earlier on, five, six, seven years ago, especially these regulators had never heard of Bitcoin, and so they didn't know what to do with it. And some states did what New York did and went the bitlicense route and created very, very onerous restrictions. Since then, I think we've gotten a pretty good settlement where you have to get a lot of licenses. But at this point, regulators understand what crypto firms are. Some states have basically said that you don't need a license at all, depending on what you're doing. And so it's much more navigable. It's not perfect. And there are different efforts that we could spend a couple hours talking about to try to create a uniform law around this across the states, but that's basically where we are.
- [22:59]
Peter Van Valkenberg
And so me as a retail user, I don't have to consider anything related to regulations of sending Bitcoin to other people in terms of payments.
- [23:08]
Jerry Brito
You don't, except that you might want to be aware whether the company that you're using, like an exchange, is regulated. Maybe that's important to you now, you.
- [23:16]
Niraj
As a regular user of, say, the lightning Network, which is, you know, important technology to make bitcoin scale. One of several solutions, but probably the most promising at the moment. There is a question here. Coin Center's mission is to make sure you don't, as a, as a member of the Lightning Network, ever need to worry about this sort of payments licensing regulation. Because you could see people maybe, and no one's trying to do this yet, but you could see people making the argument that an intermediary node on the lightning network is kind of like a coinbase or what have you. They temporarily have some control over the money as it moves through the lightning chain channel. But Coin center thinks that that's the wrong legal analysis. Because a lightning node can't unilaterally decide to redirect your funds to somebody else. They can only complete their part of the channel, and if they try to redirect, they get penalized by the protocol and they're simply not able to. So from Coin Center's analysis they don't put consumers at risk like a Mt. Gox puts consumers at risk because they can't lose or run away with the money and therefore they shouldn't fit in to the state by state licensing requirements that normal payment providers are required to fit into. And that's good policy because if you're not putting consumers at risk, you shouldn't need to get a license. And it's also essential to maintaining people's freedom to use these technologies. Because if every lightning node had to be regulated, the Lightning network wouldn't have the throughput that it would need to actually deliver on promises like, like microtransactions and low fee payments.
- [24:47]
Jerry Brito
But yeah, again, luckily we're prepared for that argument if the day comes. But it's not ever been really made.
- [24:56]
Peter Van Valkenberg
And if somebody listens to this is new, they might be like, what are you on about here, Pete? We haven't covered this yet, so the Lightning Network we're going to be covering soon. But Peter, you rightly also said that it's a way for bitcoin to scale. What I think people don't realize is the technicals behind how it works in that if I'm on the Lightning Network and you're on the Lightning Peter, and you're on the Lightning Network, Jerry, if I send money to you via bitcoin on the standard protocol, it goes from me to you. But if on the Lightning Network, it might go via Peter. So in the traditional sense of money transmitters, that's why Peter could have been considered a money transmitter. But as you can't control those funds, you're really just relaying the transaction. This is why it shouldn't require a license, which is great. Okay, so in terms of money transmissions, I understand this. This is somebody is risking my money. And I think in the traditional kind of fiat world, whether it's the banks or whether it's PayPal or Stripe, I understand why they might want money transmission licenses. And I imagine a lot of these businesses in many ways are similar. But what, what is, what does bitcoin do that's very different from these traditional fiat pay systems? And what challenges does that bring to the regulators?
- [26:10]
Niraj
So the first answer I'd give you is it shouldn't give them any challenges. It's sort of like money transmission regulation is not about money transmission, it's about custody and risk from custody. So the fact that the money, and I'm doing scare quotes right now is bitcoin money instead of dollar money shouldn't matter. The one question is the custody risk so we wouldn't want different regulations to apply to someone who's risking your bitcoin by holding it than we would for someone who's risking your dollars while holding it. We often say, if it walks like a duck and quacks like a duck, it's a duck. And so the differences there are slight in the context of a company that's holding bitcoin.
- [26:50]
Jerry Brito
Yeah. And now I'll say that the challenge that regulators who have been so used to the legacy system that they have is thinking in terms outside of transmission. These things are called money transmission licenses. They're not called money custody licenses, even though it's really what they're trying to get at. And the reason is that before the invention of bitcoin, the only way that you could transmit funds was by first custodying it. The invention of bitcoin provides a way that people can transmit funds across space and time and help others do it without ever taking custody of it. And that just does not fit into the paradigm of the rest regulators have. And sometimes it doesn't fit into the law as it's written. There are some states where you look up the definition of money transmission, and the definition literally is transmission of money by wire or other means. And so technically, that could cover bitcoin as a protocol. As a protocol, which would be very problematic. But I think regulators have slowly been able to interpret those laws to make sense rather than not.
- [27:52]
Peter Van Valkenberg
Okay, that makes sense. Okay. So like, I think we can conclude this section by saying, you know, if you're just a regular user or buyer of bitcoin, you don't really have to worry too much. Unless you want to just check that the company that you're using does have the licenses.
- [28:07]
Jerry Brito
There's one thing, though, very important, and maybe this gets more to anti money laundering. But if you are a user, but maybe you start using it more and more and you get into the habit of buying and selling a lot and maybe putting up advertisements that you are.
- [28:29]
Niraj
Willing to help people buy bitcoin or by selling it to them. If you're really getting a lot of people onboarded onto the platform, then regulators who are interested in regulating the on ramps and off ramps to bitcoin, because that's why Jerry said this might be more about anti money laundering. It's like people want to get onto the bitcoin network to do something illegal. Then if you're becoming one of those on and off ramps because you're doing so much sale and buy volume and you're advertising that you'll Help people get onto the platform, then people might start thinking of you as a money transmitter.
- [29:04]
Jerry Brito
Right.
- [29:05]
Niraj
That's a tricky area to watch out for.
- [29:07]
Jerry Brito
Absolutely right. And so we've seen this with, for example, people who use local bitcoin. Different regulators around the world will look at people who buy and sell local bitcoins and say, hey, at this point you're doing it as a business and so what you're doing is actually money transmission. So something to watch out for.
- [29:24]
Peter Van Valkenberg
Right, okay, so we can separate it here. Just a regular user who's buy in for themselves. They're absolutely fine. The only time they need to consider regulation around payments is with regards to whether they want to check the company they're using has the right licenses. But if somebody was regularly buying and selling on behalf of other people, you know, maybe using an exchange like local bitcoins. So for people who don't know, that's a little bit like a open market for buying and selling bitcoin. The local bitcoins provides a platform for buyers and sellers to come together. That's when you'd have to really think about it. But if you're a business or you're thinking of starting to set up a business and you might be involved in the transmission of bitcoin from one person to the other, then you will possibly need the license.
- [30:13]
Peter McCormack
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- [32:47]
Peter Van Valkenberg
Okay, so now we're going to move on to securities and I've visited the SEC a couple of times and I've done a couple of interviews there and this is a very interesting area and the reason this one is kind of interesting because I think this is going to separate Bitcoin, the gray possibility of Ethereum and a lot of other crypto based projects existed. So a very good area of starting for this is just for people who don't know, let's explain what a security is and then let's define what the measure of what a security is which is I know is the Howey test. Let's go through that. So people understand. And also you should probably add in there why it's important to classify something as a security or not.
- [33:25]
Niraj
Sure. So to go back to our original layout, investor protection, consumer protection, the different areas. Securities regulation is about investor protection and a security. Classically, the normal run of the mill security that you'd find is generally going to be a bond or a share of stock. Those are what we normally think of as securities. So like a share of Apple stock that you buy using Robinhood or some app on your phone or talking to your broker, that's what we normally think of as securities. And so the question might be, well, that's very different than Bitcoin because that's, that's either a debt obligation or an equity obligation that a corporation owes its investor. It's like you get 5% of this company or you get a regular $2,000 payment from us because you gave us money and we owe you. It's a debt obligation. So that seems very different than Bitcoin, where when you own a Bitcoin, you don't have a claim against Bitcoin Corporation. There is no Bitcoin corporation that owes you the value of the Bitcoin. There's no Bitcoin corporation that owes you a share of its total net worth. There's no Bitcoin corporation, period. So the question might be, okay, well, why is securities law relevant here? Because Bitcoin's obviously not a traditional debt instrument or bond or stock or thing like that. And the answer is what you were saying, Peter. The definition of a security is a little bit broader than just a bond or, or a stock. The definition in the US Especially is broad enough that it might reach some other things beyond just stocks and bonds. And that definition comes from the court case called the W.J. howey versus the U.S. which was a court case where somebody was selling some real estate in Florida and that looks like a real estate transaction. But they were also promising to maintain the land and grow the oranges on the real estate that you are buying and give you a share of the profits from the orange grove. So you're not just buying the land, you're buying this sort of stream of revenue from the guy who's maintaining the oranges on the land. And the SEC said that's not just a real estate purchase. That's actually kind of like having a share of ownership in an orange grove. And so we're going to regulate that like it was a stock because it's kind of like having stock in an orange company or an orange grove, but it's different. And the test they came up with in the Supreme Court case that said, yes, the SEC can regulate that kind of financial instrument is called the Howey test today. And the test asks, it says you're going to be subject to securities regulation if what you're selling or advertising or promoting is something where an investment of money is made in a common enterprise with an expectation of profits dependent on the efforts of a third party promoter. And that's a three or four pronged test, depending on how you count the clauses in that sentence. And they're all pretty important. You know, it's true that when we buy bitcoin we invest money. So it's obvious that even just a bitcoin sale involves an investment of money. Maybe you're mining it, but even then you're investing in a certain sense because you're investing and computer hardware to get the bitcoins when you mine now in a common enterprise was the next part of that test. And the question is, is Bitcoin a common enterprise? And the answer, we think is no, not in the same way that Howie with his land full of oranges was a common enterprise. You know, everyone goes to Howie to ask for their profits from the orange grove. Because as I was saying earlier, there's no Bitcoin corporation where you can go to and say, hey, I want the value of my bitcoin. That's not how bitcoin works. Bitcoin is more like a commodity. It's more like the oranges themselves than the person who owes you the money from the oranges. You can just own it outright and trade it. The third prong was an expectation of profits. So you're investing your money in a common enterprise with an expectation of profits. Do people expect profits when they buy bitcoin? Yes, probably. You know, but a lot of people think of it as a payment instrument where you don't necessarily think of profits as much or as a store of value where you just sort of hope for a steady long term price. But I think it's right that a lot of people do expect profits. But that's okay. If there's no common enterprise, you can meet some of the answers to this test. Like, yes, there was an investment of money and yes, there's an expectation of profits and fail others like common enterprise. And it's not a security. To be a security, you have to meet all the elements of this test. And then the last prong there is the Profits come from the efforts of others. And this is again where Bitcoin seems to fail the test. Because you know, what controls the price of Bitcoin? It's really just open markets where people are deciding independently to either buy or sell. And the amount of Bitcoin, which is the other input to the economic calculus. So the buying and selling decisions is the demand on an economic graph, and the supply is the other input to determine the price. That input is set by the protocol and is not in control of any person or affiliated group of persons. There's always going to be 21 million bitcoins. So where is this mythical person whose efforts we're relying on for the price? They don't exist. Hence why Bitcoin seems to fail two of the four prongs of the Howey test. Common enterprise and efforts of others. Now, you suggested that this might be a place where we see differentiation between Bitcoin and the other altcoins and the other blockchain projects out there. And you're absolutely right. And so the reason why the SEC is particularly interested in this broader area, if, if not Bitcoin in particular, is because some people have copied the original source code of Bitcoin, decided to launch their own altcoin or alternative cryptocurrency, and then they've sold them to the public or a promise of them to the public before the network's even running. And we call that a presale or an ICO or any number of other bad marketing terms. And in that context, now run that. So, you know, we'll call it S Coin, which may or may not stand for shit. S Coin is going to be sold to the general public, but the network's not going to launch for another year or two. Right? At that point, yeah, people are investing their money in a common enterprise because there's escoincorp that's promising to build S COIN in two years with an expectation of profits. Most of these things are marketed as great ways to, like, double or triple your money. So that prong's gonna work and then reliance on efforts of a third party. Again, there's an S Coin Corp who in two years may or may not deliver on their promise to build a new cryptocurrency. And maybe once they do deliver, it's a fully decentralized cryptocurrency where there isn't reliance on the efforts of others. But up until the point where they do deliver, you bet you're reliant on them because we're still waiting for them to deliver the thing they promised. So those kinds of pre sales and ICO agreements are usually going to be regulated as securities, whereas Bitcoin and a running network is not going to be regulated as a security. And just to now put this in context, why are we even talking about this? It matters whether you're regulated as a security or not. It matters for a couple of reasons. The promoter would need to register with the sec. They can't just start selling it or promoting it without checking in with the SEC and effectively getting permission. And if it's a security, it can only trade on national securities exchanges, which means you won't be able to have your coin traded on Coinbase. It'll have to trade on the New York Stock Exchange, which may or may not be all that. Ready to list your particular S Coin.
- [41:23]
Jerry Brito
And I'll say one more thing. Since you mentioned Ethereum, there's a question around Ethereum and what it's a security status. And I think that you see SEC and now even the CFTC has been very clear that Ethereum is not a security. And I think that's the right conclusion. Because as Peter was saying, if you run that Howie test on Ethereum, it's the same as running it on Bitcoin. You have this decentralized network, you're not relying on anybody in particular, etc. Etc. Now notice that when the SEC made that statement, they said nothing about the Ethereum presale. So you need to separate out this analysis. When Peter was talking about S Coin, you have the S Coin offering, which Peter is saying clearly a security, and then you have S Coin itself, if it ever is launched and it's running and it's decentralized. S Coin is not a security, but the offering certainly was.
- [42:18]
Peter Van Valkenberg
So can you give me an example of something that has turned out to be a security? How the SEC has reacted and the sanctions they've put on the people who run that security. I mean, you don't have to name the coin if you don't want to, but just a good example of what the risks are for people who might end up creating a security via cryptocurrency.
- [42:39]
Jerry Brito
So what's interesting is, since this is all very new, we've only seen the SEC begin with enforcement action starting in, what, 2018. We really don't have these yet. We've had settlements. And so when you have the SEC basically allege that you've issued a security and the person settles out of court, they typically accept a fine. They might have to return the funds to investors. They might promise not to engage in that kind of business again, et cetera. But what we have not had and we're looking forward to are court decisions. Right. Because so far it's just a theory. Right. The SEC says if you do these things that meet the Howey test in your security, but ultimately, for that to be law, a court has to say so we haven't had that, those presidents yet. Right now, there are two cases, you have Kik and you have Telegram, where the SEC is having to go to court and try to prove that these things are securities. And that's going to turn a lot on what the facts in those cases are.
- [43:44]
Niraj
Yeah, basically looking at the facts of Kik or the facts of Telegram and comparing them to the legal questions inherent in the Howey test. Investment of money, common enterprise, all that. On the settlement side, which, as Jerry said, is how most of the things have gone so far, the two things to look at are probably the SIA note or SIA, I'm not entirely SIA, SIA coin settlement, and the recent Block 1 or EOS settlement. So both of those were projects where somebody raised money to build a decentralized cryptocurrency or altcoin. And in both those cases, the SEC struck the exact balance that Jerry was talking about earlier, saying, look, when you pre sold a promise of future profits from your network that you were promising to build, that was a security. But the decentralized token, either EOS in the case of block 1 or SIA coin in the case of the SIA Note settlement, those are not securities. Now, the SEC didn't come out and say that those derivative innovations and technologies were not securities. But the fact that they settled with them and said, we're only fining you for the presale is pretty good evidence that this is how the SEC sees this right now and we think is definitely the right policy balance to strike. When you're asking for people to just hand you money to build something that's speculative, you should probably follow the same rules that other people selling securities follow. But once you've built it and you're not actually in control of it and people aren't relying on you anymore for its functionality and for its value, then it shouldn't be a security.
- [45:14]
Peter Van Valkenberg
Okay, so the biggest risk here is for somebody who's listening to this show might be thinking of creating some kind of cryptocurrency project that could end up becoming or being classed as a security. Now, I would put out there, I don't recommend creating any cryptocurrency project, because they all are pretty much doomed to failure. And, you know, as I've covered in my show with Nick Carter that's coming out next week, altcoins are essentially a history of failure. But if you choose to go down that route, that's the risk you're taking.
- [45:42]
Niraj
But, Peter, can I say one thing?
- [45:44]
Peter Van Valkenberg
Yeah, yeah, yeah.
- [45:46]
Niraj
On that subject, I think even if you do want to build your own cryptocurrency, you know, follow the beautiful example of Satoshi Nakamoto, and don't do a pre mine and don't do a pre sale or an ico. You know, just write cool software that you think people will want to use as a network. And if they want to use it, they'll use it. And at no point. And you will benefit if people use it. But at no point are you asking people to give you a bunch of money to trust you on your better cryptocurrency idea. Because as you said, most cryptocurrency ideas since bitcoin have been a little bit disappointing.
- [46:19]
Peter Van Valkenberg
Well, I'd say a little bit. Majority very disappointing, some moderately disappointing, most very disappointing. But just to close this one out, I've got two final questions. The first one is if someone has listened to this beginner's guide, they've gone through it all, and despite me telling them to focus on Bitcoin, to not trade, you know, just to consider this as their investment, but they still end up deciding they want to invest in other cryptocurrencies, and for some reason, they invest in an ICO and it turns out to be a security. Are there any implications on them as a retail buyer of that ico?
- [46:54]
Niraj
No, except because the secondary markets will have to be securities exchanges if it's a security, at least in the US the depth of the market, where someone can go back to sell the thing to somebody else if they want to get rid of it, might be shallow because you won't have access to Coinbase or the other major cryptocurrency exchanges to sell it. You'll have to sell it on a national securities exchange, which probably won't list it, in which case you'll probably have to sell it on an international market if you want to sell it.
- [47:22]
Jerry Brito
But there's no legal liability that I'm aware of for the user. In that case, you're the victim.
- [47:29]
Niraj
Yeah. Somebody owes you money.
- [47:32]
Peter Van Valkenberg
All right, so let's get into the kyc. Aml. This is the thing that's probably going to touch people most of all, especially if you're a bitcoiner KYC AML might be something that you're like, what the hell is this? And you might not even realize you're actually engaged with the KYC AML process, you know, when you first get into this. But you know, KYC is know your customer AML is anti money laundering. You know, it's very, very much something that's directed by the U.S. but you know, is highly relevant around the world. Can you talk about what they are and why the government deems this important?
- [48:04]
Niraj
Sure. So first, a little preface about the US versus international law, because I think this is an area where we can be very helpful to people beyond the U.S. the U.S. standards for anti money laundering and know your customer laws are in the Bank Secrecy act, which is a particular act of Congress, and in the implementing regulations that the relevant agency, FinCEN, has promulgated. And so I'm going to talk about those regulations, but let's point out first that the US was recently the president of an international body called the Financial Action Task Force, the fatf. And as president of the FATF for the last cycle, which is, I think like it's a year or two, the US promulgated new international standards about AML KYC regulation for cryptocurrencies. And FATF made those standards official in recommendation 15 and a few other pieces of guidance. So we exported our policy through the FATF to this international body. And this international body has members in all of Europe. All of the European nations are members of fatf, all of Africa, all of Asia, all of South America. So those member nations will now need. It's called recommendation 15. You know, it's called the FATF recommendations, but effectively they're not really optional. Nations around the world now are going to have to implement the same anti money laundering laws that we have in the US and that's just how it's worked out. Now that might sound scary, but at least here at Coincenter, we're here to tell you that it's not such bad news if you're really just a normal user of Bitcoin. And the reason is because the US policy on anti money laundering has been not so bad. It struck the right balance. And so here's that policy that's now going to be exported to the rest of the world.
- [49:57]
Jerry Brito
And let me just say one thing before you explain that you also have to think about, when you think about was this good or bad, is to consider the alternative. And the current president of the fatf, which took over after the US was Done is China. And so query what sort of virtual currency AML regime would they have implemented had the US not hurried up and done it?
- [50:19]
Niraj
If China had gotten the first stab at regulating virtual currencies for aml, we might not have had such a rosy outcome. So the US policy compromise on anti money laundering is this. You are regulated from an anti money laundering know your customer perspective if you are again a money transmitter. And the US definition of who is a money transmitter. In Europe we often use the word virtual asset service provider or vasp. So these are similar things. Is somebody who accepts and transmits currency or currency substitutes. And Bitcoin is almost certainly a currency substitute. It's something people use as a substitute for currency. And so the question is you are regulated for AML if you accept and transmit Bitcoin as a customer business. So that's in a nutshell what say coinbase does. They will accept Bitcoin from their customers and transmit their customers Bitcoin to other people. It's custody. It's just like our discussion earlier about custodians being regulated for money transmission license. Now there's some questions on the edges. Is somebody who's just holding their own Bitcoin a money transmitter? They accept Bitcoin from people paying them and they might transmit it to people they want to pay, but they're not doing it as a business. They're just receiving Bitcoin from someone who wants to pay them or sending or paying someone with bitcoin. So they're not a money transmitter any more than someone who decides to pay somebody with a $20 bill or receive a $20 bill from someone as a money transmitter. And FinCEN clarified exactly which kinds of Bitcoin businesses are money transmitters in the guidance they released in May 2019. And they went so far as to even say that people who set up say decentralized exchanges where you could do an atomic swap of a bitcoin for an Ethereum, for example, on a cross chain swap, if they don't as a business accept and transmit the currency substitute being traded by the platform, if it's just individual users settling outside of the platform, they're not money transmitters. And this kind of ruling goes so far as to say that say if you had a multisig agreement where you are offering a multisig wallet product to your users, and you're going to hold one key of three in the bitcoin multisig arrangement on behalf of your user, but your user has the other two keys, something like what Bitgo might do As a multisig provider, you're not a money transmitter. Because simply holding one key out of three in a multisig arrangement is not accepting anything from your customer or transmitting anything on their behalf. It's just holding one key. You can't unilaterally or independently move the Bitcoin that your customers help, you're helping your customers store. So this particular May 2019 FinCEN guidance was very, very clear about things like multisig, decentralized exchange and individual users that unless you're really operating as a business that holds other people's Bitcoin for them, like a Coinbase or a Kraken, you are not regulated for anti money laundering purposes. Now that means that if you are a Coinbase or a Kraken, or if you're somebody who wants to start a Bitcoin business that'll help people hold their own Bitcoin or hold their Bitcoin. So you're going to hold their Bitcoin for them. You will be regulated for aml, which means you need to monitor for suspicious activities. You need to file reports with FinCEN when somebody like withdraws a whole bunch of Bitcoin from you, maybe, and you need to know all the people who keep their Bitcoin with you. You need to know their name, you need to know their address, you may want to know their Social Security number and other things. So that's what anti money laundering regulation is. You need to effectively know a lot of information about your customers and give that information to the regulator. But that again does not apply to somebody just using Bitcoin. And that's important because if it did, you'd be basically asking people to spy on other people to learn information about who they're paying or who they're getting paid by and report that to the government, which would have fourth Amendment constitutional concerns about our rights to privacy, for example. But we don't need to make those constitutional arguments because FinCEN Coin center believes has made really good choices as to limiting the set of entities that are actually regulated as anti money laundering or know your customer obligated entities.
- [54:48]
Peter Van Valkenberg
Right. Okay. So firstly, I'm just going to say if you're listening in and you're wondering what an atomic swap is, then don't worry. You don't have to worry just now. If you're wondering what a multi sig wallet is, don't worry. We're going to cover that in the future. But these are all very important points that Peter is making. But I think the key separation here is, and the Basics that someone needs to understand. That is, if you're running a business and you are buying and you are giving people the opportunity to buy and sell bitcoin, there are some onerous requirements that you have to follow with regards to your customers and I think more with regards to the customer. If you're signing up to a website and you're buying and selling bitcoin, you're most likely going to have to give identification over which links you to that purchase.
- [55:31]
Niraj
That's right. And then two things quickly about where AML KYC type laws definitely will apply to you as an individual and you should watch out. The first is, as we were saying earlier, if you're going on local bitcoins and advertising your services as someone who will buy a lot of bitcoin from somebody who wants to sell a lot of bitcoin or sell a lot of bitcoin to people who want want to buy some, and you're doing that regularly in order to make a profit. You might be regulated as a bitcoin exchange, effectively as somebody who needs to do know your customer and anti money laundering controls because you're operating as a business that helps people get onto the bitcoin protocol. So if you're selling or buying a lot on local bitcoins and advertising your services like, hey, you need bitcoin, I'll give you some bitcoin, you probably need to know your customers. You probably need to register with FinCEN. The other area where this matters is in the context of sanctions law. So this is not the same AML KYC laws as what I was talking about with FinCEN. This is something called OFAC here in the US the Office of Foreign Asset Control. OFAC is the division of treasury that enforces US sanctions. US Sanctions are things like don't do business with people in Iran, don't do business with people in North Korea. OFAC applies to all American citizens. It doesn't apply to just businesses. It also applies to American citizens. So if you start paying someone in Iran and you know that they're in Iran, or maybe you don't even know that they're in Iran, you're technically in violation of sanctions law. And that doesn't matter if you pay them in bitcoin or in dollars. And ofac, the office that will enforce these sanction laws against Iran, people who violate them has recently started listing bitcoin addresses as sanctioned because they've identified them maybe as the bitcoin addresses used by a terrorist or used by someone in Iran or North Korea. And So, you know, if you really want to be diligent and you're afraid that this person I'm paying, I don't know anything about them and it's kind of sketchy, you could check the address they want to receive payment on against the OFAC list because technically, if you do end up sending to one of those OFAC sanctioned addresses, you would be in violation of sanctions law, which can have very strict penalties.
- [57:50]
Peter Van Valkenberg
All right, so the last area here we're going to cover is tax. And this is the area I think that's most important to retail users, the thing they need to consider most. And it's probably the area that, you know, people need to do most research in their local jurisdiction. So I know there's a difference between from country to country. I know, for example, in the UK it's considered a capital gains tax. I know, for example, in Germany they have specific tax laws where I think if you don't spend it for a certain period of time, it's tax free. I know it differs from country to country. So more than anything else we've discussed in this session, you really, really should be checking your local laws in your local jurisdiction. But just for the sake of this, there's a couple of key questions that we can ask. So firstly, you can obviously explain what the tax laws just briefly are in the US. I mean, 50% of my listeners are from there, so they'll probably benefit from that. But the most interesting question here, and I think this affects everyone, is why is taxation of Bitcoin so complicated?
- [58:52]
Jerry Brito
So just to explain briefly what the tax laws are, as you're saying, it varies from jurisdiction to, to jurisdiction. In Germany, it depends. Sometimes it's a currency. In the US and the UK it's capital gains. In South Korea, there's no tax. In Australia, I think there's a VAT tax on the purchase of Bitcoin, which makes it kind of a very difficult to use. So it's very different. Why is it so complicated? It's so complicated because it's this new asset that is not quite a payment system, not quite clearly a commodity like gold, but it's used in all of these ways. And I think also because the regulators haven't yet decided how to treat it.
- [59:38]
Niraj
Because it's kind of a currency and kind of an investment asset like gold. The question of how it fits into capital gains tax is hard because normally you pay capital gains when you sell a big investment and you only do that once or twice every year. But if you're always using Bitcoin to buy and sell goods because you're using it as a currency, you might end up with a whole bunch of independent, taxable moments where you have to pay capital gains tax. And Jerry's going to talk about how we're trying to improve that situation here in the US In a second. The other area where it's complicated is that these are open protocols that can fork and both the software forks. But the blockchain can fork sometimes, too, as we saw when bitcoin cash forked out of bitcoin and then bitcoin SV forked out of bitcoin cash. Now, the issue there is, if it's one of these blockchain forks, you know, before the fork, you had five bitcoin at address x. After the fork, you have five bitcoin at address X. You also have five bitcoin cash at address X on the bitcoin cash blockchain. And if you wanted to, you could use your same private key to sell your bitcoin cash. Now, because maybe you believe that bitcoin's the real bitcoin and bitcoin cash, cash is just silly. You might believe that when you go to sell your bitcoin cash. What was your basis? When you have capital gains tax, you say, I bought this share of Apple stock at 5, and now it's 10, so my basis is 5. So I owe 20% of the gain, which is $5. Well, what's your basis with bitcoin cash? You bought the bitcoin at some price before there was a fork and. And then there was a fork. And you have this new thing. How do you figure out how much your capital gains was? Bitcoin's price has changed since you bought it. And bitcoin cash didn't even exist, but now it has changed. Maybe your basis is zero. Maybe your basis is a split of the value of bitcoin when it forked. These are open questions, and they're very difficult to answer. And it's even possible that when the fork happened, the new bitcoin cash that you got out of thin air effectively was income, not even capital gains. It's like somebody gave you a valuable gift or a not so valuable gift, depending on what the price of bitcoin cash is and how you feel about it. And if it's income, then maybe you had a taxable moment simply because somebody decided to fork bitcoin. And maybe you don't even know that bitcoin forked, but because somebody else forked it, and you don't even Know, you technically might have had income in that moment because you had the private key which might have allowed you to spend that Bitcoin. So this gets very complicated very quickly, as you can understand. And we've been working with the IRS to hopefully make it not so bad and not so complicated.
- [62:17]
Jerry Brito
Just a fun other example of how forks create this kind of complication. Take Ethereum. I think when Ethereum forked and you had Ethereum and Ethereum Classic, I think a lot of folks probably did try to do everything by the book. And they filed, they sold. Let's say they kept their Ethereum, they sold all their Ethereum Classic, and they filed their taxes for capital gains and paid capital gains. But now when you look at the IRS guidance, it's not so clear which was the forked coin, because I think just colloquially, people think, well, Ethereum Classic is the fork of Ethereum. But wait a minute, Ethereum Classic is the one that never changed. So Ethereum might be the forked asset.
- [63:06]
Niraj
Yeah.
- [63:06]
Jerry Brito
And so you did your taxes wrong. It's very, very complicated.
- [63:10]
Peter Van Valkenberg
I will say if anyone came into this struggling and thinking, God, some of this bitcoin stuff's complicated, without, without doubt, this is, this is the one session they're going to be like, what the hell? But like, we. I think we can keep this simple, right? I think if we were to kind of summarize, look, if you're just a regular new user to Bitcoin, you're just buying it for your first time. You know, the thing you really need to think about, like where you're buying it. You might be given information over for your KYC and aml, and you should really check your local taxes. The people who need to really get in detail and understand about all of this stuff in terms of payments, security, kyc, aml, you know, and tax in a different way. Is anyone who's getting a think, I want to create a company, I'm going to create a business that's involved in Bitcoin or cryptocurrency. There the people have to spend a little more time. But the main issue for retail users, I would say, is the primary thing is their tax.
- [64:02]
Jerry Brito
I think that's right. And I think if you are buying and holding, what you want to make sure is that you're keeping very accurate records of what you're buying and when and at what price, so that the day that you sell, you can have an accountant help you comply with whatever tax law is in your jurisdiction. And maybe if you hold on long enough, that'll be certain and clear.
- [64:24]
Peter Van Valkenberg
And, you know, I will include a bunch of notes in the show, notes so people can follow this, they can find out more information. I think a kind of interesting way.
- [64:32]
Peter McCormack
To close this out, though, is let's.
- [64:34]
Peter Van Valkenberg
Take this back to Coin Center. You know, this is a very complicated area. What are the things that you, as an organization are pushing for? Where do you want to see changes? Where do you think this will could all get a little bit easier?
- [64:47]
Jerry Brito
So a lot of the work that we do is, you might say, defensive in nature or educational in nature. So there are some very bad ideas that oftentimes float up and we have to go in and sort of explain how things, you know, how the technology actually works and how these ideas might not be the best fit. A good example of that recently was in response to the government's reaction to to Libra. There are any number of legislative proposals that would have regulated not just the kind of stablecoin that Libra would be, but all stablecoins. And indeed, in some of these bills, the way that stablecoin was defined, it could have included bitcoin, which is crazy, but that's the way it is. So a lot of what we do is kind of defensive that way. On a proactive kind of note, I think at this point, we're very happy with, generally with the regulatory settlement that we've reached in the U.S. we think tax is the one notable area where we need more clarity. And so, for example, an example of something there is trying to get an exemption from capital gains for small bitcoin and cryptocurrency transactions. So again, if you are buying, let's say, $1,000 of Bitcoin a month because you want to hold and, you know, then you sell after a few years, clearly you did that as an investment, and you're going to have to pay capital gains on whatever gains you've made. But if you are buying bitcoin because you want to tip Niraj or you want to, quite frankly, maybe notarize some documents on the bitcoin blockchain or something like that, those are small personal transactions that should be exempted from capital gains, because if they're not, that means you owe capital gains on every time you use the bitcoin blockchain. And that creates basically a law that nobody could possibly comply with. And so we've worked with Representative Schweiker and Representative Delbene and Representative Emmer in Congress to introduce a bill that would create a exemption from capital gains for cryptocurrency. The same way that one exists for foreign currency.
- [66:58]
Peter Van Valkenberg
Okay, great.
- [67:00]
Niraj
The only thing I'd add, since we have your platform, Peter, is that Coin center is a nonprofit. We rely on donations from people who like the work we do in order to operate. And even if you think a lot of the sort of more loyally egghead stuff that we've described so far isn't that important, again, what Jerry said is right. Most of what we do is defensive. So it's two pronged. We spend time building relationships with members of Congress and their staff so that there'll be a few members of Congress who understand the technology and believe in it. When the day comes where something terrible happens and people start calling for a ban on the protocol or a ban on people's use of the protocol, you need rational people to stand up and say, look, just like we can't ban encryption, we can't ban Bitcoin, and we help cultivate those relationships. And then the other is, I write a number of pretty dense legal reports about things like the constitutional law of free speech and privacy in the US and why any attempt to ban Bitcoin or use of the protocol might be unconstitutional because it would stop people's exercise of their free speech rights or their privacy rights. So if you think that work's important, which Jerry and I, of course, sort of dedicate our lives to, please think about supporting Coincenter and don't hesitate to reach out to us.
- [68:19]
Peter Van Valkenberg
Yeah, I will echo that. I mean, firstly, if you guys didn't exist, doing what you were doing, well, firstly, we wouldn't be doing this interview, but if I was doing this interview with somebody else, undoubtedly the things we would be discussing would be even more complicated because you've helped and guided some of the regulate the regulations that exist. Right. You, you've been deeply involved and almost certainly you're going to make this, you say it's defensive, but almost certainly you're going to make this all easier for us in the future. So.
- [68:45]
Peter McCormack
Absolutely, absolutely. If you are a.
- [68:47]
Peter Van Valkenberg
Look, listen, if somebody's listening to this and you're a long term bitcoiner, you should be supporting Coin Center. But if you're new and you've just get it in, you know, down the line, just remember these guys exist, remember the work they're doing. Also go back and check out my other interviews with Peter. There's two previously, they're worth listening to. And I will have Jerry on at some point. We will do our own one, we're going to go a little bit cypherpunk and a little bit radical and anarchist at some point. All right, so listen, if people do want to find out more, how do they find out? Where do they go to?
- [69:14]
Niraj
So we put all of our public advocacy materials on coincenter.org and you can also donate there if you'd like.
- [69:21]
Peter Van Valkenberg
Awesome. Well, listen, thanks guys for coming on. This was awesome. It's definitely going to be a little bit complicated for some people, but I think we summarized it up nicely. So appreciate you coming on.
- [69:30]
Jerry Brito
Thanks for having us.
- [69:31]
Niraj
Thanks, Peter.
- [69:36]
Peter McCormack
All right, so what did you make of that? Did that fly over your head? Honestly? Don't worry, some of this still flies over my head. The most important things to be aware of as a hodler of bitcoin, someone new coming in, someone who's maybe bored a little bit, is that you need to consider your local tax laws and be aware that if you are buying bitcoin on an exchange, you will be handing over personal information. Everything else we discovered, it pretty much always relates to business. So unless you're now just thinking about starting up some kind of bitcoin based business, a wallet or an exchange, then you don't need to worry about most of us. But still, if you do want to find out more, look, you can go on the Coin center website, check out some of their stuff. I've added links to that in the show notes that should help you. And I do want to say a big thanks to Peter and Jerry for coming out and doing this and also to Niraj for helping me schedule this on Friday. I've got another great show coming up. I've got Nick Carter and we're going to be looking into the history of altcoins. That's a smashing show. Anyway, before we close out, I want to say thank you to everyone who supports the show, whoever you are, whatever you do. Big love to you from me. If you are a regular listener. If you do want to support the show, please head over to my website. It's whatbitcoindid.com Click on the Support section, it will tell you everything. Any questions about the show, feel free to reach out to me. My email address is hello@whatbitcoindid.com.