WBD292 Audio Transcription
FinCEN’s Discriminatory Rulemaking with Jerry Brito & Peter Van Valkenburgh
Interview date: Sunday 27th December
Note: the following is a transcription of my interview with Jerry Brito & Peter Van Valkenburgh. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk to Jerry Brito and Peter Van Valkenburgh, Coin Center Executive Director and Research Director. We discuss the implications of the new regulations, the key issues and what you can do to prevent them from passing.
“It’s warrantless surveillance, it’s mass data collection, just like Snowden revealed for emails and things, just for our financial records. So, we don’t like it, but at the very least we should have equal treatment suffering under this regime.”
— Peter Van Valkenburgh
Interview Transcription
Peter McCormack: Right then, Jerry, Peter, how are you both?
Jerry Brito: A little tired, but good.
Peter Van Valkenburgh: Hey, Peter, we're great, all things considered.
Peter McCormack: You're out there, fighting for us bitcoiners, keeping the dream alive. I actually don't know what we'd do without you guys, to be honest. We'd be in a much worse place. So, I mainly want to talk to you about this FinCEN ruling, but I may, if we can squeeze it in, ask you a little bit about the STABLE Act. I don't care about what happened with Ripple. But, let's start with the FinCEN.
So, a lot of stuff came out very quickly. Somebody I'm not a big fan of, Mr Mnuchin, seems to want to leave office with quite an oppressive new rule. But, for anyone listening, can you explain what it is they're proposing?
Peter Van Valkenburgh: Yeah, so this is about Bank Secrecy Act regulated institutions, which is what the Treasury does, primarily with respect to anti-money laundering policy. They say certain businesses are choke points within the financial infrastructure and we're going to use those choke points to accumulate information about the flow of funds, both domestically and internationally; we're going to use that accumulated information to identify criminal usage of the financial system and stop criminal usage of the financial system.
So, your listeners are probably well familiar with things like Suspicious Activity Reports; Currency Transaction Reports; the need for certain companies to register with FinCEN as a money services business, or with similar authorities overseas; this is not just a US concern. The Financial Action Task Force takes these rules from the US and promulgates them all around the world. It's a membership association and if you don't have the same standard as the US, you get kicked out of the membership association, effectively, and then you're a rogue state.
So, these anti-money laundering rules are everywhere. Now specifically, this rule-making is about two things. It's about a reporting rule, called a Currency Transaction Report, that financial institutions need to make; and, it's about a record-keeping rule, sometimes referred to as a Record-Keeping Rule, or The Record-Keeping Rule. And, the Currency Transaction Reporting half of this rule-making will basically say, look, it's been long-standing practice since the 1970s that if you take more than $10,000 in cash out of your bank, your bank will automatically alert the government to that transaction. It will say, "Look, a whole bunch of cash just left the financial system to this customer". That's been the case since the 1970s for cash withdrawals, or other cash payments.
It hasn't applied to crypto withdrawals, despite the fact that crypto like Bitcoin is electronic cash. The best metaphor for understanding Bitcoin is that it's digital cash. In fact, the Satoshi whitepaper calls it Electronic Cash. So, to us, it's reasonable that if you have to file a report with the government when you remove $10,000 from your bank in dollars, that you'd also have to have the institution file a report with government when a customer removes $10,000 worth of crypto. So, we do not really object to that because at the very least, it's parity with traditional regulations for financial institutions.
The problem, and it's a big problem, is that the record-keeping rule that they're imposing for crypto exchanges is not identical to the record-keeping rules that existing financial institutions have to comply with, with respect to dollar transactions; it's much more prescriptive. It doesn't allow for sort of, collect the information you get and if you don't have all the information, that's okay, take a risk-based approach; instead it says you have to collect a lot of specific items with respect to a virtual currency transaction over $3,000. And those specific items, in this list in their items, include the name and physical address of the customer's counterparty in a crypto currency transaction.
So, if you told Coinbase to pay an address that Coin Center has, as a donation address, not at Coinbase, it's our Bitcoin address that we generated ourselves, Coinbase will have to, if this rule becomes law, Coinbase will have to say, "Well, who is this address you want to pay? Give us their name and physical address". And similarly, if you were to receive an incoming transaction from a Bitcoin address, they wouldn't let you have the funds, because they wouldn't be able to comply with the record-keeping rule until they know the name and physical address of the person who's behind that Bitcoin address that's paying you.
The bottom line is, in the traditional financial context, there are all kinds of moments where a financial institution doesn't know both ends of a transaction and is allowed to comply as best as they can. In the specific rule being imposed, there's no such flexibility and goodwill; you either have to have all the information, or you can't comply with the rules. So, that's why this is a double standard, and that's why it would be really bad for crypto businesses.
Peter McCormack: Right, I've got a few questions there before we go on. So, is it only in the scenario when you are withdrawing money from a bank over, say, $10,000 that this is asked?
Jerry Brito: So, when you are withdrawing over $10,000, what a bank will do is automatically report the fact that you, your identity, that you have withdrawn the amount over $10,000 that you have withdrawn.
Peter McCormack: But, is it only in the scenario of a bank?
Jerry Brito: Only in the scenario of a bank; not presently in the crypto context. So, if you go to Coinbase and let's say I have $200,000 worth of Bitcoin in my Coinbase account; if I withdraw $20,000 worth of Bitcoin to a self-custody Bitcoin address, Coinbase is under no obligation to report that to the government. They might well file a Suspicious Activity Report of their own volition, but presently they have no obligation. This rule would create the obligation, just as the banks have.
Peter McCormack: Sorry, no, the question I'm trying to ask; are there any other scenarios where I'm withdrawing cash from somewhere, say, I don't know, I'm trying to think of one; say if I was in a casino and I won $50,000 and I was withdrawing it from them, do I also in that scenario have to?
Jerry Brito: Yes.
Peter McCormack: So, it's not just banks?
Jerry Brito: The Currency Transaction Reports apply to a whole host of different kinds of entities. And, it's not just when you withdraw; it's also when you just conduct a transaction. So, for example, casinos are one; car dealerships, for example, are another. So, if I go and I buy a car for $20,000 in cash, the car dealership has an obligation to report that.
Peter McCormack: Right, okay, so that was my first question. So, say if I'm in a bank in the US -- I mean, we have a similar thing in the UK. They ask us, but I don't know if we're obliged to, and I always lie; but, say I go into my bank -- no, let's do it better. Let's say it's online and I'm withdrawing $20,000 and I'm sending it to somebody else -- no, they'll know if that scenario, because they'll know what bank I'm sending it to. Sorry, I'm just working it through in my head.
So, I go into the bank, I go into Chase, I say, "I want to withdraw $15,000", what do they do? They say to me, "Okay, we need to know what that's for".
Peter Van Valkenburgh: No, they don't. Let's be clear. There are Currency Transaction Reports, which is this obligation to simply alert the government my customer has removed a substantial amount of cash, which will put the government at notice to investigate me potentially for any number of financial crimes.
Peter McCormack: Okay. And, I'm guessing if you do it a few times, then it looks like, "Oh look, he's doing this three times a week; we should look at this"?
Peter Van Valkenburgh: Yeah. I mean, cash businesses actually really struggle, even if they're completely innocent cash businesses, because these reports do draw law enforcement scrutiny basically to the person who the report's being filed about. But, that report does not need to affirmatively identify who I then took the $10,000 in cash and decided to pay and it would be impossible to actually identify that person, because I'm going to put $10,000 in my wallet and I'm going to go to the grocery store and I'm going to pay one person, and I'm going to go to the drug store and pay another person, and I'm going to pay my employees. How do I even know who I'm going to pay; I don't know.
So, there's no counterparty identification requirement in the Currency Transaction Report context. And, there wouldn't necessarily be in the Crypto Transaction Report context either. The problem is not the CTR requirement, the currency transaction requirement; the problem is the record-keeping requirement, which is distinct. They're trying to impose two new requirements. One is kind of fine, because it's kind of like traditional financial regulatory policy. The other is extraordinary, this new record-keeping requirement, because it would force exchanges to always know their customer's counterparty in any transaction over $3,000, so not even $10,000; $3,000.
Peter McCormack: But, not your keys, not your Bitcoin, self-custody; I could just be withdrawing to my own wallet; so, I just say it's to my own wallet. That's fine; would that scenario be fine?
Jerry Brito: You could. So, imagine this rule were to be finalised the way it is, you could go to your financial institution, your Coinbase, let's say, and say, "Hey, I want to withdraw $20,000 to this Bitcoin address", and they're going to say, "Whose Bitcoin address is that?" and you can say, "It's mine and here's my physical address", and they will record that. Then, you've got the Bitcoin and you can then do whatever you want with it. But, that's creating a new obligation that does not exist for traditional payments.
So, when I go to the bank and I withdraw cash, I'm not asked to prove, or give any information about who the payee is.
Peter McCormack: Oh, yeah, I don't agree with it, but I was just wondering what it was. And then, if I'm in a scenario where I've got my own wallet that, say, has -- say I had a wallet which was fortunate to have $1 million of Bitcoin in it, and I wanted Peter to send to you for Coin Center; I wanted to make a $50,000 donation; am I, at that point, myself, obligated as an individual, to create a currency --
Jerry Brito: No.
Peter McCormack: Okay.
Peter Van Valkenburgh: These rules only apply to financial institutions and it's important to be clear about that. Where this causes real problems is that it could cause a lot of sham compliance in the way that you just described, where the customer just says, "This is my address", when it's not their address, because they don't the headache and you don't want the headache, and that's not how the law should work.
It's just like our de minimis tax exemption. A lot of people aren't going to taxes on the 1 cent Capital Gains that they technically owe when they buy a can of Coke with Bitcoin, but the law shouldn't require people to do illegal things, even if they're minor, little, harmless illegal things; the law should be something that everyone can comply with and asks for reasonable demands.
Then, the other problem is, it's going to put a lot of friction between any exchange to individual transaction, because the exchange is going to have to be this sort of fire-bearer in between to say, "Is it over a certain amount? If it is, do we have name and physical address for this otherwise undecipherable address?"
And, the compliance people at these exchanges might eventually say, "You know what; this is just a headache. What if someone sends us $5,000 and we can never figure out who they are, so we can't give it to our customer; do we just send it back to them, because that would be kind of money laundering, you know? Bitcoin comes from an address, goes into our pooled wallet, but we send it back; that's money laundering. So, do we just segregate these things and give them to the state? What if the person then sues us saying we stole their property?"
This is a nightmare from a compliance standpoint, so I can imagine a compliance person that doesn't care so much about Bitcoin and just likes their job at one of these exchanges might say, "You know what; let's just stop having Bitcoin payment addresses at all. People can sign up with our exchange with their email address and request payments at their email address, and people who want to pay them can sign up on our site as well, and give us their name and physical address, and then we can connect them", which is of course exactly how Venmo works and how PayPal works. This is not what Bitcoin's supposed to be.
Jerry Brito: And, it's also important to keep remembering, it's not just about withdrawal, right. So, maybe it's a little onerous, but not incredibly onerous, if before you want to transact, you basically have to first get it to your own wallet that you self-custody and then transact. It's onerous; maybe not the end of the world. But, it's not just about withdrawing; it's also about receiving.
So, we're Coin Center; let's say we have an account at an exchange; we make our address available to the public; somebody sends us a $20,000 anonymous donation. Well, the exchange is going to say, "Give us the name and address of this person". We're going to say, "I don't know who that is". That's a big problem.
Peter McCormack: Okay. So, what you're saying is, you're okay with the flag being sent to FinCEN. As before, someone's sent over $10,000 --
Jerry Brito: To be clear, it's not about being okay. We're not okay with the Bank Secrecy Act in general.
Peter McCormack: No, of course.
Peter Van Valkenburgh: It's warrantless surveillance; it's mass data collection like Snowdon revealed for emails and things, just for our financial records; so, we don't like it. But at the very least, we should have equal treatment suffering under this regime.
Peter McCormack: That's it. Your compromise is, you don't like it, but at least this is in line with everything previously. And, I'm guessing they can already request this information from exchanges anyway, because they do have access to Chainalytics data; we know what Chainalytics is doing. And, I guess they can already then make their subpoena, or whatever request it is, to the exchange if they wanted to know this information. So, it really is just this slippery slope of mass surveillance.
So, the question I ask then is, do you think this is something they would do with bank transactions if they could; it just feels like something they can easily do with crypto? And, is crypto still unfairly demonised?
Peter Van Valkenburgh: Yeah, absolutely. So, I'll let Jerry talk about the process that this rule-making has taken so far, but let's point out something very important. In 1994, they started a heightened customer due diligence rule-making, FinCEN did, for banks and individual financial institutions, to do more to identify the people who are beneficiaries of transfers in the traditional financial system. It took them six years to finish that rule-making, and ours is happening in 15 days over Christmas.
Peter McCormack: And, is that legal for them to rush it through like that? I mean, obviously it is, but why is this happening in 15 days? Is this just some kind of exit plan for Mnuchin?
Jerry Brito: Yeah, good question. Is it legal? I would argue not. And this gets to all really all the deficiencies in the process they have taken. Look, in the US we have, like in most countries, there is regulation. Regulation basically is at the agency, not the elected Congress, not the elected representatives of the people, but unelected bureaucrats who have been delegated authority by Congress; they make law under that delegation.
What we have realised, and we realised fairly quickly after regulations started becoming a bigger part of government in the 1940s, is that you can't just have unelected bureaucrats decide on a whim, with little notice, with little opportunity for input, one day this is a new law; here it is. Nobody voted on it; nobody did anything.
So, what Congress did to fix that was to create the Administrative Procedure Act. And, the APA is basically a bill of rights for administrative law where it says, "This is how the people can have notice that a law might be coming; can have input into the development of that new law; and create some legitimacy, reintroduce some democracy, into what otherwise would be a completely undemocratic process".
The Administrative Procedure Act requires that agencies issue notice of exactly what it is that they want to change in the law; and give the public a meaningful comment period where the public can give input. They have to consider those comments before they finalise the rule. The APA has a couple of exemptions where an agency can, if there's an emergency, or if there's a special case, not do any of that. One is if pertains a foreign affair function of the United States Government. And so, of course, if you are going to have a rule that affects some international relations, it's going to piss off a particular government. Let's say you're going to designate a country a particular thing, or whatever, you don't want to give notice of that or seek help.
In this case, FinCEN Treasury Department is invoking that saying, "Well, this is about anti-money laundering. We thought it was under the authority of the BAS and the Patriot Act, and those things courts have found have to do something with international relations, because money laundering is international". Also they say, "This network is international; the Bitcoin network. Almost 17% of nodes", they say, "are in the US, so this is mostly an international network. So therefore, we don't have to afford you the regular notice and comment, so we're only giving you 15 days". That's one argument that they're making.
There's a big problem with that. The first is that the foreign affairs function exemption to notice and comment rule-making is categorical which means that, if you invoke it, the point of it is that you do not give any notice and do not give any comment period at all, but here they're not doing that. They've given notice, so it's not as if they're afraid they're going to offend anybody. And, they are only giving us a 15-day comment period, so that just makes no sense.
The other thing is, they're invoking a Good Cause Exemption where if you can show, as an agency, that there is good cause that giving notice and taking comment would be against the public interest, you don't have to do it. In this case they're saying, "You know, we've already been in consultation with the cryptocurrency industry before this and we think that if we give more time to comment, it could tip off criminals to move their funds out of exchanges where otherwise they would be covered by these rules".
Here's the funny thing about that. One, again, this is the kind of thing where if you really meant it, if you were serious about that, you would have given no notice. The fact that they gave notice tells us that that's not really what they care about. They don't care about tipping off people, because they have tipped off people.
Peter McCormack: That's was the first thing I thought!
Peter Van Valkenburgh: Every knows criminals require 16 or 17 days to move their cryptocurrency off of exchanges; they can't do it in 15!
Jerry Brito: Yeah, so that's number one. Number two is that they say they've already consulted with the cryptocurrency industry and therefore, this makes any further comment period unnecessary. The problem is, their obligation is not to give time for comment to the cryptocurrency industry; they had to give time for comment to the public. And, the public includes folk who are in crypto who are not in the industry, and people who are just generally interested.
It also sets a bad precedent because what they're saying is, "Hey, if you consulted with us before we have a proposed rule, then we'll use that against you to say that you can't have the normal comment period", right. And, it's also the case that they maybe sought comment from the cryptocurrency industry on a general notion of new rules, but not on the specific proposal.
So, when you take all of that, they have no good basis for the exemptions that they're claiming. But, here's the more important thing; why are they doing this? Why are they rushing it through? Well, it's clear. It's clear to anybody that the reason that they're doing it is because this administration ends of 20 January and if they gave the normal comment period, they would not be able to finalise this rule; it would go into the next administration. And, they want to get it out; they want to rush it out.
Peter McCormack: But why; why is it so important to them?
Jerry Brito: I think you'd have to ask the Secretary. I think we see this, for example, in the most recent 12-month review of their virtual currency guidelines, where there is a growing sentiment on the part of anti-money laundering, terrorist financing, policy people; that's very important to highlight, "policy people"; that, there could be a future where there's no need to use on ramps and off ramps, and if we allow people to just be able to transact any amount between each other without intermediaries, we're going to lose all visibility.
I think that kind of thinking has motivated the Secretary; this is pure speculation on my part; you'd have to ask him why he's doing it. The important thing to highlight though is, if you talk to law enforcement, if you talk to folks in the intelligence community, if you talk to people in the justice department, nobody wants this rule. This is not number one.
They will tell you, this is not what -- and, if you really care about law enforcement, this is not what you should be spending your time on. You should be spending your time on non-compliant financial institutions, rogue exchanges, especially overseas, that will let anybody sign up without KYC, etc. That's what the law enforcement cares about. They don't care about self-custody Bitcoin addresses.
Number two, this is actually going to make them lose visibility, right. Chainalytics software that they rely on depends on regular interaction between self-custody Bitcoin addresses and the exchanges. And, this is going to drive people to go one way or the other.
Peter McCormack: When does the 15-day deadline end, or notice period end?
Jerry Brito: 4 January.
Peter McCormack: 4 January. And, the inauguration is the 12th?
Jerry Brito: The 20th.
Peter McCormack: And, is there any kind of grace period before inauguration where no new laws can be passed, or can they be passed up to the 20th?
Jerry Brito: You think there should be, but no, there are not.
Peter McCormack: Well, I mean, one thing that stood out to me recently is why is any lame duck president allowed to change anything, certainly between the Electoral College votes being passed and Inauguration Day; it just seems the most ludicrous time for any laws to be passed. I understand certain things with regards to commuting sentences and certain things like that; but, in terms of actually creating new laws, it seems ludicrous.
Are there ever scenarios where laws are created during this period and then very quickly, the next administration reverses them?
Jerry Brito: Yes. And in this case, it's important to note that I'm calling it the law, because it has the effect of law, right. But, this is not a bill that Congress is passing; it's not what we traditionally call law; it's a regulation that's been promulgated by an agency, FinCEN, the Treasury Department. And so, when it comes to regulations, a couple of things can happen. The next administration can try to immediately reverse it, but if it's ultimately finalised within this administration, the next administration would have to begin a new rule-making process to undo it; that's the requirement. If you make a rule through rule-making, you have to go through rule-making to undo it.
That's the kind of thing where, for example, with this particular rule, I can't imagine that the new Biden administration is going to really spend the capital to do that where it can. What you can imagine is there is a provision where Congress, if both Houses of Congress pass a joint resolution disapproving of the regulation, it kills the regulation. And, it kills the regulation and then, the agency cannot regulator on a substantively similar matter; that's called, The Congressional Review Act.
Peter McCormack: So, what are you guys doing? I've read your comments, but specifically, what are you guys doing and what do you expect to be able to achieve with this? Are you feeling confident you can water it down; are you feeling confident you can delay it; where are you at with this?
Jerry Brito: I wouldn't say we're confident of any of those things. I think we're happy with the efforts that we're making. I think best case scenario would be to make the Secretary and folks at the Treasury understand that if they continue down this path where they're just giving people 15 days of notice and comment, when this rule's finalised, it will be challenged in court as completely illegitimate for that rushed process; and a court will overturn it.
So hopefully, if they understand that, they will say, well as much as we want to try to get this done before we leave, it would make no sense to do that and just have it overturned. So, we'll go ahead and give the 30 or 60 days that normally happens. That moves it into the Biden administration and then, once it's there, I can imagine that maybe the Biden administration does not …
One thing that often happens when a new administration takes office is that they immediately freeze all pending regulation, because they want to have a time to study it and see if they want to continue the previous administration's policy. So, basically getting it into the next administration will be good.
If we can't do that, then hopefully we can prevail upon the Secretary and people of the Treasury that it makes no sense to create a rule. I mean, FinCEN has a long tradition of having technology-neutral regulation, where they create a rule and it applies equally to banks, to crypto exchanges, to money transmitters, to anybody. In this case, they're breaking that tradition and they're creating a special rule for crypto. We're saying, "Drop that. Give the same treatment that you do to banks, give it to crypto", and that's the next best thing we hope that we can get.
Peter Van Valkenburgh: And then in the longer run, if the worst was to happen and the rule was to be finalised unchanged, in our comment we make various constitutional arguments that this kind of warrantless surveillance is antithetical to the US Constitution; to our Fourth Amendment right not to have information about us searched and seized without reasonable suspicion and an individualised warrant, because this is just bulk collection, collect all this information about your customers' counterparties. And also, constitutional rights to anonymous assembly, actually. So, there's a case that the Supreme Court heard, NAACP v Alabama, where they found that it was unconstitutional for a state, for Alabama, to obtain membership lists of private assembly, members of the NAACP.
Interestingly, when the Bank Secrecy act first came around in the 1970s, which comes after the NAACP case, the ACLU challenged it in a case called, California Bankers v Shultz, and said, "We have California banks, they're going to record all this information about people's donations to our accounts, and they will be assembling lists of donors to the ACLU. Unfortunately, in that case, the ACLU's claims got thrown out of the case, because the ACLU couldn't yet prove that any of their donors had been subject to the reporting requirement.
In this case, if anybody donates to an organisation like Coin Center at our self-hosted wallet address, and that donation is over $10,000 and it comes from a hosted wallet from Coinbase or from Kraken, we will have standing to challenge this, because it will automatically trigger a report that says, "This customer of ours made a donation to Coin Center", or to the ACLU or to the EFF, and that will give these organisations standing to say, "You can't just start compiling lists of all the charitable organisations and political advocacy organisations that people donate to. That is antithetical to our First Amendment assembly rights".
So, these are long battles that will have to be fought in the future and they're not easy to get all the way to the Supreme Court and win obviously, but these can also be credible threats, which is why we start raising these arguments now in the context of our comment to this rule-making.
Peter McCormack: By the way, I've never heard of the term "unhosted wallet" before this.
Peter Van Valkenburgh: Yeah, I slipped up and I shouldn't have!
Peter McCormack: Who came up with the unhosted wallet/hosted wallet? What is an unhosted wallet? Are we talking about wallets which aren't held by a company?
Jerry Brito: Yes. It will be interesting to try to use Google to figure out the first occurrence of this, but I blame government, right. I think that people always talk about hosted wallets, and when you talk about hosted wallets, it's pretty clear what you mean; you mean Coinbase, Kraken, right. Somebody is hosting a wallet for you. I think then, when talking about everything else, they say, "Well, what is the opposite of hosted; unhosted". And so, they settled on this language.
Peter McCormack: Generally speaking, how are the various agencies now, because this is a very different year? I got to know you guys since the last bull market, really during a bear market. They were very difficult times for a lot of people involved in Bitcoin, just knuckling down and working hard. Then, we've had this insane year in this last year where we've seen MicroStrategy put $1.3 billion into Bitcoin; we've seen Square put $50 million in; we've seen that gold company, Ruffer I think it is, put $750 million in; and, this seems to be unrelenting. This is now a very serious off-ramp for the dollar for people who are very nervous about inflation, who feel like Bitcoin is a safe investment.
In my mind, that itself creates some kind of regulatory moat in that I, in these days, don't think of Bitcoin getting banned. Yes, it can become highly regulated, but from you guys, where are you with regard to that with the various agencies? Is Bitcoin, and I tend to stick to Bitcoin, but is Bitcoin now generally accepted; are we beyond the days of thinking it could be something that could be banned? And also, even if they tried, would they be under too much legal challenge now because of the threat it does to companies within the US? Sorry, there are a lot of questions in there in one.
Jerry Brito: I'll let Peter talk about whether a ban is legally even possible, but I'll just say that, yeah, I think it's much more accepted. Everyone's much more understood, by folks in government, and it's much more accepted as a fact. And I think as they see more and more very serious folks begin to use it, they get comfortable, right; the mainstream likes the mainstream.
So, I wouldn't sorry about, let's say, the SEC saying Bitcoin's a security all of a sudden; I think that ship has very much sailed. I think where the challenge has come in is twofold: one is taxation. In the US, at least, we have just a complete mess with what the rules are related to taxation, and I think we need to try to fix those.
Then lastly, it's related to money laundering, exactly what we're facing right now. You can imagine that the more popular, the more useful Bitcoin and crypto becomes, the more anti-money laundering authorities are going to want to put it in a box, right, that they can control. And I think, quite frankly, that the anti-money laundering authorities who would do that are not so much motivated by Bitcoin; they're motivated by stablecoins. They're very worried.
So, when Libra was announced, even though you could, since 2009, any two people in the world could send money to each other in any amount peer-to-peer through Bitcoin, it was the announcement of Libra that really made the lightbulb go off in anti-money laundering regulators' minds that, "Oh my God, you're telling me that if Facebook turns this on, billions of people will be able to send each other any amount of money peer-to-peer?"
So I think, as you have more use of stablecoins and central bank digital currencies continue to be talked about, that drives anti-money laundering regulators to want to put all of crypto, including Bitcoin, in a box. I don't think a ban is possible, though, and maybe, Peter, you want to talk about that?
Peter Van Valkenburgh: Yeah, so a ban would be the easiest thing to fight, on legal and constitutional grounds, because in order to actually ban Bitcoin, you'd have to ban people's ability to run software on computers. You'd literally have to say that, "We can pass a law that says that people aren't allowed to perform maths on a calculator", effectively; and that obviously has grave First Amendment deficiencies.
But, our opponents here are probably much smarter than that and wouldn't go for an outright ban, knowing that it would be hard to enforce and likely to be challenged. So, I don't mean to be conspiratorial and I'm usually not; I'm usually the person on Twitter who says, "Chill out, crypto Twitter, this isn't a unified force in the government coming for this technology; this is just random regulators doing random things and you're associating them all together".
But, I will say this: when Jerry says that law enforcement doesn't want this changed, that should be weird, because law enforcement is the entity that most cares about money laundering and capabilities for money laundering, and law enforcement would be the organisations, like the DOJ and the FBI, that would be the first, in theory, to ask for more record-keeping requirements if there were actual problems with money laundering in Bitcoin. The fact of the matter is there is much more money laundering happening in the traditional financial sphere, and it's much harder to find the information relevant to that money laundering, because the traditional financial sphere has terrible record-keeping habits.
So, why are we getting a more severe record-keeping requirement than traditional finance? I think, yes, this administration might want to do it and do it quickly before they leave; but, what motivation could be behind that? We've always waited for banks to sort of show up and lobby congress to kill this technology, and the way you would kill it is with compliance. You'd say, "Well, we banks have to suffer all these compliance obligations, so we should place some obligations on crypto companies too". And then, the obligations that get asked for happen to be things that companies can't comply with and, oh no, you just can't deal with this stuff anymore.
I think that's a realistic way that we'd see people actually bring really extra legal and unfair challenges to this technology, through law-making and through rule-making; and they're harder to fight, because they happen sort of sub silentio, as the court would call it, rather than in a law that comes out boldly and says, "We want to ban this tech".
Peter McCormack: Right. Do you think these, therefore, are maybe future problems that I guess you guys would be very conscious of, but with Bitcoin at $23,000, it's very impressive, we're all very impressed by that; when Bitcoin's worth $230,000 or much higher and it's in trillions in market cap and lots of people are realising, "I'd rather use this than use the dollar because it holds its value", and all these ideological reasons we have; are you preparing yourself for bigger fights therefore down the line?
Jerry Brito: We're always prepared; we're born ready!
Peter McCormack: Yeah, man, I love that shit! But, you know what I mean?
Jerry Brito: I do. Maybe this is where we have a different, and I wonder what Peter thinks, but maybe this is where we have a different assessment. I'm not sure that Bitcoin poses a threat to the dollar as a day-to-day medium of exchange the way that you would think the government would really come after it. If Bitcoin, however, becomes something that is really a gold substitute, then sure, it's going to be used for censorship-resistant payments by people who need to; and that's quite frankly one of the main reasons I'm motivated to work for Bitcoin.
While that's still possible, if it's mainly used as a store of value very akin to gold, I think that's a different challenge to government. So, maybe it's a different assessment and, look, we're always updating our assessment as reality unfolds.
Peter Van Valkenburgh: Yeah, and we have been doing work for the past six years building these arguments in preparation for fights like this one and ones on the horizon, so the constitutional arguments that I've stuck in our comment are from a paper that we wrote two years called Electronic Cash, Decentralised Exchange and the Constitution. And we've got other papers actually that we've written that we haven't even published, because we're holding them in reserve.
Peter McCormack: Nice!
Peter Van Valkenburgh: It sounds a little weird, but --
Peter McCormack: No, it's good.
Peter Van Valkenburgh: -- it's pragmatic, and this is why we were able to write a comment in response to this rule-making in, what, two or three days after it was announced, and before the rule-making was even published in the Federal Register and the 15-day comment period started; not to justify their short comment period, but we're able to do this because we're focussed on this. The public at large has no idea largely what's happening, and it's outrageous that they're given very little time to even understand or respond.
Peter McCormack: So, one of the funny things is, we're talking a lot about funding open-source developers and how important it is, and I've put some pressure on some exchanges this year and thankfully, they've funded those. Don't just say no for the sake of it, but are you guys funded enough; like, are people aware enough of what you're doing? I know how important you are. Do we need to shine a bigger light on this?
Jerry Brito: I appreciate that question. So, look, we are funded enough where we can continue to operate as we've been operating for the foreseeable future and we're very grateful to all of our donors. That said, I would welcome much more funding from a much wider and diverse group of people and I would welcome that for two reasons.
One is, everybody should be involved. Everybody who is benefitting from our work should be contributing and there are people right now who are not, and that's partly because they're not aware of what we're doing, etc. In the past months, since when the STABLE Act was introduced now with this, I think people are beginning to notice what we're doing and so, we're seeing a lot more, especially small dollar donations, from the community, for which we're extremely grateful. We think it's awesome we're getting that grassroots support, because it invests people in our work and it keeps people attuned to what we're doing, so that's great.
The other thing is, if we have to engage in a legal challenge, right, so to date, we've never had to file a lawsuit. To date, we've engaged in consulting, lobbying government, filing comment letters, testifying before Congress and getting good results. At some point, we may have to file a lawsuit and those are very expensive. And so, as that becomes more likely, it's going to be good to have like a war chest for that purpose.
Peter McCormack: Okay, I mean, the next year's the year to do it, but everyone's going to be making a lot of money over the next 12 months; it's a real time to put some pressure on people. But, I guess what I'm getting at is, if you received significantly more funding, are there specific things that you're not able to do yet that you want to do; or, do you really just want the war chest, because I'm happy to make some noise about this?
Jerry Brito: Yeah, it's more the war chest right now, if I was honest; right now, it's the war chest. I don't think there's anything that we want to do that we can't do right now.
Peter McCormack: Okay, well I'll pressure some people. Okay, so the other thing I just wanted to understand a bit more is, what is the status of the STABLE Act; what does it actually mean; what are the implications of that?
Peter Van Valkenburgh: So, the STABLE Act is this piece of legislation that's been floated by representatives to leave in the House and others mostly from the further left of the Democratic Party. And, what it would do is it would say that anything that goes by the name "dollar", "digital dollar", etc, anything that tries to maintain parity with the dollar, anything that is at all dollar-like, including even PayPal balances that are dollar-denominated and have nothing to do with cryptocurrency, fit a definition that is in the law called "stablecoin".
If you fit the definition of stablecoin, the only people allowed to issue that stablecoin are federally insured banks. That's a radical change because obviously, most stablecoins out there are from regulated entities like, I don't know, Gemini comes from a New York Trust company, USDC comes from licenced money transmitters; PayPal balances come from PayPal, a money transmitter; and, none of these are federally insured banks, but they're allowed to do payments that are dollar based.
If this bill was passed, that all would be dead, and then the thing that's actually really bad about this piece of legislation, because that's bad enough; it's sort of a full re-architecting of how we do financial regulation, it will be highly disruptive. But, what's really bad is even decentralised so-called stablecoins, even something like a MakerDAO, that are just stuff out there on Ethereum smart contracts, would be illegal because they're not being issued by a chartered bank.
And, people who are validating transactions on the blockchain for those transactions, DAO transactions or whatever on the Ethereum blockchain, or maybe anchored in the Bitcoin blockchain, because you can anchor card coin type information in the Bitcoin blockchain for stablecoins; even those validators, the people who maintain the blockchain, could be liable under the way the law is drafted, simply for validating a block that included someone else's transaction, they'd have no idea what's going on; that is a stablecoin transaction.
So basically, the only way to enforce that part of the law would be midnight raids, if you will, where you'd have servers in a basement, or maybe it's just your smartphone or something, and you are complicit in furthering other people's stablecoin issuing activity in contravention of the STABLE Act, and we're going to arrest you. That is obviously a nightmare.
There is reasonable debate to be had about whether we should allow money transmitters to issue coins versus banks, if they're dollar based, but there should not be reasonable debate whether we should outlaw maintaining blockchains, simply because maintaining blockchains could mean that you maintain transactions that are subject to the law.
Peter McCormack: Yeah. It's one of the interesting things about the US leading a lot of the regulations, is that I also kind of have this underlying feeling that the majority of Bitcoin being held is being held in the US, so actually a lot of the wealth, the economic wealth, behind Bitcoin is being held in the US. So, it's kind of an own goal to damage Bitcoin right now for the US, in some ways. I don't know if that's actually true, it's just a gut feeling I have.
Jerry Brito: I think that's right and it's important to point out to your listeners that this bill is not likely to become law. It comes from a fringe element of the Democratic Party, which has control of the House, doesn't have control of the Senate. Even if it was to pass both Houses in the future at some point, it's unlikely that a moderate like Biden would sign something like this. This is not an existential threat. It's far less of an existential threat than, say, the Treasury rule-making that's happening right now. And, neither of them are, of course, truly existential like outright bans or things like that.
I will say that, you know, some of the proponents of the STABLE Act have been pretty good on this other stuff, on this privacy stuff. I was having a Twitter conversation with Rohan Grey, which a lot of people might know, as one of the proponents of the STABLE Act, on Twitter. And, he actually got my back just earlier today saying, "You shouldn't be looking for parity with the traditional finance system's record-keeping requirements; those requirements are immoral. They are surveillance based and everyone's trying to kill cash. We know this. You should be fighting for no record-keeping requirements". I was like, "Yeah, Rohan, I'm with you buddy; privacy!" but right now, we just need to survive.
Peter McCormack: Well, it does feel like there's some people who are going to be on your side coming into government. I've spoken recently to Senator Lummis; obviously, Warren Davidson is doing a lot of stuff. Does it feel like, to you, there's a shift in momentum of people who are starting to understand these currencies; do you feel that?
Jerry Brito: I mean, you definitely see a greater understanding of Bitcoin and cryptocurrency throughout the government, because they're starting from such a low base a few years ago, so you definitely see more. I think those people that you mention are real champions of Bitcoin and the technology, but there is a distinct minority.
The good thing is that there is a distinct minority of Bitcoin champions and Bitcoin detractors and so, we're happy to have the champions; we're lucky we have just a few detractors. I wouldn't call it a shift that's really going to be super meaningful, but it is a shift. People are getting it now in a way they didn't before.
Peter Van Valkenburgh: And, I just want to point out one thing, in case anything we've said leads your listeners to think the wrong thing. This is not a partisan issue. We've got Republicans on our side and Democrats on our side, so we've mostly been talking in this call about Secretary Mnuchin, very visible Republican administration, bringing this rather unfair rule.
It's important to note that an answer to the Stablecoin Act, and maybe even this we all have to think about it as a way to protect Bitcoin, is in creating a safe harbour for people who are maintaining the blockchain and not holding other people's funds. And, we've actually had a really great champion in the House, Representative Tom Emmer, who is a Republican, repeatedly now introduce a safe harbour piece of legislation; and hopefully one day, we can get the kind of momentum and interest in a piece of legislation like that to pass it.
It's a great piece of legislation. It says, "If you're not holding other people's money, you're just maintaining a public good by running a node, validating transactions, these laws can't apply to you, laws that criminalise that activity". So, it goes both ways. We've always had Democrat champions and Democrat detractors and Republican champions and Republican detractors.
Jerry Brito: Yeah, I mean the STABLE Act is Rashida Tlaib, a Democrat. This rule is Steve Mnuchin, a Republican.
Peter McCormack: So, I guess I can't look into anything that we've got a Democrat administration coming in, the Biden administration, that that would be a better administration or worse administration to work with; you won't know?
Peter Van Valkenburgh: As a moderate versus a more radical side of one party or the other, he's probably less dangerous.
Jerry Brito: Yeah. I think a lot is going to depend on the personnel that he picks to staff the Treasury, for example. So, who's going to be the Under Secretary in charge of Terrorist Financing and Financial Crimes, right? That's going to be very important. And, what are they going to care about more? Are they going to care more about theoretical threats to money laundering, or are they going to care about competition with China?
So, if you think about it, China is building a centralised blockchain strategy, they're building a central bank digital currency. If the US wants to compete, not just with China, but globally, its best bet is to bet on open networks; it's what worked in the past. The US dominates the internet, because it fostered a completely open and permissionless network. And Americans, by their nature, thrive in that kind of environment.
While people in the US and the US government was fostering the internet, France was building Minitel, which was a closed national computer network that never got past 16-bit graphics, while the internet just soared past it because it was open and permissionless. So, we have the playbook of how we can win against China; let them do their centralised stuff and let's bet on open networks here in the US. There's no reason why the Biden administration should not be able to get that.
Peter McCormack: It's a very solid argument. Brilliant, well look, this was really useful, I appreciate you coming on. Is there anything else, any other messages that you want to land before we leave? Obviously, you should tell people where to find out more information and donate money, but anything else you wanted to land?
Jerry Brito: Yeah, so www.coincenter.org is where you can find all of our information, including our recently published comments. You can also go to www.coincenter.org/donate to support us. But, very important, related to this rule-making: if you go to our website and you click on the blog post where we talk about this, it's right on the home page, you will find a link to a form that allows you to, as an American citizen, email Secretary Mnuchin and tell him not to pass an unfair rule. So, we're hoping that all of your listeners will go to our website and email Secretary Mnuchin.
Peter McCormack: I will push them. Unfortunately I can't do that, being a British Citizen, and I don't think --
Jerry Brito: I don't think there's any restriction on non-citizens from commenting. You're welcome to send an email to the Secretary and tell him that he shouldn't do this to his own country.
Peter McCormack: Yeah. I don't like Mnuchin. Right, this was brilliant, guys. I'm going to do a bit of a push, trying to get people, to encourage people, to make donations to Coin Center. I think you're doing brilliant work. I think it's highly valued and undervalued at the same time, if that makes sense and I think next year, when everyone's making billions of dollars, they should certainly look to filter a little bit your way.
So, keep up the amazing work and as you know, my podcast is always an open platform. Any issue you want to come on at any point and talk about it, just tell Neeraj to drop me a line and we'll do it.
Jerry Brito: All right. Thank you so much, Peter.
