Coin Center was invited to present testimony on Thursday to both the House Subcommittee on Digital Commerce and Consumer Protection and the House Subcommittee on Terrorism and Illicit Finance. They explained to both subcommittees the role that digital assets play in the world, what the future of the sector may look like, and how regulators could interact with the sector in a way that protects both the consumers and the innovators and encourages businesses in the industry to reside in America.
Peter Van Valkenburgh, director of research at Coin Center, spoke to the House Subcommittee on Digital Commerce and Consumer Protection. He explained to the subcommittee the revolutionary role blockchain technology is playing in the world around us. “Just as the PC democratized computing, and the web democratized news and entertainment, open blockchain networks are democratizing financial services.”
Van Valkenburgh, however, drew a stark contrast between the regulatory safe harbors given to early internet innovators, specifically the Communications Decency Act and the Digital Millennium Copyright Act, and what little is being done to protect blockchain technology innovators today.
“Both laws created safe harbors for infrastructure-building businesses,” noted Van Valkenburgh. The laws protected the creators of the internet’s infrastructure from third-party liability stemming from the users of that infrastructure.
In a conversation with Bitcoin Magazine, Van Valkenburgh gave the example of Google. Google isn’t liable for a user who illegally downloads pirated material from a website whose link popped up on their search engine. This is because of the aforementioned Digital Millennium Copyright Act, which provided a safe harbor and allowed Google to continue to build the infrastructure of the internet (in this case, a search engine) free from crushing copyright liabilities.
A similar distinction should be drawn when it comes to regulating innovators in blockchain technology, Van Valkenburgh noted in the conversation. There are two main entities innovating in the space: custodians who hold the valuable digital assets for consumers, and developers who are building the infrastructure of blockchain technology, but who don’t hold consumer funds. “These very different entities,” said Van Valkenburgh, “should be regulated in very different ways.”
An example of a “custodian” would be Coinbase, who regularly holds a consumer’s bitcoin, ether or other digital assets. An infrastructure developer would be more like a software wallet developer, who simply creates a tool with which a consumer can interact with the blockchain, safekeep their own digital assets and send transactions. The wallet developers themselves don’t exercise any control over their users’ digital assets.
The infrastructure developers, Van Valkenburgh points out, should not then be regulated as money transmitters who must get licensed state by state before starting their business. Their role is just to create portals and pipelines through which the transactions can flow, not to direct or control the transactions themselves. If the developer were found to be misleading the consumer with his/her software product, then ex-post-regulatory punishment may be appropriate, but again, there should not have to be a permission process that precedes these developers’ endeavors.
When it comes to the custodial financial services, much of the regulation, and therefore protection for innovators, is at the state level. This makes it complicated for innovators to be based in the U.S. because of the plethora of different regulators in the space. Each regulator has the ability to affect how an innovator in blockchain technology operates.
Van Valkenburgh said in his statement to the subcommittee, “In order to reestablish the U.S. as a leader we need to rationalize the chaos of financial services regulation, starting with state-by-state money transmission licensing.”
These custodial services, the ones holding a consumer’s value, should be regulated, argues Van Valkenburgh, but they should not have to repeat a licensing process 50 or more times over. Because of that costly barrier to entry, someone innovating in the space today would be best-advised to leave the U.S. and start their business in a country with simpler regulatory structures. We must regulate at the federal level if we want a simpler licensing process.
Bitcoin and Terrorist Financing
On the same day, Jerry Brito, executive director of Coin Center, joined a panel to discuss with the United States House of Representatives Subcommittee on Terrorism and Illicit Finance any national security implications of these financial innovations.
Brito explained to the subcommittee, “[Bitcoin] is open to bad actors who take advantage of it. Criminals certainly use it today, and we have begun to see some nascent interest from terrorist groups. According to a recent report on the potential of terrorist use of digital currencies by the Center for a New American Security, however, ‘Currently there is no more than anecdotal evidence that terrorist groups have used virtual currencies to support themselves.’”
Brito views the infancy of interest by these bad groups as an opportunity to get in front of the problem. “This means there is time to develop an appropriate response to the possibility; a reasoned response that targets the threat while preserving the freedom to innovate.”
The main take-home message from this meeting, however, was that, as Van Valkenburgh explained in his conversation with Bitcoin Magazine, there doesn’t actually appear to be much use of digital currency in the funding of terrorism. In fact, it is a bit unwieldy for terrorists to use because of the public nature of the distributed ledger. However, this shouldn’t stop the U.S. from developing solutions to curb the use of digital currencies by terrorists.
What Coin Center wanted these subcommittees to understand, at the end of the day, is that digital currency is here to stay. It cannot be destroyed. The technology is neither bad nor good, but instead is a new tool at the disposal of anyone with a computer. To ignore the technology is to allow other countries to take the lead in adopting and incorporating it, and gaining the benefits of it in the process.
Beginning the process of effectively and sensibly regulating digital currency is a must if the government wants to derive any benefits from its existence and prevalence.