EB28 -- Siân Jones: European Banking Authority opinion, Regulation, Coinsummit London, COINsult

Transcript

[Music] hello and welcome to EP Center Bitcoin the show which talks about the Technologies projects and startups driving decentralization and the global cryptocurrency Revolution my name is Sebastian and I'm Brian pan crane we're here today with Shawn Jones you guys all know sha Jones we've had on the show before uh you've also perhaps listened to her last regulation episode from the Amsterdam conference we just put out uh two days ago and um today today we're going to talk about regulation pretty much and the whole episode there's a lot of things have been going on so uh hopefully you know you'll be able to catch up with kind of what the situation is in terms of Regulation and how

Bitcoin businesses are regulated uh especially in Europe hey Sean hi there guys lovely to be back on the show hi thanks for coming on again uh and by the way thank you very much for these uh uh regulation interviews that you did in Amsterdam they're really great and so we're publishing we publish the first one this week and then the next one's coming out next week and so I think they're very insightful and it's very timely uh with regards to what just came out uh and what we'll be talking about today well I I agree completely and um I'm I'm very grateful to those who sped the time to be interviewed um in this first of the series of two we had Brian

scalas who's a partner at uh uh attacks law firm in uh the USA and he was talking about um the IRS the US IRS position on uh on bitcoin cryptocurrencies virtual currencies uh we had estan vanur who's a tax lawyer at PWC in the Netherlands who specializes in vat or European sales tax uh Jerry burrito who's probably the leading uh acad Mickey's Adjunct professor and research fellow uh at George Mason University he is a very interesting guy he was

involved in the um Senate hearings in the US he's written uh two excellent papers on regulation of Bitcoin and we had a very different kind of interviewee Luis quend who um um is a hacker he won an award for hacking in Europe at the Agee of 15 he became an advisor to the vice president of the European commission so he has a lot of insight and uh together they made a a wonderful bunch of interviewees and I'm very grateful to them all for spending some time at the uh at the uh Bitcoin 2014 yeah I I was kind of uh we were

both kind of surprised that this 18-year-old kid is an adviser to the European commission that's it's really impressive not just to the commission but actually to the vice president of the commission um neie Cru um you know the commission is made up of a of um multiple Commissioners from different uh member states and Ne Cru is uh the Dutch um commissioner and also vice president of the commission and now that might all be shaken up after the recent elections um but but at the moment that's been the case and she had the uh remit for the digital agenda so um she's a she's no she's no no

disrespect her she's no young person at all and yet she's very very much um into um Innovation and the digital economy and she reached out to um Lise and um he he's one of her advisers absolutely brilliant fantastic chap to listen to yeah was especially thought it was interesting that he mentioned apparently he raised like a pretty significant final run uh round of funding especially for Europe and is starting a bigco Exchange in Switzerland so I I never heard about that before so that was very interesting so I'm curious to see what comes out of that I guess I teased him I teased him about moving to

Switzerland because of course Switzerland sits outside the European Union so he's moving from Spain which is within to somewhere outside even that he advises the yeah that's a bit ironic yeah well we also just got back from coin Summit so we were in London until I mean I got back yesterday I think Seb got back Friday and uh you know we spent two days uh Thursday Friday at the conference which was in kry Warf uh this was a conference organized by Premier galenia he's also been on the show sort of at least for a short interview so I did the short one and and Seb you you talked about the conference with him before so yeah it was a it was a great event lots of great speakers um we did

some really great interviews too I think that will be coming out um I guess in like two weeks starting two weeks maybe after we've done uh Sean's second regulation episode yeah it was a great conference and just hats off to pamir and his wife uh gar for for putting on such a great event um I came away from that event pretty you know very energized uh as always when I come back from a Bitcoin event it's great to meet everybody there and uh and uh always good time so great conference with like really I thought you know quality panels um I thought the panels were of pretty good quality and high you know high

level quality uh maybe not every I was maybe interested by every one of them but uh some really important topics were discussed I I thought what was kind of interesting was that you know if if you know Canary Warf is like the Wall Street of London so there are all those huge banking headquarters it's sort of a very sterile area you know nobody lives there basically uh and it was really in the middle of it in this glass d space so you could see outside you know you see the City Bank headquarters of the Investment Bank at least HSBC all these big investment Banks je Morgan also yeah yeah and so we were like sitting in the middle kind of doing this VI conference

what I thought was kind of interesting was that there were basically no Bankers there you know we talked with Premier about that at the end but it seems like they haven't um you know they haven't gotten to the point where they feel this is something interesting or interesting enough to spend you know maybe take two days off and um get wol there don't be um don't be Hoodwinked into thinking that the banks aren't extremely interested in what cryptocurrencies have to uh uh have to offer them I would um I would say that they are certainly keeping their heads uh below the parapet they don't want to be seen to be doing it and um there are a number of large Banks who

are who have projects already underway now um looking at how they can use um blockchain technology I think that's probably the best way either in a proprietary or an nonproprietary way and U of course some of these projects will come about some of them won't come about uh but they they're quite Keen they don't want to be seen to be Keen but of course the new ebaa um opinion may may change a lot of that and um we'll we'll be talking about that yeah I mean I'm sure I I mean we know that there's a lot of things going on with finance and Banking and you know that they're starting to be interest but uh just purely if you looked at the crowd uh that wasn't apparent yet um and I I mean I think pmio also mentioned you

know he didn't do any marketing specifically to the kind of um banking sector to the financial sector so that may have been a reason for it uh and I presume this will change you know I presume in a year from now you will see a significant number of of uh just you know nor regular quote unquote regular Bankers but I guess let's get started with um the EA Sean uh do you want to give us uh a brief sort of um summary of what this has been about absolutely well brief that's an interesting word because this very long official document no no my summary will be brief but the thing that was published Friday week ago

on July 4th um some people might read something into the fact that um it was American independence day and of course all of America was asleep um in terms of the financial world but they were not plugged in that that day and was followed by the weekend so perhaps um you know it hasn't had quite the impact that it should have done or may have done on another day they published a 46 page yes 46 page opinion um uh on the regulation of virtual currencies um in the European Union so this is a document that's been published by a super regulator the European banking Authority and I'll I'll talk a little about them

later on um these are the folks who you may recall back in December last year published a a warning uh on the risks of virtual currencies this was a warning to Consumers and that warning then triggered a raft of similar warnings from Banking and Financial Regulators around the world that they're still coming out now so I think there probably been about 50 of them so far I think and they've all pretty much um been uh echoing the what the EBA U published back in December last year so the ebaa is um is is important not only within Europe but is followed uh

globally and They carried out a joint assessment with other European um regulatory authorities super authorities and identified all the risks Associated um they listed some 70 risks and they then uh proceeded to come up with their proposal for how to deal with those risks um they see a two-pronged approach um in the long term they see a whole new body of uh European Union regulation to govern uh virtual currencies and they recognize um that it it may take considerable time they even

say it may never happen um but in the meantime they call for immediate action by national Regulators in the individual EU member states uh they use an interesting word here to discourage Banks payment institutions and e-money institutions from buying holding or selling virtual currencies so um this is coded language for essentially calling on the national Regulators to take immediate action to ban credit institutions payment institutions e-money institutions from direct involvement in Virtual currencies and um they also recommended that um virtual currency gateways so um

exchanges most typically should be made subject to anti-money laundering and counterterrorist financing regimes and um that's probably about the least um uh you know least contentious of the proposals because I think most people have accepted that that was bound to happen it's already happened in some jurisdictions and and um essentially what they're saying is at the friction points between Fiat and uh virtual currencies um AML systems kyc customer due diligence the raft of things that normally apply will uh need to um uh will will need to be put into effect and

and and they're calling for that to be done so that's their two-tier approach yeah so I think it's interesting if you read it uh they talk about this like short-term thing and the long-term thing and the short-term thing is like all oh that's you know not too bad and then the longterm ideas they have are just completely crazy I mean then they are literally impossible uh to uh comply with they are they're completely absurd uh but perhaps before we go into them I don't know where should we start should we start with the long-term thing well the the longterm thing yes is a good place to start but possibly um there's a kind of I think we need to understand the

Viewpoint if you like where the ebaa is coming from you know we need to understand who is this thing called ebaa because most people have never heard of it it's another European uh quango and another um yet another Authority okay let's talk about ebaa first yeah okay well the EBA let's see about its background the EA was created um after the national banking supervisors in each of the EU member states and the europe-wide committee advisory committee made up of all those um National supervisors failed to see the financial crisis coming and um quite understandably you know said that that

you know you got all these these very clever Financial folks and they didn't see what was about to come uh they missed something that threatened the whole financial system uh we need to put well it's the usual European solution isn't it we need to create another body uh another supervisory body in there and they they come up with a whole new system of supervision um made up out of the uh insurance industry uh which has its new super regulator the security and markets uh Authority covering Securities and markets and the European banking Authority and it opened its doors for business at the beginning of 2011 and was put in charge of all the

national Regulators um so each country sets its own laws that are generally that generally have to be harmonized to European um legislation and uh this was to make sure that the individual National Regulators would would would um you know all comply with those rules and it it's essentially it's an indep dependent Authority uh and well I'm quoting from its website here it says which works to ensure effective and consistent Prudential regulation and supervision across the European banking sector and it has objectives to do with financial stability in the EU and safeguarding integrity and um efficiency

and the orderly functioning uh of the banking sector so essentially they will tell uh the national Regulators what to do so what they uh think or decide in terms of Bitcoin is going to be implemented by the national governments is that correct um partly it does have um wide- ranging powers and in emergency situations can uh can impose things directly on individual countries in Europe but mainly it it functions by uh issuing different kinds of um um of of documentation so in in in um in a harmonized banking sector um it it

produces various technical standards these things are binding um but it also has recommendations and guidelines and something called opinions which are not binding and these opinions are generally addressed at particular parts of the European legislative um uh infrastructure so in this case this opinion the opinion on Virtual currencies has been directed to the European Parliament the European commission and the Council of ministers the three entities that basically make European law and that European law then flows down to the individual countries which then have to harmonize to those

laws and The Regulators in each of those countries have to enforce those regulations this opinion is it binding or is it simply you know an opinion which uh National Banks are being advised to follow like I mean opinion by definition cannot be binding no exactly this is non-binding um it doesn't bind anyone to anything so the long-term objectives it um addresses to the legislators and it's saying you know this is we've looked at this thing called virtual currencies go make some

legislation we think this is how you should do it uh whether or not that actually happens is yet something that will take probably anything between two and four years I would imagine typically in Europe um it also makes some recommendations to the individual National Regulators because National Regulators can go over and above um the European regulations they've got to meet and harmonized to the European regulations but you know National regulations can be more stringent and so they're making recommendations to as I mentioned earlier on discourage Banks and payments and E money institutions from buying

holding or selling virtual currencies so that's a recommendation to the individual National supervisors to do something specific in the short term they could ignore those recommendations or they could follow them make them a little bit stronger a little bit weaker they've given them room wle room as we would say in in the UK to um work around this word of discourage so that coded language for ban but a country might not necessarily ban well let's talk about what those actually are so maybe I will give you so I'll give maybe a very short sort of like how I interpret it then maybe you can you can Sean you can uh say if that's totally off or what you think so my my

impression kind of is that they have their existing regulations their existing safeguards control over the financial system there's this new thing called a virtual currency how they call it or cryptocurrency um and now they're basically saying oh this doesn't fit in our system like this works differently Anonymous anybody can create it people get hacked like what if it's fraud like what if you send it and then you didn't want to send it the wrong address what if if uh what if it's issued by a criminal what if it goes to terrorist like etc etc etc so they list all these risks and it's like well obviously uh you know we have to make sure that all

this all these things that you know that that can't happen and that our existing safeguards that we have with the existing Financial system like sort of we have that same level of control and then they they I think they go from there and they issue like oh of course then yeah you know anonymity is a problem of course then it's a problem that anyone can create a cryptocurrency of course this is a problem and then they come up with all these list of measurements of like how you can basically or you could force virtual currencies to sort of behave like the existing Financial system because of then then of course they have the same level of control now that completely does not fit at all with uh cryptocurrencies and kind of like

blatantly disregards their nature that's kind of my impression I I I would suspect they're probably totally aware that this is impossible but they just go ahead anyway and then in the future they'll you know will be sort of be a situation where well we have all these although of course it's very premature since this is not actually legal in any way but I could see this scenario like that that they say oh we have all these rules now you know if cryptocurrencies don't comply with those rules well you know it's their problem we made specifically some nice rules so you could actually fit in um and so it'd be sort of also um basis on which to enforce things against uh cryptocurrency

businesses what do you think Sean well I think you've summarized it very well you don't really need me on the show at all um you you've said it exactly um the that they've said here is the banking system we've we we've been set up to harmonize and level out this playing field that makes up um the the traditional Financial Services sector particularly payment Banking and payment services and there's this new thing that's come along as you say virtual currency so it it it it includes cryptocurrencies but it could include other uh privately issued um uh currencies as well and well they that they're different but they perform some of the

same functions so let's have a look at let's let's dissect them and have a look at them and hence they sort of picked out this list of 70 uh risks Associated now many of these risks of course are associated with the traditional world as it is now the the regulated Financial Services sector um that doesn't necessarily mean that um the EBA is is negative about them it's just saying you know you want to understand them we've looked into them and these are the risks and well yes your right they don't quite fit so how do we solve that problem will we make them fit and we make them fit by saying that um virtual currencies need to um be as

close as closely as possible make themselves regulatable um let's put it that way um someone needs to be accountable so if you deal with say an individual entity like U let's say PayPal for example an entity that was set up um years ago to beat some of the same objectives that that some virtual currencies do now in terms of reducing costs for example that didn't actually happen because it became part of the system and um there's some parallels you might want to draw there um you know there is an entity called PayPal it has to register itself within the European Union and some some level it has to uh be authorized it has to meet all these

regulations and of course in for the cost of doing so well cryptocurrencies if they want to exist within the financial services world then they will need to structure or restructure themselves in ways that will enable them to meet certain rules that are very similar to the rules that operate within the traditional Financial Services sector and so long as they do that then um then um we got no problem and if they don't then they are not going to be allowed to exist or coexist exist or interact with the financial services world the regulated Financial Services world let's talk a bit about one of those things which I thought was sort of the most striking um which was

their idea that you know one problem is these decentralized currencies s of like criminals can issue them anyone can issue them there's no control over the code no control of the Integrity Etc so they say like well what we need is every um or virtual currency how they call it needs to have a scheme a governing or governance Authority which essentially is like a legal entity Incorporated somewhere so it can be sued and it can be regulated by the Eva so they will do things like I mean it's is rather absurd because they say they will even check like the you know that there are no issues with this you know the code and

the system and no flaws and bucks so I'm I'm I think this may on the positive side it may be uh it may address some of the issues we have with a lack of funding for uh core development if the ebaa is going to take over the bug fixing so oh no the ebaa won't be responsible for bug fixing no this was of course slightly sarcastic yes but what they're saying is that that that um well the best analogy I can give is this um if you take Bitcoin some entity will have to to take charge let's put it that way of Bitcoin so if we're looking at existing entities it might be the Bitcoin foundation for

example and the Bitcoin foundation will have to have um a part of itself that is incorporated or becomes a legal entity within the European Union and applies to whatever the regulatory Authority will be for virtual currencies if that happens and uh say we we we have taken control of the key elements of uh Bitcoin uh so we control the Integrity of Bitcoin and it's um most important components things like the protocol and the transaction ledger so although these things might be decentralized in the way they function that they have to be controlled in some way or or their use is controlled in

some way so say you know nobody can come along and just change the rules but that's that's by definition that's by definition impossible no the whole point of a decentralized currency is that this kind of thing is not possible so when they demand that for Bitcoin that doesn't make any sense because the Bitcoin Foundation doesn't have this type of authority and it will never have this type of authority so the only the only way I guess is if somebody comes and they do like Euro coin or something and you know you start off with having a centralized thing I mean okay but then it's just a centralized currency there's not nothing really normel about that well it may not be centralized in all its aspects but there needs to be this

Authority that in respect of each currency each virtual currency that is accountable for the Integrity of that currency well you can't hold someone accountable if they can't enforce things on you know I mean if they can't tell miners which version of Bitcoin what kind of version of the software to run then you know you can't hold the Bitcoin f accountable even if they're Incorporated in you Etc and say hey we stand up for this because well they can't necessar they can you can tell them something to do but if they can't make the miners do it if that can make the network do it well this is completely irrelevant well um they don't say they have the answers in fact the

way that they refer to it as um in coming up with the shorter and medium-term measures is to say well this is to give a breathing space uh for um new Innovations in and and development of virtual currencies some of which will be to um re-engineer themselves or to engineer themselves in ways that uh will enable them to comply with this kind of um regulated world I think in terms in the Bitcoin world this is totally impossible there's no way to do this with Bitcoin there really isn't I am the whole point of Bitcoin is that this is not possible it is you're right you're you're in the

world as it is now in the virtual currency world as it is now it does not compute um so so you're going to have two kinds you're going to have a two in fact I wrote about I wrote a Blog item on this uh a week ago uh there will be a if if this comes to pass there'll be a two tier system there will be virtual currencies that are regulated and that have engineered or re-engineered them that enable them to maybe maybe not uh you were saying the the big Bank and uh other financial institutions um are still interested in using blockchain technology then they have to comply with all kinds of crap and it will be you know be it will be terrible I mean no

nobody's going to use that I I don't think this is I mean okay maybe it's going to make it like marginally better than existing banking infrastructure if they use the blockchain technology I don't know maybe maybe not if if they have to build in all kinds of safeguards for the ebaa and and other Regulators then I can very well imagine that it's not going to be any better uh but quite regardless it's not going to be the same at all and uh of course there's no way to force users to go there so I'm like what do you like what do you think so given that this is essentially let's just say for maybe there's a way to do other cryptocurrencies that comply with this if you start from scratch but with

Bitcoin this is impossible so what do you think um do you think they know that or are they are they stupid no no no I think um and I've seen various um articles in the last week um saying the EA hasn't got an idea I don't understand um virtual currencies and um they completely misconstrue it from their perspective they understand it very well and this is what I was saying earlier on it depends on your you know where you're looking at the problem from if you're a risk manager which is what the E is there it was there to protect the Integrity of the financial system stability and and so forth the financial system in Europe um you you know you

look at the risks which is what they do and um you you you you you come up with some measures to deal with those risks they understand those uh very well they don't care whether um whether Bitcoin um uh fits or doesn't fit it doesn't matter to them whether it fits or doesn't fit what it says is if Bitcoin is to be part of the financi uh the regulated financial sector then uh it will need to fit if that's what the legislators choose of course there's a huge gap between between the EA's opinion and the European legislators um enacting something that will look like this maybe it never will maybe it'll be something

quite watered down maybe it will take into account all the the the reality of of of how virtual currencies are at the moment but uh um you know if you want to be part of the Sy in the way that the EA sees it if you want to be part of the system then you need to comply with all this stuff and it's quite interesting to show how well they understand it they say um they talk about the the the risks versus the benefits of cryptocurrencies I mean if if I just jump in here um my my idea on this is that they do understand like you say you know they do understand uh cryptocurrencies very well but you know there not there to protect the Integrity of the conceptual kind of ideological uh things that we're trying

to do with this absolutely um I just kind of want to play Devil's Advocate on this so uh on you know this opinion which uh well most people seem to think is negative but in fact at the conference when we were talking to people about it for instance they I don't think they seem to really grasp the the power that the EA had on um National Banks and above and beyond that some people seem to think that it was positive news because you know now Bitcoin can be regulated now we have you know potential Frameworks for regulating Bitcoin yeah well I mean I think the diff's really a a huge difference here between the shortterm and the longterm right right so I think the long term is you know

that's just a we'll see what happens with that but you know if those people would be sort of in task of uh coming up with a regulatory framework and if they did it according to what they write in this paper it would first of all uh be total disaster it wouldn't work uh but of course that's going to take Years anyway until anything comes with that so in the meantime we have this short-term thing and in the short term there's really not too much negative in short term it's I think it's perhaps very positive what came out of this yeah absolutely I agree the short-term implications are are good because they provide certainty in the short term actually it keeps Banks um regulated uh payment institutions

um out of um direct involvement with the virtual currency world do you think that's a good thing um potentially yes because um they won't want to miss out altogether so what they'll do is they'll form Partnerships and you've got some good examples of that already happened in uh in your two jurisdictions actually in Germany uh Fedor Bank in Munich is a challenger bank which has um a tie up already because that is a regulated um country by the way as far as exchanges are concerned and they've done a tie up with bitcoin.de and in France um I think it's payum did a tie up there with with with with a um uh with a with with a which is

a payment institution did a tie up with a a Bitcoin exchange in France I think it's called liquid Bank uh the bank deal deal with yeah something like that yeah just very briefly on that so that's actually one thing I've been wondering about as well like what does this mean for what fedo banks is on with Bitcoin de are they allowed to keep doing that is is that something that is more on the side like hey know you're getting involved here what do you think um yes and indeed the EA opinion uh gives tacet approval it in fact more than that very specific oh yes um if if you just look at uh what they say about that um they say the immediate response which is what

they call these short-term measures would also still allow financial institutions to maintain for example a current account relationship with businesses active in the field of virtual currencies but the fedo bank does a lot more for Bitcoin D and for Kraken I think than just maintain a current account I mean Bitcoin de what they're doing is providing a financial service right so they they are engaging in Financial Service they don't have the necessary licenses themselves so they get them through fedo bank now I wonder does that fall under the sort of well you're allowed to provide a bank account but not doing more or is is that more on the side that like well that's too much involvement um well I think you have to look at each on a case-by casee basis to see where where the lines are drawn

between the bank and the um Bitcoin exchange or Bitcoin business that's that's that's um associated with it it will make those lines clearer the bank cannot hold sorry cannot buy hold or sell sell uh cryptocurrencies so that's very clear under this proposal in the short term so Banks can have no direct involvement in holding uh virtual currencies but it um it doesn't mean that it can't have a an arrangement an exclusive Arrangement or something similar with um a separate um virtual currency business um they they could agree to work you

exclusively uh with each other in a way that together forms a single business functioning as a single business you know providing the the the payment um uh interface into the clearing systems for example um but the Bitcoin business would be sitting right outside the bank it would be outside the regulated sector okay so uh I mean I guess that's if you know if that's the case in short term then you know I really you know I especially you right you're in the US uh in theuk and I think in UK right Bitcoin businesses have had a huge difficulties getting bank accounts so may maybe that's going to do you think that's going to become easier now H now that's a that's a very good question I I I'm not um yet sure that this alone will

will will um make a difference but I think it's this the clarity that this gives if it comes to pass remember uh again this is a recommendation to National authorities National supervisors to to to give effect to this um but um in the long term or sorry in the the the medium-term short to medium term I think um it will be helpful uh for for UK businesses to to get bank accounts because the banks understand um um where that separation is and for them to um have exposure to Virtual currencies they'll need to to to handle accounts uh for businesses that um that are in that sector so what what also

seems to be the case right so here in Germany they did at one point say this is like some private money and so essentially like some things would be Financial Services uh and now it seems you know the the intersection between Fiat and Bitcoin is going to you know remain very regulated even in the short term but it seems to me that in the next two3 years perhaps does this mean you can kind of do whatever you want as long as you're not touching a fiat currency broadly speaking yes unless unless individual countries in Europe have a more um regulated um regime so in Germany and France um you both are

subject to um more regulated regimes in that um crypto currency exchanges are subject to regulation in in both jurisdictions for example right now because your National Regulators have said so um but the rest of Europe um where there aren't such specific U or aren't necessarily such specific um regul regulatory requirements um they can essentially um continue with impunity um except that the the other recommendation which is that exchanges should operate and become part of the anti-money laundering legislation in those countries and uh I

think that pretty much expected anyway and um it's probably a you know probably a good thing because it will help the reputation of virtual currencies so if you compare the let's say the competitiveness of Europe versus the us as a sort of a place to start a cryptocurrency Bitcoin business do you think this makes a difference do you think uh what do you think is the better place now and and perhaps over the next uh maybe three years and I guess longer term is extremely hard to tell at this point I think it's hard to tell but but but 2014 is certainly the year where where where the landscape is uh is changing almost U week by week day by

day because you get an announcement like this and you say well if all this comes to pass then Europe becomes an extremely uncompetitive place for um for crypto currencies but may be a great place in the next 2 three years but in the short term a fabulous place so um I certainly some parts of uh the European Union willly you know if if if you say well right now you you've got to be regulated in Germany you've got to be regulated in in France on to other places uh but you don't have to be regulated in UK uh UK could be a wonderful short-term place to um um to to to start a business the problem uh the elephant

in the room is the long-term problem because if this thing which the EBA envisages comes to pass everywhere throughout Europe will then be the same and will be part of somewhere that's extremely um uncompetitive so what do you do you've got a world at the moment where an exchange can exist uh say in the UK doesn't have to be regulated um maybe it has to be regulated for anti-money laundering quite soon that that let's say that's that's a given pretty much everywhere over the next year or two I should imagine um but apart from that which is which is not such a big deal um it doesn't have to meet Capital

requirements it doesn't have reporting requirements it um it doesn't have to pass all sorts of tests as to the way the businesses run in terms of governance in terms of the people who run it and so on so uh everything else is say pretty lightweight so wonderful place place to do business you you build up a successful business what happens in 3 or four years time if there's say a virtual currency directive that then has to be implemented throughout the European Union uh do you then deregulate as a as a as a as a regulated business you you well you wouldn't be regulated but do you stay in the deregulated sector and now stop dealing with any currencies that might choose to become regulated um your ability after this

long-term set of objectives will be that um um you you'll have to work outside the system um you know if you if you carry out certain functions um such as exchange functions you know if they're for deregulated um deregulated currencies while you're sort of outside the system but then will Banks still want to run a bank account for you that that that becomes questionable perhaps we can talk about some of these places in Europe that aren't uh to this European banking Authority opinion and and subsequent European regulation um so the aisle of man is one of those places where they've

uh pretty much like opened up the red carpet for Bitcoin businesses to come in uh stating that they won't be regulated and that they only be subject to anti-money laundering uh laws um what's what's the long-term potential for places like this to uh become sort of you know the center you know for for all Bitcoin exchanges to set up in European they're que they're queuing up right now to to start up in places like the AIS of man um they announced a few weeks ago that as you say the doors are open if you run a reputable uh virtual currency exchange please come to the island man um all you need to do is register the fact that

you're um dealing in Virtual currencies um and that you comply with our anti-money law ing laws and um uh and for the time being we have no plans to to regulate so what a wonderful um incubation environment um is man will be a number of exchanges have already set up um there there's an incubator um open for opened its doors already there lot of very um um a lot of people queuing up to start up in the island man and there will be other locations so um the Channel Islands um Jersey gery alony um the the these locations will be looking to to do things uh they already are

looking um other offshore centers such as Gibralter uh which is uh you know physically in Europe but but but outside the European Union uh same as the Channel Islands and um and the Isam man um all all all waiting to uh to to to welcome business isn't that a risk though that all I mean if we if we get to a situation where most if not all of Bitcoin exchanges are situated is in these jurisdictions that uh a shift in uh in regulation or a shift in policy for those for those uh jurisdictions uh down the line can just basically effectively run all of those uh exchanges uh you know illegal or unregulated

or is isn't that a risk I mean I think as as an exchange you won't be able to do that anyway because you're going to have to intera intersect with the you know if you want to do a Euro Bitcoin exchange you know you're not going to be able to avoid the regulations if you want to H allow people to use bank transfer sepa Etc right that's right because you have to be within with the SE sepa to uh be able to accept Euros but I guess it's interesting if you're pure Bitcoin business and you don't really care about interacting with the existing Financial system then perhaps that's a great place well uh think about how it is now um you've got um exchanges all over the world you you've got exchanges

in in in China for example until a couple of months ago you could quite happily do business with them um you've got exchanges in Singapore you've got exchanges in Hong Kong uh you've got exchanges in South Africa uh you can you can send payments there and um deal with exchanges there just as as you can within the European Union so that's really not a problem in the USA they they tend to extend their regulation beyond their Shores so they say that if you do business from outside the USA but with somebody who's resident in the USA or who is a US citizen then our us rules apply in Europe it tends

not to be that way in Europe it tends to be the case that if you do business uh in Europe um it's where you do the business that that that that counts not who you do business with so um you could be in Europe and um deal with an exchange outside of Europe um relatively easily but you you're right to highlight the problem with the banking sector because even in places like the is of man the alaman is a part of although it's not part of the UK it plugs into the UK uh payment clearing system Bank clearing system and as such um is reliant on the main Banks who operate that clearing system so even the banks

in the is of man who are rubbing their hands together at the prospect of lots of new business coming their way um they still have to bring their clearing Partners along with them uh to to accept this business and uh in ways that will not upset them and affect their other business and what about the interaction with uh the Euro Zone banking system and sepa transfers like how how does that work well the um the European system the actual clearing system is is Target and um uh it operates in a slightly different way and it's applied slightly differently in different um in different um countries um but it's easier um for

for in some respects for payment institutions to to to deal with that clearing system that it is in the UK but nevertheless it's administered generally by in each country by a central clearing Authority usually the National Bank in that country and of course they will only open accounts with other U for for payment institutions so uh you have to be part of the regulated sector to to plug into uh to plug into the clearing system so yeah banking will be the uh will be the problem area and if we come back to the longer term issue um there'll be the included regulated world and the excluded world the excluded

world will not be able to do anything with the Fiat world because at every point of interface banks for example payment institutions it will not be allowed to interact almost certainly so be out in the cold okay but um I don't see that as you know like if I was running let's say some crypto business um that's you know there are all those things like exchanges where obviously you intersect but you know once people have Bitcoins and then if then you say like some business that I don't know is a gambling site that just uses Bitcoin or any kind of business that's purely Bitcoin then if someone tells me well you know you're

not allowed to inter interact with the banking system you know because um this is not regulating the right way but you can do whatever you want because you know this is not regulated then I I think this is not such a not such a terrible thing or or does that mean some things would become illegal some activities well I don't think we we there's no detail so we don't know what will or won't be illegal or even if any of this will come to pass um but but for virtual currencies to succeed they need to have points of interface with the real world you've got to be able to to to buy and sell your your your virtual currencies um and exchange them rather for for for fat

currency and um there's always going to be there's going to have to be a Gateway um those gateways will will effectively be uh be choke points okay so I I mean I guess we can sort of summarize this you know I mean I I was when I read it first I was sort of worried I mean I I did see in the short term it's okay I think I'm in I think in a sense this is a good thing you know because Bitcoin will develop so much before these people will like get any kind of coherent plan together that it will probably be outdated by the time they have a plan so they will have to start over um so you know I think this could be you know it

could after all be a positive thing and just the fact that the the also that the report gives two or three years you know to work without really having regulation uh you know like you say it might give some time for the Bitcoin ecosystem to uh evolve uh without regulation and perhaps at the end of that you know their opinions will have changed you know what what do you guys think about that yeah I think that's very likely I don't think the E's opinion will change at all I think um that they've done a very clever Thing by issuing this as an opinion they' said here we told you all the bad news um they've discounted a lot of the benefits and they say that those benefits anyway are less important

within the European Union and they're not really concerned about anything outside um if these things come to pass there'll even be those benefits will will will evaporate even more because the costs will increase yeah but we're talking about really like lowlevel benefits but we're not talking about some of the the new innovations that are coming out of uh the you know the cryptocurrency space right I mean they're only addressing it as a currency and they're they're AR addressing some of this other stuff like crowdfunding and stuff you know so I think that they're missing the ball on that and uh to only address the underlying benefits of Bitcoin as a currency which we all agree on and such but that's complicated enough already I mean yeah I'm sure I mean Sebastian I'm sure you're right

right that that whole crowdfunding thing is going to come up as well you know that's going to come up later I'm it's probably not going to take that long let's say maybe in a year or so in the next year I presume we will see statements there as well but um I Sean Sean I I think I'm I'm you know I'm going to disagree with you here because I think in two years so much can happen like let's say in the US we've had something like you know 200 million dollar invested in Bitcoin startups now let's say in two years we have that same equivalent amount invested in Europe let's say we have you know we go from 3 million users to 50 million users we'll have lots of businesses starting accepted like more of an understanding I these things will have I think will have

a big effect on uh I think that's in in the end my whole view of this kind of is the most important thing uh for Bitcoin and for cryptocurrencies is growth because if it grows fast and it all this services are developed a lot of uses are added it would be much much harder uh to have uh regulations and rules that you know Bitcoin because they will hurt a lot of people they will you know they will destroy jobs Etc so if it gives us two years three years that's uh huge I mean let's think back three years where was Bitcoin 3 years ago exactly you you're absolutely right um the faster Bitcoin and virtual currencies

generally grow uh the more important uh the sector becomes um the more uh important politically um U not stifling uh with not overregulation um will will be on the agenda but um think about the European legislative process uh the day that this opinion was published uh the European commission the the commissioner responsible for the financial services sector said fine we're on the case um his uh um his office issued

a response to one of the newspapers one of the news organizations I think it was Bloomberg said yes we we we this is obviously really urgent we're going to have to start on this straight away now admittedly the the focus there was on um on anti-money laundering as the most urgent thing but yep we're going to start work on this thing so it will take um probably um a year or so um maybe two for a draft virtual currencies directive to come out if that's the route that they choose and that then will be subject to uh negotiation and revision over probably another onee

period where all the different countries will have their input and the politicians will start to have their say and eventually a final draft will come out in maybe two three years time that will go before the European Parliament and these are all polititions voted direct you know elected directly by um their constituents in Europe by people like the three of us and uh these politicians will then say yay nay or change some of the some of what has been proposed and then go to the Council of ministers which are basically the the governments of the 28 member states sitting together as a kind of committee as a council and eventually if they endorse it it becomes law so

this thing that is down the line maybe three four years it will start now it will start in these next few months so unfortunately um we need to mobilize uh politically and locally within our different countries to get our viewpoints about um about virtual currencies across and that the value the economic value the benefits and so on uh U may may need to be weighed more greatly in this balance that goes on so that the end product is not something that's over regulated or perhaps not even regulated at all yeah but some of

some of these values and viewpoints are in fact challenging the current system system and the current model in place notably the political system and you know the Democracy itself so uh I mean if if we're looking at like broader stuff you know for instance um how do you think that will sit with uh with politicians to say that you know we want cryptocurrencies to replace democracy down long term oh wow that you mean as in um as in decentralized voting systems for example yeah for instance that's uh that's that's an interesting uh thought isn't it you know if if if if I think that our legislators across Europe will probably have um will struggle to understand some of the concepts behind

cryptocurrencies they'll you know they're they'll probably look more closely to um the existing Fiat world and so will relate very heavily to some of these points that are raised by the EA they may kind of then get the idea of virtual currencies a bit more because if there's enough if enough people the three of us and the the huge community that there is in Europe that that gets across to our national legislators and to our national European legislators that represent us get these things across uh then um they'll understand the some of these more um ideological Concepts behind uh behind but will they

see that you know this might threaten the whole system of uh of of of government oh I I think they might struggle with that one yeah I mean I think this is obviously just the first wave of these things because uh you know Sebastian as you correctly pointed out this only concerns Bitcoin as sort of money and of course there's all these other things that you know they haven't dealt with and you know they're not the EA has no interest in any other uses and and indeed in a in in their world well they they about the financial system though I mean if you talk about uh when you start having derivatives or shares all that kind of stuff you know well derivatives are an interesting one that's a different that's a different um bureaucracy that's the European Securities and markets Authority they

may they may also have something to say about it but actually that's that's not so difficult to understand because derivatives that are based on bitcoin um are just derivatives what they're based on doesn't really matter um but if you've got derivatives as are proposed in in in um some some of the ethereum projects for example that are being talked about um these These are more interesting because they you know the the derivative it's itself then may be a decentralized agent and uh therefore not subject to Market control and I wouldn't be surprised if they then come up with something similar to the EA solution you know you for it

to be legal it needs to have a governing Authority because if it's decentralized then obviously there's not an issuer but if there's not an issuer that needs to someone needs to be accountable I mean perhaps my my thoughts on this and you know the the fact that this is going to take so long you know the fact that this regulation is going to take two three maybe four years to to be put in place and enacted at the European level and you know by this time Bitcoin will have evolved tenfold perhaps uh we'll just show we'll just go to show and illustrate and demonstrate the the archaic nature of our governments and and illustrate that in fact you know this new technology can uh change the way that we do things and and uh make

our society move forward so I think that the very fact that Bitcoin will be regulated and that it will take so long uh will be a very good uh well a very good boost for uh for this new technology I think we need to be mobilized um quickly to have some real political uh or exercise some political IC force uh to mitigate um some of these proposals as early as possible European legislation in the payments sector has um um followed after the event so often if we look back at the payment services

directive um and the early naughties the e-money directive they were being revised you know quite frequently before they settled down uh because they were you know it took so long for each of them to to to be drafted and passed into law that they were then out of out of date already by the time they became law similar sort of thing will happen here probably if there's um uh if there's the will to come up with some kind of virtual currencies directive in Europe then uh you know work will start on that now it might pop out of the system in um in three four years time two three four years time uh is that going to be transparent at all this process like what's going on or no clue yes it will

yes oh yes I these things were you know that the European legislative process is transparent this opinion and what went into it was completely without transparency the EA can take U measures to uh to have hearings or or hold um hearings and and so but but the EA didn't do that for this opinion it came up with its opinion and said here legislators you go and do something with it and the next step the European commission is always Consulting with every body uh that's why it takes so long uh so yes that's why I say we need to to to mobilize and get a voice at at the table now because if we don't laws will be uh enacted based on what the bankers say this is the European banking

Authority it's responsible for the old world the traditional world and they're about to say what should happen in the virtual currency World by saying it should become part of it okay um now we we need to have a voice in the virtual currency world that says well actually there may be some good reasons not to some of the things are good um you know things like um um having um having um for example anti-money laundering is generally considered to be a good thing um some of these things will be unworkable like the scheme governing authorities it will kill off um virtual currencies as they currently exist if that was to happen so this two-tier system probably isn't

going to function very well needs to be something else um so you know we need to get this the this heard this voice heard yeah so it's important I guess for all of us you know that we are active in different countries with different foundations Etc you know get involved in that and and try to steer this process but I guess especially if it is transparent uh I think that's quite optimistic so uh maybe before um before we wrap up because we're kind of at the end of our show uh Sean you wanted to give a very brief update about what you've been up to uh with your company no oh yes thank you um well we're opening offices um over the next few months in well surprise surprise the

aisle of man um specializing there on uh Regulatory Compliance matters we're going to be opening up in Brussels uh specifically with uh public affairs um so we'll be talking a lot to the European commission I guess that office will will will be very busy over the next um next um few few months and years so are you going to get paid by companies to do this public affairs work or how does that work because it seems to be sort of in the interest of Bitcoin versus uh or or is that like a company will hire you uh to do some lobbying for them well um speaking personally I I I I'm I'm already active with um the UK

digital currency Association and through that with with with tie-ups with other European uh organizations and the work that we do there of course will be um you know will be for the general good there's nobody paying us for that but um um the idea of opening an office is that there will be businesses that will want to have their voice heard uh they already substantial businesses um existing in the space and they will be affected by this by these proposals and we'll want to have their voices heard we'll also be you know there're also other investors VCS not virtual currencies but um Venture Capital

companies that uh um have earmarked this space and want to perhaps um have a voice that's heard as well so um yeah there'll be there'll be companies that will will will want to have that that public affairs representation okay fantastic so if somebody is you know is working on that or is thinking of setting up uh a virtual currency or cryptocurrency company then you please get in touch with Sean and then you perhaps you can help you do that on the aisle of man or some place like that that's uh friendly and where you don't get harassed too much I guess the good thing for you is that all this regulatory news is just bringing in more business well it's my field so that's that's good but I just

find it extremely challenging and you know interesting and challenging yeah so thanks so much uh you know for listening this week uh and thanks Sean for joining us today and kind of giving us thank you for inviting me yeah giving us the update on uh on the Eva what kind of going on with regulation I think this it has given us a reasonably good idea of what the situation is in Europe in the next two years three years I think at least some rough idea and and I think that's a useful thing so yeah thanks so much for listening um if you want to support the show you can you know you can support us by tipping donating at epicenter Bitcoin tips you can also follow us on Twitter at enter BTC and

you can subscribe to your newsletter which goes out every Friday well except last Friday because there was a coin Summit but next Friday will um and uh yeah and that's it we'll be back next week actually uh in during the week next week Sean's second regulation episode is out and then we'll be back with a regular episode uh a week from now thanks so much h [Music]