EB88 – Siân Jones: Bitlicense And The Regulatory Straitjacket

Transcript

shapeshift bismillah Khan our signup required is the easiest way to buy and sell gems dash new bits Mineiro and other leading crypto currencies go to shape-shift iota instantly convert your all coins and to discover the future of crypto currency exchanges this episode of epicenter bitcoin is brought to you by vulturo the goal to Bitcoin exchange trade gold to Bitcoin instantly and securely starting at just one milligram go to voltar com to deposit some Bitcoin and start trading today hi welcome to epicenter Bitcoin the show talks about the technologies projects and startups driving decentralization and the global cryptocurrency revolution my name is Sebastian creature and my name is Brian

club and crane we're here today with an old friend of ours sean jones she's been on the show quite a few times to talk about her favorite topic which is regulation and it's been a while that we did last episode of regulation but quite a few things have happened since then so we wanted to have her back on to dive into these topics thanks for joining us in a jean well you're very welcome it's always huge fun being being on the show with you guys I'm you know you're making me start to feel like an old piece of furniture I'm comfortable comfortable and and and you're used to need indeed you know it's not sure that I would describe regulation is my favorite topic

yeah this is the one I know about nice t-shirt by the way oh yes my a percent a Bitcoin one yes thank you couldn't wear anything else well yeah I think it's interesting because when we get started we kept talking about regulation it came up again and again and again and then I think it's sort of faded a bit into the background in our programming I'm not exactly sure why I think there was a lot of news at the time and maybe the news has decreased a bit although there would be a whole lot to talk about today and maybe also it's just the same story over and over and there's a lot of repetition right like I was going to say

you know you just get bored of listening to me talking I mean it's just often when you have some for example with these guidances like someone makes a statement then your next person makes a statement or next bank or central bank or something and it tends to be pretty much a word-by-word copy of the previous guy so today there's a lot of that that's for sure but there have been things to cut that we talked about in the past some of them have come to fruition of late or coming to fruition and so it's kind of I won't call it exciting because I don't think that's quite the case but it's certainly having an impact on the industry right but so today movie with difference because they

are i think if you really big news that oranges sort of statements about some opinions or something and the most importance of course--but license which was announced when was that two years ago and i would say believe it or not he was only a year ago as juden gym last two nights here and there was all this huge commotion at time right a lot of interest in the Bitcoin community and now it's actually enforced and it seems to sort of gone without much attention that that's happened but for people who aren't too familiar can you give it sort of a very brief description of what a bit license regulations are sure so this

is new york state's own own set of regulation they were first out of their starting block by first of all having hearings on this new staff of digital currency and that started at the beginning of last year and by the summer of last year 2014 they decided to to issue some draft regulations and I say some they were if I remember correctly the first version of it had them about 40 pages of regulation and undoubtedly incredibly wide in scope and and really in most people's opinion

burdensome and rather too vague in ways that sort of it tried to catch absolutely everything and surprisingly went over and above a lot of federal regulation so it seemed on the face of it to duplicate certainly some of them money laundering provisions and indeed make them more onerous so that you had to do them sort of for federal authorities the FinCEN is the is the government agency that deals with that and also for New York State so it was very costly very burdensome very wide in

its terminology and extremely vague in some areas so that it you know when you've got definitions that are broad very all-encompassing you but but somehow not precise enough so they put it out for consultation or for feedback initially there was a 45-day period that Ranveer remember correctly till sep tember last year and they extended it because they had I believe well over a thousand items feedback coming in some quite long some quite short some very sort of academic and some just generally

from members of the public who just didn't like it and and and so they extended that and that ran into a rock toba time into the autumn and they took a lot of that on board and came out with the second set of second draft if you like and that came out at the beginning of this 2015 and there was a further period of feedback and as a result of that they did some fine tuning and in June they published jun 2015 they published the final version this is the regulation

this is the rule set of rules it's still something in 40 odd pages so it's still pretty extensive they tightened up on a lot of the a lot of the provisions in there love the detail and the result is that it's on the kind of on the book since the the end of the end of June so we're recording this in July and folks have 45 days so only until the first part of August to get their applications in if they're caught by the regulations

so that's the background and I think one of the key takeaways above but what you just said is it that the costs and burdens earnest of this regulation is just I mean it it is very wide encompass and what it in in vague in what it talks about in a document and and it you know it just seems like there's no way that this is going to allow any type of innovation within the space I mean I don't see how any anyone is going to be able to build anything if they're going to be regulated by lightly license by bit license or want to play in the

regulated space it is burdensome it's very broad it's quite in spite of the number of iterations it's gone through it still not as precise as as a lot of people would like there's been fair degree of criticism at the at some of the definitions the scope is still quite woolly they've been more precise in that in the first version they took out they had them we could have been construed that they were including say software companies that were developing applications for virtual

currencies and they they they clarified that and and took out the took out those kind of provision so they did a bit too narrow it down but it's still extremely broaden and they I think you ve t if you look at the sort of a larger picture right there the United States likes equalities the land of the free and this is strong and you of like free markets and capitalism competition and and all that stuff and then if you read this thing it's just a complete joke like this is like you could easily have seen a country like North Korea writing something that done because there's just like nothing of that in there because it's essentially gives complete power to

this superintendent to say who's allowed to do business how are they allowed to do business and and their their clauses in there it just made me incredible that there's one nothing in this part shall be construed as limiting any power granted to the superintendent under any provision so so there's a very good and then another one is I think a crazy provision as well that you know one has to get permission if one ever changes the product or makes a new product there are any material changes and then of course the question is what are material changes and and then this is definition there so material change may occur when

a change is proposed to an existing product service or activity that may cause such product service or activity to be materially different so material changes make me something with you really different of course that does not limit at all like what the mr. superintendent call the material change so i think it is it is a quite crazy but for example any any merger and acquisition has to be approved by the superintendent and he has a judge that somehow this is in the interest of the public of course there's no standard for saying what is so you can do whatever you want I mean I am quite frankly I think this is this is just grace and

this is just the beginning right because if other states start adopting regulation like this then you potentially faced with a situation where every you have to be licensed and everyone in the states and different states might have different provisions like this which you know may vary materially I mean one thing in one state or another yeah well let me throw in another one which our support was sort of crazy so right one of the things is when you get regulated you have to each key each employee has to like submit like 10 years of their work history and the criminal record and the fingerprints and and the photograph to the FBI etc etc and then then the superintendent is going to church whether he sees the

qualities and that person to run such a business I mean that is crazy so this person is going to look at once record and says you know do you have the necessary character qualities to do business that is that is I ice find that so absurd and I think it's so what are we left of here I mean either one has to say that this narrative of the United States is this free market capitalism liberty-loving country is just complete bogus or maybe there's something big that I'm missing here well it's one one of the problems is for us in Europe is

that we have an entirely different system that is based on legislation that comes from the top and regulators just executed and the tends not to be anything like the sort of the discretionary powers that are granted to our regulators in Europe whereas in the States and a lot of powers devolved to two regulators as supervisors so the New York Department of Financial Services the the superintendent who was Ben lawsky who kicked this thing off he's now actually just moved on his sort of final act was to announce the final version India say

we're all set what he has moved on was to advise companies who comply with these crazy regulations no I said I mean I think in any democratic country that should be illegal I mean well of course we don't exactly know you know exactly what he's going to be doing in his new role but he's certainly gone into private practice talking about a conflict of interest I think we have a wonderful example of a conflict of interest here well I've heard all sorts of things said about his ultimate ambitions and in the USA you have to remember that a lot of these appointments are political in nature and

sometimes it's it's a pathway to a political career so I think you might might extrapolate from that some some thoughts about that the direction that that this is gone Ian and is going in might might sort of be born out of some of that I'm not suggesting for one moment that you know that it's not this is a subject that has to be looked at every where in the world is looking at it and indeed throughout the US but I let me pick up on one of the best chance points the the reality in the states is it's 50 jurisdictions plus the federal

government so each state makes its own laws and so far as its own sort of domestic arrangements of concerned is perfectly free to do that so here we've got new york as a major global financial center interestingly enough small all a smaller jurisdiction into the global terms and say California but but you know it's a it's a global financial center and so it's it's got a lot of responsibility this superintendence role is responsible for banking and insurance and financial services and that accounts for businesses that I believe controls

somewhere around about six billion dollars of assets or something of that order me know probably very significant chilean probably a 6 trillion sorry forgive me yes you're absolutely right sorry six trillion which is which is a lot of big telephone number and you know a lot of focus is on arnetta as a financial center and it's perfectly right that they should consider it the reality is that each of the different states will take a different view so New York's first out of the starting block California maybe have a moment to talk

about that later on but California are doing something but on an entirely different scale and other states have started to address the subject and most of the states are looking at it and some of them are looking at what might now become the new york model and may decide to follow New York others may prefer to take a more a lighter touch approach and be competitive with New York actually use this as an opportunity to take some financial business away from New York and I think that's a consequence we're going to see from what's going on at the moment there are some notable businesses

that have said that they are going to quit New York and either move to other parts of the USA or move overseas and one so this is a trend will see one of their questions that are that's very interesting when you talk about exactly that question you know competition between different jurisdiction between different regulatory frameworks is what's the scope of this bit license and I think that's also one of the one of the aspects that I personally find so offensive like living not in the US that you know something like Bill license

really has that sort of understanding that well this is applies anywhere in the world as long as there may be in your resin and a customer or something like that so it can you speak a little bit about what does that actually mean does that mean only it's not because it's not just started in New York right it's also startups somewhere else that New York customers will it work to just block IP addresses you have a review there yes um you raise an extremely interesting point the definition of a virtual currency business activity which is basically what if you conduct any of these you need to get a bit license and

what it actually says is that it this term virtual currency business activity means the conduct of any one of the following types of activities involving New York or a new york rezident so there's already a pretty wide scope because you know it's not just about New Yorkers in the sense that they're people who are resident there but in any other way involving New York and this is very wide and there's no as far as I'm aware has never been tested it's it's a very broad term so any one of the following types of activities involving New York or New York resident one receiving virtual currency for transmission or

transmitting virtual currency except where the transaction is undertaken for none financial purposes and does not involve the transfer of more than a nominal amount of virtual currency and I don't believe that nominal is he sort of defined anywhere so that's going to be an interesting what are we talking about you know a dollars worth for a hundred dollars worth or thousand dollars what's nominal and and the second activity is that of storing holding or maintaining custody or control of virtual currency on behalf of others so that's actually quite a good one in a way because it's essentially talking about p Burchill currency a digital currency business that's looking

after other people's money or holding other people's money if you want to think of it in those terms and and it's probably right that there should be some standards for that if you think about losses that have occurred whether through fraud or through just inadequate protection measures or being managed by people who just didn't understand the extent to which they were going to be responsible for other people's assets if you think about some of those cases over the last over the history of Bitcoin to date then that's probably a good thing and then the third thing is that of buying and selling virtual currency as a

customer business so that's essentially exchange activities I guess you think about it and the fourth case is where's actually mentioned that that covers exchange services of customer business I suppose there are some differences that suppose trading might be different or and this is the really quite worrying one in one sense and that is controlling administering or issuing a virtual currency so there's this question of you know who who controls it who administers it or who issues it well issues probably quite easy in decentralized world nobody

is use it but controlling is is is is a little worrying will add defect miners that there's a strong possibility yes I think that that is that is one one concern in indeed at least one of the major mining pools announced that it was closing on the back of that particular provision so at the moment the feeling is that yes it does include minors I want to point out that we're getting what you're just the the statement New York resident let's let's read what it says about New York resident so new york rezident is a person that resides is located has a place of business or is conducting business in New York so you

could simply be a tourist in New York because you're located there from what I understand or you could be conducting business in New York on something completely unrelated so you could be perhaps a Canadian and living in Canada I've never set foot in New York and have a digital currency business and conducting business with someone in New York on something completely unrelated maybe you're just in a buying shoes on some website I mean this is that this is the point we don't we don't really know how extensive this involvement provision is but you're quite right it's generally felt that involving New York is extremely broad and will capture an

awful lot of people who are engaged in virtual currency businesses even though they are not in New York and even though the people that they're doing business with are not New Yorkers but where there might inadvertently be some unrelated relationship with with with new consequence of that of course is what you end up being right is is that no business will be able or almost no business will be able to be totally sure that they're not violating the license right so every every every startup in this space will have maybe some even if

it's small some risk that they could be actually falling onto the license and of course it's always places like well if they don't like somebody they they can go and look very closely at that specific company find some way they violating bit license so they should actually be recommended but they didn't and and go after them which i think is it's extremely extremely worrying look at me just point Kim just make the point that this regulation was written for exactly that purpose can we agree on that I mean for the most part I think that the fact that it's so vast and so vague in its terms specifically will make it possible for

New York regulators to go after people that they don't like or that they perhaps don't agree with political ideas or business ideals or what have you it is common in US financial regulation and the laws affecting financemoney payments to be global in scope it's a particular perspective that is taken by America it has a number of other laws that effectively global in nature there's been a lot of emphasis in the last three or four years over a piece of

legislation about money that Americans might hold in banks anywhere else in the world and making those banks in other parts of the world responsible in various ways so it's an Outlook it's a particular outlook which which certainly those of us in Europe are unfamiliar with we we tend to think about jurisdictions as looking after their own and not trying to reach globally it's an imperious out I couldn't possibly comment some people might consider it that that's that is the those are acts of financial imperialism all there about modern modern imperialism certainly

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must submit an additional application fee in the amount of five thousand dollars to cover the cost of processing blah blah blah and so these license fees will not be reimbursed in the event that the license doesn't go through so if the application process is rejected so if we look to the future and perhaps California has a regulation and who knows like Nick's Texas and other other states and next thing you know I don't know some country in Europe starts having licensing as well and and as a company you now have two up front all this money to become licensed in all

these jurisdictions because they are so vast and in any case you need to be ensure that your abiding by law in each of those jurisdictions wouldn't that just make it completely impossible for any startup to even come to existence but the real cost is not the $5,000 reveal cost is hiring lawyers and hiring the staff that's that not i mentioned manuals and policies and complying with dad and i mean that is is going to be I mean I don't know if you have any estimates but I mean it seems we exactly that probably it would cost hundreds of thousands of dollars yeah here you see you don't need me on this show you know all of the population

and the implications you're absolutely right the cost the 5,000 is the smallest item of expense some people think it's it's a pricey application fee and and and indeed you know you've got annual renewal fees and you've got when you get your periodic examinations and they come and check you out you have to pay fees for that and so on and so forth but all of those are the smallest part of the cost some of the requirements have very expensive implications you're required to have competent compliance professionals you've got to have a

compliance officer you have to have anti-money laundering professionals people who experience in that field and you have to have a chief information security officer and have although they've lightened up a little bit on the security provisions it's still very heavy on cyber security requirements and so when you total up all of those kind of costs and let's bear in mind that compliance is not something that's just in the crypto world financial services generally have had to beef up on on their compliance staff in terms of numbers and and so it's become very much

that the job du jour it's the it's a good profession to be in and the top professionals command very high salaries them so when you start adding all those costs up you're probably looking at quarter of a million to half a million u.s. dollars a year would certainly in to my mind not be far off the mark obviously it depends on your business model and it depends on it does depend on your it depends it depends on your business and on your scale and various other things as to quite where that costs its but it certainly will penalize the small

business is although there has been some concession there in the first draft they were you know is like it was all or nothing and there's a lot of criticism and they have given a sort of version I like to think of it as that a bit core a bit license light a sort of provisional license for startups but the costs are still going to be hefty there's no doubt about it certainly for a you know a very small start-up there are one of our sponsors right shape-shift day they were I think the first company or maybe nope best known company turned on sat there they're leaving your of course it makes perfect sense no with their product

because their product it's a very easy to change cryptocurrencies if you start to have to do cave I see you and every person they would make an awful product and so first of all how can start ups avoid being affected by bit license is is blocking IP addresses is that going to be effective or is that going to be insufficient and and do you see that do you have some insight in other startups how they are reacting on the company's how they're responding to the bit license well I in spite of the fact that we've been talking about it on two or three shows and others of course it's received a lot of publicity in the in the in the virtual currency media I don't think enough businesses have

really been considering the implications and you you're very right i mean companies like shape-shift who are a crypto to crypto business they are also caught by these provisions so this isn't just about fiat to crypto or crypto to fiat it it encompasses crypto to crypto and and so you know it it becomes very difficult to comply with some of the provisions at all it just isn't by it isn't possible so it's going to cover people globally because you really don't know

if the person you're dealing with is a New York resident or some way involving New York so you could be you know if you geo blocked a New York IP addresses well what happens if someone from New York happens to be visiting Los Angeles when he or she and performs a transaction so your IP addresses is a Californian IP address so you know you've got blocking geo-blocking isn't going to be sufficient but I guess the question would be then is that enough of a community NC well I tried right so and no no no no that's not good enough no it's an all-or-nothing it's absolute and

if you if you inadvertently if you inadvertently breach one of these provisions and you perform a transaction when you should have been licensed and you weren't licensed then I'm afraid though you know it's a it's an offense and it as far as I understand it it's it's potentially a jailable offense and certainly a findable offense and you know USA is is quite aggressive at trying to try to make examples of people outside its jurisdiction outside its territory i should say but within what

it treats as its jurisdiction which is and okay well yes and in in gambling there have been cases where folks have been indicted and they've tried to have them extradited from other countries or when they were passing through the US and didn't even realize that they'd fallen foul of some some law or regulation have been arrested them on landing in in the US this has happened a number of times if you remember in the case of liberty reserve so that's kind of a related industry they closed down businesses and the bank account all over the world and

sought to arrest people in a number of jurisdictions and sort the cooperation of those other jurisdictions law enforcement and so on so forth so ignoring the staff or thinking that you know I'm too small and I'm not in America and i'll do my best buy just geo-blocking New York IP addresses or even US IP addresses may not be sufficient today's magic word is imperial IM PE RI al head over let's talk bitcoin calm to sign in enter the magic word and claim your part of the listener reward 11 topic that hasn't wasn't discussed or mentioned in the bit

license is multi seek and of course multisync makes is hoping a little bit more complicated because you know for example custodianship is a regulated activity but what happens now can split that custodianship among several parties and none of them can actually use or access the questions fun with our permission about one of the other parties so what do you think this means for multi sick providers well this is one of the areas of vagueness that when you know those of us in the compliance and colleagues in the legal profession a bit concerned about because yeah if you look at the terminology of new york's

bit license it seems to be suggesting that any measure of control so if you're just one signatory and you're based in new york then you're caught by it or indeed if you one party is involved is it is it is it is involved with New York or New York resident and so on and so you'd be caught by it whereas under this is where we start to see all these little subtle differences the California legislation which is not yet enacted but but getting close has taken a different approach and and has been more precise and refers to full control so full

control means we believe is probably to be interpreted as being total control so a single signatory on a single cig wallet whereas on a multi cig wallet you know that's not no one party has full control and so you would fall outside of the provision so New York looks very much like it doesn't take any regard to being multi sick or single thick whereas other jurisdictions are starting to differentiate now on the topic of control I mean it brings to my mind the idea of smart contracts and if you have smart contracts that initiate machine-to-machine payments or in the

area of Internet of Things so for example you have a smart watch which is meaning a smart watch but maybe like a washing machine sending money to a service provider or repair facility then who's to be regulated I mean well I actually I saw a provision that applies to exactly that it says a be licensed company is not allowed to do business if anybody that doesn't have a physical location somewhere yes I mean you're touching on something that will become increasingly interesting over the coming years Sebastian and that is the whole

question of the the capacity of you like of devices the legal capacity of devices to enter into binding contract you know are they agents of the people who own them or who possess them or if they're free thinking and I suppose you could take this extend this to the whole concept of artificial intelligence and so on these things that are free thinking would be free thinking or independently thinking is perhaps a better way of putting it I mean not even thinking it's just the fact that there that there an automated an autonomous actor I mean they could

not be thinking it all just be completely autonomous I mean very simple program that yeah we have any intelligence but is autonomous and can interact with and well and so is it the agent of the person who sort of set it up because they take responsibility for what it is going to do but if I sounds impossible well but load so then that does it have some well that's of course another matter entirely we're absolutely right there's there's a lot of academic debate at the moment about on this very topic and it's going to be very interesting I think the law will do what it always ends up doing in eventually and that is catching up with technology technology is changing how things are

transacted and eventually the law will have to catch up and decide how to treat it at what point does there's a device in the Internet of Things you know take responsibility can it of course take responsibility of course you can't in the sense that we know it today so in a world where everybody is accountable how do you make someone accountable for the actions of a device who knows I mean this is this is new territory and it will keep lawyers very busy I'm sure it will so you mentioned the California license which is currently in its going

to the legislative process right so it's an i guess in a draft process right now well it's a it's a it's a proposed piece of legislation so an assemblyman in california has drafted he's actually the the committee chair I think the banking and finance committee something like that and he has drafted a piece of legislation that was published around the februari time februari this year 2015 and has been working its way through the various stages so it's passed through the assembly which is the lower house of the legislature and it's

already had its first reading and the committee reading and some amendments in the Senate the upper house so it is probably I guess somewhere about three-quarters of the way through becoming law it's um it's been it was considerably lighter in volume than the New York equivalent so we're talking about if New York's was something like 40 pages I think when it first came out the California one was about four pages it doesn't attempt to address most matters it's more about trying to bring virtual currency businesses into the same realm as money transmitter

businesses so trying to find the parallels and bring them into a similar licensing system so essentially that's for consumer protection purposes it doesn't really address any issues of cybersecurity and anti-money laundering there that there are other provisions for dealing with some of those things in other pieces of legislation it doesn't attempt to duplicate things that are addressed by federal agencies so things like the money laundering issues that are addressed by FinCEN it's not trying to duplicate those things within the state in the way that New York has done and some of the revisions as it's gone

through the legislature have been to sharpen it up so for example this reference that we just talked about to full control is is really very helpful in a virtual currency world absolutely deals with the situation of multi signature in a good way and says basically you know you're not actually responsible for somebody else's money if you haven't got full control of it so that's good it dropped the provision for for exchanges so it's basically just has a separate activity so it's only about

whether or not a business is holding other people's money that's that's just the issue and whether it's do whether that entity is doing it in the state of California so it it did start life by referring to residents of California not nearly as wide as New York's involving California but involving California residents but even that in the latest draft has been taken out and it's been replaced by simply the activities being carried out in California so that the business has to mean it's a case for Californian businesses and that's how this has a lot more reasonable yeah and

much tighter much clearer much simpler much more appropriate not trying to be all things to all people but rather just saying you know other similar types of business have to be licensed and there are obviously provisions for minimum capital and keeping money either bonding other people's money or providing surety for it or putting it in a certain kind of account that is you know not that is fairly safe but these are kind of common-sense things that you would expect to see in most finally where there are financial intermediaries so

yes much much more pragmatic and much better much more appropriate one of the interesting things about California is that it's a very large jurisdiction you know California is the largest GDP of any of the US states and you know it ranks somewhere around approximately around number 10 in if it were a country and its own right so it's out of 100 890 jurisdictions around the world if you were to insert individual US states in there California would be in the top ten New York's comes up at around about somewhere around about

India or somewhere like that number 14 15 16 something like our show today is party by voltar com the goal to Bitcoin exchange now when you live in ruin or in France or in a lot of comfortable places like the US etc we often forget that when you put money in the bank you don't actually control it anymore and it's not really yours so when things go wrong do you still have access to it maybe maybe not and i think the grease thing has that really Illustrated that and it's we Illustrated that some forms of money are protected from that and bitcoins one of them and gold is one of them that's right if you want to start buying some

gold you can do that very easily with Volturi calm you can start trading as little as one milligram of gold and you don't even need to do any kyc if you're buying less than five thousand dollars worth of bitcoins per day so that just eliminates all barriers to entry so and the gold that you buy in Volturi belongs to you it doesn't belong to voltar oh it doesn't belong to some third-party you own the gold legally so go to voltar calm and start trading some gold today and we would like to thank Voltaire 0 for their support of epicenter Bitcoin what's interesting is just the contrast between New York which is traditionally a financial sector and California which has a history of tech startups and innovation and the the death in which this regulation goes and tries to either

control or not you know people that do it easily imagine the complexity with all those Silicon Valley startups and all the silicon valley-based VC companies that have invested in in Bitcoin and blockchain companies and think about all the people who are now employed in California in this industry it would be really complicated and foolish and foolish yes they'd be shooting themselves in the foot and sending loads of companies awake although some have even on the basis of this lightweight regulation perhaps not entirely because of California but because of things that

are going on in the US generally have upped sticks and and left and the most notable one of those is a pope who a month or two ago announced they were upping sticks and relocating to Switzerland and I think will be very interesting to see where all of this is going I think we're we're we're starting to see jurisdiction becoming an issue so far as regulation is concerned so when you've got to start up and you've got to start up that it's just getting off the ground it has to think carefully about where the costs are going to enable it to to innovate freely and without being

burdensome you know you want your money for development you've startup money for development and marketing you don't want to spend it on on getting licensed and then when businesses are starting to scale up there thinking about which jurisdictions are going to allow them to operate in a very cost effective way and they've got to balance the considerations of where it's possible to to operate cost-effectively with where the markets are and at the moment the biggest markets for bitcoin and bitcoin related services and that market is without question the USA and North America generally so so touching again on light touch regulation not to spend

too much time on this because we do have other topics to cover the Canadian Senate issued a report on virtual currencies which proposes a lighter touch at a cryptocurrency revolution regulation and and perhaps this light touch is is most notably illustrated by the wonderful Canadian humor on the front cover which is digital currency you can't flip this coin yes and there's a lovely contrast between the the seriousness of the US and New York in

particular and this tongue-in-cheek approach from north of the the border with Canada yes I know that as Canadians we're not to so we don't take herself too seriously in any case well and and what's really interesting is that Canada came out very early on with sort of concerns about money laundering and sort of set up some enabling provisions and has as far as I'm aware yet to do anything with it meanwhile I think it was a referral by the government to to the Senate asking it to one of its committees its banking committee to take a look at virtual currencies digital

currencies and and it did so for about three or four months and came out very recently with a report and the conclusion on that report was that this stuff is is basically innovation it has a lot of benefits it can improve not only the financial system but probably also the way the government functions and essentially whilst recognising that there are some money laundering concerns it essentially recommends to government that it should take a more a very balanced approach and give some

breathing space and there's a kind of implication of about three years breathing space too it's nice that we need to do this yeah those those messages its contrast as well if I had a little Canadian flag I'd be waving it right now I well of course the it's only a committee's report albeit senators are important people but but you know they that they're not the executive but our one imagines that the government will probably is likely I think to to to follow that take and give more breathing's let's go on to talk about about ripple because ripple is kind of interesting in this sort of a cryptocurrency context right because a lot of big funders don't like

rip too much and ripples off and fall of us is sort of you know building things for bank and beings are very regulatory friendly and and the indifferent system I don't know if these some of these accusations were so true but regardless and ripple is is also a large company right i think you have about 100 people they've raised a lot of venture capital from from top-tier venture capital firms and it's quite interesting that even though they've sort of always explicitly been very regulatory friendly very government friendly that they have been

fined by FinCEN except for seven hundred thousand dollars what do you make of that I um I think it's a what I would call a kind of shot across the bow they're setting an exam which is the the money laundering regulator federal money laundering regulator think of it in those terms making a point by making a point because ripple is arguably the second largest virtual currency after Bitcoin so it's something that will people will sit up and pay attention to and they're saying do not treat our regulations and our laws lightly if you

look at the detail of this fine what the background is to it he goes back to I think 2013 or so you had a FinCEN was one of the first regulators to to issue some pronouncements on on virtual currencies and and basically said you know it's it's it's like money transmission so treat yourself as a money transmitter and the effectively the the so-called Bank Secrecy Act applies now ripple started engaging in what would be caught

by that money transmitter law of the money transmitter provisions of their law back in i think it was around march two thousand thirteen and a couple of weeks after it started doing that a FinCEN actually came out with this this announcement of its interpretation and patently ripple did take note of it because about six weeks later it stopped those activities so these infringement of the law these breaches actually took place in march and april 2013 ripple labs set up a separate company xrp to

and started to the restarted its activities in the summer i think july or august time and clearly had the intention of doing it properly but started engaging in the transactions before it had a money laundering system in place its procedures in place which not having them in place was a breach and before it had appointed a compliant chief compliance officer and so on and so forth and in fact i think it took several months to hire someone in that role so all the while even though it was in on the face of it was its intention

to sort of follow the law it kind of thought that you know it didn't really matter or leave at least that's the way that it comes across in those early days and there's a salutary lesson in that for other startups in this space so yeah they did react to the to the to the FinCEN ruling it did react appropriately stop its activities but not fast enough and when it restarted in a different guys it obviously had the intention of doing it right but and your stead of getting the things in place first didn't do it and along comes FinCEN a couple of

years later and said hey guys we found you you you were in breach here and had a couple of other issues that they should have dealt with in a particular way transactions that they refused because associations their implications of that of course are because you know whippleton do this exactly right way although they were trying to do it the right way if you look at this in the space of pickle and comprehensive companies I am quite sure that a wide number if you know certainly the vast majority if not all of them have committed similar infringement does that mean we can expect intend to go start

going after a lot of other companies move similar similar find similar charges I certainly don't rule out the possibility obviously it has less impact the second and third time than it does the first time it had a lot of impact and it's made serious businesses sit up and think about it this is why I say I think it's really and they're trying to set an example they're trying to get the message across that you need to follow the rules and you need to do it before you start engaging in any transactions and so you need to think about all of these things and be properly advised

before you start operations yeah yeah i agree with you a lot don't yeah the other thing i was wondering about so it seems like one of the things Ripper was doing they were selling extra p right so one of the things for example this also makes repeated Roger bear I was aware didn't the complot sent them to again ed document of course they knew who whatever so but regardless so and they go fine for that right that's like an infringement now one of the things was done quite a lot in 2014 and to some extent also this year where these coin sales right were company started some point if um factum gems and others and

then they sold them to whoever wanted to buy them for bitcoin right there is no kyc down and annuities does that mean we can expect FinCEN do go after these companies were failing to do kyc during those crowd sales well of course it's not just kyc and i need to make this point having an time a little bit yeah the provisions of much broader than just checking who you're doing business with at the start there are a lot of ongoing obligations and a lot of procedural obligations and indeed having correct personnel so all of those things come into into play and will we that you're trying to draw me out on whether whether

or not i think FinCEN will go after others i think there is a strong possibility that they may attempt to go after some of the larger better known names in order to make a point i think there's a strong risk of that they may take the view that they've got the message across with with ripple and so so long as people pay heed to that and do it differently from now on they might they might not invest so much time in investigating other infringement but it's generally believed that they certainly have investigations underway facts before them that are that suggests

that that they might or could go after other people i think one worrying point here is that if you subsequently power say registering with FinCEN or any of these other agencies particularly in the US you of course opening your books on all the things that you did in the past and by you know by definition you're kind of exposing yourself to the risk of being find for past infringement even though you're doing it right now it generally felt that ripple were only find or find only as much as seven hundred thousand dollars which with a you know with

somebody like FinCEN is actually considered a light fine there were some other provisions that they had to follow including making some changes to the rippled system and also to the procedures in relation to ripple trash actually I you forgot to add to bring out because I saw that as well I said enhancement after it further cause do you know any anything about the specific nature of those I don't think that they've been published in any detail so i think we can speculate there been one or two observations about changes that have been made but essentially you have all sorts of rules about the information that needs to flow with the transaction

and about linking transactions to individual party so one of the observations has been that ripple trade was quietly sort of stopped for certainly for new business this is the non-institutional the the sort of personal personal lines trading individuals and and i think they've just put out a statement of quite recently indicating that they were suspending new signups whilst they improved their system so i guess you can kind of put two and two together and say that that's

connected with that may have been one of the detailed requirements and and certainly that's something that i will I think we should be more concerned about because here you have a regulator who's saying you've got this stuff that's that's decentralized well of course there are questions about the extent to which ripple meets the sort of decentralized decentralized approach so you know that ripples a good one to go after would be much harder to do this with with Bitcoin and others and is trying to influence the the nature of the of the protocol the nature of the

system the anonymous or pseudonymous nature of it by getting it changed in order to conform to the that the anti-money laundering frameworks that already exist bring it if you like into line with the existing controls that say banks and other financial institutions have to follow so let's before we wrap up move on to a topic which is a bit closer to home for us which is the the case of dat a few months ago we mentioned this on I think it was the last time you were on the European Court of Justice is currently I mean there was a case at the European Court of Justice that was brought on i believe by a norwegian or sweet sweet estrellas

gentleman and the question is will Bitcoin transactions be subject to be a tea that is will you be charged via tea when you buy Bitcoin and will the Commission's that exchanges make also be subject to dat can you tell give us an update on that just very very briefly the case is a very specific case about the v8 whether or not there's v80 on exchange commission's in Sweden in relation to a particular business that was one run by a single guy David hedquist and he and the the tax authority in Sweden couldn't agree it went to the Swedish courts and they couldn't work out whether or not it was

subject to the kind of financial services at and payments exemptions that exist in the VA te rules which apply throughout the whole of Europe at all of EU and so they referred the case to the highest court in Europe the European Court of Justice for a decision on interpretation of this these exemptions this case started nearly a year ago and has gone through various stages it's significant now because it's had an oral hearing so the Swedish tax people and mr. n Gris lawyers and other interested parties so a couple of European states

germany and the Estonia we gave some input and the European Commission which is kind of the the civil service and government in that sense of the European Union also made a submission and put these what it believed was okay or they individually believe were the case to the judges now what's interesting about the European system is that a single advocate general issues an opinion shortly after the case is heard and this opinion is going to is is going to come out 3 days is expected three days after

the this is being recorded so by the time it goes out they'll likely will be this opinion on the table it's not binding the judges then consider that opinion and they can take months many months sometimes to do that so it's not definitive but statistically the opinions are more often followed than not and why this is interesting is that in order to decide whether or not the via it's subject to v81 may have to decide what is this stuff in the first place you know what is Bitcoin what our virtual currencies because they

obviously don't fit they weren't thought about dreamt about even when v80 laws were made and when these exemptions were written and there's a strong possibility that that out of this case will come the unintended consequence of defining what in law virtual currencies are and that may go beyond virtual currencies to other blockchain fuel for want of a better expression so that that has obvious implication of potential implications and of course it could be that they say well this stuff is just like commodity and if it's like a commodity then it's subject to v80

itself so then you could have a situation where when you buy a cup of coffee and you pay for it with Bitcoin you're engaging in some kind of barter transaction so you know I take my cup of coffee and pay you in a carrot and and so there would be v80 on both sides of the transactions so if you think there are 28 member states the European Union is the largest economy in the world at the moment it would have a very significant impact if that if it were decided that this stuff was good commodity of goods and even if it was decided that it was like financial type

instrument and therefore you know not goods not subject to a barter transaction it might still they might still rule that the and exchanges Commission's or margins are subject to v80 and that would make a European exchange is highly uncompetitive in a global market so there are all sorts of significant implications that might be coming down down the highway soon yeah I'm so well John thanks so much for joining us today was it was a pleasure talking about all these topics I think it was very interesting very important it's not the most uplifting topic to network but it's certainly important as

participants in this cryptocurrency bitcoin blockchain movement to understand where things are going and how they'll be affected by these various regulatory attempts no doubt the real world is catching up with with innovation that's and may constrain it in some way or may help it we shall see absolutely so to listen to thanks so much for joining us so we put out new episodes peps and a Bitcoin every Monday you can subscribe to it on your favorite podcast app for Android or iOS or you can subscribe to on soundcloud you can also watch the youtube videos on youtube.com slash

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