Jerry Brito: The Case for Electronic Cash in an Open and Free Society (#296)

Transcript

[Music] this episode of epicenter is brought to you by baltoro the gold hedging platform for the crypto community trade goal to Bitcoin instantly and securely starting at just one milligram go to vault or gold slash epicenter to get early access to the v2 platform and to start trading and buy Microsoft Azure do you have an idea for a blockchain app but are worried about the time and costs it will take develop the new Azure blockchain dev kit is a free download that brings

together the tools you need to get your first app running in less than 30 minutes learn more at a kms slash epicenter hi welcome to epicenter my name is Sebastian Cujo and I'm the head Roy so today our guest is Jerry Britt Oh Jerry Brito is the executive director at coin Center and previously was at the Mercatus Center at George Mason University so Jerry is has been in the crypto space since I believe 2011 and he's been you know quite vocal as a lawyer and speaking with lawmakers and regulators for quite quite a long time about crypto and blockchain in general but mostly cryptocurrencies in Bitcoin

and how US regulations apply to these new crypto currencies and asset types it was a great interview I mean I think that guy is so sharp and so on point and so we talked about a whole a bunch of things we talked about this paper that he wrote recently called the case for digital cash we also talked about Libra and everything that's been going around there and some of the legal implications and regulatory implications with Libra and Gerry only had an hour with us so we had to cut it a bit short but we did talk also about the recent FinCEN guidance around digital currencies and whether or not exchanges and digital

currency issuers are or not services businesses so it's fascinating interview and we hope we will have cherian again in the future to talk more about this kind of stuff also while preparing for the episode I I read through JD's blogs and his paper on the case for electronic cash like JD has a certain eloquence with words and I found like so many sentences that I found like oh let's copy it into my email and I'll read through them read through these sentences someday and so do check out his his writings as well I find they're so well written and so

beautifully crafted yeah so I'll have all the links to everything that we mentioned in the show in the show notes so got a couple of things that we want to mention so first you guys are doing a podcast course is doing a podcast tell us a bit more yeah so yeah we've started this podcast we're calling it the chorus 1 podcast it's gonna be quite different to epicenter and our thinking here is like when we founded chorus 1 one of our key objectives was to create a community of engage token holders that work together to shape the future of decentralized networks you know so if

you think of a network like cosmos or Solana or any of these networks it's ultimately a network of people and it is important that the people that are holding the tokens that are delegating that are using using these networks they became they are really engaged with it they are informed about what's going on in the network informed about the governance that's that's happening there and so we are now involved with three networks in a production capacity and like four networks in a test capacity and we felt that we have a lot of insight onto how these networks are being shaped by the decisions that the people in these networks are taking and you felt that podcast could bring out

what the internal chatter of these networks very well and that we were uniquely suited to bringing out that internal chatter so that's that's what chorus podcast seeks to do it's to improve the conversation around these networks and improve the decision-making in these networks it doesn't have a defined format some of the some of the episodes will be interview only but they'll be shorter than epicenter others might cover other others might be educational covering certain topics some might have governess debates and things like that we're still playing around with the format and we would love for you to check the check the episodes out and

give us feedback on what on the direction you would like that podcast to go that sounds great I haven't listened to it yet I know there's I think three episodes out but I looking forward to hearing it so I think you can get it pretty much anywhere you get podcasts right so like iTunes and I I added it to my pocket cast it's on Spotify I'm not the show where you could get it either I'm pretty sure I'm pretty sure you can get it like just about anywhere you get podcasts oh yeah yeah subscribe to the to the chorus the chorus one podcast in your in your in your podcast app just search for chorus one and you'll find it and well yeah well we'll link to the show notes in the show notes as well

with Hertz two events there's a couple of things happening in the next couple of weeks so first you guys are you and Brian and Sonny are all going to Korea for the biddle Asia conference yes I'm kind of I'm kind of regretting that I didn't plan to go to this conference now yeah you are you're missing out on a lot of about men and bibimbap and kimchi yeah where I get to enjoy Paris in the summertime when there's nobody here which is priceless yeah so tell tell already it's about but would you be doing there so so there are two main events so one is a hack Adam which is a hackathon organized by the interchange

foundation and the second is a conference called bittle Asia 2019 and chorus is a sponsor of the hack atom and epicenter is a media partner for brittle aja 2019 we have a session in the hack atom as chorus and we have year featuring on a panel we have an epicenter panel at the middle Asia 2019 conference so you can grab you can meet with Sonny Brian and myself in both of these events and catch up about epicenter as well as chorus okay so the hackathon is I'm looking here Friday 19th to Sunday the 21st of July and you

can get more info at Biddle be you i dl j / hack Adam I'll link to that show notes and the conference is just bittle Asia and that the panel is happening on the 22nd so Monday it's motivated by Brian and it will feature Adrian brink of Krypton labs sunny Harriet cow or Chow a virus Network and Liang Liu of scale lapse so if you're in Asia in Seoul for for biddle Asia you should definitely attend and check out the check out the panel and let me

know how it went because I will not be there fortunately but yeah hopefully hopefully it will be recorded and we'll be able to release it as a bonus episode as an epicenter live episode yeah we'll try to get that we'll try to get that organized and lastly and this I will be here at this at this event I was mentioned last week there's Def Con happening in August I believe it is on the 21st to the 23rd of August in Berlin and I will be there with Rica and sunny and also I think be doing an epicenter live episode there and probably a meet-up in Berlin if there aren't too many events competing with our Meetup

so you can get 20% off by going to DEFCON 2 IO and entering the code epicenter DEFCON 2019 that will also be in the show notes and the last thing I want to mention I'm not sure if I mentioned it on the show or not I've been talking about it on Twitter quite a lot is that I started a cosmos newsletter about two months ago or so and I've been trying to keep it regular like you know once every two weeks or so and the newsletter basically just kind of covers everything that's been happening in the cosmos space over over that period so you'll just get a bunch of links to interesting articles software updates product updates from all the different wallet

apps validator updates so it's it's just basically a bird's-eye view of everything that's been happening in the ecosystem over the last two weeks or so and so to sign up for the newsletter I would love you to sign up it's that cosmology email it's really simple and you can sign up there and get my newsletter in your inbox so with that here's the interview with Jerry Brito hi so we're here with Jerry Brito Jerry is executive director at coin Center and previously was at the Marcus Center at George Mason University and today we're going to be speaking with Jerry about a whole lot of things including coin Center a paper that he wrote titled the case for electronic cash we'll also talk

about Libra since it's on everyone's minds and finally we'll talk about the recent FinCEN guidance with and how it relates to cryptocurrencies exchanges wallets and things like that so Jerry thanks for joining us today thanks for having me so to start off what did you tell us a bit about your background and how you got involved in the crypto space sure so yeah I'm a lawyer and my whole career has been in technology policy I was as you say before coin centers the Mercatus Center at George Mason University and there I directed the technology policy program so focused on all kinds of tech policy issues so old-school telecom issues but also

copyright privacy and increasingly towards the end of my time there emerging technology issues so sharing economy drones 3d printing and then bit so I sort of chanced upon Bitcoin in 2011 and when I saw it I just fell down a rabbit hole as so many people do and I think what what I saw from my vantage point was all of the regulatory questions a Bitcoin raised and at the time nobody was really certainly not in DC nobody was thinking about these questions that you had people sort of the main question people were asking on on Bitcoin talk I remember was how can this be legal because only the federal government has the power to coin money

and you know that's not actually correct and and there's so don't ii was really thinking about this and I was just very lucky to be right place right time and start writing about it and talking about it and publishing about it and pretty soon to sort of became the person in DC the folks on Capitol Hill and at the agencies would go to to ask questions about Bitcoin early on and as an early lawyer in the space and in DC talking with law makers and regulars what were some of the questions that they were asking you at that time very early on they just didn't understand it at all and so it was very much just how does it work

then you started getting the questions of is it anonymous that was a you know it's a question that we would get a lot and then maybe you started to have things like Silk Road and so you started to get questions around illicit use and so early on I was part of a task force that the Center for Missing and Exploited Children put together with law enforcement folks at different think tanks and folks in the crypto community and it was good because the report that came out from that task force ultimately pointed out that hey while there are illicit uses there are a lot of positive uses here there are ways to deal with the illicit

use etc and eventually that led to the first congressional hearings on crypto currency that were I think really good for for Bitcoin because essentially what law enforcement and the feds said that the hearing is that they had it under control that it's fine so the you know that's kind of that's kind of that what the questions were always all about early on and what lady do start coin Center it sort of became out so this is sort of after those hearings actually those hearings were in 2013 in late 2013 and just as the amount of attention and interest from government on Bitcoin was

at its peak right after that you had mal Cox collapse and you had the Silk Road bus and so you had a lot of attention a lot of it was negative and at the same time really at the only institution that Bitcoin had a Bitcoin foundation was also kind of falling away and so there was no institution to really basically answer the basic questions of policymakers needed answers and to develop policy thinking here and so there was just an obvious gap and so it was just a confluence of events where different people sort of recognized that gap at the same time so Alex Markos so I think you've had on the show before

now is the Bitcoin core developer Balaji Srinivasan who at a time was in recent Horowitz myself Arco powder Robin Weisman who runs our lobbying for us we all kind of saw this and we're just you know saw that is needed to happen if you're holding a significant portion of your net worth in crypto you're probably waiting for your aportfolio to moon anytime but holding crypto doesn't mean you should be irresponsible in the face of volatility risk that's where Volterra comes in Volterra is the leading gold hedging solution for the crypto community and as a stable asset trusted for millennia gold is the perfect long-term hedging solution and an epicenter we've been using vulturo since 2014 to protect a portion of our

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go to volt or gold flash epicenter that's VA u LT oro gold / epicenter we'd like to thank vulturo for their support of the podcast maybe they just just an update around coin Center so what are some of the key battles that the organization is fighting today from a policy perspective so it's interesting we have I think been pretty successful on different policy initiatives that we've been focused on for the past four years so look big policy issues that I think you probably have talked to Peter about the previous episodes before was securities regulation and so they're after all of it you know it was I think

for lots of folks they felt it was a pretty slow process but actually I think relative to how the SEC usually operates it was pretty quick we got some really good clarity on how they view crypto currencies as far as securities law so they have stated clarity that Bitcoin aetherium and things like them are not securities so for us that's just a huge victory there's still some outstanding questions I think affect a lot of folks but for us that I mean that was something Bitcoin theorem are these securities or not that was an open question just a little bit over a year ago and it's not anymore so we're very happy with that there with anti money laundering and Bank Secrecy Act

regulation we you know the FinCEN came out with guidance in 2013 that explained how they applied the Bank Secrecy Act and regulations to cryptocurrency and the ecosystem but there was a lot of open questions about them and we thought that they were sort of continuing to interpret it right but as we'll talk about in a minute they issued guidance a couple months ago where they've kind of clarified that the way that we've been interpreting and it's suggesting that be interpreted is they interpreters so that's a huge victory and on the money transmission side which has been a perennial issue for cryptocurrency we've worked with a uniform law Commission to develop a a model act for state regulation of

cryptocurrency money transmitters that's now making its way to different states California across your fingers might be adopting it soon which would be a huge win and we've also worked with some members of Congress to introduce legislation that would preempts state money transmission licensing for noncustodial users so if you're running you know some service that does not take custody you wouldn't be subject to my transmission so we're pretty happy where we've been and so it's like what battles do we have it's a pretty good position to be in the two big battles and I wouldn't call them battles but the two big challenges I still see one is tax I or s unfortunately has continued to drag its

feet and issuing guidance about cryptocurrency and so there are a lot of open questions related to de minimis transactions related to how do you do hard fork accounting lots of different things so there we worked on our report that highlights what are the open questions we've delivered this and briefings to Congress to the Treasury and to the IRS and we've worked members of Congress to introduce a couple of bills that would try to get at some of those problems so taxes is a live issue for us and the other is it's not so much a battle that we're fighting it's just a battle that we think could come and we

want to be prepared for it and that has to do with privacy so to date cryptocurrencies have time to be very public and transparent and so that's been a very simple thing to explain but of course that's not a good solution for anybody you want to have individuals to have privacy in their financial transactions and that increasingly we're going to see an upgrade to cryptocurrency so that their private right it's kind of like when we went from HTTP to HTTPS right and that's a good thing we want to make sure that policymakers understand it so this is this paper I think that we'll discuss we've sort of taken a two-step approach

one is my paper where I sort of make the case to policy makers so that they make sure they understand why we call it digital cash which is digital currency that is peer-to-peer censorship resistant and private which is what a dollar bill is why that's important for a liberal open society which I think we can all agree we won't have so that's one paper that I wrote I think I was published in January February this year and in the second paper that we published was by Peter and there he sort of explains if you wanted to put regulations to curtail digital cash you would find that there are constitutional

barriers to doing that so it's sort of two one is we're saying hey this is a good thing you should regulate it and number two but if you are trying to regulate it understand you're gonna be limited in that right now I mean we've also had Peter Van Valkenburg also from coin Center a number of times in the podcast and so you know we're not gonna spend too much time digging into coin Center because we've we've covered that organization at length and there's so many things to talk about but those who are interested in learning more about coin Center and sort of diving deeper into what that organization does I wouldn't like you to listen to our two episodes with Peter Van Valkenburg which are 182 and 227 and feel free to go to coin center.org yeah of course it's also interesting to me

that when I go through the old blogs of coin Center 2015 mostly many of these blogs are about how law enforcement uses the transparency of Bitcoin there's a blog blog on that yep and I think like some of the early arguments that coin Center made was around leveraged bitcoins transparency to you know embellish it position in front of law enforcement but it feels as if in 2019 that that plank because of the technology developments that plank is going to get weaker coin Center and therefore there has to be a different thrust a different way of arguing for for the development of these technologies but I I think that's right

I think that's definitely what happened but I also think that those positions are completely consistent so in 2015 when a member of Congress would come and ask us and say hey is Bitcoin anonymous or can police catch bad guys the correct answer is no it's not anonymous and let me explain to you how indeed law enforcement has used the blockchain with forensic analysis to catch bad guys and that satisfies a member of Congress of course you know in the back of my mind I might think it might speculate you know but I can also imagine that in the future it's not always gonna be anonymous and so we always knew that at some point we would have to address that and so that time is finally come and so

that's what we're doing very interesting so I think you've never covered this topic with Peter so it would be nice to start with you tell us about this paper which is the case for electronic cash what's the main thrust and the argument of this of this paper sure so the paper is actually not completely about cryptocurrency cryptocurrency kind of comes in at a variant and the paper is actually just a case take away electronic it's really just a case for cash because I was telling you before when I write a paper I usually try to imagine a reader that I'm writing for and in this case my reader was a mid-level official at a law enforcement

agency or at a regulatory agency somebody who maybe instinctively thinks cash is something that maybe could be eliminated or that it's problematic because they're always dealing with bad guys and you have to say no actually is essential to a liberal open society which is which the preservation of which is a reason that many folks in government who are true patriots go into government service and law enforcement service to protect right they want to preserve an open liberal society they care about the values this country was founded upon and that's what they're dedicating their lives to preserving and

I need to explain to them that cash is an essential component of that and so that's what the paper tries to do and and the argument is pretty straightforward and I think it's one that I think it's pretty intuitive to cryptocurrency enthusiasts but I think regular folks folks in government probably don't think about it and it says we are moving to an increasingly cashless society and I described how we're seeing more and more transactions moving to basically credit cards or mobile payment systems and you can look at certain countries Nordic countries for example Korea where cash at this point is really a relic right it's

something that is very rare ATMs are rare Bank branches don't carry cash and everywhere you go you basically pay with a credit card and they look at you weird if you pay with cash and what I point out is in that world that a cashless society is an intermediate in society because if you remove cash as an option that means every single transaction that you do is going to be intermediated by some bank or some corporation some payment provider and what that means is is that every transaction is going to be a surveilled so it's gonna be seen by a third party and be the transaction can

be blocked or you know either selectively or you can be blocked completely from the ability to transact when you have that that is a real challenge to a liberal open society where and then so then I basically give some examples of how for example in China this is being used and China is really a remarkable case study because in the span of really just a few years cash has been almost eliminated people have just moved completely to using a li pay and WeChat pad and and those to account for I think like 90 percent of all mobile payments and in

China and so what you have there is a world where all transactions or visualize to companies which are basically means they're visible to a state and they will block you if you're trying to do things you're not you know that the words of an executive from Ali pay are not healthy the other thing that they'll do is that they you know this feeds into the Chinese social credit scoring system and this means that you know what you buy and what you do is gonna feed into your your social credit score that then will go into what schools you can send your kids to what

lights you can take etc so really this is kind of having an intermediated society really opens up a door for a more authoritarian control of one's life that's the state control you also have corporate potential misuse and the example I give is target there is a case study that I highlight where there was a this happened I think like five years ago there was a father of a teenage girl who walked into a target this is the New York Times related this walked into the

store and basically chewed out the manager saying he had a mailer in his hand that was for baby products right and said what are you trying to do this was sent to my house addressed to my daughter and she is you know 16 years old what are you trying to do get her you know you want her you think she should be pregnant what is this right the manager looked at it he didn't know what it was he apologized he says I don't know father went away a couple days later the manager called the father and said hey I'm just calling to apologize again and then father said no actually I owe you an apology turns out there's been some activity in my house I didn't know about and my daughter's due in a couple months

how did target know that that girl was pregnant they know because every time you buy something at Target target is tracking you and command making a dossier on you and so what they would do is when you use you don't even have to opt into this by the way this is completely not you don't have you there's no opt-in to this whenever you shop at Target you are assigned a customer number unbeknownst to you and this is tied to for example whatever credit card you used that is associated with you and they keep a list of everything that you buy and so what

target did is that they they had a program for expecting mothers where they give them discounts and stuff and so they knew that this cohort of people who had opted in were pregnant they then basically just correlated the purchasing activity of those people who they knew were pregnant with their wider just universe of customers and just using data mining they could figure out quite specifically who was pregnant and even when they were probably do right based on just the shopping habits what you were buying is that you're buying diapers it could just be that you're buying you know aloe vera lotion and chocolate right that that might be a

trigger and so this girl was deprived of her privacy and she was deprived autonomy right she was deprived of her ability to tell her father about her pregnancy on her own terms and she didn't opt into anything so what is the only option that you have if you don't want to participate in that it's cash right she could have paid in cash so as we move to an increasingly cashless world we need to preserve a form of cash and that's does we all know that's cryptocurrency right that's cash that is you know to me cash does not just mean money cash means a very

specific kind of money it's money that is person-to-person its bearer it is such a chip resistant permissionless and it is private and so that's important I mean cash cash is one option another option is like having companies that don't like exploit data and especially for something as sensitive touchy it's like a possible pregnancy like I mean that just feels totally unethical and I mean if you from the European perspective just seems like completely absurd that this would not actually you know happen there's something kind of paradoxical though but when you're talking about the the idea that money that a cashless society tends

more towards surveillance and payments potentially being blocked and of course like this is rampant than China I saw a video recently I don't know if this was real or not I always sort of questioned these videos but there was a video of someone seemingly in China paying just with like a face ID so with no phone oh yeah looking at a camera and someone like there's some sort of facial recognition and their account as being debited I don't know if this is true or if it's not I'm sure it's coming soon but the this this idea obviously makes sense to us but if you're addressing your paper to a law enforcement officer or a lawmaker it seems like these are things that they I mean from from my perspectives these are things that they

would probably want write like a law enforcement professional say hey yeah it's great that I can track you know bad guys and a lawmaker Coris yeah we want to block people that are not I don't know like paying the taxes or you know it seems like these are tools that you give given the regulatory landscape and so FinCEN and all the AML and KY C and X cetera like it seems that those directives go in the sense they I don't think so actually yes I think that's their initial instinct right is to say we do want to be able to track we do want to be able to block I want to be able to do my job well and more efficiently and so that's her initial instinct and so but what this

paper tries to do is to point out to them what you know if we eliminated cash that your job could be very easy and you got all the tax cheats what are you giving up and when you point that out to them people who work at fence and people who work in law enforcement there again as I say the reason they're in those jobs is because they're Patriots who care about this country and the values that this country was founded on and if you point out to them do you want to be more like China or do you want to be more like what the u.s. is meant to be they get it they don't want to be like China right they want to be able to surveil people with a court order right

they understand that with a court order is important right there they're not for getting rid of court orders right so I think that's what you have to point out to them and so look I point out to them you know in the paper there's another sort of case study that I point out that I think for a policymaker there should understand so I explain what's happening in New York with the National Rifle Association right so the NRA whatever you think about the NRA whatever you may think about gun ownership or whatever the NRA is a what is it is a free association of people it's nonprofit it's a free association to people that engages in what engages in free speech all the NRA

does is publish write publish papers they lobby Congress right so they're engaging in constitutionally protected activity to do what to stand up for another enumerated constitutional rights which is the right to bear arms so what they're doing is basically just a non-profit engaging in free speech that's the NRA whether it whether you like him or not the governor of New York Andrew Cuomo after a school shooting he put out a press release where he announced that he was directing the Department of Financial Services in New York DFS to basically tell all financial

institutions that do business in New York which means qualify institutions in the world right to essentially stop doing business with the NRA right or they're basically their licensing would be in jeopardy if you cannot get a financial institution that does business with New York to service you you're dead you're out of business completely right so what is this this is governor of New York using his power to basically silence and shut down a political opponent because he doesn't like their political views not because they're doing anything wrong it just shut them

down completely and so today that's Andrew Cuomo and the NRA tomorrow it could be Alabama and Planned Parenthood right we don't want that in this country I think our us centric view as I must say from this side of the pond it just seems of course of course you'd want to stop the NRA but yeah I mean I I understand from like the us suspected like under under the under the column of the Constitution in for speech that yes this does seem absurd yeah and you're right so so we're definitely making us centric arguments here right these arguments might not be a very persuasive to people in China maybe out to people in France either but

yeah so what does the NRA engaging in its engaging in free speech you know like four or five years back I would have had difficulty empathizing with this argument but I empathize with this argument ever say like founded a cryptocurrency company and have had to search for bank accounts in the US okay trust me it's like a huge challenge yeah even after you get a bank account every three months they'll be an email from your bank asking you a bunch of questions and you'll wonder Oh am I gonna be shut down now you paying all the taxes you have all of all of your legal documents in order you have lawyers in your team everything but

still it's a constant worry that one of these few banks that are willing to give a bank account is gonna shut shut it down and then we can be completely ostracized from the American financial system like this this is a possibility view we lived through as a law-abiding member of the u.s. Society I I lived through this possibility and then you realize well if I am living through it maybe there have been other people that world are also living through like situations like these right and and then then you realize that like all the cryptocurrency is actually a tool for freedom because like there are people like me they might be doing other things

not doing cryptocurrency but they have this risk and the stool set serves to alleviate that risk I think that's right and look you understand from from that position if you don't have a bank account you can't do business and you're not doing anything wrong you're doing everything by the book as you say and because you're perceived as a risk you're just shut out like you basically you can't engage in business we can then query whether you should be seen as a risk or not but put that aside in the case of you know the case with New York the reason the NRA is being targeted is for their political views period like there's no there's no risk or not

they're not doing anything except publishing books and videos and the governor is deciding to single them out unilaterally and say we're gonna just turn you off right and so pointing that out to folks who otherwise might say yeah this is a great tool for law and order is to be able to track and shutdown people when you point out to them yeah but then somebody could just use that and for political purpose you know they might begin to understand and look we don't say I don't think the cryptocurrency for it to be a tool for freedom as you say people have to switch completely the cryptocurrency it just has to be an option it has to be an escape valve

right so that if you're engaging in activities that might be politically incorrect and somebody wants to shut you down or you don't want to be observe your this girl you don't want to in a cashless society where we no longer have paper notes you need to have that option right the people need to retain that option to transact privately and to transact notes that's your persistent fashion yes this this I absolutely agree with and wholeheartedly I mean think that like of course we need to have that option and there are still strongholds like like Germany for instance is is a place where yeah although it frustrates the hell out of me every get me go there

as I have to remember to take out a bunch of cash before I go there and I'm quite often I still forget to do it but yeah it is after a while it does feel sort of sad fun satisfying to be able to say hey like I like people here sort of hold this this very dearly like they they hold this this right to pay with cash very dearly and it is disappearing because yeah even though our passing directives to you know try to make card payments easier cheaper faster and at some point you know like even here in France like it's illegal to pay for anything in cash for more than a thousand euros I think so we do see this clamp down on cash or Oh totally

it's Germany is very interesting because as you say it's it's sort of the opposite the country that until a couple years ago you could not pay in anything except cash at Aldi or IKEA they did not accept anything except cash it just was amazing right so I have to tell you that's right many places and many are cash only what's interesting about that is is why is that and I you know I I don't know I you know we should ask some of our German friends but my intuition is that it has to do with Germany's experience with two kinds of authoritarian regimes right there Germany was subjected to both communism

and Nazism and they're very sensitive to the kind of control that you can experience that way and you know if you're trying to always retain that option it's interesting you point out that in France you can't pay in cash were certain things above something that I discovered in my research where this paper is that the reason you had a 500 euro note which is something that so many members of the the European Union are trying to get rid of is because Germany insisted on it and Germany would have had a thousand euro note but we're talked down to just having a 500 euro

note and that I think it is ultimately gonna get phased out yeah of course and the five your 500 euro note is in fact you just quite fit for organized crime so I think it probably will get phased out just for because of sheer like numbers all right like nobody uses a 500 euro note I I've never even seen one so this episode of epicentre is brought to you by Microsoft and the azure blockchain workbench getting your block team from the white board to production can be a big undertaking and something as simple as connecting your blockchain to IOT devices or existing ERP systems is a project in itself well the folks at Microsoft had you covered you already know about the Azure blockchain

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build your first application in less than 30 minutes visit a kms slash epicenter and be sure to follow them on twitter at MSFT blockchain we'd like to thank Microsoft and Azure for their support of epicenter so moving on to our next topic today which is Libra of course Libra was announced a couple of weeks ago but mid June and it's generated a whole lot of buzz and acclaim and anger and a whole lot of things a lot of opinions from a whole lot of different angles and perspectives I'd like to yeah ask you what are your thoughts on Libra on a high level at a high level

it's just very interesting what they're doing I think bottom line it's a net positive for cryptocurrency if it launches and it gets adoption where people begin to get used to having a mobile wallet that where they have a token that is not denominated in their country's currency rights if they get you used to that you can imagine that that opens up the idea space for other cryptocurrencies and so that's all on that plus on the flip side I'm a little concerned on the regulatory front or on the on the policy front that you know

cryptocurrency has been sort of a minor policy issue in DC and again very us centric but I can imagine this is the same in capitals all around you know cryptocurrency is an issue that policy makers pay attention to but it's not the top issue and there isn't any major player that is sort of like the base of crypto you have lots of different folks building lots of different things and so you have this vibrant ecosystem and you have Facebook coming in with a project like this I think there is a possibility that one cryptocurrency all of a sudden

gets a lot of attention for policy makers and number two Facebook becomes the base of crypto car even though what the project that they're building is I would say not a cryptocurrency and completely unlike any of these other things and so we've begun to see folks who reach out to us a little confused about the distinction between something like Libra and Bitcoin or ethereum and so part of what we've been trying to do is explain these things are completely different there are some similarities but they're very different and what's important is is that those technical differences drive different policy outcomes explain them how in your view Libra is different

Bitcoin and is Libra cash no I would say libras not cash I'll tell you how it's different number one Bitcoin does not have a company that issues it and redeems it right bitcoins emerge from a network of peers who join together and validate transactions for each other so there's no company that controls or runs or issues the bitcoins right bitcoins do not have a reserve of quote-unquote real-world assets that back the token and but are redeemable right that is

what Libra is right so Libra has a company that runs it it's called a Libra Association that company issues the crypto I wouldn't say corrupt okay issues the digital currency and manages a fund of assets that back that thing these are completely different things one is a company issuing a token the other is a network that is open permissionless and nobody owns or controls and again these have what you would you would think would have completely different regulatory regimes yeah whereas because in one case there are no intermediaries and because there

are no intermediaries it poses fewer risks and because there are fewer risks there's less regulation that's necessary uh with the other there is a major intermediary the operator administrator of the network that also custody and manages of funds of real world assets and so that's a risk and that's where regulation might be appropriate so so you're saying then that the the Libre Association which is this consortium of companies you know among which uber Facebook Iliad a whole whole bunch of others are essentially the administrators of this cryptocurrency

because they issue the currency so based on this this basket of currencies and real world assets the the currency the Libre currency will get its value and then presumably there will be issuance and sort of I don't know if you want to call it quantitative easing on the other side like some whatever like the destruction of the currency in order to sure like a stable price at which point you think because the paper does say that they want to make it more decentralized but you know it should that logic then become I don't know like it's a smart contract you know like or governed by a smart contract that is administered by the Libra blockchain and

the administer the consortium are merely validators so he was something akin to cosmos at which point did this this association ceased to become an administrator and just you know another another cryptocurrency that just happens to have a mechanism that adjusts based on you know uh you know Oracle's that fetch the sort of price of other other assets I think the the main sticking point for so you know as you know the Libra Association in its documentation to make a commitment to move towards a permissionless network within five years I think that's fantastic I really struggled to see how that's going to be

possible while maintaining everything else that they that is true about Libra I think that there are technical challenges about how you do on chain governance but I think those are probably solvable I think that there are incentive problems because you've got a couple dozen companies at the moment who have paid ten million dollars to be investors in Libra and they are going to be paid back based on the interest of the reserve right in order for us to become permissionless they're going to have to grow the number of validators to hundreds thousands infinity right well that means that they are going to just

voluntarily give up their shares in the ownership and dividends of the reserve so query what incentive they have to do that but putting all that aside assume that they decided their goodness of their heart they just want to give that up the last thing that I think makes this kind of impossible is if you have a reserve of real-world assets those real-world assets are going to be kept where they're going to be kept at financial institutions financial institutions do not open and maintain bank accounts for dolls right there has to be a person a legal person's name who owns the assets that backs the currency

that's going to always be a company run by people maybe those people want to always abide by the decisions of the DAO of the network but what if they get a court order so as long as there as long as this is backed by real-world funds kept in financial institutions it's not going to be provisional açaí I don't see how it let me put it take it back I don't see have you permissionless one way you might see it is if you can imagine completely permissionless central bank coins being issued then you can imagine so what something like what they're doing but we don't have that right yeah - David Alfaro on this yeah that's right it's almost as I'd like to be permissionless to avoid the regulatory

regimes you need to have assets that's untethered to any of the any of the fiat money systems like Bitcoin like Z cash if you if you tether it it will reside in some institution and then they can be cold orders and they'll always need to be like these people that are that have that bank account and that will always be this point of criminalization control trust in that system and you can't get rid of it I think that's right and I think that that brings up basically two types of regulation one is control in a sense of being told you can't you know you have to freeze these particular

address in these funds or you have to block these transactions or whatever that kind of control but I think also if you are managing you don't have this in Bitcoin right in Libra there is a company that has a fund of billions of dollars potentially right hundreds of billions of dollars so this is very successful of whose money the public's money and they're managing it for the benefit of the public and to keep a promise that they're gonna manage it to have a stable Valley that's a big responsibility that they're taking on and I think most governments would see that as an activity that probably would be regulated and then an interesting

question is well how who's the right regulator what's right regulation what's what is Libra I think is a a very interesting question what's the us-centric answer to to who regulates Libra in the u.s. yeah it's not clear so you might think you know is it a bank it looks like a shadow bank right and in some sense it's not a bank because it doesn't have a bank charter right is it a money transmitter or in the European sense is it an e money company I'm not sure it can be because state money transmission so number one it would mean that the Libra Association

would have to go state-by-state get money transmission licenses which is not doing Calibra the subsidiary Facebook is Lieber Association is not but if they did money transmitters are only permitted to keep their customer funds and Barry specific specified permissible investments right this is a problem at coinbase had in Wyoming in Washington State in Hawaii where Bitcoin was not one of the permissible investments listed and so they would have to hold it like a 100% reserve requirement so they just got out of those states so these are very very limited things that you

can keep the money in as far as I understand foreign currency and foreign issued government debt is not one of the things that's permitted so I'm not sure how they could be a money transfer so what are they with the thing that just jumps out to me is if you take away all of the blockchain and crypto and tech lingo from what they're doing and you just look at the activity what is the activities you're doing what are they doing they're taking money from the public and they are investing it in a fund of foreign currencies and government debt so that everybody has a share of that basically and they are actively managing this fund to maintain

this valley what is that I mean it sounds to me like a mutual fund so that's a security right and if you look at the definition of security and in the securities act it's you know there are a lot of broad is like debt instruments just plainly are securities so this is you know it could be the business of security and if it's a security how does it work as a currency because securities can only be traded on national security exchanges so anyhow it's just there's a lot of questions there that to be sorted out through well you heard it here folks yeah Libre is a security I'm not saying it is I'm saying I don't understand I

wanted to I'm saying tell me why why I'm wrong no that's really interesting I don't know the most interesting part of that is in how to use a security as money and and I think that's a question that lawmakers will struggle with for and Libre probably will start with it for a while though there was one point that I want to bring up which is at which which is interesting and you sort of touched on it and and that's how Calabria is going actually I'm getting old my transmitter licenses but but the Association is not and you tweeted in response to an interview on the Unchained podcast with Laura Shen where she interviewed Dante this Bart a who's the head of policy at Libre and she asked him ok well then then you know Libre if Libre is regulated and they

have to abide by bio FAC sanctions lists then there's a whole question of okay what if the US for instance wants to sanction Iran and you know Europe doesn't and his answer was well you know that's not up to the that's not up to the Association that's really up to the companies that are operating as money services businesses so for instance calibra and and presumably others that are you know operating wallets and and an applications at user applications but they have that the the Association isn't concerned with this sort of thing and you argued that he was probably wrong about that could you break that down for us sure and look I mean I hate to be

this guy but it's not so much I'm arguing against it I'm just asking questions as they say because I don't understand how it could be otherwise so look you've got to leave our association Lieber association is again the company that is issuing the coins and redeeming them under Vincent's guidance a company that issues and redeems digital currency is a money transmitter is an administrator of a centralized virtual currency and so would be subject to BSA Bank Secrecy Act regulation right so I I don't see how they escape that if you look at III think what Lehrer what's Lieber

sociation is saying is at the on-ramps in the off ramps to to Libra will be regulated and that's absolutely true this is the same thing as Bitcoin right so Bitcoin the network is not regulated but coinbase or BitFenix or whoever it may be these are regulated and then they do have to know their customers they do have to do especially activity reports and arrests and so libras right when they say that the honors in the off-ramps the exchanges that trade in Libra will be regulated but they sort of did the question is what about the Libra Association right and so with Facebook or sorry with with Bitcoin Oh FAQ a few

months ago added a few Bitcoin addresses to the sanctions list right just the addresses themselves and so this means that regulated parties have an obligation in fact not just regulated parties everybody in the world has an obligation everybody in the u.s. anyway all US persons have an obligation to not do business with those addresses and if they happen to do by mistake they need to report it immediately right so that's the kind of thing that coinbase and BitFenix and and the rest will block transactions with those addresses but there is no company there is no Bitcoin company that can do that at the network master level right with Libra there is

and so I don't see how they escape a court order where or just having to comply without back and block sanctioned addresses does that make sense yeah that really makes a lot of sense actually and because they have the ability right yes as the validators they could push a software update that blocks particular addresses that i've been told to and then then we have the obligation to yeah if they have the ability then they have the obligation with Bitcoin there's no ability right so that's why there's an obligation right and so very quickly again on this topic of Libra the before

moon defense and we're conscious of your time here so there's been a lot of pushback by by regulators and lawmakers in the US and in Europe particularly in the u.s. there was this this committee on financial services who wrote a letter to Mark Zuckerberg show Sanders and David Marcus asking them to stop all development of Libra what does this letter mean in your opinion I think this letter means that politicians members of Congress from both parties really really don't like Facebook and you know different parties have different reasons

to be upset with Facebook but that's just a political fact that members of Congress from both parties just you know do not trust Facebook I do not like Facebook and so when they are confronted with this announcement of we're gonna build a new global currency you know I I think that they are you know kind of scoring political points a little bit but I think also you know expressing their distrust of Facebook member of Congress can send you a letter and ask you to stop doing something that carries no weight obviously and I think it is actually a little bit on American to use

a phrase that without any legal process you'd be told to stop until Congress can think about what you're doing that's not the way things work here that said I think it kind of highlights the political reality that Facebook raises very interesting I think like I think the Libra experiment is gonna I teach all of us with so much about how these systems are going to work and I suspect may be the conclusion in the end might well be well that's why bitcoin is designed the way they think you might be right yeah so moving on to the defense and so so FinCEN recently the FinCEN

which is the Financial Crimes enforcement network they recently issued some guidance on how the Bank Secrecy Act applies to cryptocurrencies and its users so we like to unpack this guidance but before we unpack this guidance perhaps it's nice to know about like what is FinCEN what is its role and what does it regulate sure so in the US you have the Bank Secrecy Act the Bank Secrecy Act is a financial surveillance statute it requires financial institutions to know their customers to register with Vincent and to provide information such as suspicious activity reports to fin sun-soaked Vincent is the regulatory agency within Treasury that basically

manages the Bank Secrecy Act right and so it makes sure that all financial institutions are doing kyc reporting to them etc and so when you have cryptocurrency the question is what obligations and to and to which actors in the cryptocurrency space does the Bank Secrecy Act apply right who has what obligations and FinCEN in 2013 was the first federal agency to come out with any sort of official pronouncement on cryptocurrency on Bitcoin at the time what it said is basically the network itself has no obligations because

there's no buddy running it right but on ramps and off ramps exchangers of cryptocurrency have are basically our financial institutions their money transmitters and so therefore their financial institutions that are regulated it basically had three categories of people right it said there were users of cryptocurrency and users of cryptocurrency have no obligations there are exchangers of cryptocurrency and they have regulations and then it has a third category which does not apply to pick one but only applies at the time to things like eagled and Liberty Reserve calls administrators and administrators are those who administer a centralized virtual currency and put into circulation and redeemed from circulation digital currency and they're

also BSA regulated so they put this guidance on 2013 and it's a pretty I think fair settlement for who has what obligations in crypto but there were all kinds of questions that once you start applying that to what people are doing in a real world they're kind of open questions that remain right so is a Dex a money transmitter etc and what they did just a few months ago with her new guidance is nothing changed right from the from the existing guidance they just restated the guidance as it was in 2013 but answered a lot of the questions that have sort of been bubbling up since 2013

and the way they did that is by taking the original guidance and applying it to fact patterns from business models that have emerged and say okay well how does it apply to this how's that applied to this and we were very happy to see that the approach that they took matches what coin Center has been advocating for since 2013 so what if you guys been advocating and what are some of the major points in this guidance so the big headline takeaway is that if you are simply building software writing software and deploying software you are not regulated right it is if only if you're engaging in money transmission

that you are regulated and money transmission means receiving and sending and that making that super clear I think is the big takeaway there's still some ambiguities that kind of remain because so imagine that you build a Dex building and deploying the Dex may not be mighty transmission but then if you use it that might be money transmission so so that's interesting but look I think it's again a pretty fair settlement those of where we've got to thanks and I would encourage our listeners to to go to coin centers

article detailing the contents of this guidance will link to that in the show notes and a whole bunch of other content that Jerry and coin Center have written including Jerry's tweet storms about Libra which are always great to read Jerry thanks very much for joining us today hey my pleasure thanks for having me we release new episodes of epicentre every week click here to subscribe for hundreds of insightful interviews with some of the leading minds in blockchain and crypto you can also listen to the audio version of the podcast on iTunes Spotify stitcher and other podcast apps click here for a full list of places where you can listen thanks for watching at the center and we hope you'll join us

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