Episode 6 — A conversation with Jill Richmond about the U.S. government’s piecemeal efforts to regulate cryptocurrency and how states are jumping in to fill the holes created by the patchwork of federal regulatory policy.


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Host:
Chitra Ragavan
Chief Strategy Officer
Gem

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The crazy ups and downs of the crypto market over the past year and a half have been punctuated with a drumroll of announcements from the an alphabet soup of federal agencies about their differing definitions of cryptocurrencies, particularly as they relate to the crowdfunding mechanism known as Initial Coin Offerings (ICOs).

The Security and Exchange Commission or SEC has declared that tokens raised through these so-called ICOs (except Bitcoin and Ethereum) constitute “securities” that have to be regulated by said agency or else could be deemed “illegal.” The Commodities Futures Trading Commission (CFTC) disagrees (and even got one federal judge’s support) on its assertion that cryptocurrencies constitute “commodities,” and should be regulated as such. That doesn’t jive with the Internal Revenue Service (IRS)’s determination that cryptocurrencies are in fact, “property” and are taxed accordingly. But the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has begged to differ with all of the above, saying crypto is essentially, “money,” and that token issuers need to follow federal money transfer rules.

So it came as little surprise that the crypto industry signaled its growing lack of faith in the federal bureaucracy and its seeming inability to wrap its head around the new economy. In September, leaders from the industry, Wall Street, and various venture capital firms met with lawmakers in the nation’s Capital and demanded speedy Congressional involvement in resolving this regulatory madness. Their demand was simple and unmistakable: Give us clarity or else.

These industry representatives warned Congress that the lack of consistent guidelines would create a chilling effect and force many companies to head overseas, taking with them billions of dollars and future innovation potential.“The competition around the world is real. But there’s still time and opportunity for the U.S. to be a leader here,” said Joyce Lai, a lawyer at the blockchain startup Consensys.

So it’s not surprising that state governments are jumping in to fill this vacuum of leadership and are jockeying with each other to open their doors to crypto firms so they can broaden their faltering tax base. They’re doing it through a variety of actions with somewhat mixed results and the prospects of creating even more confusion.

A July 2018 report by the Lathrop Gage law firm describes the increase in state activity as “both a blessing and a curse.” Titled, Blockchain and Cryptocurrency: State Law Roundup, the report says that the industry welcomes these state-driven initiatives, but, adds that “. . . the resulting patchwork of often conflicting definitions laws and regulations creates a minefield for industry participants to maneuver, significantly increasing compliance costs.”

Another report, by the Carlton Fields law firm, pointed out that there’s a failure of uniformity among states with respect to the most basic questions on cryptocurrency, including the question that’s uppermost on crypto firms minds: Are they bound by existing state money transmitter rules for the sale or exchange of cryptocurrencies? There is “a complete lack of consensus as to whether they do or not,” the authors said, using the blockchain term “consensus,” tongue in cheek.

The “uncertainty is made all the more complicated by potentially contradictory guidance from the Federal Government,” the report says, referring to the varying opinions by the SEC, CFTC, and FinCEN.

The report says that the few states that have tried to pass laws have seen it backfire (notably, New York’s “much-maligned BitLicense scheme.”)

The report adds that that these flawed regulations have “resulted in an exodus of blockchain and virtual currency businesses from states . . .”

I sat down with Jill Richmond recently to talk about this “damned if you do, damned if you don’t,” conundrum confronting states even as they push through a flurry of legislation aimed at drawing crypto companies to their doorstep. Jill is Co-Founder of the Digital Asset Trade Association, or DATA, the industry group working with states to pass consistent legislation and to remove the big barriers to trade for crypto businesses all across the United States.

One of the biggest problems is the shortage of banks that will support crypto commerce. “There are banks that are more or less unhelpful to companies that are operating in the US,” says Jill, “And companies are finding themselves having to find a jurisdiction and bank outside of the U.S.”

Now, Wyoming, which wants to become the so-called “Delaware of the West,” in its friendliness towards crypto firms, is moving numerous pieces of legislation, including one to create a “Bitcoin-friendly,” crypto bank. Such a bank would be able to manage both traditional currency and digital assets for crypto firms, albeit with strict limitations.

We talked about the impact of the 2018 midterm election wins of three so-called crypto-friendly governors including in Colorado, California, and Wyoming, and the re-election of two others, in Rhode Island and Texas in drawing new crypto business to these states.

And we explored how the principle of federalism is driving conservative political groups (such as the American Legislative Exchange Council (ALEC) to reduce federal intervention in crypto regulation and give more power to the states. Case in point: In March, in direct contradiction to the SEC’s definition of cryptocurrencies, Wyoming passed House Bill 70 into law and became, according to an article in Forbes, “the first state in the world to define cryptocurrencies as an entirely new asset class.”

Jill and I discussed how laws such as this so-called “Utility Token Bill,” are walking a fine line between politics and substance and what impact, if any, they will in 2019 have on virtual currencies businesses that are trying to find a home in this new ecosystem.

“I think this is a good year to see some either groundbreaking movement,” says Jill, “Or some clarity.”

This is a great primer on the politics of crypto so be sure to tune in!

And don’t forget to join us next week, to learn more about how the crypto advertising ban by Google, Facebook, Twitter, and other social media giants, is affecting the industry, especially in this down market. My guest is Kelley Weaver, Founder and CEO of Melrose PR and host of the popular crypto podcast, “Crypto Token Talk.”

Topics Covered

  • Patchwork of federal regulations
  • Confusion and lack of clarity
  • Complex woolly regulatory environment
  • States trying to create clarity for companies
  • Many states also creating patchwork of laws
  • Difficulties of crypto companies to get banked
  • Interest from banks to move to foreign jurisdictions
  • Confusion over definition of cryptocurrency and ICOs
  • Role of federalism in crypto politics
  • Conservative groups working to give more power to states
  • Digital Asset Trade Association (DATA) working to create consistent state legislation
  • States Report Card
  • How DATA was created and got involved in legislative activity
  • States doing the most on regulation
  • Gubernatorial races and impact on industry
  • Wyoming becoming Delaware of crypto
  • Rise of crypto banks
  • Getting Congress to become more engaged
  • Closing thoughts and key takeaways

About Your Host, Chitra Ragavan

A little background about me — I’m the Chief Strategy Officer at Gem, a Los Angeles-based crypto portfolio startup. Prior to Gem, I was Senior Counselor to the CEO of Palantir Technologies. Before entering the software startup world as advisor to CEOs, I was a long-time journalist at WTTW/Public Television in Chicago, National Public Radio (NPR) and U.S. News & World Report Magazine (U.S. News).

My goal is to provide independent and thoughtful analysis of the events and news shaping the industry.

By way of full disclosure, I am a crypto investor. If we ever mention a specific cryptocurrency in the context of a discussion, I will fully disclose my investments, if any, in that currency and expect the same from my guests. I’ll avoid any and all conflicts of interest in the course of these discussions.

You can learn more about me on LinkedIn, my website, or my Instagram.

Enjoy your crypto journey, unicorns!

Chitra Ragavan