The much anticipated regulatory panel featuring former U.S. Mint Director Edmund Moy took place this afternoon at the Cryptolina Bitcoin Conference in Raleigh, NC. Featured here is a transcript of the more interesting discussion topics, which has been edited for brevity and clarity. The event included a 30 minute panel discussion and a 20 minute question and answer session.
The panel was moderated by Todd Erickson, who is on the Regulatory Affairs Committee of the Bitcoin Foundation.
The regulatory panel included:
Carol Van Cleef
Moy: I’m Ed Moy. I served as the 38th Director of the United States Mint which made our country’s circulating coins as well as collections coins and precious metal bullion. I’m one of the few people here who has made currencies before and I have hands on experience with regulations.
Cleef: There are rumors that someone in my family made currency. I am an attorney from D.C., have a long history in the banking industry and have worked with money transmitters and money servers for 15 to 17 years, and have been in the world of digital currencies for 6 years now.
Beal: I am a corporate attorney in Los Angeles, but I have been working in the Bitcoin stage for about the last year and half, working with exchanges, wholesalers and consumers products in the Bitcoin space.
Aylor: I am an attorney out of Charleston, SC, and got started in Bitcoin when I represented a client – the first person in the U.S. to ever have his bitcoins seized by the DEA – Ross Ulbricht. Since then I’ve been involved with consulting.
Gibbons: I’m a CPA form Charleston, S.C. who got into Bitcoin space the past year and work close with small businesses and people on taxes, IRS, and Bitcoin related issues.
Moderator: The first thing I want to do, I’m a senior vice president at a bank so I have intimate knowledge of these regulations and the first questions bankers ask me is: we don’t need more currency. Well the question really is, what problem did Bitcoin solve, what is it designed to do? My definition is that it solved the problem of publicly transferring an asset without the trust of a third party.
Q: What is the right amount of regulation?
Moy: Bitcoin challenges government monopolies. Governments are not going to give up that monopoly so from that level I think it will be very difficult to not have any regulations. There is currently no law that regulates Bitcoin so that ends up allowing each regulatory agency to take that law that allows them to regulate and see if they can stretch it to regulate. And with them not being able to understand it fully, you’re going to get a hodgepodge of regulations. Particulary when agencies don’t coordinate with each other. And you are going to get conflicts. Take a look at what the IRS is doing. They are declaring that Bitcoin is a piece of property subject to capital gains and losses. Right now, without central federal law defining this you are going to get a hodgepodge.
Cleef: Part of the confusion is that you have Bitcoin itself and the question is what is Bitcoin? Is it a currency or protocol, and when you start to sort out ways it is being used and how it functions, you have different players and regulators coming in, and so it will look like a hodgepodge in certain ways, but we have many things going on and sorting out those things is one of the tasks that’s really at hand today. We have blowback in respect to the NY BitLicense situation, as they tried to be inclusive to all the things going on with a little too broad of a brush.
Q: What do you think bitcoin is?
Beal: It means different things in different contexts and it’s hard to tie it down because it changes so quickly, and the speed at which it changes is only going to increase as you have more tech people building on top of it. We are going to use it in all sorts of ways.
Q: Isn’t it important to classify it?
Gibbons: The worst thing you can do is regulate something before you fully understand it and I think the IRS missed the boat there and just issued some regulations. And if you look at the tax code, it’s really a socially driven code, and it’s set up to make society do certain things. Not only do their regulations make Bitcoin a tax nightmare, but it makes it unfavorable to transact in Bitcoin.
Mod: What would you have classified it as?
Gibbons: I think treating it as a currency is fine.
Q: It was really concerning that the CFPB identified the cost as being more expensive than when using a credit card, can you speak to that a little bit?
Cleef: The CFPB advisory that came out was in response to the GAO report, and that was commissioned by the senate committee on homeland security. The GAO was tasked with going out and evaluating what was happening with the federal government and what kind of regulation efforts were under way with respect to virtual currencies. What you would have expected would have been a critique on the way the Secret Service, FBI and DEA are working together, but at the end of the day the only recommendation they had was that that the CFPB needed to get in the game, and so they jumped in the game.
I thought it was interesting that it said it was virtual currencies but they only looked at crypto currencies and it was not too dissimilar from other advisories that have been put out.
And the CFPB were not very favorable on the cost when comparing it to using credit cards.
It’s the first time I’ve seen an analysis of that type and I’d like to see a more definitive analysis. The conclusion was that by the time you figure out how much it costs you to do an exchange, that it’s more costly to the consumer than using a credit card right now.
The federal reserve has also issued a couple advisory, on the federal reserve side, at the very end of that document, they said that a central bank might want to consider using this technology for a domestic payment system. Whether they could they use it as a payment method issued by government.
Moy: As most of the community knows, Bitcoin is many things, not just one thing. You can’t put it into one existing category that everyone can agree to right now, so as a result when you take a look at all the various things you can do, the government is going to be asking how can they co-opt this element or that element, and when they co-opt it, they might not do it as well or might have some problems. They are gonna see some advantages here, and see how that can make their job a lot easier. If they could somehow use Bitcoin block chain protocol to process checks and it ends up being cheaper, then that is a good government thing and they will pursue it.
A penny today costs about three cents to make and the Federal Reserve buys it from us for one cent, so any penny that goes into circulation today, the taxpayers are subsidizing it by two cents. If you want to create or digitize the U.S. dollar and issue it, the cost of doing it would be substantially less than the physical manufacture right now and that’s a good thing. As this begins to expand, the government is going to ask how they can co-opt parts of it to make their jobs easier and to benefit the taxpayers. I think its inevitable that we won’t use physical money due to cost and how easy digital is.
Cleef: We already have digitized money. The issue is: are the payment systems quick enough. And the Federal Reserve has been looking at how to revamp them. The Fed is still trying to do same day settlement, much less instant settlements, and they are still a couple steps away from getting to same day settlement. And they should take what we’re learning in the crypto world and give us alternative methods to do this quickly. There are currently initiatives in the government going on to look at how to do this quickly.
Q: Various states are trying to determine whether cryptos should be considered money under money services act. And they are saying that the owner of a unit of crypto has a right or guaranteed ability to convert that unity into sovereign currency, therefore the only way to convert is to find a willing buyer. So crypto cannot be considered money or monetary value under the monetary service act.
What do you think about states who say it’s not money and does not have monetary value?
Gibbons: I think its stifling what Bitcoin should be used for. I think it’s creating more layers of regulation and it’s going to be treated different in certain states like Texas and Kansas than it’s going to be treated somewhere else.
Aylor: It’s interesting that they go that far in one direction, and it has a lot to do with their real knowledge. And particularly, when you see other states following and copycatting. you’re just going to cause more confusion. And as we see more regulations move forward, you’ll start to see a lot of issues on the tax side of things at the state and federal level in terms of reporting standpoint. When you have things like Texas or Kansas, it’s going to be different. You’re going to see different loopholes that are created. It could be that a lot of states like to complain about the federal government when it’s convenient, then at other times they like to fall back on it. But whether it’s the business or tax side, there are only so many case the federal government will get involved. But at some point the states are going to have to do something more than they are doing.
Q: What do you think about when they say this is not money transmission?
Moy: I like dealing with states that narrow definition of money. A lot of other states have open ended definition of monetary value. And I know when a state has a narrow definition of money that my client activity doesn’t require them to get a license and so those states like Texas and Kansas have been outspoken about that. So it’s important for wholesale sellers, or ATMs. I like it when states come out and at least clarify that because clarity is something we don’t have a lot of. It might be short sighted but its clarity in the short term.
Cleef: We have 50 states and 50 different banking and security departments and they are staffed differently and many are understaffed, and the case of Texas, it was written by a lawyer who has a tech background and he has been getting himself educated on this. We don’t have those kinds of resources in many of the other states, so there is an educational issue here. So people need to work with these states and get them to understand what they are dealing with.
There is a steep learning curve and that’s what were dealing with. People don’t feel it has reached that critical mass.
Q: If somebody stole my bitcoins, is stealing bitcoins a crime?
Gibbons: Stealing anything is a crime.
Q: Somebody hacked my computer and stole my coins and so if they take that digital property, how would that be prosecuted? Is it a felony?
Aylor: Yes absolutely. Instead of Bitcoin, think about SS number or identification. You’re talking about their information thats being stolen and that’s clearly a crime. Whatever you want to define Bitcoin is, if it’s being stolen, just because it’s recognized differently in different states doesn’t mean that if it is stolen that it should be any different from any other thing you own. The problem is going to be, who is going to be investigating that and how will that case be brought forward? It think it will be hard to prosecute those that come through because you wont know who was responsible.
Q: Ebay: if I buy a flash drive and it has bitcoins on it. Is that money transmission, is that a sale of goods? What would you classify that as if I by that flash drive for $1000?
Cleef: The eBay example may not be the best example because eBay owns PayPal and the extent you have money transmission involved it would occur over PayPal in a regulated environment.
Whether or not that is considered money transmission depends on the state. And the question I’ll be asking is who is actually involved in the transaction and it’s a much more complicated issue. If you’re selling the drive and you’re engaged in the business of selling drives with bitcoins on them, and the state recognizes the sale of bitcoin in some way to be a transaction involving the transfer of value, then it may be you, the person who is selling the drive, who is engaged in money transmission instead of eBay itself.
Mod: From and accounting perspective, if I just sold, not every day but just wanted to sell one BTC for $500, I would have to account for that as a sale of property.
Cleef: You do need to be concerned as to whether you are involved in the transfer of value and if you are adhering to the licensing laws and if you know who’s buying on the other side. The DEA approached two gentleman on locabitcoins.com and said we want to buy bitcoin, and approached them representing illegal activity saying they want to buy bitcoin. So you need to be aware of those things.
Q: We don’t know who is doing transactions and storing our data especially with large pools. The largest driver of risk are the miners. Do you think regulators will require identification of miners?
Cleef: I don’t think there has been a lot of review from a regulatory perceptive into that verification process. The anonymity issue is definitely something that has being considered, but is coming from the law enforcement community. How can they trace criminal activity and is the money function obfuscating that criminal activity? But we’re not very far along in the regulatory process in the way we look at the miner function overall.
Beal: Mining is becoming more centralized particularly with Bitcoin. It’s hard to be a hobbyist. And as those centralized bodies get more powerful and are responsible for processing those transactions, I think you will lose anonymity simply because they are tasked with a huge responsibility with billions of dollars going through that pool very day. I assume that that one day it will be a large enterprise running those centralized pools for profit.
Cleef: As you move towards more concentrated mining and centralization what’s going to happen is that you are going to move towards a central administrative model. If you remember when FinCEN came out, they had centralized on one side and decentralized on the other, so it’s going to move whatever cryptos into a more centralized function so it will put the miners into a position where they may be subject to money transmitters license and regulation, and have to take on a higher standard or responsibility in respect to regulations.
Mod: So if miners are the only ones who issue the currency, if you mine in the U.S., you might be regulated but what happens if you mine in South America?
Beal: If they did something in the U.S., if you are going to transact business here, they would be under the same standards.
Audience member: But what’s the going to be the argument from a miners stand point of being anonymous? What argument would they have if the government was going to begin asking for that requirement? “Look, if you’re going to mine you have to have some responsibility.”
Cleef: As you go from 1000 miners to 3 miners, to your point on the issuance, if you’re still generating currency through mining, then you do have a question whether that is proof that you are becoming issuers of money. When you’re talking about the verification process then you have questions, like if you look at it from a criminal analysis is are you facilitating criminal activity. So if you’re performing those mining functions to allow those transactions to happen, and you are down to one or two or three miners, does that mean you are helping to facilitate criminal actions? It will come down to how many players are at the table and what level of activity do they have.
Q: It seems like new regulatory opinions are coming out frequently, so, what should the community be doing. Are there any best practices We are def living in disruptive times. What should we expect?
Moy: I think there is a multi-pronged approach and i’m not saying its going to be easy due to the decentralized nature of the bitcoin ecosystem. But number one is: education. If you want better regulations, the people who write them need to be more knowledgeable and that is along process. You need to educate the members of congress who are on the key committees that will write the laws, you need to educate their staffs because staff will most likely survive longer as they go from committee to committee. And you need to educate state regulators and legislators, as well as regulatory agencies statewide. This is a multi-year process and you’re looking at a fast paced industry.
Number two is that to the degree that you can do this, the more you self-regulate and the more you provide transparency, and the more positive model you give to regulators to follow so that when they do put out the regulations they are going to make a lot more sense.
So for me in the gold industry, one way you determine a mutually agreeing price of the gold is through the London fix, and that basically came out because of the three biggest banks who had most of the gold trade would sit down and negotiate with each other until they had a price. That is the market coming up with a solution that today regulators don’t really come up with. And a lot of the fix stayed in place for almost a hundred years before the marketplace began forcing a different solution.
Educate regulators and provide self regulatory model to give guidance.