New regulations could reshape the crypto landscape, balancing innovation with necessary oversight.
Key takeaways
- The current state of crypto is compared to unregulated online sports betting, highlighting a disconnect between its intended purpose and reality.
- Coin Center is dedicated to protecting the development of free and open-source software in the crypto space.
- Common sense regulation is needed for trusted entities in crypto, but not for software development.
- AI development should utilize decentralized systems for better ownership and reward mechanisms.
- Legal standards for crypto and AI code distribution will likely align under the First Amendment.
- The state money transmission licensing regime is unsuitable for crypto businesses due to differing risk profiles.
- Equal treatment is advocated for banks and crypto companies regarding regulation.
- Software providing neutral infrastructure should not face the same licensing requirements as traditional financial entities.
- Forcing decentralized systems to register and report user information is problematic.
- Decentralized systems reduce information asymmetries present in traditional brokerage contexts.
- The Blockchain Regulatory Certainty Act (BRCA) clarifies the jurisdiction of money transmission in the crypto space.
- The BRCA aims to provide statutory clarity to FinCEN guidance, preventing its disregard by prosecutors.
- The prosecution of Tornado Cash lacked specificity and should have reflected software changes over time.
- The BRCA provides clarity on non-controlling blockchain service providers, crucial for developers.
- Non-decentralized rulemaking is essential for determining obligations under existing securities laws.
Guest intro
Peter Van Valkenburgh serves as Director of Research at Coin Center, a non-profit research and advocacy organization focused on public policy issues for crypto and blockchain technologies. He previously served as a Google Policy Fellow at TechFreedom, drafting policy and litigation briefs on technology issues. At Coin Center since 2014, he has testified before Congress and briefed US and EU legislators on crypto regulation, including DeFi protocols and non-custodial development.
The state of crypto and its regulatory challenges
- “The current state of crypto is akin to unregulated online sports betting, which is a shame for the industry.” – Peter Van Valkenburgh
- Coin Center focuses on protecting the development of free and open-source software in the crypto space.
- “We are a civil liberties firm focused on guaranteeing the people who want to develop the free and open-source software are protected from undue prosecution or regulatory treatment.” – Peter Van Valkenburgh
- There should be common sense regulation for trusted entities in crypto, but not for software development.
- “We do believe in common sense regulation of trusted persons in the space… what we are against is attempts to license and permission software development or the operation of truly neutral infrastructure.” – Peter Van Valkenburgh
- The state money transmission licensing regime is not suitable for crypto businesses due to differing risk profiles.
- “It’s odd that a Coinbase would be regulated exactly the same as a MoneyGram or a Western Union right because their risk profiles are different, consumer protection issues are different…” – Peter Van Valkenburgh
- There should be equal treatment between banks and crypto companies regarding regulation.
AI and decentralized systems
- AI development should leverage decentralized systems for better ownership and reward mechanisms.
- “I would be more comfortable if the way AI was built out over the next few years was as much as possible with decentralized systems for both like who owns the compute resources and how do we reward training data and things like that.” – Peter Van Valkenburgh
- Legal standards for crypto and AI code distribution will likely be similar under the First Amendment.
- “The exact same precedence that will be set in the world of crypto… are gonna be identical as far as legal standards that are developed under the first amendment.” – Peter Van Valkenburgh
- Decentralized systems reduce information asymmetries that exist in traditional brokerage contexts.
- “The information asymmetries that we would normally worry about in a broker registration context… start to fall away when we’re talking about truly decentralized systems.” – Peter Van Valkenburgh
- Forcing decentralized systems to register and report user information is fundamentally problematic.
- “The thought that we would force you to learn all the people who bought and read your book and report them to the government… starts to look very Orwellian and it’s problematic.” – Peter Van Valkenburgh
Blockchain Regulatory Certainty Act (BRCA) and its implications
- The BRCA aims to clarify the jurisdiction of money transmission in the crypto space.
- “The first provision to focus on for this question is the blockchain regulatory certainty act… it was intended to create a safe harbor from unlicensed money transmission prosecutions.” – Peter Van Valkenburgh
- The BRCA provides statutory clarity to FinCEN guidance to prevent prosecutors from ignoring it.
- “Tom Emmer’s bill, the Blockchain Regulatory Certainty Act, simply took that FinCEN guidance and codified it and said we’re gonna make this a statutory rule so that it can’t be ignored because guidance is guidance…” – Peter Van Valkenburgh
- The BRCA provides clarity on what constitutes non-controlling blockchain service providers, which is crucial for developers.
- “I think the BRCA’s definition of noncontrolling blockchain service or service provider or software developer is much clearer than anything we’ve had in the past except maybe that 2019 FinCEN guidance.” – Peter Van Valkenburgh
- The BRCA may exempt certain blockchain activities from money transmission liability if there is no ongoing control of customer funds.
Legal challenges and developer liability
- The prosecution of Tornado Cash lacked specificity and should have reflected the changes in the software over time.
- “The bigger problem of that charging of Tornado Cash was the fact that they weren’t specific enough with the facts because Tornado Cash obviously changed over time and they should have charged it accordingly.” – Peter Van Valkenburgh
- Developers of noncustodial software could face criminal liability due to broad interpretations of money laundering charges.
- “I wanted to focus on the conspiracy to money launder charge because the reason I think it’s important is because like you know even if we totally got rid of 1960 wouldn’t developers still be exposed to criminal liability under in my view the very broad and incorrect way that the prosecutors have been applying the conspiracy to money launderer charge.” – Peter Van Valkenburgh
- The DOJ’s interpretation of conspiracy law in relation to software developers is highly problematic.
- “So to me that was always really highly problematic a highly problematic reading of the federal conspiracy statutes… I just I’ve never seen how we have all of those elements in these cases.” – Peter Van Valkenburgh
- Software developers should not be held responsible for how their tools are used by others.
- “You shouldn’t be found to be guilty of money transmission and unlicensed money transmission simply because other people used your software to transfer money.” – Peter Van Valkenburgh
Implications of the new bill and financial oversight
- The new bill will create categories of federally regulated financial institutions with BSA AML obligations.
- “This bill will create new categories of federally regulated financial institution that will have BSA AML obligations… it’s actually a strongly regulatory bill that will create a lot of new data and data collection for law enforcement.” – Peter Van Valkenburgh
- The Blockchain Regulatory Certainty Act aims to focus law enforcement resources on actual criminals rather than software developers.
- “The bill in the senate right now that passed the house is the brca rightly forecloses the wild goose chase of going after software developers so hopefully doj scarce resources will be spent correctly on policing actual bad behavior that’s hurting victims.” – Peter Van Valkenburgh
- The DOJ needs better funding and resources to effectively prosecute serious financial crimes.
- “We do bring up the importance of funding fincen better of making sure that we have the resources to do these hard prosecutions to do these hard rule makings.” – Peter Van Valkenburgh
- Law enforcement needs to prioritize resources effectively to combat serious crimes rather than pursuing software developers.
Crypto’s reputation and future directions
- Crypto has a terrible reputation and is often viewed as a giant online casino.
- “We should just be honest that crypto has a terrible reputation right now because it’s mostly just like a giant online casino which is unfortunate…” – Peter Van Valkenburgh
- Crypto needs to replace the existing financial system to avoid being seen as just online sports betting.
- “The fundamental level it needs to be it needs to replace the existing financial system or we’re always gonna be slaves to… just online sports betting without a regulator that’s fucking stupid…” – Peter Van Valkenburgh
- The crypto industry should acknowledge its shortcomings and work towards building a better reputation.
- “We should talk about how people don’t like it and find a way to like build it better so that it’s something worthy of being liked again…” – Peter Van Valkenburgh
