There’s no centralized ledger keeper in a digital currency,
but just because there’s no “Bank of Bitcoin” doesn’t mean that bitcoin holders
are always safe from fraud or theft. Some companies may help their users buy or
sell bitcoin and they may also secure the cryptographic keys to their digital
currency balances. Possession of sufficient cryptographic keys to spend someone
else’s funds is functionally similar to keeping custody of someone else’s
valuables, and if a business walks and quacks like a financial-custodial duck,
it will be regulated as such.
The tricky part for policymakers is how to describe that
“duck” in terms of law and regulation: How to differentiate between the set of
activities that are custodial (generating risks for consumers) and therefore
regulated, and the set of non-custodial activities (activities essential to the
technology but free from consumer risk) that should remain unregulated? If that
distinction is not clear, the law could be over- or under-inclusive. Some
consumers could be left unprotected and innovation could be chilled by
burdensome but unnecessary requirements.
Securities and Commodities Regulation
Digital currencies like bitcoin can be held as investments,
and distributed computing networks like Ethereum can be the platforms that help
people build digital investment vehicles. Securities and commodities law may
implicate the creation and trading of these cryptoassets. As with consumer
protection policy, the primary question in this space is not, “How do we
regulate these new things?” but instead, “Which technical activities fit into
which existing regulatory structures?”
Financial Surveillance (AML/KYC)
The Bank Secrecy Act and the Patriot Act mandate that money
services businesses record and report certain data about their users to law
enforcement. Dealing with bitcoins instead of dollars doesn’t save a company or
its customers from the need to comply with these surveillance requirements. But
what about use cases, such as potential Internet of Things applications, which
have nothing to do with transferring value?
There are real world examples of systems that run on
this technology that do so by regularly making miniscule transactions worth
only the smallest fraction of a cent. A miscalibrated regulatory approach could
encompass those as well, unintentionally requiring a tiny startup to develop
bank-level compliance when dealing with pennies’ worth of funds.
Privacy and Identity
Financial privacy is an umbrella term for both data security
We can think of security as the ability to hide information
from all comers and privacy as the ability to shape how we selectively reveal
information and how it is used after revelation. Poor security and poor privacy
have costs: identity theft, merchant compliance costs, chilling effects on
speech and cloaking costs from user self-help. Digital currencies, such as
bitcoin, can be used to improve security and grant users more granular control
over when and how they choose to identify themselves.
Perhaps the most exciting aspect of digital currencies and
distributed computing networks is that they are entirely open for
experimentation. There’s no patent or copyright to license, no university or
corporation from which to seek a job, no exclusive membership fee to pay.
Anyone with a computer and an internet connection can develop and share their
own currency, financial contracts and strategies and vision of the future.
These technologies are platforms, not products. They are software standards and
shared networks whose purpose is to enable group computing. Like the PC and the
internet, they are not useful in isolation, but rather as a means for consumers
to access applications and a means for developers to design and share new
applications, just as word processing applications make the PC platform useful
and websites make the internet useful.
Open blockchains have the potential to cut across all
manners of industry and regulatory regimes. At the moment it is their financial
applications that are generating the most interest and therefore where most the
regulatory scrutiny is directed. Coin Center works to ensure that those regulators understand this technology and
develop policies that meet their objectives without inadvertently quashing uses
in other verticals. And as those uses develop, they will no doubt bring about
regulatory interest of their own.
Neeraj Agrawal is the director of communications at Coin
Center, the leading non≠profit research and advocacy center focused on the
public policy issues facing cryptocurrency and decentralized computing
technologies like Bitcoin and Ethereum. Agrawal leads the organization's
marketing and public relations programs. Previously, he worked on global
internet infrastructure and governance issues for a major technology company.
He is a graduate of Syracuse University and is currently based
in Washington, D.C.