As blockchains and cryptocurrencies evolve, there are times when the technology outpaces the law. That’s when Coin Center steps in. The non-profit, which represents the technology, not the industry, and aims for regulators to keep a mostly hands-off attitude, has already helped shape questions around which types of Bitcoin wallet providers are financial institutions and whether new coins being offered represent securities. And answering these questions has drawn it back into previous cases involving everything from Florida orange groves to Manhattan co-ops to golf club memberships.

Show Notes


Welcome to Forbes podcasts.

Laura Shin:
Hi everyone. Welcome to Unchained, a Forbes podcast produced by Fractal Recording. I’m your host, Laura Shin, a Forbes contributor covering blockchain, cryptocurrencies and Fin-tech. Thanks for tuning in. If you’ve been listening to the show and like what you’ve been hearing, please review, rate, and subscribe to Unchained on Itunes or wherever you get your podcasts. It helps spread the word about the show. For today’s episode, I’m speaking with Jerry Brito and Peter Van Valkenburgh, executive director and the research director respectively of Coin Center, a non-profit research and advocacy center focused on the public policy issues facing blockchain and cryptocurrencies. Hi Jerry and Peter, welcome to the show.Jerry Brito: 00:48
Thanks for having us

Laura Shin: 00:51
Jerry, let’s start with you. How did you learn about Bitcoin and blockchain and come to found Coin Center?

Jerry Brito: 00:55
So I first heard about Bitcoin in February 2011 on a security podcast that I listened to and that sort of hit all the right buttons for me. My whole career I’d spent in technology and policy and I sort of fell down a rabbit hole and I was very lucky to be in the right place in the right time. Somebody working in technology policy in Washington DC at a time where very few people were paying attention to this. And so I began to write about it, began to ask people around town, DC, on the hill, the federal agencies, “Are you guys thinking about this?” And people really weren’t and some who sort of had closer jurisdiction maybe heard of it and knew they should be paying attention, but there weren’t. And so again, I was at the right place at the right time and began to write about it. I was at the Mercatus Center at George Mason University at the time, and eventually developed something called “Bitcoin, a primer for policy makers” which was an introduction to the technology, how it works, why it’s important and what are the regulatory implications. And in 2013, helped the Senate Homeland Security Committee, develop the first hearings on Bitcoin, testified at those hearings. And so again, just really, was very lucky to be at the right place at the right time to sort of be the DC guy on this technology. And around the same time there was an increasing interest from government about this technology. Policy makers are beginning to see that, you know, this intersected with consumer protection, with anti-money laundering rules, with tax rules, with commodities and securities rules. And so they were going to be paying attention to this and they want to ask questions about it, but there was nobody… they couldn’t pick up the phone and call Bitcoin. And so, it became apparent that there needed to be a serious, and credible resource center for not the industry, because we don’t represent the industry, but for the technology. And so, myself and some other folks who were interested in seeing that happen founded Coin Center about two years ago.

Laura Shin: 02:55
That’s a really interesting distinction you make between the technology and industry. What do you mean by that?

Jerry Brito: 03:00
Coin Center as you mentioned is an independent nonprofit. And what that means is that we’re not a trade association, so we are more like the Electronic Frontier Foundation, more like the EFF, which represents the rights of users to use the Internet for the Internet to remain open and we’re less likely, probably not like it all the Internet Association which represents the interests of Google and Facebook. So while the Internet Association and the EFF have lots in common, a lot of the same interests at stake. One represents industry and you have corporate members that direct the organization. The other is independent nonprofit. It sets its own agenda and is really looking out for the technology to remain free and open. And that’s what we are. We exist, to make sure that open blockchain networks remain free and open and that users have a right to use them. And that, to the extent there will be regulation, that regulation is rational and that it is as slight touch as possible.

Laura Shin: 03:00
And how do you do that? What does Coin Center do?

Jerry Brito: 04:00
So, our mission is to make sure that open blockchain networks get the same regulatory treatment that the early internet. So the early Internet bloomed and flourish into what we have today in large part because the government policy was one of being completely hands off and to the extent that is necessary to regulate for there to be light touch regulation. That was the explicit policy of the United States towards the Internet. And that worked out very well. And so we want to replicate that for open blockchain networks. And we do that really in three ways. We do education, we do public policy research and we do advocacy.

Jerry Brito: 04:36
So the education piece is where we spend probably most of our time, especially over the past few years and that is simply making sure that regulators, members of Congress, folks in state legislatures, all different levels, have the information that they need about technology. How does it work? Just basically, clear up any misunderstandings about how technology operates and how it works and we answer those questions, what regulations might be effected. And so we do that through backgrounders that we publish, that are sort of short, just the facts, primers on discrete topics of the technology. These are on our website. We do that through one to many briefings, one on one briefing meetings. As we have these conversations, eventually we get to questions where we don’t have the answers to those questions and that’s because they’re typically questions of law and policy where technology has outpaced law. Where the technology now allows for things the law never contemplated. And so there’s a gray area, there is a gap and regulators are going to be looking to fill those gaps.

Jerry Brito: 05:43
And so that’s where the second thing that we do comes in and that’s policy research and really what Peter leads at Coin Center. So there we engage in the policy thinking, and develop sort of the policy positions of how should you fill those gaps that regulators will fill. But we want to help them by developing a thinking that says, here’s the gap, here’s the issue. Here are different alternative ways that you might fill that gap. And here’s our preferred route because it’s a route that allows you the regulator to meet your end, but in doing so, you don’t do any inadvertent harm and you do it in the most light touch possible way that preserves the freedom to innovate for innovators.

Jerry Brito: 06:28
And the last thing we do is advocacy, which means lobbying. So we lobby on behalf of those preferred policy outcomes. We will testify at hearings. Either in Congress or the legislatures. We will file regulatory comments, sort of advocating for this preferred policy solutions.

Laura Shin: 06:46
And, just out of curiosity, where do you get your funding?

Jerry Brito: 06:50
So, our funding, about half of our funding, so our budget is about a million dollars a year. We are a staff of five. Three of us are attorneys. About half of our funding comes from individuals. Just individual persons who care very much about this technology. The other half comes from investors and companies in the space. And among those, we’re very happy to have some of the top people in space, including Andreessen Horowitz and Union Square Ventures and Digital Currency Group as well as Coinbase, BitPay, BitGo, Xapo, Circle, I hesitate to even begin to list them because I’m afraid I’m gonna leave some out, but anybody you can think of, but also some of the newer players, including Zcash, the Ethereum Foundation, Blockstack, basically from across the landscape.

Laura Shin: 07:49
Peter, how did you learn about Bitcoin and how did you end up at Coin Center?

Peter Van Valkenburgh: 07:55
I think it was my first year of law school at NYU and a friend of mine was chatting with me on G-chat. The two us us were the dorks in high school and he told me about Bitcoin in 2011, this new electronic currency. And I got real close to setting up a mining node actually. And inevitably, I think it was probably exam season for first years at law school and if you know what that’s like, that’s miserable. So I kind of lost interest unfortunately in this mining node, which was one of my bigger regrets going forward. I’ve always been sort of a self-loathing liberal arts grad who always partially wished that he dropped out and just learned to code. But anyway, focused on technology policy law because of probably that regret. And also because the space is really fascinating throughout law school, mostly looking at digital copyright law and digital privacy.

Peter Van Valkenburgh: 08:49
My sort of hero legislation is the Digital Millennium Copyright Act, not the anti circumvention provisions but specifically the safe harbor for notice and take down, which makes copyright a little less onerous for intermediaries like Google and really allow those companies to flourish and make the Internet as useful as it became. And I always think that without those laws we would have seen probably the migration of a lot of companies away from the US. And Silicon Valley would probably not be the thing that we know it all today as this hub for innovation. So I thought I’d be focusing on copyright and like I said, digital privacy wasn’t long after that, the Snowden revelations came out after I graduated from NYU Law and I worked at a think tank in DC, under a Google Policy Fellowship Grant. Which is a fantastic program but, again still working on copyright issues and privacy and keeping Bitcoin in the back of my head, something that I would tinker with and play with and think about and regret not mining those years earlier. Until Jerry, we share a lot of mutual friends from his time at Mercatus and George Mason. Jerry came to me and said, “Hey Peter, do you want to be the director of research at a Bitcoin think tank?” And I think I laughed and I said, “That’s, that’s ridiculous. No such thing exists. And nobody in their right mind would do that.” But then minutes later of course said, “Absolutely, yes, where do I sign up?” And that was two years ago now, a little bit more now. And we’ve just been making a go of it. And it’s been by far the most exciting, legal policy work I think I could’ve ever imagined. Probably more exciting than what I imagined because copyright and digital privacy are areas that the internet disrupted existing expectations of what could be enforced. A lot has already happened, a lot’s already been written and in many cases we’re at a sort of stalemate between the need to enforce existing laws and the capabilities of the technology and where we draw the line as to what’s possible and what needs to be prohibited. Whereas with Bitcoin, that line is not a line. It’s a big, big, fuzzy, gray area. And that means there’s so much work that I think we can do to move the needle on the future of permissionless innovation here as compared to say with more traditional internet technologies.

Laura Shin: 08:49
And so what has been your role at Coin Center?

Peter Van Valkenburgh: 11:09
Sure. I’m the director of research. Which means a few things. So as Jerry said our main job, especially in our first year of operation was education. Somebody at the treasury, someone in Congress, or a staffer, they want to be able to call Bitcoin to ask, “Hey, what are you doing?” There is no CEO of Bitcoin. So Coin Center plays a role where we can help educate them about what the technology is, what people are doing with it. And so, for me that means especially coming out with a series of really plain English explainers that in 2000 words or less, deal with a discrete topic of the technology. So something like, how private is it? How anonymous is it? Because of course there are these rumors. That Bitcoin is this perfect, nebulous, dark network that is perfect for facilitating, drug deals and things like that.

Peter Van Valkenburgh: 11:59
As it turns out, of course Bitcoin is actually surprisingly transparent. And with blockchain forensics, law enforcement can actually get a pretty good picture into what people are doing and how money is moving around in the Bitcoin network. So we have a backgrounder that, as I said, it’s a short piece that’s written in non tech speak and it’s actually written by Adam Ludwin. In this particular case, he wrote our privacy backgrounder. I think you had them on it, on your show before. And it just lays out, this is what visibility we actually have into transactions and it’s not nearly as anonymous as its famed. And we also write some of the backgrounders. I have the luxury of getting to write the backgrounder on mining, which is always sort of the doomsday question when you’re talking with a policy maker, they’ll say, “OK, sure, peer to peer money, that sounds great, but what’s this mining thing?” And there’s all kinds of issues. They’re stemming from, in part the choice of the word mining, when in reality what they’re doing is validating signatures on transaction messages and being rewarded for that. But then you have to say, “What does signature validation mean?” And, “Oh we’re going to explain elliptical curves now.” So finding a way to explain that, any number of other things in plain English is a big part of my work. But then, as Jerry said, whenever we have conversations with policy makers about what the technology enables, inevitably there comes this point where they said, “Well, we regulate some of those activities and we’re used to regulating the financial institutions that would have performed those activities for people. What happens when people are performing those activities on their own? How does the law which is usually calibrated or written to intersect by regulating intermediaries? How does the law apply to direct personal interaction with the protocol like Bitcoin or for Ethereum for that matter?” So figuring out the policy thinking that needs to be developed in order to present, as Jerry said, the various avenues that regulators might choose because they’re going to choose an avenue. Being able to present those different avenues, what it would look like to regulate in one way versus another.

Peter Van Valkenburgh:  14:00
And then also finally advocate for an avenue that we believe would allow the regulator to feel like they’ve upheld their statutory obligations. They are tasked by Congress to regulate but still preserve the freedom to innovate. That is always an interesting question in this space. So to go back to the Digital Millennium Copyright Act, for example, you had copyright liability that applied to third parties who share content basically. So the user uploads a video to Youtube and Google gets in trouble, even though it wasn’t Google that uploaded the video. The DMCA was an avenue of enforcing copyright law that still had some fidelity towards the purposes of copyright law. We’re still going to enforce some of copyright law here, but we can’t do it in a way that presents massive liabilities to Google. So we choose a compromise, which is the notice and take-down system. You can ask to have a video removed. And if Google has a system for allowing people to ask and complying with those asks and challenging them when they’re frivolous, then we can move forward. With Bitcoin, it’s very much the same thing. So, multisig wallets is a great example. Some of the stuff that say like Ben and Mike at BitGo have worked on. In a multisig wallet situation, you have someone who looks almost like a financial institution. You know, there’s this wallet product. The customer puts their bitcoins in this online wallet product, right? But for those of us who know the technology, BitGo’s wallet and any multisig wallet is much more exciting than that. It’s not that you’re giving your bitcoins to a company. Instead, they’ve given you a software platform that will allow you to generate these three keys and you the customer can hold two of them and BitGo is just there holding a third key in case anything ever happens to one of your keys. So this is a great situation for say, consumer protection in the financial context because BitGo is not a fiduciary custodian in this case. If they were to get hacked or if those guys were to go crazy, which they’re not going to, they’re awesome guys, but if something terrible was to happen to BitGo, the consumer still has control over their money. That’s an amazing new, business model as compared with the normal custodial, we hold your money for you type model that you see in financial institutions.

Peter Van Valkenburgh: 16:23
How does consumer protection regulation apply to a company like that? Should they get a money transmission license? We don’t think that that makes sense at all because they’re not custodial, they don’t have that sort of solvency risk. But, how do you write or interpret existing money transmission laws such that BitGo is not included in those existing regulatory rules. Basically, you need to come down to a definition of what it means to actually control bitcoins on behalf of someone else. And BitGo as I think many people would agree and we’ve made good progress convincing many policy makers on this point. Does not have control of your bitcoins. They store one key of three. They are backup recovery service. They are not a custodian. So coming up with that definition of control, trying to get it into new regulations when they come from the states, say the New York bit license or California’s AB1326. Trying to make regulators aware of the differences between, say, a multisig wallet, a software wallet and a hosted wallet or fully custodial wallet. That’s where the policy research really comes in. Where we try and develop legal language and advocacy materials that will push for, as I said, this way forward where we can still protect consumers, but do it in a way that doesn’t, jeopardize the vibrancy of the technology and the vibrancy of the American, innovative scene.

Laura Shin: 17:49
These details are super fascinating. Like these, case examples that you’re giving. I love that story. And, I know Coin Center recently celebrated its two year anniversary. What have been its main accomplishments during that time? And if you have really specific examples like that, that’s great.

Jerry Brito: 18:15
I think you can divide it into two buckets. One more on the defense. The other one more sort of proactive. On the defense, it’s kind of hard to point to any one thing because it’s more about education and making sure that policy makers don’t make easy to avoid mistakes. It’s making sure that regulators understand the technology and don’t do something stupid. And it’s hard to tell stories, that don’t make a particular policy maker look stupid. But, we’ve had situations where, a member of Congress will be very concerned about the elicit uses of Bitcoin or other cryptocurrencies and they may be thinking of a holding a hearing about this and we’re able to go in there and talk to them. When they’re thinking about that and say, “You don’t really don’t need to hold a hearing about this because we’re happy to answer all your questions and actually, law enforcement is doing very well going after bad guys here. And also, this technology is making consumers much better off, something that you would appreciate.” And then the hearing doesn’t happen. So, a lot of that is what we do, is avert things that could go wrong.

Laura Shin: 18:15
More behind the scenes.

Peter Van Valkenburgh: 19:42
More like the FBI, you only get noticed for your failures, never for your successes.

Jerry Brito: 19:51
That’s right. On that front, one thing we have done is we helped found something called the Blockchain Alliance. which is a public, private forum between law enforcement and many of the companies in the industry, as well as academics, and non-profits like Coin Center. What it does is it’s very simple, it’s just sort of a clearing house where law enforcement has questions about the technology or where we send the subpoena. They have a clearinghouse of being able to talk to exchanges and others in the industry, who might be able to answer those questions. And it’s also very good because it does a couple of things. It provides a clearinghouse service. Number two, it helps law enforcement understand the limits of what they can expect the industry and ecosystem to do because there’s some questions that an exchange can’t answer because they don’t have the information. And so making sure law enforcement understand the limits of what they can expect and ask is, is I think valuable to everybody. At the same time, these are small startups that are sometimes being overwhelmed by law enforcement requests to the extent you can streamline those but also helps the small startups.

Jerry Brito: 21:09
I think on the more proactive side, it’s a lot of the work Peter just talking about. Which is developing the policy thinking that hopefully will become the policy it’s adopted. And to give you some examples with that, Peter’s talking about definition of control, which is very important because those companies that have control of consumer funds are likely going to be subject to regulation. They’re gonna subject to licensing, subject to anti-money laundering regulations, etc. etc. But those who do not have control, should be completely outside of that. So defining controls, very important to make sure that we exclude multisig providers. We exclude minors. That we exclude nodes on the lightning network. That we exclude software wallets. It should all be excluded. And so I’m very happy to say that we’ve developed good policy thinking, good language about what that definition is and it is one that now I think, it’s becoming sort of the consensus definition. For example, the Uniform Law Commission, is in its current draft of its national uniform act for digital currencies. We hope that we’ll pass next year. So, that’s very important to us.

Laura Shin: 21:09
What is that?

Jerry Brito: 22:26
So basically, as you know, each state has its own money transmission licensing regime. So for example, the New York bit license, was probably the first one. But each state has its own. And with that, the problem there is, is that today you have dozens of states individually coming up with their own regime of how they’re going to regulate Bitcoin or other digital currencies.

Peter Van Valkenburgh: 22:47
Specifically regulate the businesses that hold other people’s bitcoin for them. A lot of people think, “Oh, California is going to regulate Bitcoin.” As if they’re going to regulate the whole thing. And this is in some ways what we’re trying to do is make sure they only regulate custodial companies. But that’s not us usually fighting a regulator. It’s helping them understand there are some companies that hold other people’s bitcoins. Basically like a bank or a money transmitter and there are some that are not. They’re doing something like mining. They might just be a person in their basement running a full node that relays transactions. Does that person transmit money? No, they’re transmitting bitcoin transaction messages. But that’s by no means a clear, obvious distinction to someone who doesn’t understand this.

Jerry Brito: 23:27
And that’s an important point because I think a lot of people think that we, Coin Center is pushing for regulation. We want to see Bitcoin regulated. We want to see these companies regulated. And that’s not the case. We think about it this way. If we say nothing, regulators will regulate. And, that regulation that they develop will encompass not just the custodial companies, but it will encompass potentially the miners and the lightning nodes and this person in their home who has a node that they’re running. It will encompass all these people. So the alternative to that is that yes, we advocate for regulation because there will be regulation, that is much more limited, limited to only those people who really should be regulated because they are holding customer funds and posing a risk. So that said, you have to do that state by state because each state is developing its own law and that’s very cumbersome and wieldy and then you can imagine being a company that needs to get 50 licenses. It’s very expensive, time consuming and each state’s going to have a different law. A little bit different. So the Uniform Law Commission is a national body of mostly academics, and some regulators. And they develop uniform laws. For example, uniform commercial code which governs contracts which is adopted by just about every state in the country, comes from the ULC. The ULC develops uniform laws that then the states are free to adopt and today they’re developing a Uniform Regulation of Digital Currency Businesses Act. Our definition of control has been influential there. And then, same thing in the security space, our thinking on securities regulation of cryptocurrency issuance, I think has been very influential.

Laura Shin: 25:27
Yeah. Can you talk about that a little bit more because I know that this summer there were a number of blog posts that VCs are writing. We are seeing some buzz about these new networks that are offering what people are sometimes calling app coins. Where, you need their token to operate on their network, whether it’s some kind of decentralized dropbox service they have or a decentralized reddit or whatever it might be. There have been other guests that have spoken about this trend. What is it that you are seeing from the regulators in terms of their attitude towards these?

Jerry Brito: 26:07
So the question there has always been, is Bitcoin a security? Is Ethereum or ether a security? When is a token, a coin a security? And then if it’s a security, who is the issuer? Who was the promoter? Did they register with the SEC? Did they follow the rules? And for us, we’ve seen many different enforcement actions from the SEC over the years, but it’s certainly been sort of tangential to Bitcoin or other digital currencies because they’ve been forcement actions where you had a clear ponzi scheme. Something like Bitcoin Savings and Trust where the guy promised outsized returns and he was just paying new customers with old customer money, right? Or old customers with new customers money… But it just so happened that the payment system, there was bitcoin. He could’ve been using dollars. He could have been using bananas. It just so happened that it was a bitcoin. And then when the SEC enforced against a typical ponzi scheme, bitcoin is in the headline.

Peter Van Valkenburgh: 27:17
The SEC had to say something like, investments made using bitcoin are still investments under our tests for security. But that’s a fairly obvious thing. You’re not going to suggest that people never invest bitcoins and things. Of course they do.

Jerry Brito: 27:29
What we saw though, and this is probably a year and a half ago, what we saw though is that there would soon come a case. There would soon come a time when the SEC would have to bring an enforcement action against a ponzi scheme of some kind where the security question was in fact a cryptocurrency, right. And what very much looked like that was a case called Paycoin. And the SEC is presently investigating Paycoin. And Paycoin was an open cryptocurrency network with mining.

Peter Van Valkenburgh: 28:08
It was a staking coin… It’s proof of stake. Not proof of work, but it is an open source code repository that was forked from Peercoin, which was forked from Litecoin, which was forked from Bitcoin. Just as so many other altcoins have been forked and developed. Many of them totally not scams, very interesting projects. Ethereum probably being one of the most interesting and certainly most well adopted, second to Bitcoin right now.

Jerry Brito: 28:32
And so the SEC, who are investigating now. They probably will charge folks who issued Paycoin and promised the people who were buying Paycoin from them that Amazon would soon integrate Paycoin. They were promising that their company would always pay a floor $20 for these tokens. So people bought them with an expectation of profit, given the promotion that they had done, and then these people made the money and ran away, Paycoin collapsed. At some point, something like that, the SEC is going to say, “This is a security.” And so the question would be for us, was going to always be when the SEC says that Paycoin is a security, are they going to simply say Paycoin is a security or are they going to say cryptocurrencies are securities. Which would be bad because something like Bitcoin really should not be a consideration.

Peter Van Valkenburgh: 29:22
And even if they said Paycoin is a security and left it at that, it would leave open the question, “Ok, well, that was a cryptocurrency.” So what differed about Paycoin versus Bitcoin or Ethereum or Steem or any of the other tokens out there. What differed from Paycoin and those other tokens that made Paycoin a security and these other things not a security. And if nothing deferred or if they’re silent on the matter of what different than we’re all in a big legal gray area which is unsettling for entrepreneurs in this space. You think, “Oh, I have this great idea for this app token that’ll power a decentralized platform that’ll allow people to come together online and agree on something like the best posts on reddit like thing or something like that. But maybe I don’t want to do this because I don’t want the SEC knocking at my door for failing to register as offering a security.” And that’s quite reasonable because actually the penalties for failing to register as offering security and issuing it nonetheless are very strong. They’re calibrated to stop that behavior at any cost basically. And so the question is I think one of competitiveness, and it is a question about US law specifically. Coin Center aspires to be fairly global in scope, but our expertise is very much with US laws. But in the securities context, that’s actually probably the right focus anyway. International securities laws generally are drafted in a way that’s much more circumscribed where the securities regulator has the power to basically come in and enumerate through rule making of sorts, what things are securities and what things are not. In the US there is no such rule making. In enumeration, there’s a flexible test which was actually set by the federal courts for what kinds of innumerable scams and that’s actually a quote from the Howey case, will be the sort of scams that we regulate as securities and this four part test, which I won’t go into, the specifics of, can be applied flexibly. It can be applied to cover any different type of offering and potentially something like Paycoin would fit very well into that test.

Laura Shin: 29:22
Can you go into the specifics. Can you explain it to me briefly?

Peter Van Valkenburgh: 31:33
Sure, we can geek out a little bit. So the Howey test has four parts. It’s an investment of money, in a common enterprise, with the expectation of profits, dependent or reliant on the efforts of a third party promoter. Investment, common enterprise, expectation of profits, third party promoter.

Jerry Brito: 31:50
And if you meet these then you are a security. You are issuing a security, in which case all these regulations apply.

Peter Van Valkenburgh: 31:58
So you can see how this is an open test. And actually the case where that test was formed was a case about an orange grove. So it’s the Howey test. And the guy in question in this case was W. J. Howey who owned an orange grove in Florida. He would invite rich New Englanders to come vacation… a winter in Florida, stay at the hotel near the orange grove. They would tour the orange grove with them and the New Englander would say something like, “Oh, the orange groves, they’re so beautiful.” And then W.J. Howey, he would say, “Well it’s funny you should say that, the groves are for sale.” And then they basically negotiate a deal where the New Englander would buy… I’m a New Englander. I’m sorry, I’m making New Englanders sound like suckers… But the New Englander would buy a small track of the grove. So he’s partitioning this multi-acre orange grove into little pieces. And you would own this land. You’d have a deed to it basically, but you’d also sign a contract with W.J. Howey, where he would maintain the trees, pick the fruit, take the fruit to market, sell it, get a good price and give you the profits from your piece of the orange grove. And what the supreme court said in the Howey test was, this is not a real estate deal, this is not people buying land in Florida because they want to live on it or develop it themselves. They’re buying, they’re investing their money in this common enterprise of growing oranges. They’re expecting profits because they expect the growth to be profitable and they’re relying on W.J. Howey to make this growth profitable. This is a security. This is the thing we’re supposed to regulate. It doesn’t matter that there’s no stock certificate or the formalities of offering a share. It doesn’t matter that all you have is what they call in the case, a nominal interest in the assets of the enterprise. So I know, I just seemed to just talk about oranges for the last two minutes and it sounds crazy. But it sounds like Paycoin, not like Bitcoin. And so our framework basically goes in and looks….

Jerry Brito: 33:58
And just to say what our framework is… you were asking about the things we do or the things we’ve accomplished. So we’re seeing that this was going to come, we develop a framework. And it’s available on our website, our mining transmission framework is there. Our securities framework is there, where we lay out the Howey test and we say this is how it applies to Peercoin. Here’s how it applies to Bitcoin. These are different things and also now it becomes very useful for people who are building app coin based applications.

Laura Shin: 33:58 Let’s talk about why Bitcoin is not?

Peter Van Valkenburgh: 34:31
It’s easiest to start with why Paycoin is. Because we can look at the Howey case, I’m selling off pieces of land that will grow fruit and you’re going to get the profits from that. This is a profitable deal where you own a nominal interest in the assets of the shared enterprise. So Paycoin, Josh Garza, the guy who is the serial scam artist actually. He had previous scams before this who created Paycoin is selling tokens from a de-centralized… well an open source, at least, cryptocurrency. You’re buying nominal interests to the assets of this cryptocurrency as a common enterprise. And who are you relying on when you expect profits from Paycoin? You’re relying on the guy who as, Jerry said, promised Amazon integration. Said, “We’re working on a deal with Amazon. Amazon is not going to use bitcoin. You’re going to buy all your amazon goods with paycoin. You’ll be able to buy anything you want.” And you’re going to rely on the guy who promised that in two months after the pre-sale was over, we’ll rebuy these Paycoins from you at $20 because they’ll probably be worth more than that. But we want you to know that there’s always a guaranteed minimum value. You’re relying on this guy who was the only guy developing this software. It’s a fork of Peercoin. So you go to the github repository, you fork it, you put your brand on it. He changed like a couple lines of code honestly. And there were some really sketchy stuff in there too. So as I said, it’s a proof of stake cryptocurrency where there is no mining. You stake some of your value to take part in the consensus mechanism to do the transaction validation and to get rewarded. There were some staking nodes that were specifically identified in the code that earned supernatural returns. So basically, we have to ask ourself, well who are those special stakers? Of course they were also the Paycoin developers. So everyone thinks this is just a very fair deal, very open technology. Really what this is a common enterprise led by one scammy dude, taking in investment, giving out nominal interest to the assets of the common enterprise. And they’re relying on him. Josh Garza is W.J. Howie of the 21st century. Or maybe he’s Charles Ponzi actually because the cloud mining operation he had set up before that. As I said, he’s a serial scam artists was an empty warehouse where he claimed to be giving you access to a bitcoin mining rig. But, as Jerry was saying, he was really just paying old investors with new investors money. So the SEC is looking at Garza and has actually charged him for basically perpetrating a ponzi scheme in this cloud mining operation. They’re going to turn to the next thing he did, which is Paycoin and they are looking into that now.

Peter Van Valkenburgh: 37:24
So how is Bitcoin different? How can they say, selling these paycoins is the security, but selling bitcoins isn’t a security? And there are a number of things here. So we go through the problems. Was there an investment of money? Well, people do invest their money in Bitcoin. You need to meet all the problems though. So if that one’s met we’re not doomed yet. Common enterprise with Bitcoin, this is a really difficult thing to actually get your head around. Bitcoin isn’t really a common enterprise and the way that a going concern or a corporation as a common enterprise. Bitcoin is like an industry. There are all these unaffiliated individuals, unaffiliated developers, unaffiliated corporations and companies working loosely together on the Bitcoin project. Very much like there are many people in the gold industry. Some of them are mining it out of the ground. Some of them are making jewelry out of it, some of them are finding industrial uses for gold. So this isn’t a common enterprise because it would be absurd to call the gold industry a common enterprise. If I buy a gold ring or a piece of gold bullion, I’m not relying on any particular company in that space to back up the value of my purchase or to make profits from that purchase. I’m relying on an industry and we don’t regulate the entire golden industry as the issuer of the security. So Bitcoin looks more like a commodity in that sense than a security. Whereas Paycoin, we really were relying on one corporation. On one going concern. So that’s one of the main reasons Bitcoin doesn’t fit.

Peter Van Valkenburgh: 38:50
Another useful question though is say, “why doesn’t Ethereum fit? Why doesn’t an app token for a de-centralized reddit? Why doesn’t that fit?” Because maybe there’s fewer people working on this thing. Maybe it is a bit more, cohesive or coordinated and not quite as distributed. What saves those things that are are not scams and are really cool innovations from being classified as securities? We’d get into this in our framework as well and the logic for why those things aren’t securities or aren’t good fits for securities under the Howey test on the associated case law is kind of interesting. Comes from lines of cases about condominium sales and about golf courses, so just those two points, just to go into them. There’s a history, especially in say New York City of selling co-op shares in real estate and people buy them to live in the apartment building. They don’t buy them because they expect to profit wildly from owning a share of this real estate development. And the building is already built so it’s not really a speculative investment. It’s something you could do just to live in it or rent it out. In a number of cases, the federal courts have said that those are not securities, owning those shares. Even if they appreciate in value. Even if you buy them as a speculative intend in mind. You buy them, because you could use it because you could live there. It is an actual utilitarian value. If you buy the apartment in the giant tower in New York city right now that has 10 foot by 10 foot windows and is taller than the empire state building, you probably are expecting that it’s going to be a good investment. Although it might be over overplayed.

Peter Van Valkenburgh: 40:31
But the bottom line is there’s a utilitarian value to that thing and that in a line of cases has saved those offerings from being considered securities. You can think of this in the case of kickstarter as well, where people will give money to get like a pebble smartwatch, which I’m wearing right now actually. Go Pebble. That’s not a security because basically you’re giving your money in order to get the useful thing. I have this watch, that’s what I want. So something like Ethereum is useful. You actually need ether in order to run smart contracts. There’s a lot of buzz about smart contracts, but there are some fundamentals there that are very real, the programmatic algorithmic control of money to do cool things, to automatically pay people for providing valuable computing resources, to automatically pay people dependent on the results of some sort of smart contract that measures, I don’t know whether it’s raining in Peoria or not. Those are really cool applications and the only way you can build an open decentralized platform for powering smart contracts is by having a scarce token that rewards people for giving their computing power to that shared network as a resource. So you need ether to do that and you need ether to run smart contracts. Just as you need a home to live in it. You might buy a home also for its speculative value. You need ether to use it for smart contracts and you might buy it also for speculative value saved from being a security. If we use the same condominium case law as an analogy for the Ethereum space. Ether is referred to as gas. And in many ways it’s the same thing. You buy gasoline to power a car, you can also stockpile gasoline in the expectation that it’s going to go up in price.

Peter Van Valkenburgh: 42:09
So the other line of cases is golf courses and I’ll try and be brief with that one. The golf course, country club cases talk about when you sell an interest in the thing. Whether you sell it before you’ve built the thing or after you’ve built the thing. So this is why this is relevant and you probably already thinking about pre-sales of app tokens basically, which there have been many of. In the history of golf course development. Something our possible future president knows a lot about and it might have been sued actually for it. It should be interesting. But anyway, lots of people would decide to sell memberships to the country club before the country club was built. They’re like, “Get in at the ground floor in the new links in Scotland. It’s going to be worth a lot in the future.” Those offerings were treated as securities by the federal courts. In other cases where the golf course is already built and memberships are being sold, those offerings were not treated as securities. This leads us to something. So for example, Steem, which is an app token that creates a de-centralized reddit, did not do a presale. That’s very good, at least in my opinion, for an appraisal of whether Steem is a security. Steem is also useful, so some of the same arguments that we discussed in the Ethereum context are there. Steem is also decentralized. Other people can run and develop steem clients. it’s not just one company, but a big thing about Steem’s initial token distribution is that there was no presale. So it’s kind of like these golf course cases. We’re not saying, “Hey, buy these golf course memberships, or these memberships to the future decentralized reddit.” And then we’ll build it and it will be awesome. We’re saying, “Hey, you want to get access to be able to vote up content or vote down content. Here’s an access token.” It’s a membership to use a thing, not a speculative investment in a thing.

Laura Shin: 43:55
That’s very interesting, that Steem got that part right. I know there’s some talk in the community that they didn’t get other aspects right, because they think the distribution of the tokens, maybe it’s a little bit less than ideal at the moment.

Peter Van Valkenburgh: 44:11
But you raise an interesting point. And you’re not talking about securities law when you talk about it, you’re talking about, which is very cool. You’re talking about community norms. One of the amazing things though about these community norms is that they actually jive pretty well with the Howey test. As if there’s really nothing new under the sun. Scams look like scams and non scams don’t look like scams. And communities have always evolved to try and ferret out the scams by having norms like, “Hey, you should do your distribution this way.” “Hey, you shouldn’t take money from people without some sort of obvious like basis for the value of your thing until it’s on the table.” And securities laws evolved in this context as well. And it’s kind of cool to think that even when we move into the world of crypto finance or whatever scary term you want to label it. We still have the same community norms evolving. People criticizing other people for offering things that they don’t think are right. but we also might have the same legal flexibility in the same legal tests that would still be just as applicable. Like the Howey test and associate case law.

Laura Shin: 45:04
You mentioned the upcoming election and this summer we saw proposal to have a pro national Bitcoin policy. The SEC is going to have this fin-tech forum where they talk about blockchain technology… just briefly in a couple of lines, how would you say the attitude of policy makers and legislators have changed and what might we expect the impact to be from the election?

Jerry Brito: 45:32
So the heartening thing, sort of working in earnest for two years and even for a few years before that, has always been that policy makers, especially in Congress, especially at the higher policy making levels and administration are very open and receptive to this technology. And they’re open to innovation and they want to see it flourish in the United States. It’s important to them. So it’s always been very positive, but the concern about elicit uses and the closer you get down to the lower levels within particular agencies that have jurisdiction, either on anti-money laundering or securities, they’re going to have more and more concerns, but it’s concerns that you can address. So that’s sort of generally been the attitude. The elections are going to have a… it’s going to be interesting, right? So I know that, Hillary Clinton’s transition team in the technology paper did mention blockchain technology broadly. So I think there’s just a general positive attitude there. Donald trump has not really said much about this, so it’s sort of a question mark there, but Republicans, often are more free marketing in orientation and so you can imagine they might be a sort of receptive to the light touch approach. I think what’s going to be more interesting is how Congress ends up and how the balance of power is because right now nothing is happening in Washington. Nothing is getting through Congress and so to the extent that you want to have a national policy that favorable to cryptocurrencies, you need things like safe harbor for non-custodial uses of these technologies, right? That says to the states, you shall not permission, you shall not require a license from those firms that do not pose risks. That’s something we’d like to see come out of Congress. Like the multisig companies we were talking about earlier, for example, but also miners and any number of others. We hope we end up with a sort of arrangement between the House, the Senate and the White House that can work together to pass pro innovation policy.

Laura Shin: 47:52
Great, where can people learn more about Coin Center and get in touch with you?

Jerry Brito: 47:57
So if you visit, you’ll see everything you need there. We have a newsletter that’s weekly that you can subscribe to. And, we are also, as I say, a small non-profit, so you can also support us by donating at the website as well.

Laura Shin: 48:16
Great. Well, thanks to both of you for coming on the show.

Jerry Brito: 48:19
Our pleasure. Thanks for having.

Laura Shin: 48:20
Thanks for joining us today. If you’re interested in learning more about Jerry and Peter and Coin Center, check out the show notes which are available on my Forbes page, And if you’ve been enjoying the podcast, please remember to review, rate and subscribe to it in Itunes or your preferred platform. Thanks again for listening.

Forbes: 48:49
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