Caitlin Long investor's podcast

Bitcoin: Law & Legal Implications – Caitlin Long on The Investor’s Podcast, Hosted By Preston Pysh

Check out The Investor’s Podcast Episode Page & Show Notes

Key Takeaways

  • Bitcoin operates regardless of government laws
  • If the U.S. bans Bitcoin, exchange activity will simply move to another location. That said, there are more likely attack vectors (such as taxation and placing heavy regulations on crypto institutions).
  • Bitcoin doesn’t need to be legal tender to succeed; it can coexist with the dollar, and even re-enforce it in some cases
  • Wyoming passed 13 blockchain laws enabling digital assets (e.g., currencies, securities, and utility tokens). In essence, these laws:
    • Define the legal status of digital assets and exempt them from state taxes (although federal taxes still apply)
    • Create a fintech sandbox for financial companies
    • Authorize state-chartered depository institutions to provide crypto-related banking services
  • Financial institutions are required to obtain & share personal information about the origin and destination of money in wire transfers (known as the ‘Travel Rule’)
    • With Bitcoin, this means having to obtain and forward this information before conducting transactions (because transactions can’t be stopped after taking place)

Resources Mentioned

Intro

On Banning Bitcoin and Exchanges

  • Bitcoin operates regardless of government laws
    • Bitcoin will continue running even if internet service providers (ISPs) ban it (Bitcoin uses satellite nodes and mesh networks)
  • If the U.S. bans Bitcoin, exchange activity will simply move to another location. That said, there are more likely attack vectors (such as taxation and placing heavy regulations on crypto institutions).
    • No matter what, though, cryptocurrency markets navigate their obstacles
      • For instance, the majority of exchange volume happens outside the U.S with companies that don’t serve U.S. customers due to regulations
    • Fortunately, we’re seeing improvements in U.S. cryptocurrency regulation rather than a crackdown

Legally Defining Bitcoin

  • A legal tender is a government-enforced currency for debt payment (i.e., it must be accepted within the country)
    • The U.S. Constitution states that only Congress has the power to specify a legal tender; it also states that only gold and silver are legal tenders (The Dollar is neither)
  • Wyoming laws map virtual currencies to the same treatment as money in commercial law—the next best thing after legal tender.
    • Receiving money is free of adverse claims (not knowingly defrauding someone means the money received is clear and free of claims against it).
  • Bitcoin doesn’t need to be legal tender to succeed; it can coexist with the dollar, and even re-enforce it in some cases
    • For instance, Bitcoin is used overseas by locals to get a hold of Tether-dollars

Wyoming Blockchain Laws

  • Wyoming passed 13 blockchain laws enabling digital assets (e.g., currencies, securities, and utility tokens). In essence, these laws:
    • Define the legal status of digital assets and exempt them from state taxes (although federal taxes still apply)
    • Create a fintech sandbox for financial companies
    • Authorize state-chartered depository institutions to provide crypto-related banking services
  • Banks handle custody for big institutional investors, but the FDIC prevents them from keeping custody of crypto—mainly because of the risk of associated with losing private keys
    • Wyoming laws allow state-chartered banks to custody crypto through the bank’s trust department—something no other U.S. bank is allowed to do
      • These state-charted banks may be even safer than traditional banks because they’re required to hold 100% reserves as they’re not FDIC insured
  • Crypto-banks can handle tokens classified as securities without requiring a broker-dealer license (A bank license can handle securities)
    • Institutions like pension funds and endowments are limited to dealing with certain types of regulated financial institutions (like banks) that currently can’t provide crypto-services
      • “We are about to get some that can and that’s going to broaden the universe” – Caitlin Long
  • Bitcoin and crypto are building a new financial sector in parallel to the traditional one; the more bridges between them, the better
    • At a trillion-dollar market cap, Bitcoin conversations go from, “You made some money,” to, “We now have a globally recognized asset and settlement layer”

The Golden Opportunity in Wyoming Regulations

  • The Wyoming banking division received over 100 inquiries from crypto companies, but not many are going through the process; why?
    • Possible solvency issues: many companies have no audit or proof of reserves (they also commingle assets)
    • Wyoming laws require 100% reserves and prohibit rehypothecation, but many crypto lenders outright say they’re re-hypothecated (and they’re not FDIC insured)
  • Current crypto companies have nothing enforceable in their contracts; a few examples:
    • Their terms of service allow a stable coin issuer to use cash in any manner they see fit
    • Fork policy: they may or may not support hard-forks
      • (A Hard-fork is a change to the protocol rules that results in creating a new blockchain working independently of the old one – and a new cryptocurrency)
    • They define Bitcoin as a “digital asset” (which is quite broad)
  • Wyoming laws require defining an asset by referencing its source code version on GitHub. This means:
    • Explicit customer approval is needed before switching which asset is supported
    • Changing terms and conditions becomes theft of property (they can only give your crypto back)
  • Many incumbents can’t comply with these laws, and thus, it’s a golden opportunity for new players to bring in truly big money
    • “The best companies in the industry will be in Wyoming complying with those strict rules. This simply means that they’re solvent, and they’re are not allowed to become insolvent by playing fast and loose.” – Caitlin Long

State Rights vs Federal Law

  • The fact that several states are now legalizing marijuana demonstrates the power held at the state level
    • Think: Will it be the same with Bitcoin and crypto? (12 states have already passed a Utility Token Bill)
  • The U.S. Constitution defines the powers of the federal government; all other powers are reserved to the state
    • The federal government has jurisdiction over securities. but not property
      • Wyoming laws classify virtual currencies as money and utility tokens as digital consumer assets (both are forms of property)
  • Lawyers and accountants argue the location of an asset is determined by the location of its private key, but you could easily memorize a private key and walk across a border (or, more than one person could memorize a private key)
    • A potential solution: decide based upon location of the hardware module storing the private key (or the location of the decision authority if there is more than one hardware module)
    • This is important because enterprises must disclose the location of their assets for auditors and regulators
      • Keep in mind: Moving hardware location to jurisdictions with more favorable laws can be easily done
  • President Trump has deregulated many industries, yet the financial sector seems to be moving in the wrong direction

Bitcoin Mixing

  • Financial institutions are required to obtain & share personal information about the origin and destination of money in wire transfers (known as the ‘Travel Rule’)
    • With Bitcoin, this means having to obtain and forward this information before conducting transactions (because transactions can’t be stopped after taking place)
    • The law requires storing all this personally identifiable information and have human review of suspicious transactions (Which massively increases the cost of being regulated, and involves risks of data breaches)
    • U.S. exchanges are already complying with these laws; moving to Wyoming and obtaining bank license helps them expand their user base
  • Bitcoin mixing obfuscates information about the transacting parties; this has elicited a strong response from Secretary Mnuchin
  • We’ll have mixed and regulated markets, but they won’t clash enough to split the network into fungible and non-fungible tokens
    • Dealing with institutions means you won’t be able to CoinMix because they have to comply with regulations (like KYC, AML & CFT)
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