[NYU Law Digital Currency Conference] Panel 1: The Legal and Policy Issues

[NYU Law Digital Currency Conference] Panel 1: The Legal and Policy Issues

great thanks glad to be here I think this is a terrific topic for for this event and so congratulations both to the federalist society and to the classical liberal Institute which is a terrific new Institute here the law school about which we are very excited and thankful for the leadership of both Richard Epstein and Mario Rizzo we're doing terrific things there and the student leaders of the federalist society this year are doing terrific work as well bitcoin is a great topic it's a topic about which I could not no less and so we're it not for the demands on a Dean's time I would stay and every second spent here I would be I would be learning a lot from what I understand it's possible to use this currency if that's the right term for it even anonymously and that it is far from clear whether it falls under any regulatory authority both of those are really interesting both kind of use questions and regulatory questions and so how if at all law ought to respond to this phenomenon whether regulation ought to be a goal at all or whether this is some sort of utopian absence of a regulated currency I think are very interesting questions that I certainly don't propose to have the answer to but if it turns out that bitcoin is here to stay then I'm sure that before I'm done being Dean I'll be trying to fundraise in Bitcoin and so I'll to come to all of you for free ounces on how to do that in the meantime let me just say thanks again to 12 to the panelists and the organizers for being here and good luck for for a great event thank you production I thought I would start off I in in retrospect these titles panel law and regulation doesn't quite capture the environment you're in with Bitcoin now it's it's this strange amalgam of swirling eddying current swear sometimes what you're grappling with is kind of the public image of Bitcoin other times the most arcane points of administrative law you know i never thought i would have occasion to understand as much about the IRS as i have in this context and other times it's looking at legislation that might be 40 years old and you think to yourself okay and how are we going to apply this to something that not many people have heard of let alone understand and and so bitcoins law and regulation is some amalgam of those and sometimes it's it's more driven by the public image of it for example when certain people get arrested for money laundering or you know when the federal government shuts down these online bazaars for for drugs and weapons at other times it is a genuinely good faith effort to understand okay we have these existing laws how exactly should they apply you know or in the case of you know if they don't apply do you need new ones so there's something about the moment in time where we're in with Bitcoin where you're never going to get all the answers if you just look at the regulation you're never going to all the answers if you just look at the underlying law and you're not going to get all the answers just by sort of running it as a PR exercise convincing everyone that bitcoin is great it's going to have to be some combination of all three if as its advocates say they want to achieve widespread mainstream adoption of this and we got a great lineup here to talk to you about this before we start I wanted to ask how many people here have heard of Bitcoin or heard heard of before okay I'm hoping about one hundred percent if you're gonna show up right how many would say that you understand it okay that is a above average showing for the you know compared to the general population they throw out a few things how many people read the Newsweek story on the unmasked Satoshi Nakamoto how many people believed it when they first read it when they first read it oh no one wants to pony up to that maybe see you Englander okay point yeah there you points points for 4 / honesty okay all right I just those are the beans are interesting benchmarks and also how many people here are students of the law or lawyers tech industry venture capital finance little of everything okay all right that skivvies give us a good sense of who we're talking to I would like to begin by introducing the panelists I'll do it one by one rather than get long-winded on this but we're gonna start with Reuben grinberg from Davis pulk take it away thanks so much so my story with Bitcoin starts in 2011 I was a law student at Yale and had to write a paper of sitting in my banking law class looking at the wikipedia page on money and there was this link to Bitcoin and all the link was to this website with just a user forum where I mean anyone who didn't have a computer science background could not understand a single word of what people are saying thankfully I have a master's in computer science and worked as a soft developer before coming to the law so I thought it was a great opportunity to try to explain what it was all about and and thankfully since I've done that other people have taken up the mantle and have done a much better job than I have like my panelists sitting to my left here but what I want to talk about today is just very quickly I think the the compliance and regulatory landscape for for businesses in Bitcoin today and I think the way the best way to cover so i think is if i'm running a bit coin business i'm about to start one or thinking about renting what do i what do i have to worry about when do i have to worry about it how much is it going to cost me what happens if I get it wrong and who can help me so let me take those topics very quickly and I don't only have a few minutes here so you try to go through this pretty quickly so what do I have to worry about the number one thing that everyone realizes you have to worry about is is anti money laundering and counter-terrorist financing regimes both here in the US federal and state level and abroad and that is because everyone knows that because that's what's been in the news so Charlie Shrem one of the former board members of bitinstant you know former tighten and tighten in the Bitcoin industry who gave the keynote speech at the inside Bitcoin conference about a year ago he was recently arrested on participating in a money-laundering scheme involving helping out people who were who were monkey laundering money for silk road besides that we also know recently the IRS put out some guidance on taxes last year saying that Bitcoin should be treated as property regulatory a certainty is great but they're also a bunch of articles saying we don't know how to this was going to work in practice because now every time you spend your Bitcoin it means it's a taxable event I think that software developers who have various products that they're just going to have to bake in the tax recording into their software aside from those things there are maybe the Securities regimes i think when i first wrote my paper i concluded that they were in a security and i think that's pretty much been accepted you even though you know you won't see a Court opinion out there I think that's pretty pretty much universal something that is is less accepted is whether the CFTC would consider it a commodity I think it would I think probably most people would agree i think the CFTC would agree to but the reason it's not under the CFTC is jurisdiction is because the CFTC generally regulates commodities derivative so unless you're talking about a derivative on a on a Bitcoin then you're not within the CFTC space and besides that there are just myriads of laws and rules both in the state and federal level and if you're talking about operating abroad just you know forget about it so the interesting thing is you've got people in the early days of Bitcoin and working abroad who say you know Bitcoin can't be regulated or you know I I live here in Canada or you know I'm operating us lavake I don't have to worry about us laws and that's just wrong we know that if you have us clients then you know you have to worry about us laws and if you don't eventually you're going to probably end up in jail so when do I have to worry about it immediately and there's a couple of reasons for that one is if you operate oftentimes a money transmitting license and you fail to register there can be crime and criminal penalties for that and in some cases there are there grace periods but without getting into too much detail you have to worry about this stuff immediately and the more important reason is that the business the way it's run your cost structure it's going to be intimately tied up with how you set up your compliance structure how you how you deal with these issues whether it's by having more people or having more software and if you worry about it until later you're just going to find you can't run your business is just not compatible and doesn't make sense to just worry about it until later how much is it going to cost me a lot and I've spoken to some of the largest Bitcoin businesses and often it's not surprising sometimes for them to be spending a third or even a half of their of their budgets of their of their investment money on compliance issues and and that means money that they spent on lawyers or on their internal compliance functions that's that's a lot of money and I think probably higher than what you would expect for most startup businesses and it's just a reflection of the fact that there's a lot of uncertainty in the Bitcoin world on on what what are the regulations and and it's actually very common where there's most uncertainty to have enormous compliance costs and a lot of the most of the work that I do is actually not bitcoin-related but very traditional bank regulatory work and I do a lot of Volker work right now and in part that's because there's a lot of uncertainty of how to interpret vulgar and it's just drinking from a firehose the questions we get from clients what happens if I get it wrong I've already alluded to one of the potential outcomes as you go to jail but more importantly you know and more realistically you're not going to get any banking relationships no Bank is going to want to work with you and and then it's going to be very difficult for you to grow your business and then finally who can help me I think everyone as you know we're here in a law school so it's obvious that you could turn to a law firm but also there are consulting firms that can help out with these sorts of things and it's very specialized firms that look into AML compliance and other areas of compliance so I think it's you know to focus on this particular issue that's the you know what do I have to worry about when do I have to worry about it how much is going to cost me what happens if I get it wrong who can help me and then one more point I wanted to make us for those of you who are here who are law students I think you have a big role to play I wrote my paper back in 2011 and you know no one's really i think you know besides Jerry here really looked more deeply at some of these that I brought up because they largely settles those issues so one example was I looked at you know does is there any federal law that says you can't make your own currency I said no and no one's really cared about it since and there are some important issues that no one's talked about that may turn out to be a problem there was a blog post recently saying that if someone is taking bitcoins as a business perhaps that bitcoin is actually property under the UCC so such that a bank that has a relationship with that business would have a security interest in those bitcoins even if those bitcoins are then used by that business further on down the line this would create all kinds of havoc the bottom line is there's a lot of unexplored unexplored territory in the Bitcoin legal field and what would be really helpful is if people like you who had a lot of time to just sit and think could could write some stuff on it that'd be great I neglected to say that we're going to try to make this as discussion driven as we can so panel still talk for a little bit very much wanna hear what you want to know about Bitcoin from us and given the recent Newsweek situation also try to answer for the sins of the press once all these folks have spoken so now we're gonna go to Jerry Brito of George Mason University of marcada cetera i will give Jerry credit as being one of the leading guys in Washington who has carefully like you are a five-year-old child explained to you what bitcoin is you know that and and very very patient Jerry wrote a a primer on Bitcoin to sort of walk the policymakers through and you know as a journalist I'm very grateful to him as a resource because sometimes I just need to call people and say explain to me like I was five so Jerry explained to us like we were from well thank you so much and you know on that note if you don't understand what bitcoin is pleased during a Q&A raise your hand and we will explain it I think that sums we all of us up here I think have worked on Bitcoin for so long where we are serving interest to get to some of them the next issues related to Bitcoin especially Bitcoin policy in the law and so I think that's what we're all kind of doing up here but but if by the time we're done you still don't understand when is please stop and and asked a question so what I'm going to talk to you about today is exactly that is what's next with Bitcoin in law and I'm taking the opportunity to plug a new paper that will soon be publishing hopefully law will be putting out the draft this week and then we'll hopefully get a lot of peer review from from smarter folks in US and and and publishing it soon but what we wanted to do with this paper is to say well the first application of Bitcoin was basically a alternative to money transfer and to payment systems as a result the first wave of Bitcoin regulation was exactly regulation that fit payment systems and money transfers so that's AML kyc that is consumer protection that sort of thing so we've looked at that already so what's next what are the next applications of Bitcoin and therefore what will be the next wave of Bitcoin regulations and so we looked at basically financial regulation of Bitcoin ray so we looked at Bitcoin derivatives Bitcoin backed securities we also looked at Bitcoin denominated instruments which is an amazing thing that exists and you have markets and exchanges for instruments that are becoming denominated that are operating today seemingly under the radar and unregulated so we look at that but today I want briefly sort of talk to you about prediction markets which I think illustrate well the challenge that Bitcoin poses to policy makers right so prediction markets for those of you we don't know are basically exchanges where individuals trade or known as event contracts which specify some future event with different possible outcomes a payment structure based on the outcome and a contract expiration date and that that date is when the payment happens so for example you could have a contract that says Hillary Clinton will win the u.s. presidential election in 2016 and it will pay out ten dollar if the event happens and it will pay out zero dollars that the event doesn't happen and then you could trade this contract and it you know depending on what you think you could either buy it we're short it and it could trade so if it trades for five dollars and fifty cents then we all know there's a fifty five percent chance that Hillary Clinton will win the election so obviously what this does is it allows people to bet on the result of the event but more importantly what it does is is that aggregates a belief of all the market participants in order to forecast the odds of actual event occurring and that's very valuable it's a great positive externality that comes out of this this trading and we can have prediction markets for all sorts of things rare event contracts for all sorts of things so in addition to elections you could do you know the Academy Awards or the Super Bowl winners you could do internal to accompany you could do sales figures you could do flu trends so they also tend to be much more accurate than polls and surveys and others or forecasting methods because you have something on the line you're aggregating the wisdom of crowds but you're doing so with something on the line so that people have insight to really be accurate and also incorporate all sorts of information that might not otherwise be available where you could use it some sort of socially beneficial uses of prediction markets can include forecasting the probability of man-made or natural disasters predicting political events that could affect financial markets right so such as whether de let the debt limit will be raised better forecasting IPO pricing allowing hedging against the failure of a product such as you know entertainment or pharmaceuticals where you have a lot on the line so you know I guess you can tell I'm a big fan of prediction markets unfortunately in the US the regulatory atmosphere around prediction markets has been pretty hostile the CFTC has essentially shut down prediction markets in the u.s. basically they look at event contracts as commodity options and so they see them you know they need to be traded unregulated exchanges or exempted and they have permission has not been forthcoming they shut down the one really big operating futures market or should say predictions market which is called in trade they've shut it down 2012 and since then they have not given any exemptions or any permissions right so you've had other exchanges that have asked to offer for example election prediction markets and that permission has not been forthcoming so you know today the only real real money prediction market that is operating the Iowa electronic markets and it's very limited you only have a small number of people that can trade the amount that it can trade is very small so that's sort of a long way of practicing what prediction markets are here's where it gets interesting with Bitcoin today you have prediction markets operating online that accept Bitcoin where the event contracts are denominated in Bitcoin so for an example of this is something called predictions and predictions likely runs afoul of CFTC regulation what they are offering are essentially essentially option contract and they're not you know registered with the CFTC or otherwise operating as an exchange the question though is if the CFTC wanted to take action how do they go about enforcing that rule you know you were talking about banking relationships to the best of my knowledge prediction is basically just using Bitcoin as the bank so there is no bank that you can go and and sort of ask as an intermediary to facilitate an enforcement action there is no payment processor either right so when you would use in trade you would either use a bank wire transfer maybe you would use your credit card here there is not that you're just basically using Bitcoin so enforcement's gonna be very difficult you also have something called BTC Oracle which allows you basically it's binary options on the price of Bitcoin so you can bet on the future price of Bitcoin using Bitcoin which is kind of a weird thing but it's doable and the way it works is there isn't even necessarily a website they do have a website but you don't have to use website essentially you can just send bitcoins to a particular Bitcoin address controlled by BTC Oracle and depending on whether you're right or wrong about your guess as to the future price of Bitcoin you're going to get back more or less bitcoins and you sent and so even if you were to cease atom d domain and take away the website it does nothing to the underlying service you can continue to speculate on these binary options using Bitcoin and eventually we're going to see completely decentralized prediction markets so that there is no website in fact there is no company they're just going to be counterparties finding each other and being able to bet on just about any kind of event an earthquake the price of Google political events and I just don't know like to CFTC or any other regulator is going to do about that because enforcing that really can only be done against the individuals and it's it's going to be very very difficult to my hope is that rather than attempt to fight a losing battle there that policymakers were sort of choose to normalize these prediction markets and what I'm talking about this challenge this is sort of this is what people talk about when you say Bitcoin can't be regulated of course Bitcoin the protocol can't be regulated but intermediaries can absolutely they can and they are the question is when you can't get ahold as intermediaries or you can't enforce it against those intermediaries or when you are increasingly disintermediated so that there is nobody you can go after this is going to be a challenge I think for regulators in prediction markets in gambling and in all sorts of other areas I'll stop there and thank you I'm gonna move the order slightly because Brian Klein yes you is Baker Markarth about law firm of Vega marquan knows law enforcement but he also works with the Bitcoin foundation and I think that will be a nice way then into John's talk about the US Congress but Brian good oh excuse me I actually went to law school here and it's nice to be back I never imagined that I would be back at the law school talking about Bitcoin because when I went here there was no such thing as Bitcoin I have just two quick questions before I launch who in here actually owns a Bitcoin any portion a Satoshi which is the smallest of nomination who in here is interested in possibly buying a Bitcoin who doesn't own one all right you know if you'd asked this question six months ago a year ago you wouldn't see any hands and people would probably even raise their about interest but I think that shows the shift that's happening here my background is you know what the law school here I'm a criminal defense attorney I'm a former federal prosecutor and now I help out the Bitcoin foundation the foundation is the lead advocacy group for the Bitcoin community its goals are to educate and advocate and most of the major players are members of the foundation the foundation interacts regularly when Washington DC John's dealt with foundation members the foundation general counsel testified in front of the Senate I went last year and spoke with FinCEN so that's what the foundation does and just to go to sort of Jerry and rubens points you know what you're seeing from my perspective both on the foundation as a criminal defense attorney is you know for a while and it's think it's still true if you put the word Bitcoin in front of something you get a press story so if you sell your Tesla or a Lamborghini or you indict somebody in Florida for transferring a few thousand dollars you get a press release and you get Bloomberg or the wall street journal or someone to cover that and from the law enforcement perspective there's nothing wrong forcement officials they like other things but they love to get attention for what they're doing and I think what we're going to see coming forward are more prosecutions a lot of the early adopters when there weren't a lot of rules and there was sort of this vacuum that Jerry and Reuben talked about you know there was his era where it wasn't clear what bitcoin was or what applied to it and now we've slowly seen an era of enforcement and the Dean actually was incredibly wrong I mean when he got up there and said I think it's anonymous and there's no regulation that couldn't be farther from the truth either those things but I think that's the popular perception it's not anonymous and it's heavily regulated even now today and that's why you're seeing law enforcement actions because law enforcement is concerned vincennes concerned that bitcoin can be used to finance terrorism or narco traffic and the concern is based on just because not everyone here maybe is familiar with Bitcoin essentially bitcoin is gold with a teleporter ok so you can move value from here to anywhere in the world essentially instantly and so as you can imagine if you have a nefarious purpose that can be a very powerful tool it can also be a powerful tool when you don't have a nefarious purpose and I think just to stray from my point a little bit that what bitcoins going to hold in the future setting aside the law enforcement aspect we're in like nineteen ninety-four of like Bitcoin versus the Internet I mean in 1994 I don't even remember the internet I remember pine email okay there was no Google there was no Airbnb there was no Facebook there wasn't on all of these applications and Bitcoin at its core is a protocol and a currency that trades on that protocol but what you're going to see and I think this is what Jerry's talking about going forward is the protocol is incredibly powerful it allows for you to engage in trustless transactions anywhere in the world and what I mean by trustless transactions what sounds bad but it's actually genius it wipes out intermediaries you don't have to have an intermediary between you and another party you're dealing with so for example instead of having a bank like recently I tried to wire money to Brazil to reserve a hotel for the World Cup that's a total nightmare let me just tell you I tried to wire two hundred forty dollars it cost me forty dollars in wiring fees citibank screwed it up i had to go back and they had to fix it bitcoin you can do that within 10 minutes cost you almost nothing and you can look at the block chain and verify that that's the power of bitcoin today the power in the future is like Jerry's applications he's talking about you hear about things like you want to license music okay you can layer data on top of Bitcoin transactions in the protocol so that if you're a musician you could license your music to anyone in the world without using a third party to do that and I'm not the genius who's going to come up with these applications or I wouldn't be here I wouldn't be a lawyer I've been trying to make money somewhere but there are people out there today who are thinking about these things and I think the energy level you see about Bitcoin and Ruben referred to this last year there was a conference and it's being held right now about Bitcoin there were 300 people there was in a hotel was crammed into a lobby or into a small area this year there's 2,000 people at this conference there's people in suits and ties there's professional players who are getting involved and I'm not just an apologist for Bitcoin i'm just i'm a believer and i think that's what your scene is that transition from when it was on the fringes to the mainstream and law enforcement is diving in the venture capitalists are diving in everyone's diving it's exciting time for a Bitcoin and I think everyone's trying to jump in that's my spiel John Collins is the mail on Capitol Hill for Bitcoin where he's a professional staff at the house excuse me at the Senate come professor me but and I say so safe to say works closely with Senator Carper Senator Tom Carper from across the river in Delaware and senator tom is one of the well I think it's safe to say he's the leading member of Congress has taken a strong interest in Bitcoin and he's not in the position to make definitive decisions about Bitcoin but if is anybody kind of shepherding the process that would be senator Carper Jones is man well thank you guys for having us today and I'll just give you a little brief background on sort of what the work that Senator Carper and the committee has done and then we can probably just turn it over for some later conversations but it was about this time last year that there was a kind of one of these price bubbles in the in the Bitcoin market and as Brian just said anytime you see you put Bitcoin in a press release it gets attention it's something a topic that had been on our personal radars for a number of years but at that point you know the committee that I serve and which senator Carper chairs is the Homeland Security and Governmental Affairs Committee and so we have 22 dual roles one is obviously to manage and conduct oversight of the Homeland Security Department and then everything else basically yeah jurisdiction over nothing jurisdiction over everything and the governmental affairs piece is really focused on sort of how is government collaborating and coordinating on any number of issues and to us Bitcoin at that point was clearly something that people were talking about in in two ways one it's a way to buy drugs on the internet it's a way that terrorists may or may not be using it it's a way that that criminals are getting away with murder and then on the other side of the fit of the spectrum were folks like Marc Andreessen and others were saying this is the next internet it's the biggest game changer in technology since since the internet which is obviously very two very different things one would think except it's it's really not when we've looked back at these conversations that were in Congress at the time that e-commerce was just popping up on the internet in particular there was a hearing in 1995 which mike castle who is a longtime congressman from the state of delaware actually held a hearing of a banking committee called the future of money and he was very very excited about a flashlight that he had bought online and that was delivered to his house via cyber cash which was a vehicle at that time which was later bought by verisign and later ultimately bought by paypal but obviously and topic of that that hearing was very much a dialogue that we're having about bitcoin today there was there was concern about people who would use it for nefarious purposes and then folks who who really thought that it could facilitate Commerce in a very real way and since that time we've seen both things happen but we've found a way to bring value to a marketplace but at the same time address the risks in a way that makes sense so you know what our focus was is to really you know at that point Congress no one in Congress had really paid attention to it outside of a few members who had wanted to bring attention to sort of the Silk Road website and what was going on there but what we what we aim to do is really kind of cast a really broad net not only an industry but in law enforcement and federal regulators to see you know what is the level of risk and at the same time what is the federal government if if it if this is the next internet it's the next big thing that's going to touch all these disparate parts of government either as a payment rail or as a commodity or both how is the federal government coordinating and how are we collaborating to make sure that because in any sort of government or any sort of office you know people have different equities and they will try to grab at things from different ways and so we wanted to make sure that there was a coordinated response consistent message coming out of the federal government related to Bitcoin and its treatment and so that's what we we really push regulators to do and and follow basically just started bringing in agency officials for informal interviews and then formal interviews sent a round of oversight letters from ourselves and our ranking member tom coburn to I think of six relevant federal agencies asking them where are they on Bitcoin what's their plan what are their thoughts and then follow that up with the first congressional hearing on the topic in November where we brought among panelists such as Jerry Brito on the industry side folks from the Department of Justice from the Department of Treasury and the Department of Homeland Security and the message at that point was and I think it holds true now is that we're working on it we're collaborating through several working groups not only in the United States but internationally law enforcement it's a concern it's a tool that can be used for for nefarious ways but we think at this point we have a handle on it although we need to remain vigilant and we want to work with industry to figure out how to do that and from from Treasury and other officials there's promise here and we need to figure out a way that that we can control it or at least put some safeguards in place for consumers but at the same time allow entrepreneurs and folks that want to bring value to the marketplace to do so since that time we've had well the fence and guidance was was really the first piece of guidance and for those that aren't familiar with it that's the Treasury guidance that basically said that you know if you're a Bitcoin exchange they will regulate you at the point of exchange so at the point in which you exchange your dollar for a Bitcoin ery Bitcoin for a dollar and if you are an exchange under their guidance and this is very simplified version of this you have to register with Vincent as a money service business and do all of anti-money laundering regimes that are required of that and then register with the individual states 48 of which I believe you have money transmitter licenses and traditional money transmitters are like Western Union which is a very different thing that a Bitcoin exchange and that's something we can get into a little later about what's going on I think at the state level and then most recently the IRS has come out with their with their guidance defining Bitcoin as as property for tax purposes so at the point where we're at with Congress we're continuing our work we're working on a majority staff report to sort of bring together sort of our findings related to this issue and I think as agencies way in it's becoming clearer sort of where the federal government is able to place this technology within the current baskets of regulations that we have and in our conversations I the role of Congress is you know it's as I think Carter said earlier today it's very much a reactive organization in ways going to see with the conversations we have with our constituencies and industry and other places does does that guidance make sense as what IRS said or Treasury said or other folks said does that make sense with the current regulations is there a need for new regulations perhaps and that could be you know the conversation that that Congress has over the next year over the next two years but it's still very much a nascent niche technology that for the most part you know there haven't been a whole lot of folks in Congress that have begun paying attention to it but I suspect that will be changing over the next few years for for certain and can I just chime in I mean I think the one thing that's interesting never gonna get this figured out I don't know how i bought a Bitcoin if I can't figure out the mic but from my perspective it's great what senator Carper's committee did and is doing and trying to engage in a dialogue one of the biggest problems though is that for example the IRS issued guidance without engaging in a dialogue with anybody so they issued guidance three weeks before taxes are due saying you need to treat this as property and people have been spending bitcoins like a currency buying coffee and pizzas and whatever for the last year's and it's imposed an incredible compliance obligation on people and I think it's great the Senators committee is trying to synthesize clear guidance for the community but the problem is you know the left hand and the right hand aren't talking always I mean FinCEN says it's a currency and IRS says it's a property and it just creates this sort of unknown and it creates all sorts of headaches and I'm sure Jerry and Ruben have their own thoughts on that but to me it's the government does need to move quicker and faster because bitcoin operates at incredibly fast speed it's like the internet things are moving every day new things are developing and waiting six months or a year for report Bitcoin could radically change in those six months to a year and then they'll be playing catch-up again I don't know let me just throw a few things out here about said about the media before I do if you're interested in some resources on Bitcoin Google quick take and Bloomberg and Bitcoin and you'll come up with a fairly easy sort of thumbnail sketch of Bloomberg of Bitcoin complete with some links to our reporting about it I think it's pretty accessible I wouldn't know because I wrote it Jerry's primer I'm sure little Google George Mason University Mercatus Center bitcoin bitcoin primer there you go find it easily and then the paper originally written by Satoshi Nakamoto is shockingly accessible I was very surprised when I sat down and and looked at this it's not long either Hank it's one like 10-15 pages or something you know and it's in it and it's it's really helpful to your understanding of Bitcoin when John mentioned that that you know bitcoin is this thing that is used to launder money buy drugs smuggle weapons and whatnot usually after that somebody says that in the next breath it says it you know the people in the Bitcoin community will say and that's because the me of focus is crazy on you know on the on the bad aspects of this or usually they say the mainstream media now I have to confess I never been entirely clear on what the mainstream media is it's really it's mostly a synonym for the media outlet that happens to be pissing me off at the moment but you know it's probably safe to say that the Bloomberg is a mainstream media outlet and you know one notable thing that governs what you see about Bitcoin in in the mainstream media is that most of the organizations are pretty large so just like the federal government although mercifully not quite as Extreme you have a sort of learning process where reporters junior editors senior editors editors-in-chief you know familiarize themselves with the topic at hand and get comfortable addressing the more complex issues in a more nuanced way I wrote a story for Bloomberg about Bitcoin which walked through in fairly pedestrian terms how Bitcoin functions as a payment system in a way that's less fraud prone and more efficient than the current payment system and I in the end it was a very useful exercise internally I hope some people outside Bloomberg enjoyed reading it but internally it led me sort of get my footing with the editors and say this is this is something we need to need to cover another point about Bitcoin coverage that I think sort of accounts for what drives some people nuts about it back before the internet there was an icon cept in being a foreign correspondent for an American newspaper or rather being a bad one which involved reporting from some company some country you name it anywhere in the world and you take the most extreme element of the society in which you've been plopped and you take that as typical for that country you know and that it's pretty easy to do that with Bitcoin because frankly you know some bitcoiners say some crazy stuff you know the dollar or bygone year of the dollars of bygone here you know I mean Ross albuq or you know the guy who ran Silk Road allegedly now look at the criminal defense attorney you know bragged in an interview in an anonymous interview with Forbes about what he was doing so it's easy to fall into this trap but I have to say the Bitcoin community preps this trap marvelously every time for the for the for the press you may have seen numbers of peace by Kevin ruse is a great journalist in I thing was New York magazine entitled the doomsday cult of Bitcoin and it compared Bitcoin enthusiasts just these these end of the world whack jobs from the 1950s where they the end of the world obviously did not come in the 1950s and so they transform themselves into a cult with its own sort of internal rituals and whatnot and just sort of turned in on cells in crazy fashion that to me as an example this kind of questionable journalism where you're you're taking extreme elements and pushing them as the story of Bitcoin you got to dig in it's it's it's something you have to do to understand it and sort of take on approach the subject in good faith there's also another thing I wanted to point it out which I wasn't going to include this but I'll since we're in the financial capital l I'll throw this out I was struck by this something that the Comptroller of the currency Tom Curry said the control of currency regulates the largest banks in this country national banks jpmorgan chase bank of america some small ones too but mostly large and he had previously been the banking commissioner in massachusetts and he's told a Senate committee it was in the context of jpmorgan chase but it could have been anybody as the Commissioner of banks in Massachusetts I had on the wall a charter for the bank of Massachusetts signed by John Hancock in 1784 yes the guy with the fancy signature the very last provision of it says that examiner's appointed by the Commonwealth shall have full and free access to the books and records of an institution that is the fundamental cornerstone of our banking supervision in this country for over 200 years and the reason that jumped out at me in the Bitcoin context was if you if you say that to somebody in the tech world somebody from Silicon Valley that a basic principle of how this industry is going to work is that federal examiners are allowed to walk into your business and anytime they want and have access to any information they want they I mean they they'd go silent because they would not know where to begin the the culture of finance and technology could not be more different in this respect the you know the prototype for a Silicon Valley startup is you know you get a couple of people in a room smart programmers you know they might not bathe for a week you slide pizzas under the door and they write the code and they throw this application up on the web and people start downloading it and there are bugs in the system in the application and you figure it out along the way and fix them imagine a bank that opened its door on and said well you know we're going to have bugs we might lose your money that'll be just a glitch you know we'll work through those things no I mean financial services is never going to work that way and and and as I was surprised to learn it's been like that for 200 years there's been some measure of federal supervision so one of the the growing pains of Bitcoin has been the the coming together sometimes it's a clash of cultures I think right now there's a bit more of an effort of those two cultures to come together to create viable companies but that is going to rear its head again and again and again where the tech people say let's do this and the financial people say no you can't do that it's it's it's going to happen in every country every company I guarantee it'll be mostly lawyers and say no you can't it's mostly lawyers yeah mostly compliance lawyers yeah so finally a Newsweek I suppose the central question here is would I have published the Newsweek story and based on what I know about how they reported this story I would not have published it I can't speak for Bloomberg News as a whole but we have a style book it's called the Bloomberg way and one of the central principles reporting a story especially one like that where you're taking an ostensibly private person and you're thrusting them into the the public sphere is you write down everything put it all in writing and tell this person I am about to publish all this stuff about you in a major national new magazine and now is the time to tell me if I'm wrong I may be incorrect in this but so far nothing I have heard from Newsweek indicates that they did something like that the story seems to sit on a thin read of a conversation that the reporter had in the driveway but you have nothing to lose by going to your subject and laying all out exactly what you want to print you know that said I would write the story if I knew who Satoshi Nakamoto was I think it's a you know this person or people came up with a very elegant solution to a long-standing problem in finance of how do you conduct a train how do you conduct the trust lyst transaction that Brian referenced and I'd love to meet the mind that came up with that you know it must be some weird combination of you know Bill Gates and Thomas Jefferson sort of you know somebody who had code but who can also you know has a sort of free-ranging mind that can think outside of the box and a lot of people in the Bitcoin community got uppity that this person was was outed you know but you know earlier today I was talking on a panel about this and I asked who had actually read the Newsweek story and you know virtually every hand in the room goes up because we're insanely curious about this and one of the main objection that that a lot of the Bitcoin community had to writing about the sky was that what really matters is the idea this is something to chew on at an institution of higher learning what really matters is the idea and that the person doesn't matter at all and to this argument I have one name to throw out to you and that is the name of Martin Heidegger I ma by training a master's degree in European history which is exactly what you'd expect from someone who covers finance at Bloomberg but Martin Heidegger was unquestionably brilliant philosopher you know being in time a pathway 20th century philosophy that influenced a generation particularly in France he was also a fervent not see the Nazis made him the rector of Heidelberg University one of the Mogul you know prestigious university in Germany where you know he presided over the sort of ugly hollowing out of what was once a great institution and then only recently in the last couple of months as heidegger's endless Diaries have been published do we find in his home and people writing at him writing very nasty things about Jews he was an anti-semite with the best of them and so my takeaway from the story of satoshi nakamoto and Martin Heidegger is that it's very easy in theory to say you only care about the idea but in practice once you find out about the person you might have second thoughts about that you know if Bitcoin if we find out that Bitcoin was invented by the NSA with the help of the CIA or if it was the code was originally written by that hacking unit of the Chinese army I can guarantee you we're going to end up having a different conversation about Bitcoin than we would before it's just it's just human nature so with that I will shut up I my preference is to go right to questions but I am a reporter so I have plenty of my own and I can throw out but does anybody in the audience want to want to kick us off don't be shy go ahead and either speak very loudly or microwave over to a microphone okay Jerry Honor I would point out one thing that just last week mint chip which was the Canadian mints attempt exactly were describing creating a digital a bearer dollar Canadian dollar threw in the towel and they have stopped development on that on that project and you mentioned cryptocurrency and I'm not sure that the state would create a cryptocurrency as we understand the word which means it's completely decentralized trustless sort of bearer digital instrument because a government is going to want to control the monetary policy and you know you're gonna be able to have to make competing currencies as you want so I you know you can imagine a country someday sort of backing a particular digital currency with their own currency we're tying it in some way that would be interesting but you know that's a long way in the future I would say this is a much more this is a niche thing but I think it gets at what you're talking about which is some state-sponsored somewhat the postal service inspector general a few months ago and i'm sure you guys all subscribe to their newsletters but actually developed a rapport looking at sort of you know the Postal Service's is broke and they're trying to figure out how to not be broke and one of the ideas is in some way using digital currency as a as a business in some way but they also explore the idea of developing a post coin and i don't i'm not an expert in postal policy but internationally there are these international clearing houses where if you send something to Paris the postal service the United States has to settle up with the postal service in France to to pay for that last mile of delivery the they think there's a lot of promise to have a international post coin too because these clearinghouses take a long time to sort of settle up and it's kind of a clunky payment rail process so they've they're seriously exploring or at least have thought about it at this point about developing a digital currency specific to postal services I could see that if the postal services across the world have that problem i'm sure there are other niche businesses that could also perhaps use you know digital payment rails in a similar way maybe that's how it develops and i don't know but that's a specific thing that i know at least has been explored in the united states so far i would just say that bitcoin the protocol itself could allow for that something like that to happen the post office could ride above it on a layer but also what you may have heard about are these things called altcoins and so i'll just talk about that for a quick second because an altcoin most common now like you may have heard of kanye coin which was like Kanye West that got shut down or dogecoin or doggy coin or litecoin and what a lot of people have done because bitcoin is an open source protocol other programming genius people and wherever they may be in the world have taken that protocol and made slight tweaks to it and then released it and let other people access it and try to run with it so I think that one of the geniuses of open-source software and Bitcoin in general is that you can make tweaks throw it out to the market and people can take it or not Bitcoin has been the first mover it is it has sort of flaws to it but those can be fixed and I think there's a lot of innovation that will happen I mean it's crazy to me that the system we use for moving money around is hundreds of years old checking account ledgers those kind of things I mean we're in the 21st cent 20 seconds into whatever century 2014 and we're using a system that's around for hundreds of years I mean we need to advance that system and bitcoin is the Internet of money or at least what it hopes to be the Internet of money I'm just going to add I agree with everything that's been said to try to go along with the hypothetical a little bit you know if the US government were to support a new cryptocurrency that was decentralized but yet backed by the dollar such that it would be stable valued and essentially pegged to the dollar I think that and you could send money from you know point A to point B without a financial intermediary I think that would be revolutionary amazing and that the value of Bitcoin quickly plummet because there would be little reason to use it that sort of you know I'm going out on a limb here but I think you know that supports what my colleagues are saying which is that the development of alt coins these other other similar technologies but that build upon Bitcoin and various ways are very very important some innovations going to happen within Bitcoin something's going to happen within other similar technologies so not to just push back a tiny bit simply that i can see that too right so this is what canada try to do with midship right is exactly that and i can see the US government eventually doing that but i don't think they would create a cryptocurrency i agree you're great I yeah it's so so if you so because with the cryptocurrency basically you bacon to the algorithm monetary policy and then you set it free and it's very difficult if not impossible to alter the monetary policy and a government the United States probably is not gonna want to give up that kind of control I I think so I agree with the premise that it's very unlikely they have a government create a cryptocurrency it looks like Bitcoin but I think it's possible to build one that doesn't have the same restrictions on supply I think you could have it work in the way it does except that supply is connected to you know a group of people at the Federal Reserve and just so everyone knows bitcoin is limit to 21 million bitcoins ever so the way the mining works is in the way bitcoins are created is miners solve these problems and as a reward they get bitcoins right now I think it's 25 bitcoins every 10 minutes and in solving that problem they're supporting the network that tells people what transactions have occurred so it's a virtuous circle between the creation and the end Bitcoin which is why it's grown and become so powerful but it's limited to 21 million bitcoins now that can go down nine decimal 8 decimal 98 decimal points so that's actually consilium zuv bitcoins potentially but that's a limit and the US dollar doesn't have that limit Treasury can just print dollars all day and we're all stuck not that I mind it cuz I like the US dollar we're all stuck with that though because the only way we can pay our taxes the only money that the government is going to honor is US dollar so the US dollar is not going away I think most people view bitcoin is an alternative currency a way that can complement sort of restrictions that we have with our current currency and it can build different things on top of it sorry throw out one fun thing that you can look up is a look up Aurora coin on the internet and you know this involves Iceland which is a fascinating case because as a result of the financial crisis Iceland has really tough capital controls and because bitcoin is a way to move value outside the current system of capital movement the Icelandic government has been not surprisingly very very hostile to Bitcoin so at one point some cryptocurrency enthusiasts we don't know quite who it was we're planning an airdrop I'm not making this up an airdrop of paper into Ireland with the various computer codes necessary to unleash the value of a royal coin so they could smash the shackles of fiat currency for the citizens of iceland it's the precise reverse case of what the questioner asked about but it tells you something about where governments come from on this we had a lot of questions let's see I saw you first in the back there with the right yeah hi thanks for coming I've for questions you could take your ignore any of them they concern I'll just rattle them off they concerns cybersecurity anti-fraud regulation and AML regarding cyber security I was wondering if you think the private sector is sufficiently incentivized to prevent the types of huge hacks and cybersecurity risks we've seen regarding anti-fraud do you think that the multi-party approval option or other parts of the Bitcoin algorithm that evolved by community consensus could be marshaled to solve some of the anti-fraud problems regarding regulation to what extent our currency and country-specific regulatory efforts sort of whack Amole where use will just move to the path of least resistance like less regulated countries or any of the other 190 + virtual currencies and regarding AML do decentralized anonymizing processes like coin join mean Bitcoin will always be perfect for people who want to launder money maybe we could group those and I'm going to be an assignment editor here maybe Ruben and Jerry no okay I want to see the whack-a-mole Rubin and Jarrett and take a big swing at the group um good okay I wanted to response the whack-a-mole question which I think it's great great series of questions so you would there are a lot of countries right now where there are really no regulation on on Bitcoin and you would think that everyone would move there and in certain cases your rights a lot of exchanges are established abroad if you look at where their main legal entities or house it's you know nicaragua or slovakia or something like that but i think those institutions very very quickly realize that by by putting themselves in these random countries that no one thinks has effective afore sment mechanisms not to pick on those two in particular i mean those in particular but it becomes very difficult for them to raise capital and to build trust with their with your customers and so you're actually seeing an enormous amount of investment in Bitcoin businesses in the US and I think a repatriation of some bitcoin-related money and businesses to the u.s. in part because the regulation that I think is coming very soon here is going to be smart and responsive and is going to help build trust I you know I think this is sort of a paradox in that you know people in in the Bitcoin world on the one hand don't want regulation on the other hand we want it because we want clarity you know it's tough to balance and find what's the right set of regulation but I think everyone agrees that if you achieve this this balance it'll be very very good you'll get trust from your customers I'm you'll have good relationships the regulator's it will be ultimately great for for everybody so on the cyber security question we've seen many security issues related to Bitcoin so a lot of Bitcoin stolen especially from exchanges that then go out of business I think what's important to understand is that there's nothing inherently and secure about Bitcoin itself the protocol the system the network to the contrary bitcoin is incredibly secure in a sense that it is impossible to counterfeit a Bitcoin the you know unlike the way it easy or not easy but it's not difficult to counterfeit a US dollar so the Bitcoin actually is very secure when it comes to the units and the transfer of the units that that's basically perfectly secure watch tomorrow we'll have a breakthrough in cryptography yeah so so that said what all the security problems we have with Bitcoin our basic cyber security problems meaning it's the issues not with Bitcoin issue is with computer security if your computer your network is insecure and I can break into your network I can steal your Bitcoin right so that's not about Bitcoin be insecure us about your network being secure and I think what bitcoin does is that what it's doing is it's putting incredible is creating an incredible incentive for people to try to break into networks and we've had hacking very long time and we've had cyber security concerns for a very long time but what do you what do hackers normally steal or what could the for Bitcoin what could they have stolen well they could have stolen IP in which case okay now you have the IP if you're China maybe you can pass it along to you know corporations are associated with the state to make use of it okay or if you are more pedestrian hacker of your Russian mafia maybe you can steal credit card numbers and then what do you do with those where you have to fence those or you have to utilize them yourself to buy goods or to otherwise you know get money out so it's it's it's very intermediated with Bitcoin once you break into the computer and you grabbed a Bitcoin you have them you have cash and so what this is doing is it's creating a great incentive to break into computers and to answer your question I think it is equally creating an incentive to secure computers because if you have your computer broken into you're going to lose money right it's not it's not sort of a tertiary law so you're going to have you're going to literally lose the money so it's it's just amping up the arms race that we've already seen for a very long time so I just want to push back up very very quickly I just want to say every single almost every single exchange and wallet provider has been hacked and people have had their money stolen you know and I'm probit coin but I think we need to be really honest and I think that should gives you an indication of you know what incentives are and are not enough I I don't think they're enough I i think i think regulators have been coming in and and then play a role here i I think that just to counter that pointer add on to it you know when you're holding money people are going to try to take it people who try to rob banks people try to do other things armored cars whatever bitcoin is is money or property that you can use convert quickly to money I mean the same week you had Mount GOx meltdown and there was a huge investor loss or exchange customer loss allegedly and it's a little unclear citibank lost four hundred million dollars in Mexico I mean these problems are not unique to Bitcoin it just happens to be something a new way for criminals take money potentially and its problems that banks have struggled with for hundreds of years how to use secure people's money and I there's been a lot of innovation in this space and there's a lot of funding going into that one of the largest funded Bitcoin companies of recent note is Zappo's and they got I think 20 million dollars from very esteemed venture capitalists to set up secure vaults for people's Bitcoin holdings so where there's a problem there's a there's a solution that people are trying to work on so the next hand i saw was Steve right here and then you and then okay let's try to move around here you know touching on something that Reuben and brian said I think the IRS would very quickly lose interest in Bitcoin if it was dollar coin and there were no profits to be made and the question is you know if you trade currencies actually you're supposed to pay taxes if you make a profit it's not like currencies don't get taxed our turn currency trading doesn't get taxed so you know again I suggest that you know if NYU lot of law graduates didn't get taxed you know would be very popular in the room but it would distort the market why should Bitcoin when you make profit on it be different than or how would you have the IRS tax your profits on Bitcoin there's no de menos de minimis exception which there is with foreign currency so when you and I travel abroad and buy some euros and maybe it appreciates or maybe it doesn't no one's calculating that and paying tax on a de minimis level and I think the biggest problem here is again as a lack of engagement with the community about what bitcoin is not something what the IRS did for example just to related to FinCEN vincent issued guidance but it didn't anticipate really what mining was and it didn't really understand it and so they had to change their guidance at the end of last year and offer sort of clarity and when you have a government regulator who just comes in issues broad sweeping guidance three weeks before taxes are due without consulting with anybody in the community or any of the major players that just smacks of heavy handedness and it's max if you're going to have dumb regulation and I think what that can stifle innovation I mean we had the internet at first there was an Internet I mean you'll know more about this John but I think there was an internet sort of tax free internet sales were allowed to be largely tax-free on a federal level because Congress decided that we want to allow this innovation to occur and so yes the tax man is always going to get his or her do but when we're at 1994 were in 2014 with Bitcoin it makes sense to move slowly but intelligently in terms of when you put down sort of broad sweeping regulation and I'd be curious John's take on this they probably can't say anything officially but let me just say quickly that I don't think anybody is making the case that profits in Bitcoin should not be taxed I think if you owe if you buy something online annual sales tax you need to pay that sales takn in fact today merchant processors that except the coin collector sales tax and remitted okay if you are accepting your salary in Bitcoin as some people do or if your minor and you have your basic income in in Bitcoin you owe income tax ordinary income tax on that and today people pay that and if you buy Bitcoin and hold it and you realize the game you need to pay you no tax on that game the question simply is is Bitcoin property where is it currency and and it has to be one of those two and the IRS shows property which I think probably was the correct decision simply because bitcoins characteristics fit look more like like property and as a result the olden be as you mentioned if you had been classified as currency you would still owe taxes on any gains what's different between property and currency are the rates and also this de minimis exemption which is very important I think that's the key with property there is no de minimis exceptions for every cup of coffee and if i buy a dollar cup of coffee in the Bitcoin that i used to pay that i bought at 75 cents i have to report 25 cents worth of gain and that's something that with currency we don't and maybe we need John we need to have Congress addresses because Congress is only one who can really I'm I'm from the government not here to help you so let me just and I'm going to push back a little bit and just kind of walk you through sort of where the IRS garth guidance came from so about three years ago roughly the chair and ranking member of the Senate Finance Committee which is the Senate's committee that deals with tax issues asked the government accountability office which is Congress's auditing arm to take a look at virtual currencies and tax implications and that was everything from Bitcoin to World of Warcraft dollars to the whole sort of spectrum of digital currencies writ large and the j-o-b came back and said you know IRS has some stuff on this but not really and they need to develop it and IRS said okay and what GA was said specifically to them is to put it within the context of current law so what IRS did and again it's something that it's it's pretty new still we're still trying to kind of wrap our hands around it what it actually means but what they said you know they had two choices either property or currency and currency for tax purposes is very specific it's its legal tender and bitcoin is not you can't pay taxes with with Bitcoin you know it's not good for all dad's public and private which is on all of your dollar bills so the way they had to put it in the category of their current law and their current authorities is as property as essentially virtual gold in the same way that you you know as I understand it you know they view it as if I were buying a cup of coffee with a gold ingot which maybe starbucks will take probably not but obviously people don't buy things with gold ink it's so but you know they have certain authorities that we as Congress have given them throughout time and they had certain choice to make what the world role of Congress at this point is and frankly the role of the public in industry and folks like the folks are up here at this panel you know the fence and guidance after a time was based in large part on eagled which was a digital currency not decentralized but I'll was had a lot of legal troubles and years ago and and much of the fence and guidance was based on that and then applied to Bitcoin it wasn't a great fit in some ways and it was been refined after after the fact i would expect and my understanding from IRS as they are taking meetings with folks and taking comments and they're listening to folks in industry and i would be very surprised if you don't see further clarifications down the road and further refinements but again as we sort of observe either the IRS guidance or any other regulatory agency that comes down the pike with with with their thoughts on this you know Congress is going to have to take a look and these agencies are gonna have to tell us if they need additional authorities or additional definitions in order to deal with virtual currency in as a payment rail which is is how a lot of folks think it could be valuable let's get to our very patient questioner right here you had your hand up your question of just ask my let's move around the room yes could you speak up please um I practice tax law for more than five or six years and I'm gonna just and I'm interested in the UM the most you know um current financial is a financial product and I'm wondering whether so there is a two options for the tax treatment of a Bitcoin one is property one is currency and I guess there now there's consensus that it cannot be treated as a currency then my question is whether the treatment of a properties of right treatment right tax treatment so I want to ask the panel's about their opinion a you know about you know treating Bitcoin as um derivatives or secure it is instead of property ask you as a practicing tax lawyer had you have anyone come to you saying I've got this Bitcoin what do I do sorry I used to practice tax law back in Korea and also in the US but I I'm no longer protects practicing towel because I'm a PhD student right now so sorry about why don't I briefly answer derivatives maybe you can sir your securities oh you mean treating it for tax purposes acid derivatives yeah I just you know I don't think any of us I think you may have practiced tax law longer than anyone us on this panel so if you want to answer the question okay yeah yeah I'm treating it as a property is as a general matter is a right approach but since this is um based on the e-commerce or e you know electronic net electronical environment it's very hard to tax as a traditional property and that's why I'm asking whether you should be treated as aa you know kind of clothes I securities or quasi derivatives I understand that you know both you know derivatives or securities are not perfect treatment for the Bitcoin I knew I understand that but since property I think the property is not also perfect no treatment I wonder you know how you were thinking about this so this is way outside my comfort zone I'm not a tax lawyer but I would say I think it'll be interesting to see what responses the Bitcoin technology community comes up with I think you'll find while it providers and merchant payment processors to start baking in you know will take care of your tax problems for you the other thing I want to bring up is there is so I mean part of the idea of I think the way this works now is you have to track your you sort of have two options for if its property for pink tax as one as you track your basis so on the basis of you know I've spent a particular Bitcoin I bought that Bitcoin at that time at this exchange at this rate and I know exactly what i bought it for I'm the alternative is to use I guess it's life 0 or 5 photo remember which it is and apparently there's a you know very similar approach is used for for for securities where you know you can buy there's dividends that you get it a bunch of different you know prices and so you know at the point which you sell it you have to somehow either tie it back in a particular way or use one of these mechanism you know five for life oh so I would analogize to that i like i said i'm in a way outside my comfort zone here but i think i think this is something that the you know enterprising law students and law professors here who are more expert in tax could could really help out here with you have an itch to open the business okay well keep going a gentleman sort of reddish sweater just yell i'll repeat if we need to oh there it is so I've heard somewhat mixed signals today about regulate ability and my question is is essentially if what we're talking about is a system that is a protocol that's a basis on which any user can innovate and create intermediaries that are somewhat autonomous that function because of the community rather than because a corporation has propped them up as the way to do the thing so Jerry you mentioned the prediction market if we were to really make these innovative tools as open source community has made a lot of software that's become fundamental to the internet does that speak to the regulatory gullibility question determinative Lee it seems like you could regulate but it'd be something like what copyright has turned into we're in your criminalizing mass behavior and compliance becomes a non-starter on a certain level I think that's exactly right analogy right so you think about BitTorrent being sort of the successor to Napster Napster was centralized as a result you know you can shut it down BitTorrent is decentralized so you can't shut it down but they're still in the world of BitTorrent you're still going to be intermediaries so you still need to find the magnet file or the bit torrent file and so there will be websites at host these and so can you regulate these websites okay maybe we just centralized websites maybe you decentralize those and so I think this is ultimately always going to be a cat and mouse game but i think i think you're right i think ultimately it's going to be so take prediction markets you can imagine a world where it is a lot like prohibition and i think that file sharing has been compared to alcohol prohibition and eventually what happened with alcohol provision it was normalized with file sharing we're seeing not exactly normalization but we're seeing what we saw was at the record industry where the entertainment industry began to deal with it as a fact in the world rather than try to fight it so perhaps you might see a future where you know prediction markets become a fact in the world and so the choice becomes we want to normalize this and treat it in the same way let me throw something out to think about in this context one thing I've noticed some covering bitcoin is because it's not just a technology it's a currency and money is you can run these fantastic thought experiments you know fill an evening thinking about what you could do with Bitcoin and imagine yourself in a world where everything is decentralized there are no intermediaries and on and on and on and as a consequence of that like the the question is did question the regulate ability of the entire system but that system doesn't exist yet and will that system would that system exists if except as a niche I have my doubts and one of the central reasons for that is it's going to take a lot of money to operationalize the Bitcoin protocol as an effective payment system as an effective payment method though the whole caboodle and the money that wants to get into that is not interested in their innovative but they invest with what the intention of what every venture capital is invested is namely exiting they want to eventually have something that can be sold you know and there'll be a fun moment in mid coin history I'm convinced it's coming at some point or a big bank buys some piece of technology that's part of the Bitcoin ecosystem and effectively you know concedes defeat in one sense but in another sense that's the ultimate mainstreaming of Bitcoin but those are the scenarios that people are looking at building actual companies registered companies eventually listing them for an IPO or selling them and these these scenarios of something that's fun to think about in your mind but is very hard to imagine in practice I just just be aware that that's what you that's what you tend to do we heard this conversation many times and evenings / drinks you know the more drinks of crazy but BitTorrent exist right yeah and I don't think we should be so dismissive of BitTorrent is also I mean I I would not call that a mainstream nada yeah but open source software exists mostly because of user innovation a lot of these people don't even get paid for their work sure and apache runs the web basically but you know i just learned this today do you know how apache came about was a whole bunch of the big tech companies put people on it which is to say they were paying their salaries and they put together a paci they kicked in all sorts of intellectual property that was theirs for the purpose because there was a collective interest in making a patchy work so to say that individuals just came together and through this together in a decentralized fashion is not quite correct in that in the Foundation funds the chief scientist Gavin Andresen and funds a lot of the core developers of Bitcoin so even in Bitcoin some of the people who work on the protocol and sort of build the changes the foundation is that supports a number of them and has them on salary so I think but again like anything else anyone else can suggest a change to the protocol and maybe it gets adopted and maybe it doesn't I would just say the Carter your point I mean I don't think anyone here knows what the future is going to hold for Bitcoin and I think I'm not dismissive and I think those late-night exercises over beer are not only fun but i think you know ten years from now when we have this talk there'll be things done with bitcoin in the protocol or a protocol like bitcoin that none of us would have imagined in this room today and it's maybe some kid in college who came up with it just on the fly for fun I mean when Google came out and they wanted to digitize every book in the world or whatever you know could scan the whole world with maps because we can all go to Google Maps those things sound crazy and those are things kids would have bannered around in college and now those things are happening and I think you know I'm a sort of a non creative lawyer who likes to do criminal defense and I'm not going to come up with those ideas but there are people that will and i think you know that's what excites me about this is not what's happening today so much but where it's going to be 10 years from now and you know maybe i would say now still you shouldn't buy a bitcoin unless you're willing to lose everything but i think if you want to bet on the future and you're willing to take some risk a bitcoin as a decent bet and i think it will be exciting to see what happens just a question these two gentlemen have been waiting so you and then you with the beard yes so my question is kind of related to Peter's it's about the wisdom of regulating bitcoins we we just heard that bitcoins the future we don't know what's going to hold it's a really quickly changing technology and it's kind of impossible impossible to predict where it's going so that's the case why do we want to regulate it at all because it strikes me that any regulation that happens right now and a couple years will most likely be wrongheaded because we don't know where it's going or even worse will create a path dependency for Bitcoin such that what might have been an optimal allocation is destroyed because of the regulation and we go to a sub optimal path so how do you regulate in that context it's a great question I I think it means that regulars have to be really really careful there you know you can imagine a couple of different ways to write bitcoin-related regulation one might be I have in my mind you know coinbase or I have in my mind cracking or you know whatever exchange and here is what I think needs to happen on how they arrange their cold-storage and how they deal with this problem and how they deal with that problem the the other end of the spectrum is saying you know you need to deal with security reasonably period I think what you're going to find is responsible regulation is going to be somewhere in between where on the one hand it actually prescribed some standards and gives people some comfort that people are doing things the right way but on the other hand is is not so clear-cut and and solidified that it's not going to be able to respond to changes in Bitcoin or two new crypto currencies that come down the pike but but it's it's it's a worry i think it's it's it's you know it's it's hard to say what the right answer is here do we just wait another 10 years and see what happens I mean people are people have lost you know however hundreds of millions of dollars in macaques that that worries me and I think there's got to be a you know some way that regulation can help there without killing innovation without solidifying the innovation is happening cryptocurrency space here's something to chew on you know the Bitcoin industry wants clear regulation it's not as though the mainstream of the Bitcoin industry is saying don't touch us at all if you do anything you will kill this thing in its cradle because the mainstream you know the the smart innovators and the venture capitalists understand that they need to have a certain degree of certainty going forward if they're ever going to sell these you know build and sell these businesses I've no doubt that in a couple years times people will FinCEN is probably going to update its guidance on Bitcoin and money laundering within the next year you know so this stuff is going to happen and it may be but there are a few false starts before you know I hit the right formula I just want to point out real quick you know you should think critically when you hear people in the Bitcoin industry say we think regulation is good in part because of who it's coming from people who are very well-funded and it helps them sometimes once they figured out the lay of the land they've got the money they've they're running for regulations to be written for them and create high barriers to entry for others so you know something people might like the barriers to entry to the law and just like just add real quickly Jeremy a layer who's the CEO founder of a circle internet financial testified at our hearing and he said something to stop with me said it's you know it's one thing for a kid to sit in his garage and develop a photo sharing app and not feel like the government needs to come and regulate it it's a very different thing to create financial products or financial institutions which is what we're talking about here so you know there do need to be some rules of the road and and for folks who as a Carter just said who want it to become mainstream you know the average consumer I can't remember I remember distinctly when we first got America Online how long it took my mother to buy something on the internet because she was like so I'm going to send my credit card number through our telephone to who who's going to see it and and you know if you want consumers to actually be a part of this be a part of whatever financial products or services come I know later on top of this protocol or a protocol like it they're gonna need to feel some security or confidence in Bitcoin companies need banking but it's one of the biggest problems for any Bitcoin company is if you go in your bank and say I'm going to open a pickling company give me a banking out they'll say no way you know I guess you have like a very powerful venture capitalist it is fun yeah so FinCEN guidance lent credibility the IRS guidance despite its flaws or parent flaws lends more credibility to Bitcoin and what's happening here that's why we're here I mean it's becoming more and more part of the mainstream I think what everyone on this panel wants is smart regulation and that's always hard to figure out and tomorrow regulation means one thing to one person and one thing to another but everyone's in favor of innovation so the regulation that allows innovation but regulation that also protects people and make sure that terrorists aren't using this to fund their illicit activities so it's just finding that on that spectrum so yes sir thank you all for coming out i think it's wonderful to hear your perspectives on this so i work here at nyu with just security which is a national security blog and we've been very interesting hopefully we're putting up some coverage looking at Oh possible it might be for Bitcoin really to be used in a very serious way to move a lot of money out of the country I'm still getting a handle on the technical details but one of the questions that I have for you is looking at the ways in which bitcoin is not anonymous but it's pseudonymous how much do you think regulation can and should interact with the blockchain to try and understand where money's coming from and in your estimation do you think it is possible to do some aggregate analysis to ease some of the problems that people are really afraid of I know at the hearing in Washington everybody was sort of talking about you know this risk of really all the money's going to flee to all the terrorists everywhere and as much as I think that's an exaggeration being somebody who does look this issue I am really concerned and I'm curious how much you are so I think so a few things I mean law enforcement is concerned about the coin right now again we need to understand sort of how nascent this technology is and how small the market cap is there's a lot of ways for organized criminals and other folks that want to move large amounts of money across the world to do so and and they do it so law enforcement feels now now having said that you know the blockchain I would be very surprised and there's been independent academics sarah michael john from the university of california san diego student out there wrote a paper we've spoken to her several times and she did a lot of work to map the blockchain I would be very surprised if they're not people in the United States government that have done similar things so you know right now the potential to move large amounts of money there really isn't because there's not really large amounts of money in the large scheme of things to do so but law enforcement is definitely concerned and remains very vigilant and you know as as this you know as a part of the larger cybersecurity build up as crime moves to the web more and more I just think that you know the tool resources that they need to deal with it whether it's mapping or whatever well I think be a part of that larger effort so it's something that again at this point isn't there but I think law enforcement is vigilant in the future how love let me just throw something in here I was an editor bloomer walked over and handed me a paper in which somebody had found as many public Bitcoin addresses as they could and essentially reverse engineered the pseudonyms and said you know because people like Jerry occasionally throw a Bitcoin address out there in public so you can associate a name with it a lot of people do this and so you can reverse engineer and make it entirely anonymous know exactly who's doing what and I mentioned it's only because the editor who walked over and gave me this paper as a long time writer and editor in the intelligence fear so I don't think this you know and Bitcoin would not normally come come up on his radar unless somebody had sort of steered him to that so yes people are thinking about this you should also be in touch with the Atlantic Council in Washington they're doing they're doing some sort of event I think it's later this week or next but that was the first time that I noticed that some sort of geopolitical geostrategic foreign policy people who don't normally think about something as mundane as economics started taking up the idea of Bitcoin it may be because the director of the Atlantic Council's former editor of The Wall Street Journal at DARPA I know how some sort of sponsored a contest like a grant contest to D anonymize the block chain so DARPA has been looking at it Google is as Carter sir pointing out is you're probably easiest way to dia naanum eyes the blockchain you type in basically paste in a Bitcoin address weird that you're curious about in probably one out of four times you're going to get back a name and this is also where know your customer comes in right this is with the bank secrecy act is supposed to address so i personally use coinbase as you know the wallet angst into exchange service that i use and coinbase knows who i am and so if there's ever subpoena that needs to happen you know coinbase will turn over the information and also the more information you have through kyc about Bitcoin addresses the easier the michael john type analysis becomes so i think the probably the bigger challenge for governments are capital controls where what you're really looking to do is get the money out of the country so this is why countries like Iceland are very hostile to Bitcoin and China is sort of bivolo to potentially hostile because they're not so much concerned about the identity of the person there can turn about just not having money leave the country the do something Oh the gentleman my left is going to get the last question thanks I've heard a lot of advocacy of regulation for creating consumer confidence and I was wondering if we might want to look at the history of the origin of financial markets in Amsterdam in London in New York the past 400 years and looking at those as self-regulatory organizations so the London Stock Exchange created as their motto my word is my bond the New York Stock Exchange similar history as a private club so all of these people were equivalent of working in their mother's garage but it was private regulation rather than government regulations well there is movement out there for you know SROs there's a group called data that's meeting this week it's this week right yeah this week in Washington and it's for digital currency self-regulatory organization I think you will see that as a general direction I think responsible players in the industry do want to set up ways to police themselves and build trust and credibility you know though kind of things can only work so well and go so far but I think that is something that you will see more of with digital currencies in Bitcoin in general and I think people are generally supportive of those ideas I just want to say a couple things response one is in in the u.s. if you are not you don't have the support of a regulator it's almost impossible to build up something called a self-regulatory organization without running afoul of antitrust laws that's something that you have to think about the next is I guess what you're wondering is first of all you know our how long are we willing to wait for for regulation for you to build up things that are effective you know is it is is one mount gox enough is it too is it 10 I mean the other side of it may be well we think that regulation brought on by regulators by government is actually going to be less effective than what the community is going to come up with on its own I mean I think that's an important conversation to have I you know I'm not sure I'm I think I think it's time I'll just throw out something one of the it's not technically self regulation but the way industry associations encourage best practices this is something that industry often goes to regulators do and say you know where we're going to you know ensure that we follow these rules for self-imposed these rules for a consumer protection and so on and so forth and it's typically these come up in situations where the government is contemplating regulation the industry is trying to push back in the case of Bitcoin it's coming up because I think there is a genuine genuine desire to create good actors at the public and Trust the problem that they have run into and I've covered this in other industries is they are consistently unwilling to actually throw out the bad actors within within the ecosystem it's very hard for an industry to police itself and you know you brought up the the New York Stock Exchange I suspect national city bank was you know member of the new york stock exchange in in the 20s and early 30s with the onset of the Great Depression you know we know all sorts of bad things that they did as a result of the subsequent investigation so you know these private these private collections they definitely they definitely work and they definitely encourage certain practices but they don't have a great track record of policing themselves at least in the experience my experience covering them individually so I'll just throw this out for fun what something fun the Bitcoin sort of gives us a peek into is the possibility of algorithmic regulation where a lot of the sort of justification for regulation is to make sure that the counterparties are trustworthy right with Bitcoin or with blockchain technologies you could create contracts that are provably fair and provably execute and so you can imagine a decentralized exchange of some kind of stock exchange or something where were a derivatives exchange where you can prove mathematically that all of the transactions have happened to reconcile and that they have been fair and everybody's you know hand it over what they said they were going to hand over and so a lot of the justification for regulation goes away there so I mean it's it's a fun thought you know over beers thought experiment kick we don't wanna throw John out of a job though government so yeah I want to get it replaced with a drone or whatever we're talking about here no I think just real quick I think there's a lot of ways to cut the cake I think a CRO that that presents a plan and has legitimate actors and the private sector and perhaps with oversight from Congress and some industry players as well that could be a way that maybe buys us a few years to see how this matures or doesn't mature there's other ways to do it too but I think it'll it'll just be who kind of comes to the table and if they're perceived to be legitimate alright I'm uh I don't want to get the stink eye from the organizers so I'll say thank you very much for our panelists this is a great collection of knowledge here about a bitcoin of many facets you know read the primers read up it's there's much to


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