Author: Chamber

A Critical Moment for Blockchain Education in Congress

by Chamber

A Critical Moment for Blockchain Education in Congress

Chamber to Host Congressional Blockchain Education Day on July 18
with 120+ Members in Attendance to Address Misconceptions in Government

 

By Amy Davine Kim, Chief Policy Officer, Chamber of Digital Commerce

 

Never have we seen some of the critical commentary and statements around blockchain technology as we are seeing prompted by Facebook’s announcement of the new Libra platform.  This new platform, proposed to offer a payment solution using a blockchain, has drawn some of the most unusual and alarming statements from policy makers, including calls to ask industry to halt innovation and concerns around global financial stability.  Also concerning are the President’s statements critical of bitcoin and business platforms utilizing blockchain technology.  These types of conclusory statements do not fully comprehend the full impact of this technology or the breadth of companies that are innovating in this industry.

This is an important moment. One where fear of the unknown and serious misunderstandings are impacting our ability to move forward, progress as a nation, and remain leaders in entrepreneurship and innovation.  Given the wide range of commentary offering inaccurate descriptions of law and the technology, it is acutely critical that lawmakers understand the industry they are seeking to assess and, potentially, regulate.

This is an industry using blockchain technology for the provision of a wide number of financial services – such as remittances, payment for goods and services, investment, and issuance of corporate interests/securities, for example.  But the story doesn’t stop there.  A significant number of companies are using this technology in other sectors, such as to track the origin of goods such as produce, develop digital identity solutions, provide more efficient and effective insurance claims settlement, allow for secure electronic voting and many others.  The impact of this technology will be felt in almost every sector of the economy.  Congress must take into consideration the full scope of these activities before considering whether to create additional laws to restrict its activities.

That is why education and advocacy at this moment is critical. 

The Chamber of Digital Commerce is hosting a Congressional Blockchain Education Day next week to bring more than 120 of our members to Capitol Hill to meet with Senators, Representatives, and their staff to share their platforms with legislators, bring this broad perspective to Congress, and demonstrate that this industry must be supported.

We are honored to host the four co-chairs of the Congressional Blockchain Caucus – Congressmen Tom Emmer, Bill Foster, David Schweikert, and Darren Soto – to address our members next week. They will kick off a day of vital discussion and information about the dynamic applications for this technology, existing regulation of this industry, and some of the frictions impeding progress for both long-established business platforms as well as technology start-ups.   

Given the critical focus of the United States on how to increase regulation and subsequent enforcement actions, many companies are looking to other, major industrialized nations to develop their platforms.  These countries include Singapore, Japan, Hong Kong, the European Union, and other countries that have realized the competitive advantage these technologies bring and are actively pursuing strategies to become leaders.  The United States is rapidly falling behind in innovation and entrepreneurship – traits that used to be the hallmark of the U.S. economy.  We must remain competitive in a global marketplace or risk ceding the development of technologies and standards that will dominate the way we do business in the future.

More than ever, we need responsible legislators who understand the full impact of this technology and how it benefits businesses, government, and consumers.  Now is the time for our members to join together to deliver this important message to Congress and to demonstrate the full potential and significance of blockchain technology.  

—

For real-time updates, follow Congressional Blockchain Education Day on July 18th on Twitter at @DigitalChamber using the hashtag #DCBlockchain. 

Canadian Federal Department of Finance Proposes Changes to Canada’s Tax Regime for Virtual Currency

by Chamber

Canadian Federal Department of Finance Proposes Changes to Canada’s Tax Regime for Virtual Currency

On May 17, 2019, the Department of Finance (the “Department“) released for public consultation a set of draft legislative proposals (the “Proposals“) which, if enacted, would amend the Excise Tax Act (Canada) (“ETA“) to treat virtual currency as a financial instrument for purposes of the Canadian Goods and Services Tax/Harmonized Sales Tax (“GST/HST“). The Chamber of Digital Commerce Canada filed a reply to the consultation applauding the initiative of the Department and asking the Department to: 

  1. Establish a specialized industry task force to ensure that all tax policy and legislation in Canada is reviewed holistically and can be applied in a manner that will not impede the growth and competitiveness of the emerging digital asset and virtual currency economy in Canada;
  2. Ensure definitions underpinning the tax regimes in Canada are clear, appropriately inclusive of the entire digital asset and digital currency ecosystem; and to,
  3. Ensure tax treatment of digital assets and digital currencies is consistent with provincial, national and international definitions being applied to virtual currency and digital assets.

The Proposal and Impact

The Department stated that the intent of the Proposals is to clarify that certain taxpayers who transact in virtual currency will not be required to charge and collect GST/HST on supplies of virtual currency despite present ambiguity in the ETA concerning virtual currency. The confusion comes from the lack of clarity around whether a virtual currency should be treated as property, a service or currency for GST/HST purposes.

The Canada Revenue Agency (the “CRA“) takes the position that virtual currency is a commodity and property for ETA purposes. If this position were maintained, the interpretation could give rise to anomalous GST/HST consequences for taxpayers who make supplies or transact in virtual currencies. For example, under the CRA’s current view, when a taxpayer acquires virtual currency, the taxpayer may be charged GST/HST by the person supplying the virtual currency.

Moreover, when a customer who is a GST/HST registrant pays a GST/HST registered merchant for a supply of goods or services using virtual currency as a method of payment, not only would the merchant be obliged to charge, collect, and remit GST/HST from the customer for the goods or services, but the customer might also be regarded as having made a taxable supply of the virtual currency to the merchant. As such, the customer may also be obliged to charge, collect, and remit GST/HST against the merchant.

The Proposals aim to address these issues by adding a new definition of “virtual payment instrument” to subsection 123(1) of the ETA and by amending the current definition of “financial instrument” to include virtual payment instruments. This change would make certain common transactions using virtual payment instruments exempt from tax under the ETA or zero-rated if provided to a non-resident, effectively lifting the GST/HST collection and remittance burden from most transactions involving virtual currency.

 

The Chamber’s Response

As part of the public consultation process concerning the Proposals, the Chamber prepared and filed a response (the “Response“) to the Department. The Response includes the following submissions.

1. The Department should establish an expert-led industry task force to facilitate collaborative dialogue to ensure that a holistic approach is taken to regulating virtual currency that will not impede the growth and competitiveness of the digital asset and virtual currency economy in Canada.

 

2. The Chamber supports the intent of the Proposals, which would alleviate the GST/HST tax treatment on virtual currency discussed above, but takes the position that:

·  the definition of “virtual payment instrument” is unduly narrow and would exclude certain virtual currency, such as stable coin, and certain digital asset tokens from this beneficial treatment given that the proposed definition presently carves out exchangeable, redeemable and convertible property;

·  given that the ETA defines “property” to be something other than “currency” the definition of “virtual payment instrument” is internally inconsistent as it requires a virtual currency to be “property” in order to qualify as a “virtual payment instrument” but also requires that the same virtual currency act as a medium of exchange, which is the conventional economic function associated with a currency;

·  the Proposals create uncertainty as to whether miners (and other taxpayers who supply virtual currency) will be able to claim input tax credits to offset GST/HST in respect of costs incurred to obtain and operate the infrastructure necessary to process transactions involving virtual payment instruments; and,

·  the Department needs to take into account definitional consistency and clarity between the ETA and the Income Tax Act (Canada) in order to ensure that the Proposals do not create unintended implications or further inconsistencies for income tax treatment and reporting requirements for virtual currencies.

 

3. The Chamber also highlighted certain present difficulties faced by Canadian taxpayers under the Income Tax Act (Canada), which the Department should address in order to alleviate the income tax burden associated with common transactions like buying a cup of coffee using virtual currencies.

 

Canada Considers Regulation of Crypto Asset Trading Platforms

by Chamber

Canada Considers Regulation of Crypto Asset Trading Platforms

Chamber Canada Presents Eight Principles-Based Recommendations

Canadian securities regulators are working to establish a regulatory framework for the digital asset marketplace. The Canadian Securities Administrator (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) recently published Joint Consultation Paper 21-402 Proposed Framework for Crypto-Asset Trading Platforms, requesting feedback from market participants on “how requirements may be tailored for Platforms operating in Canada whose operations engage securities law.” The blockchain industry has long called for regulatory clarity around the regulatory treatment of digital assets and trading platforms.

The versatility of digital assets has proved a challenge for regulators around the globe. The sheer number of unique characteristics that digital assets may represent means that much work remains to be done to understand their potential and functionality. A digital asset can be a security, a currency, a commodity, property, or even a hybrid of these characteristics. Some have even suggested that a digital asset may initially represent one functionality, such as a security, and then shift and represent another, such as a commodity. When it comes to the regulatory treatment of digital assets, this very versatility can be baffling at best.

The Chamber of Digital Commerce Canada welcomes the opportunity to engage with CSA-IIROC and recently submitted a comment letter on their Joint Consultation Paper. Below is a summary of our comments.

Our Recommendations for Canadian Regulators

At the heart of blockchain technology innovation is tokenized networks.  All assets, whether tangible or intangible, can be tokenized, tracked, traded, and stored on blockchains. Digital asset trading platforms are a foundational part of a global blockchain infrastructure. They are the on and off ramps into the blockchain ecosystem. In our response, we proposed eight core recommendations to CSA-IIROC regulators to help establish a robust blockchain ecosystem that meets the needs of securities and non-securities stakeholders:

Recognize that not all digital assets or digital asset trading platforms should be considered within the reach of securities, commodities, or derivatives regulatory frameworks.

  1. Publish frequent, timely, and transparent guidance on digital assets, digital asset trading platforms including guidance related to digital assets that are, and are not, considered to be securities, commodities, or derivatives.
  2. Coordinate with other policymakers and regulators, including the Department of Finance, FINTRAC, and the Canada Revenue Agency, to ensure that regulations are aligned, consistent, clear, and not overly burdensome to industry.
  3. Take a principles-based, technology-neutral approach to regulation and policy to foster innovation.
  4. Establish meaningful industry dialogue and collaborative consultations to create effective and appropriate policy, regulatory, and legislative regimes for the global digital marketplace.
  5. Establish a task force of experts to work with federal and provincial government policy makers and regulators to fully study and review each aspect of digital asset trading platforms alongside broader global regulatory frameworks and objectives.
  6. Develop objective investor and consumer education tools to help inform the public about digital asset trading exchange platforms and associated risks and benefits.
  7. Take the time necessary to research and review the global blockchain ecosystem, considering all policy and legislative perspectives, to design and support a competitive blockchain ecosystem in Canada.

Foundational Marketplace Research and Policy Discussions Are Needed

Blockchain technology is fundamentally reshaping how we interact with each other and how we acquire and transfer value digitally. Companies in all sectors, not just financial services sectors, are being impacted by this technology.  It is time to bring additional clarity and support to the blockchain ecosystem so that Canada does not get left behind while the rest of the world moves forward.

The much bigger question is where do we start?  The CSA-IIROC proposal brings the conversation forward, but industry participants feel quite strongly that it does so without addressing fundamental points of clarity like, when is a digital asset considered a security or not? And when is a trading platform no longer a money service business? There are many more questions that appear to be unanswered and, if addressed collaboratively between policy makers, regulators, and industry, may actually allow Canada to establish a clear and successful path forward.

Steps toward Making Blockchain Technology Mainstream

Working to establish cross-Canada policy and regulatory regimes is crucial to ensuring that innovators, markets, consumers, digital asset owners and trading platforms, and everyone in between knows how to best act to take advantage of blockchain technology. Through our work, it is clear that companies operating in Canada are keen to work with policy makers to establish a path forward. We encourage CSA-IIROC to find solutions that work nationally and internationally that encourage innovation and economic opportunity.

As a next step, we’re told by regulators that the industry comments will be considered in drafting a balanced policy and regulatory approach for digital asset or “crypto-asset” platforms.

The CSA and IIROC are expected to host broader industry roundtables and additional consultations as they work toward a proposed draft regulatory framework.

So, while the regulatory waters are still a bit murky for digital assets and their trading platforms in Canada, collaborative discussions that support industry will best promote this highly innovative sector of Canada’s digital economy while ensuring efficient functioning of the market place.

Following the Chamber’s recommendation, IIROC has launched a call for participants to join its newly established Crypto-Asset Task Force.

To view the Chamber’s comments to CSA-IIROC, please visit here.

New Report Card Measures State Legislative Support for Blockchain Tech

by Chamber

New Report Card 

Measures State Legislatures’ Support for

Blockchain Tech

 

Exponential Increase in State Blockchain Legislation

State legislators started recognizing the economic and consumer opportunities that blockchain technology can bring as early as 2014 and began to introduce legislation supporting its growth. Recognizing this upward trend, we published our Legislator’s Toolkit for Blockchain Technology prior to the start of the January 2019 state legislative sessions. State legislators want to promote blockchain technology in their states.  Our goal was to arm policy makers with ideas for legislation that would benefit the growth of blockchain technology.

So how are the states stacking up? Nearly six months later, our State Working Group is taking a closer look through the introduction of a new State Blockchain Report Card. The results:  The introduction of state blockchain legislation has exploded. In fact, we’ve seen an increase from 64 bills introduced among the state legislatures in 2018 to 237 and counting as of May 16, 2019. Of these bills, 55 support the concepts in our Toolkit.

One of the key suggestions in the Legislator’s Toolkit for Blockchain Technology, and one of our primary principles in our National Action Plan for Blockchain, is the development of an office to coordinate resources and information to support blockchain technology.  The following states have created working groups or task forces specific to blockchain technology: California, Delaware, Illinois, New York, Vermont, and Wyoming; while 11 states have introduced legislation to create a government office or group that focuses on promoting blockchain technology: Connecticut, Florida, Kentucky, Maine, Massachusetts, Nevada, New York, Oregon, Texas, Utah, and Virginia.

We look forward to seeing even more support for blockchain technology in state legislation throughout the year and in the next legislative sessions.

 

A Patchwork of State Smart Contract Legislation

The federal Electronic Signatures in Global and National Commerce Act (E-SIGN Act) and the state Uniform Electronic Transactions Act (UETA) are technology neutral and thus already address the enforceability of signatures and records using blockchain technology and smart contracts.  Nevertheless, in an attempt to support the technology, Arizona, Arkansas, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, and Washington have all enacted disparate amendments to their electronic transactions laws. And four states – Connecticut, Illinois, Iowa, and New York – still have legislation pending to do the same.

While there is no doubt that these laws share a common goal – to encourage and support blockchain development in their respective jurisdictions – these state laws are independent of one another, are inconsistently drafted, and create a patchwork of inconsistent laws from state to state.  This makes it difficult for global digital businesses to comply with laws in the United States and is a barrier to entry to the market.  As noted by the Uniform Law Commission, “… the UETA already adequately encompasses blockchain and smart contracts, and changes to specifically address these technologies are not only unnecessary but also detrimental.”

Seven U.S. Members of Congress Urge Administration to Support Blockchain Technology

by Chamber

Seven U.S. Members of Congress Urge Administration to Support Blockchain Technology

This week, seven Members of Congress wrote a letter to the Director of the National Economic Council requesting that the Administration “hold a forum on blockchain technology and include blockchain technology in the initiatives the Administration intends to promote on emerging technologies.” The letter is the first step in making blockchain technology – the innovation and the economic benefits that come with the technology – a national priority. The letter was led by Congressman Trey Hollingsworth (R-IN) and supported by members of the Congressional Blockchain Caucus including Darren Soto (D-FL), Bill Foster (D-IL), Tom Emmer (R-MN), Ted Budd (R-NC), Josh Gottheimer (D-NJ) and David Schweikert (R-AZ). The Chamber was happy to work with Congressman Hollingsworth and his staff to bring life to his vision to support blockchain technology on a national level.

We view the letter as a key component of the Chamber’s National Action Plan for Blockchain, which calls on the U.S. Government to make support of blockchain technology a priority.  Specifically, it:

        • Urges the U.S. Government to publicly support the development of blockchain technology in the United States; and
        • Provides a set of guiding principles for government as it considers how best to support blockchain technology, including that industry must lead innovation.

The current regulatory environment is stifling innovation in the United States and this letter will help spark an important national conversation about these issues.  The forum will bring together key public and private stakeholders to address the benefits of the technology, how it can improve business and government processes and promote financial inclusion, while focusing on important barriers to the responsible development of the technology.

Moreover, the U.S. Government is currently supporting key technological advances in 5G, artificial intelligence, and quantum computing.  Blockchain technology is widely recognized to have similar transformational potential and must be developed and promoted as a key technology that will fuel cutting edge industries of the future.

“Innovation is part of this country’s DNA and our efforts to further develop blockchain technology can help our country remain a leader in invention and modernization,” said Rep. Trey Hollingsworth, Vice Ranking Member of the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. “I am encouraged by the Administration’s efforts to explore financial technology and artificial intelligence and I look forward to working together as the technology evolves.”

We fully support Congressman Hollingsworth and the members of the Blockchain Caucus as they advocate for the promotion of blockchain.  These efforts bring the blockchain ecosystem one step closer to realizing the vision presented in the National Action Plan for Blockchain – one where blockchain technology benefits industry, government, and consumers alike.

The Future of Digital Assets Are Counting on Updated Accounting Standards

by Chamber

The Future of Digital Assets
Are Counting on
Updated Accounting Standards

The Future of Digital Assets Are Counting on Updated Accounting Standards

By Paul Brigner, Director of Technology Policy

The Chamber regularly advocates for updated legal and regulatory frameworks for digital assets, so it should be no surprise that we are also in support of updated accounting standards. As we look to the future, the potential for digital assets is enormous with major corporations starting to invest in them and even accept them as a form of payment. However, in order for digital assets to truly become mainstream, businesses, their accountants and even consumers need better guidelines on how to account for their digital assets. To address this need, the Chamber’s Digital Assets Accounting Consortium (DAAC) has been focused on advocating for the development of accounting and reporting standards for digital assets.

About two years ago, DAAC asked the Financial Accounting Standards Board (FASB) to address accounting for cryptocurrencies, and we have continued to engage on this issue with relevant standard-setting bodies.  On May 15, the Chamber submitted comments in response to the International Financial Reporting Standards (IFRS) Interpretations Committee tentative agenda decision on Holdings of Cryptocurrencies published in the March 2019 IFRIC Update. 

Our comments were informed by results from a recent industry survey conducted by DAAC as well as a set of use cases that demonstrate the various ways in which cryptocurrencies can be held and used in different situations, thus impacting their accounting treatment.  Based on our survey results, use cases, and member feedback, our position is that IFRS should allow for different methods of accounting depending on the intent and use of the crypto asset. For example, these methods should include the option to apply the relevant IFRS accounting standards for investments, inventory, and intangibles.  Read our full comments for more detail.

Accounting standards are of paramount importance for the blockchain industry and an indispensable resource for accounting professionals who are lacking guidance on how to properly account for holdings of cryptocurrencies.  As such, we are counting on IFRS, FASB, and other standard-setting bodies to set appropriate accounting standards that recognize the various uses of digital assets.

Visit the DAAC page on the Chamber’s website and learn more about how you can get involved.

The New World of Decentralized Identity

by Chamber

The New World of
Decentralized Identity

The New World of Decentralized Identity

 

By Vinny Lingham, Co-Founder & CEO, Civic

When it comes to managing personal information, there is a lot left to be desired. While nearly 64 percent of Americans have experienced or been notified of a significant data breach, only 30 percent of adults worry about the security of their passwords, and 71 percent still think there are too many security measures.

Yet, identity is essential to everything you do in your daily life, and the ability to control and protect our personal data is critical. We need to start thinking about identity differently.

 

The Role of Identity

Proving identity is how people engage with the world. It is how people apply for a bank account or a job.

“It’s how people order transportation through an app on their mobile phone, get into a bar to have a drink, or log into any online account. Even if it is as simple as swiping a fob to get into your office building, possession of that fob serves as proof of who you are.

Identity also influences our lives in more subtle ways. Senator Mark Warner recently published policy proposals regarding the regulation of social media. The first topic is disinformation, presumably motivated by the fallout from Cambridge Analytica and the ongoing debate about foreign interference in the U.S. elections process. Disinformation initially might not seem related to identity, but identity is an underlying issue in addressing concerns about bots and astroturfing with online accounts.

Understanding who we are interacting with online is critical.

 

The Problem with Identity Now: Centralized Databases Make Us Vulnerable

Before the height of the digital transformation, the majority of interactions were generally in-person. Now, we engage in thousands of communications and transactions online, and many of our identity problems start with the way we collect and store information. This information is vulnerable in centralized databases, and once these databases are breached, it’s difficult to regain control over that information.

Take Equifax for example. More than 140 million social security numbers were stolen, and there is no way to recall those breached records. The bigger problem is that we rely on knowledge-based identification. If you have my social security number and some identity facts about me, it’s relatively easy to hack my accounts or impersonate me. And with more and more of our transactions being done online, hackers can destroy people’s lives in seconds.

Today, it is difficult to establish trust, both as an organization and an individual. Organizations pay a lot of money to protect the information they collect, yet large databases are increasingly valuable and difficult to protect. People are losing trust. According to Pew Research, 42 percent of people have stopped checking social ,media for several weeks or more, and over 25 percent of people have deleted social media off their phone in the past year. The list can go on and on.

We need identity solutions that will help build trust and ensure that the people are who they say they are, whether approving an insurance claim or personal posts on the internet. We need to unite the person behind the keyboard with the personas they create online in a seamless, secure way.

 

Transforming Identity: Blockchain Offers the Opportunity to Change the Way We Prove Who We Are 

When identity is tied to pieces of information, it’s relatively easy to impersonate people and replicate documents. Blockchain technology gives us a new way of approaching identity. With blockchain, you can create encrypted public points of reference. This means a signature that verifies your information can live on a blockchain, where it can be referenced by anyone who needs to verify your identity. Instead of proving identity by sharing information, people prove identity by proving ownership of information.

Blockchain enables a much, much higher bar for hacking and stealing someone’s identity.

 

The New Concept of Identity

We currently live in a world where people don’t have control of their identity information. Information is stored in central places and not reusable, unless there’s a third party involved in the authentication process. As we move towards a new concept of identity, individuals will regain control and have the ability to protect their personal information from being hacked and misappropriated, and the way that we prove who we are looks a whole lot different.

Imagine scanning a QR code with your mobile phone to prove you’re over 21 to get into a bar; to vote using credentials on your mobile device, as opposed to plastic ID cards; or being able to log into any app or website without needing to remember a username or password. Imagine that your identity is tied to you as a person, rather than abstract information about yourself like your car in high school or your mother’s maiden name.

It’s a slow journey, but we’re making our way to the new world, where identity is decentralized and in hands of the people that it identifies, and I’m looking forward to the day where we have more control over our identity and our humanity.

Around The Block: Member Viewpoints – Dave Schoepfer, Wipfli

by Chamber

Dave Schoepfer, Partner at Wipfli describes their desire to share information with other Chamber of Digital Commerce members and how beneficial it is to their clients, especially in accounting. In this Around the Block: Member Viewpoints, Schoepfer explains the importance of regulation and how it will affect the members of the Chamber and people in the industry worldwide.

Financial Action Task Force Proposes Recommendations that Impact the Global Blockchain Ecosystem

by Chamber

Financial Action Task Force Proposes Recommendations that Impact the Global Blockchain Ecosystem

Financial Action Task Force Proposes Recommendations that
Impact the Global Blockchain Ecosystem

The Financial Action Task Force is taking significant steps that could impact our industry. Here’s what you need to know.

The FATF Sets Global Anti-Money Laundering Standards.

The FATF is a multi-governmental organization that sets standards and promotes global implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats to the financial system.  The FATF thus develops anti-money laundering policies to bring about national legislative and regulatory reforms in its member countries.

The organization maintains a series of Recommendations that are recognized as the global anti-money laundering and counter-terrorist financing standards.

The FATF monitors the progress of its members in implementing necessary measures and publicly identifies countries that fail to meet its standards. This can have significant implications for financial institutions operating in or with those countries.

The FATF’s AML Standards Were Expanded to include Virtual Assets and Virtual Asset Service Providers.

Last fall, the FATF’s Recommendations were amended to include a set of definitions for what it calls “virtual assets” and “virtual asset service providers” (VASPs).  In February, the FATF adopted an “Interpretive Note” to explain the application of the Recommendations to virtual assets and VASPs.  In the process, it asked for public comment on how to apply existing Recommendations regarding wire transfers to VASPs.

In setting these definitions of virtual assets and virtual service providers, the FATF expanded the universe of things subject to money laundering and terrorist financing beyond typical payments and money transfers to include:

a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations. (emphasis added).

Virtual Asset Service Providers include:

any natural or legal person who is not covered elsewhere under the Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

  1. exchange between virtual assets and fiat currencies;
  2. exchange between one or more forms of virtual assets;
  3. transfer of virtual assets;*
  4. safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
  5. participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

* In this context of virtual assets, transfer means to conduct a transaction on behalf of another natural or legal person that moves a virtual asset from one virtual asset address or account to another.

The Chamber’s Response.

Earlier this month, the Chamber submitted a letter to the FATF expressing concerns in relation to the FATF’s proposed paragraph 7(b) of its Interpretive Note to Recommendation 15 which advocates two key principles:

 

1. The Definition of Virtual Asset Is Broad, Going Beyond Typical Payments or Medium of Exchange, and Must Be Limited to Payments or Medium of Exchange When Applying AML Standards to Virtual Asset Service Providers.

The FATF AML Standards are designed for financial institutions to develop an added protective layer between ordinary commerce and financial systems.  As the FATF noted in its 2015 Guidance for a Risk-Based Approach to Virtual Currencies, it focuses on the “gateways” to the regulated financial system, such as convertible virtual currency exchangers.  The broad definitions of virtual asset and virtual asset service provider in this context makes it unclear who is captured within the requirements.

It is more common to see descriptions of regulated financial activity involving a virtual asset limited to its function as a medium of exchange (such as in the FATF’s 2015 Guidance for a Risk-Based Approach to Virtual Currencies and FinCEN’s 2013 Guidance – Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies), and more particularly in the wire transfer context.  The FATF’s own definition of a wire transfer requires that the transaction be carried out through a financial institution.

Note that the FATF’s 2015 Guidance focused on Virtual Currency Payments Products and Services (VCPPS).  In just 3 years, the FATF has changed its terminology, as well as the scope, indicating that this is a quickly evolving area requiring close study to avoid another such shift.

 

2. It Is Inappropriate to include the Broad Scope of Virtual Assets within a Wire Transfer Framework.

Considering virtual assets within a wire transfer context misunderstands the way in which virtual currency transfers work.  Transfers of virtual currency may not always involve regulated financial institutions at both ends, which is contrary to the very definition of wire transfers used by the FATF.

This interpretation would also cut off independent users from accessing regulated exchanges unless they, too, established their account at a VASP.  The requirement to obtain incoming originator information or outgoing beneficiary information would effectively block out any potential participant that does not hold its account at a VASP.  This could have a devastating effect on encouraging growth among this community within a regulated environment, potentially pushing it out.

Building a Coalition to Ensure Effective AML Compliance.

The proposed paragraph 7(b) of its Interpretive Note to Recommendation 15 will be finalized in June 2019.

The Chamber supports effective regulatory action to mitigate the risks presented by emerging technologies, including virtual currencies, but believes that more work needs to be done before a final interpretation and definitions can be issued to effect meaningful compliance.

As part of our efforts to promote sound anti-money laundering and counter terrorist financing (CTF) compliance regimes, the Chamber’s Chief Policy Officer, Amy Davine Kim, along with several Chamber members, will be attending the FATF’s public consultative meetings May 6-7, 2019 in Vienna, Austria.

While each business has its own specific perspectives on the details of these issues, the industry is unified in these broad principles.  We are coordinating a group of industry members to help present these important factors to the FATF. Let us know if you’ll be in Vienna.

New SEC Framework Signals the SEC is Open to Recognizing that Tokens Are Not Securities, But Does Little to Advance Clarity

by Chamber

New SEC Framework Signals the SEC is Open to Recognizing that Tokens Are Not Securities, But Does Little to Advance Clarity

New SEC Framework Signals the SEC is Open to Recognizing that Tokens Are Not Securities, But Does Little to Advance Clarity

 

What happened

On Wednesday, April 3, the SEC released staff guidance entitled, “Framework for ‘Investment Contract’ Analysis of Digital Assets,” to discuss its application of the Howey Test to digital assets.  Specifically, the guidance describes the various considerations for determining when a digital asset may constitute an “investment contract” under federal securities laws based on the actions of promoters, sponsors, or other third parties. The SEC also issued a No-Action Letter regarding TurnKey Jet, Inc.’s (“TurnKey Jet” or “TKJ”) plans to develop a program to use digital tokens to facilitate transactions.

The SEC staff stated that it will not recommend an enforcement action against the interstate air charter services company’s program as described because:      

  1. funds from digital token sales will not be used to develop its blockchain platform, network, or app;
  2. tokens will be immediately useable upon purchase;
  3. the tokens will only be tradeable in the TKJ wallet and not wallets external to the platform;
  4. the price of tokens will be maintained at $1 USD and can only be resold to TurnKey Jet at a discount to their face value; and
  5. the marketing promotion focuses on the functionality of the token over its potential increase in market value.

Why it’s important

Both of these developments are pivotal efforts that will help define how various types of tokens will be treated by U.S. regulators. Said another way, depending on how they are defined, the SEC could assert sweeping jurisdiction (read: enforcement) over the token industry.  If within the SEC’s scope, tokens and token sponsors must comply with SEC registration and reporting requirements or qualify for an exemption.  

Our take on this development

As explained below, our overall view of these developments is that they represent a cautious, albeit imperfect, first step. Importantly, a few kernels of evolution should be noted:

    •  
    • First, the fact that the SEC (staff) has issued a document acknowledging in more detail that tokens may not be securities and provides in depth criteria for determining when that may be the case, comes a long way from Chair Clayton’s statements made in February 2018 during a U.S. Senate hearing that every ICO he’s seen is a security, as well as conversations we have had with the SEC last year.
    • Moreover, the Framework acknowledges in writing (rather than verbally in a speech) that tokens may be a security at one point in time, and then no longer maintain those characteristics of a security as the platform evolves, a policy position that William Hinman, Director of the SEC’s Division of Corporation Finance, notably enunciated regarding ether in remarks at an industry conference on June 14, 2018. 
    • Finally, the Framework also recognizes that virtual currencies may be viewed differently, albeit as a factor in the overall equation. That said, bitcoin and ether should be considered outside the scope of the securities laws given the SEC’s requirements that a currency be immediately used to make payments in a wide variety of contexts or act as a substitute for real currency, may be used to pay for goods or services without first having to convert it, and operate as a store of value that can be saved, retrieved, and exchanged for something of value at a later time.
    • Unfortunately, the good news stops there. By developing a list of over 60 criteria for analysis, the SEC staff has ensured that every token platform will trigger at least one of those criteria, if not more, thus expanding any analysis significantly. 
    • In addition, with little explanation of which factors carry more weight and which carry less, or how those are measured, participants in token systems (and legal counsel for those participants) have an even more challenging task of determining when the relevant token reasonably may be considered a security. Thus, while the insight into the various factors that may cause a token to be viewed as a security is interesting, the sheer number of those factors without meaningful guidance as to how those will be weighted and assessed, potentially creates more ambiguity, rather than less.
    • Another area of concern relates to secondary market considerations. The Framework states that if “a digital asset is transferable or traded on or through a secondary market or platform, or is expected to be in the future,” then it is more likely that there is a “reasonable expectation of profit.” This analysis is concerning. Policy makers must recognize that as the token economy evolves and all manner of assets can be tokenized, the ability to trade those assets will also increase in ways we have not previously seen.  A decentralized system requires a token that is able to be traded freely on secondary markets.  Treating tokens as securities would scuttle this ability.  Thus, the Framework seems rooted in traditional notions of securities platform trading without acknowledging this evolving reality.
    • After that assessment, it’s surprising to find that the TurnKey Jet No-Action Letter detracts even further from meaningful guidance. One can convincingly argue that the TurnKey token would not be considered a security under any circumstances.  That said, the conditions cited for coming to the conclusion that the SEC staff will not recommend an enforcement action regarding TurnKey are not just restrictive, but go even further than the criteria in the Framework would indicate.  The requirements that tokens may be “traded” only on the platform, and if redeemed, must do so at a discount, are overly constricting. 
    • Finally, because the Framework represents the views of SEC’s FinHub staff, it is not binding on the Commission.  Further, by its own terms it restates information drawn from enforcement actions, speeches, the DAO Report, and other previously made statements, thus leaving the industry searching for meaningful clarity.

All in all, we have a lot of work to do as a community to continue to demonstrate the fundamental differences among the various types and functions of tokens. Many businesses and consumers are still wary of conducting business or transactions using blockchain because of the lack of a predictable legal environment governing activities involving the technology. In the current blockchain ecosystem, the development of digital tokens that can represent numerous things, from a currency, to a commodity, a security, title to property, identity, provenance, and many others, has created the need to interpret existing laws that may no longer adequately govern the new features of this technology. As we continue to develop these technologies worldwide, we have seen that government policies have a profound effect on the development of blockchain in that location. Many countries are capitalizing on this opportunity and promoting policies that encourage adoption, while others are not as supportive. It is imperative that governments recognize publicly the benefits of this technology in order to engage businesses (and government) to enable innovation.