Why Impeding the Use of Self-Hosted Wallets Puts the U.S. at an Economic, Social, and National Security Disadvantage

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

Self-hosted wallets (wallets that are not hosted by a financial institution) play an important role in the digital asset ecosystem. These self-hosted digital wallets are no different than the leather wallet in your handbag or pocket: they help you hold different tools and assets that you use in the digital world, just like a leather wallet holds your cash, credit cards, or driver’s license.

Often digital wallets are “hosted” by an exchange like Coinbase, eToro, Gemini, Bittrex, and others, meaning that those companies help administer the wallet by providing custody and other services for you.  When you want to use something in your digital wallet, you simply instruct them to do it for you.  A self-hosted wallet is similar to when you yourself reach into the wallet in your pocket or handbag to grab your cash to spend it where you wish – whether at the coffee shop, the hardware store, or at Overstock or another online retailer.

Some policy makers, such as the Financial Action Task Force (FATF), a multigovernmental body that sets anti-money laundering recommendations globally, have expressed concern over self-hosted wallets, even suggesting they be banned outright.

 

Proscribing or severely limiting the use of self-hosted wallets is a bad idea, and here’s why:

1. Self-hosted wallets are the equivalent of the wallet in your pocket or handbag. We would never suggest that consumers can no longer use cash.  This concept is no different simply because we are operating in a digital environment.  As we have seen with the Covid-19 crisis, the world is moving rapidly toward the need to operate digitally, but that does not mean that we lose our rights to privacy and security in the process.

2. According to a recent BIS report, 80% of central banks are looking to potentially issue their own currency digitally. This includes the United States.  If self-hosted wallets are prohibited or severely limited, citizens would have to conduct all activity using a digital dollar through their bank or other regulated financial institution.  Also, among that 80% are key economic competitors such as China, the E.U., Japan, and others.  Any proscription would greatly tilt the playing field in their favor at our expense.

3. Wallets hold value. Value constitutes more than just fiat money.  It can also include your identity, which is intricately connected to the way in which you authenticate yourself to banks and every other account-based website.  They can also hold value generated online, including airline miles and customer points.  None of these things should be prohibited or limited in the digital world any more than they are in the physical world.

4. Of the countries that are actively testing issuing their own currency digitally is China, which has already processed over the equivalent of $300 million in digital yuan through pilot programs. We were caught flat-footed in remaining competitive with 5G in the telecom sector.  Must we again fall behind because we are unwilling to invest in and support another technology sector?  Everyone is aware there are risks when operating in a digital environment.  What we must do is understand those risks, mitigate them, and march forward.

 

These are just 4 examples of why a hasty move under a perceived deadline of January 20 can greatly impact an entire world of possibilities for global digital economies.  We should not impose anything this drastic without following proper rulemaking procedures, including extensive consultation with industry and policy makers over the effects on social and economic progress and national security and how we can address concerns of all involved.

Self-hosted wallets have been on policy makers’ radars for some time, and we have engaged with both U.S. and multilateral policy makers in educating and advocating on this issue. This work must continue, ideally through a coordinated approach, to ensure that we do not further inhibit the technology leadership of the United States and the commercial rights of all who do business here.

Congressmen Introduce Legislation Promoting Growth of Digital Token Business in the United States

Today, Rep. Tom Emmer (R-MN), Co-chair of the Congressional Blockchain Caucus and Ranking Member of the House Committee on Financial Services’ FinTech Task Force, introduced the Securities Clarity Act of 2020, which proposes amending federal securities laws to distinguish between investment assets that are part of an investment contract and securities. Simultaneously, Ranking Member Mike Conaway (R-TX), House Committee on Agriculture, introduced the Digital Commodity Exchange Act of 2020 (the DCEA), which proposes developing a federal framework for the prudential regulation of token trading platforms, among other things, under the CFTC’s supervision. The bills are intended to work in tandem to promote the growth of digital tokens and blockchain development in the United States by tackling challenges blockchain innovators are facing from different angles. Each bill is discussed in further detail below. Given its length and complexity, the Chamber has also developed a detailed summary of the DCEA.

Securities Clarity Act of 2020

One of the biggest issues impacting our industry today is whether digital tokens issued as part of investment contracts are themselves securities.  This is a legal issue promoted in our amicus brief in the case SEC v. Telegram – that digital tokens that are a part of an investment contract are not necessarily themselves “securities” under the federal securities laws.  The Securities Clarity Act amends the securities laws to make this clarification law by:  

• creating a new term, “investment contract asset,” and excluding it from the definition of security; and
• defining “investment contract asset” as “an asset, whether tangible or intangible, including assets in digital form sold or otherwise transferred, or intended to be sold or otherwise transferred, pursuant to an investment contract; and that is not otherwise a security….” 

In other words, digital tokens should not be deemed securities solely because they are the object or subject of an investment contract.  It is critical that digital tokens have their own legal analysis as to whether they are securities, and we support this effort to make that a reality.

Lewis Cohen, Co-founder of Chamber Member DLx Law, noted that the uncertain legal status of many digital assets hampers the growth of the infrastructure needed to facilitate the use of these assets for their intended purpose.  Cohen commented, “This bill would bring the U.S. into greater alignment with the regulatory approach taken in other major jurisdictions and will foster the development of blockchain technology here without compromising on investor protection when actual securities are sold or traded.”

“The Digital Chamber has been convening discussions on securities proposals like this among Members of Congress and industry stakeholders for years. Their input on this proposal and many others are vital to advancing support for emerging technologies and making sure they have a home here in the United States.” – Congressman Tom Emmer

Digital Commodity Exchange Act of 2020

Another major challenge the industry faces is the current multi-faceted licensing regime. For example, to operate nationally, token trading platforms must obtain money transmission licenses in each state they wish to do business, a tedious and costly process. 

The DCEA seeks to reduce barriers for token trading platforms by supporting three primary objectives:

• permitting token trading platforms, referred to as “digital commodity exchanges” or “DCEs,” to be supervised by the CFTC under a voluntary registration scheme, allowing DCEs to offer services nationally without obtaining a money transmission license in each state;
• enabling trading of certain digital tokens offered as part of an investment contract “presale” by allowing CFTC-registered DCEs to list “presale” tokens that are not securities; and
• creating a regulatory framework for DCEs to trade leveraged, financed, or margined transactions (“retail commodity transactions”) and gives the CFTC discretion to develop rules related to disclosure; recordkeeping; capital and margin; other financial resources; reporting; business conduct; and documentation for these activities.

With over two dozen members who are money transmitters, CFTC-regulated entities, or both, the Chamber has extensively considered the impact of the DCEA on state-regulated money transmitters as well as federally regulated DCMs, SEFs, and DCOs. We support efforts to streamline and refine the regulation of money transmitters, including token trading platforms, to bring them more in line with 20th century digital realities.  Creating such a structure requires careful consideration to create a workable solution for both money transmitters as well as CFTC-regulated entities, which operate within a complex regulatory framework. As such, the Chamber remains interested in further exploring the details around the integration of this legislation into the regulated commodities marketplace while solving the complex yet limited state-by-state licensing regime.

Energy and Commerce Committee Clears U.S. Blockchain Development Legislation, Congressman Discusses Plans for Blockchain Office in Commerce Department

Congress is making progress in establishing U.S. leadership in blockchain innovation. Last week, at a markup held by the House Committee on Energy and Commerce, Rep. Darren Soto (D-FL), Co-Chair of the Congressional Blockchain Caucus, revealed he is working towards establishing within the Department of Commerce a Blockchain Center for Excellence, an office presumably dedicated to advancing blockchain innovation in U.S. commerce.  The Committee on Energy and Commerce also passed two bills promoting U.S. competitiveness in blockchain technology, marking a shift in how Congress is looking at U.S. blockchain development. The Chamber celebrates these milestones as a step towards building a national strategy to advance U.S. competitiveness in blockchain technology development. Almost two years ago, the Chamber called for a National Action Plan for Blockchain, proposing that the United States government approach blockchain technology with clearly articulated support to encourage private sector development and innovation, so we are pleased to see this legislation will be considered by the House.

The Blockchain Center of Excellence

The United States needs a coordinated approach to be a leader in the adoption and promotion of blockchain technology, and an office housed within the Department of Commerce could serve as a facilitator between the public and private sectors. Establishing an office to promote  U.S. blockchain innovation is a cornerstone of our National Action Plan for Blockchain, and we look forward to working with Congressman Soto to share our perspectives on how this office can support blockchain companies innovating in the United States and attract innovators who have relocated to more predictable legal environments overseas.

Legislation Supporting U.S. Blockchain Development

The Committee passed H.R. 8132: The American COMPETE Act, which calls for a national strategy on U.S. blockchain development and legislative recommendations to expedite blockchain technology adoption in the United States. As we’ve said before, the potential promise of blockchain technology will not be realized in the United States without the widespread support of policymakers. The Committee also passed an amended version of H.R. 8128: AI for Consumer Product Safety Act, incorporating two bills previously introduced by Rep. Soto: H.R. 8153, the Blockchain Innovation Act, and H.R. 2154, the Digital Taxonomy Act. In addition to establishing a pilot program to test the use of artificial intelligence in consumer product safety, the legislation now calls for a study to examine how blockchain can be used to protect consumers and an annual report by the Federal Trade Commission (FTC) on fraudulent actions related to digital tokens. Notably, the legislation requires an assessment by the Department of Commerce of federal regulations where greater regulatory clarity is needed to promote blockchain innovation in the United States.  This, of course, is an issue that greatly impacts many in our industry, and we encourage those agencies to look to industry for important feedback on these issues.

It’s a significant development that Members of Congress are championing the key components of our National Action Plan for Blockchain, and it will be important for the United States to maintain its stature as the premier location for technology, innovation, and entrepreneurship.

Bill summaries for the American COMPETE Act, Blockchain Innovation Act, and Digital Taxonomy Act are available below.

H.R. 8132: The American COMPETE Act

• The American COMPETE Act is a package of legislation that focuses on U.S. competitiveness in AI, Internet of Things (IoT) in manufacturing, quantum computing, blockchain, new and advanced materials, unmanned delivery services, IoT, 3D printing, and use of AI in combating online harms.
• The Study to Advance Blockchain Technology directs the Secretary of Commerce and Federal Trade Commission to conduct a survey on the blockchain industry and potential risks and submit a report to Congress on its findings.
• The study focuses on two primary areas: 1) industry use and adoption; and 2) blockchain marketplace/supply chain risks.
• The study must be completed within 1 year of the bill’s passage, and the report must be submitted to the House and Senate Commerce Committees 6 months following the study’s completion.

H.R. 8153: Blockchain Innovation Act

• Directs the Secretary of Commerce, in consultation with the Federal Trade Commission (FTC), to study and report to Congress on the use of blockchain technology in commerce and its benefits in preventing fraud.
• The study focuses on several areas: 1) commercial activity and investment; 2) fostering public-private partnerships; 3) the benefits and challenges of using blockchain technology for consumer protection, including preventing fraud and securing transactions; 4) areas in federal regulation where greater clarity is needed to promote innovation in the United States; and 5) additional observations and policy recommendations.
• The study also includes a public comment period to collect feedback from industry.
• The report must be submitted within 6 months of the study’s completion to House Energy and Commerce and Senate Commerce Committees and made available to the public through the Department of Commerce’s website.

H.R. 2154: Digital Taxonomy Act (Amended Version Incorporated within H.R. 8128)

• Directs the FTC to report to Congress annually on actions related to consumer protection and digital tokens.
• The FTC must report on regulatory actions and other efforts related to digital tokens and consumer protection through its authority to prevent unfair or deceptive acts or practices (UDAP) as well as legislative recommendations.

 

Tax Reporting for Cryptocurrency Exchanges: How to Overcome Challenges and Calculate Cost Basis

SUKU Develops a Blockchain-based COVID-19 Solution with a Fortune 500

By Yonathan Lapchik, CEO, SUKU

Standard for AML Funds Travel Rule Jointly Approved by Chamber and Industry Bodies

Ushering In Japan’s Race to Embrace Blockchain

By Ken Kodama

April 24, 2020

The Early Days of Blockchain In Japan

I entered the blockchain and cryptocurrency space in 2013, after having consulted on financial products for personal clients through my previous career in the financial planning business. The most well-known cryptocurrency exchange at the time happened to be Mt. Gox which was based in Japan. Due to the infancy of the industry and lack of proper regulatory measures during those days, Mt. Gox had many issues including a big hack. It was a big national issue especially as it brought mainstream media awareness to the unregulated nature of cryptocurrencies. I became acutely aware that interest in cryptocurrencies and Bitcoin was increasing day by day and that there was something worth thinking about more in depth as established stakeholders would become more aware of this industry moving forward and practical building would continue to ensue. 

Around that time, I happened to meet Charles Hoskinson, the former co-founder of Ethereum, and we deeply connected over our shared belief in the potential of cryptocurrencies and blockchain technology to provide useful utility for a vast number of industries and people. There was a growing blockchain community of interested developers and investors in Japan at the time, to be one of the first real efforts in the country to build a blockchain and raise more mainstream awareness of blockchain in Japan and the surrounding region.

 

The Blockchain Industry in Japan These Days

When it comes to the relevant laws and regulations surrounding blockchain & cryptocurrencies, Japan was at the forefront in the region. With a base of interested blockchain enthusiasts from the early days, Japan had been one of the first countries to define cryptocurrency as an official method of payment and regulate crypto exchanges with KYC measures in 2016. However, since a hacking incident of Japan’s leading cryptocurrency exchange Coincheck in 2018, Japan has seen a shift to a more strict and conservative policy. While this is important from the standpoint of consumer protection, there is also a perception that the restrictions on leverage and taxing capital gains from cryptocurrencies as additional miscellaneous income  may actually hinder the development of the blockchain industry. 

Singapore on the other hand, is very strict with its anti-money laundering rules, but outside of that has been creating blockchain-friendly legislation that promotes the development of the cryptocurrency and blockchain industries. Japan can learn much from this example on how to foster our industry by promoting development and protecting consumers at the same time with appropriate policy initiatives that are well-balanced. 

 

How Japan is Leading The Way

EMURGO is working on several ambitious projects, including a 5G alliance with NTT Docomo – Japan’s largest telecommunications company – a collaboration with large fintech company Metaps Plus to allow Cardano ADA payments at 30,000 retail stores in Korea, creating a blockchain task force with the Republic of Uzbekistan to develop a blockchain-based digital economy, and running a successful blockchain education business in India including collaborative partnerships with five well-known Indian universities.  

Although our business within Japan is relatively small compared to our overseas presence, EMURGO is the best known blockchain firm with a Japanese heritage and proud to be a founding entity of Cardano which is a globally recognized top ten blockchain protocol. EMURGO & Cardano are always building the protocol and expanding the drive to adopt blockchain solutions abroad but also keeping in mind on how to tailor the built-up experiences to the Japanese market. Being a part of the Chamber of Digital Commerce’s Executive Committee has also been very fruitful in allowing us to share information resources with some of the top policymakers and stakeholders in the global blockchain industry.

 

One Of The Most Impactful Inventions Since The Internet

The cryptocurrency and blockchain industries are still in their infancy and many things have happened in the past five years, with gradual mainstream recognition. However, there is no doubt that this technology will be one of the most impactful inventions since the Internet, and it is being actively employed in both the developed and developing world. It is unfortunate that Japan, which had been at the forefront of this industry for a time, has now moved in a more conservative direction since the hacking incident for the time being. Of course, the customer protection standpoint is very important, so we hope to create many business use cases to demonstrate the useful utilities of blockchain technology, and then follow-up with further support to continue to contribute to the development of the Japanese cryptocurrency and blockchain industries. This shall provide encouragement for the Japanese government to shift back to a more progressive rather than defensive stance when it comes to driving the adoption of blockchain technology. 

 

Ken Kodama is CEO of EMURGO – a global blockchain technology company providing solutions to developers, startups, governments, and enterprises. EMURGO builds enterprise-grade applications, builds developer tools, invests in startups, and provides blockchain education. EMURGO has offices and manages projects in Singapore, Japan, the USA, India, and Indonesia, and is a founding member of the Cardano protocol. 

 

Familiarity Breeds Adoption For Digital Asset Marketplace

April 22, 2020

We are always pleased to see our Members team up to introduce innovative solutions to the market and this month was no exception.  We saw the news Chamber Member ErisX joined forces with fellow Chamber Members Fidelity and TradeStation in separate announcements to bring familiarity, liquidity and security to the crypto community.  Fidelity’s announcement focused on institutional investors gaining secure and regulated access to ErisX’s cryptocurrency markets while TradeStation Crypto focused on their retail and individual services to their customers looking at digital assets.

ErisX recently wrote a paper on how familiarity breeds adoption in the crypto market.  The paper discussed the role financial intermediaries play in the digital asset space and their proven track record of understanding the needs of investors.  Financial intermediaries also validate that trading and investing in digital assets is secure, something that cannot be overstated.  With the news this month we thought we would take a look back at that paper and its important points.

The World Economy Transformed

April 17, 2020

The Chamber of Digital Commerce, Reinventing Bretton Woods Committee, and Accenture co-hosted a virtual discussion on the theme of “The World Economy Transformed” which focused on the multidimensional monetary and fiscal policy responses to the global pandemic. Ollie Rehn, Governor of the Bank of Finland, James Bullard, President and CEO of the Federal Reserve Bank of St. Louis, Benoit Cœuré Head of the Innovation Hub and Director of the Bank for International Settlements, and Barry Eichengreen Professor of Economics at the University of California at Berkeley provided insights and comments on the current response in their respective regions, and globally, and on what to expect for the road ahead. 

Benoît Cœuré, Head of the Bank for International Settlements Innovation Hub, published remarks: Learning the value of resilience and technology: the global financial system after Covid-19.

Chamber of Digital Commerce Submits Comment Letter on Digital Assets to Basel Committee

March 23, 2020

Chamber of Digital Commerce Believes that not all Digital Assets Present the Same Levels of Risk – Recommends to Basel Committee that They Should Be Assessed on a Case by Case Basis as Currently Done for Other Similar Products and Services

The Chamber of Digital Commerce (the “Chamber”) recently submitted a letter for consideration by the Basel Committee on Banking Supervision (the “Committee”) with respect to its December 2019 discussion paper regarding the prudential treatment for crypto-assets (the “Discussion Paper”).

While the Committee appropriately recognizes some risks associated with high-risk crypto assets, deserving of a “conservative prudential treatment;” a one size fits all approach to these assets is not warranted or appropriate.

Specifically, such an approach fails to recognize the differences in the risks associated with various activities that a bank may undertake regarding these crypto assets. Because crypto-assets present varying considerations and risks based on their economic function and use by a bank, the Chamber believes that the Committee should analyze the risk profile of a crypto-asset through a framework that takes into account:

1. the economic function of the crypto-asset and unique attributes of the crypto-asset at issue; and
2. the activity in which a bank engages with respect to such crypto-asset. Once the risk profile is properly evaluated, a tailored capital requirement can be determined under a similar approach to the one used for traditional financial assets.

This approach utilizes the principle of “same risk, same activity, same treatment” for crypto-assets that are similar—though not necessarily identical—to traditional asset classes.  We provided an illustrative chart at the end of our comments to demonstrate that even those assets that may currently considered “high risk” have different risk considerations.

Crypto-assets are evolving and the risks present today will evolve as the market develops. As a result, we recommended that the treatment of banks’ involvement with these assets must be agile to meet rapid changes in the market.  Different activities that a bank may undertake have materially different risks and this should impact their prudential treatment.

The Chamber’s approach will allow banks and regulators a flexible approach to properly calculate an appropriate amount of capital in the face of a rapidly evolving industry.