Chamber’s Congressional Briefing Provides Insight into Blockchain & AML Challenges & Opportunities

October 23, 2019

This week, the Chamber of Digital Commerce brought together experts from across the industry and government to discuss the application of laws aimed at the prevention of money laundering with virtual currencies and how blockchain technology is being used to combat illicit finance. Congressman Bill Foster, co-chair of the Congressional Blockchain Caucus, kicked off the session describing his work educating other policymakers about the technology, how different cryptocurrencies maintain their own unique characteristics, and how some have varying levels of traceability that can be helpful to law enforcement. “It is really important that we empower agencies like FinCEN and the FBI with the tools that they need to combat illicit financing, without crimping the revolutionary applications of blockchain,” he said.

The panel included Amy Davine Kim, chief policy officer, Chamber of Digital Commerce; Kevin O’Connor, compliance and enforcement officer, the U.S. Department of Treasury, Financial Crimes Enforcement Network (FinCEN); John Roth, chief compliance and ethics officer, Bittrex; Michelle Bond, global head of government relations, Ripple; and David Jevans, chief executive officer, CipherTrace.

Following are key insights from the discussion:

The cryptocurrency landscape in the United States is well-regulated. The U.S. federal government as well as almost every state regulate the transfer of cryptocurrencies. John Roth, former special counsel for international money laundering policy at the U.S. Department of Justice as well as inspector general at the Department of Homeland Security, explained that states not only impose state licensing requirements on money transmission but also regularly borrow from federal anti-money laundering rules. Kevin O’Connor discussed FinCEN’s role in regulating cryptocurrency transactions at the federal level, which have been in place since 2011. David Jevans shared his thoughts on the efforts of the Financial Action Task Force (FATF) in creating international guidelines for cryptocurrencies. 

Blockchain has enormous potential for business and law enforcement to detect and trace criminal activity. Amy Kim noted that Bitcoin and blockchains aided law enforcement; for example, the Department of Justice recently successfully used Bitcoin to bring down a major dark web child sexual exploitation site. John Roth described how the Blockchain Alliance, an initiative co-founded by the Chamber, as well as industry, work to aid law enforcement in this area.

 Law Enforcement Will Be Employed When Necessary. Kevin O’Connor reminded the audience of FinCEN’s action against BTC-e for not having the appropriate AML controls in place when dealing with U.S. customers. “Our message to exchanges that offer these kinds of cryptocurrencies is that you have to have controls in place to mitigate the risks…,” he said.

Download the Chamber’s report “Understanding Digital Tokens: Guidelines for Anti-Money Laundering Compliance and Combatting the Financing of Terrorism” for the Chamber’s thought leadership on this topic.

Reflections on G7 Working Group on Stablecoins Report: Investigating the Impact of Stablecoins

& U.S. Senator Rounds’ Letter

 

 

WASHINGTON, DC, October 17, 2019 – Today, the G7 Working Group on Stablecoins released a report investigating the challenges and risks related to stablecoins like Libra. The report also outlined the applicable legal and regulatory frameworks, as well as a way forward to improve cross border payments. In addition, Senator Rounds issued a letter that is significant to the blockchain ecosystem as a whole. The following statement is from Perianne Boring, founder & president, Chamber of Digital Commerce. For follow up/further comment contact: marie@digitalchamber.org +1 202-422-2589.

 

The G7 Working Group on Stablecoins report is an important resource for global policymakers and regulators to consider in evaluating stablecoins like Libra, ensuring a vibrant and properly functioning marketplace.  Stablecoins may drive efficiencies and innovations throughout the economy, enabling a more inclusive global financial system. Challenges and risks identified by the working group should be carefully considered and addressed, and we urge global policymakers to leverage this work to provide a path forward for stablecoins that have vast potential to benefit the global economy. Regulators and policymakers around the world are recognizing blockchain as a breakthrough technology and we encourage them to continue to view technological progress as an important objective.  It is important that innovation occur according to a strategic plan to ensure that policy objectives and forward progress occur symbiotically. Our members are eager to engage with policymakers, and we will continue to encourage and facilitate those efforts.

In addition, Senator Rounds issued a letter in the stablecoin debate that offers significant meaning for the blockchain ecosystem as a whole. His letter, for the first time, sees beyond the skepticism surrounding one company’s innovation, and instead looks to the leadership of the United States in technological innovation. Policymakers must allow innovation while simultaneously considering associated policy considerations and risks, and tailor regulatory frameworks accordingly. Senator Rounds captures the reality of blockchain technology – the United States is falling behind in this space. We need a Plan to ensure the United States innovates deliberately and strategically to ensure we remain at the forefront of setting the standards and parameters for this industry.

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About the Chamber of Digital Commerce

Headquartered in Washington, D.C., the Chamber of Digital Commerce is the world’s first and largest trade association representing the digital asset and blockchain industry. For more information, please visit: DigitalChamber.org, and follow us on Twitter @DigitalChamber.

Press Contact:

Marie Knowles
marie@digitalchamber.org

Cybersecurity Risks and Opportunities Raised by Blockchain Technology

September 24, 2019

Introducing “Considerations and Guidelines for Advancing Cybersecurity in the Token Economy” the Latest Installment of the Chamber’s “Understanding Digital Tokens” Report

Blockchain technology has incredible potential to strengthen cybersecurity across the digital economy. Blockchain is based on the discovery of new ways to leverage existing cybersecurity technologies like public key cryptography, distributed computing, and consensus mechanisms to create ledgers that feature inherent tamper resistance and resiliency never before realized with traditional approaches. Because of its cybersecurity and other benefits, many experts foresee a time when blockchain will underpin all enterprise business models.

While the market continues to place a strong focus on blockchain’s transformative potential, less focus has been placed on its cyber risks and benefits. Today, we are pleased to introduce “Considerations and Guidelines for Advancing Cybersecurity in the Token Economy.” First, the report addresses cybersecurity considerations for public blockchains. Second, the report explores regulatory considerations from a cybersecurity perspective, addressing the application of both new and existing frameworks. Third, we provide a set of guidelines for advancing cybersecurity in a tokenized economy.

(Read our recent blog posts here describing the series.)

The report discusses the unique and nuanced risks that must be taken into consideration to effectively manage cybersecurity to protect tokenized assets. These include the following five considerations:

1. Lack of central authorities and impact to asset recoverability
2. Compromise of distributed consensus protocols
3. Inappropriate access to private keys and/or endpoints
4. Protocol and smart contract vulnerabilities
5. Inaccurate external data sources

The report also provides guidelines that practitioners and policymakers should follow to enhance security across the token ecosystem. These guidelines aim to create a dialogue around cyber risks and encourage policymakers and practitioners to design standards for technical and business solutions to mitigate these risks.

The full “Understanding Digital Tokens” series includes guidelines on securities and non-securities tokens, anti-money laundering compliance, consumer protection considerations, as well as an economic analysis of the token ecosystem.  We are also in the process of updating the compendium of country laws governing activities with digital tokens. A legal landscape from Japan and an addition to the United Kingdom report are next in the queue and will be published soon.

Chamber’s Token Alliance Addresses Anti-Money Laundering Compliance in its “Understanding Digital Token” Series

September 10, 2019

Today, we are pleased to introduce “Considerations and Guidelines for Anti-Money Laundering Compliance” to complement our “Understanding Digital Tokens” series.  This report supplements our earlier reports from the series on securities and non-securities tokens, consumer protection, and the data and trends on the industry.

(Read our recent blog posts here describing the series.)

AML compliance continues to be a primary focus of industry since FinCEN published its original guidance on convertible virtual currencies in 2013. The latest approval by the FATF of Recommendations involving virtual assets and virtual asset service providers and FinCEN’s most recent guidance for virtual currency businesses keep these issues at the forefront of industry priority.

Modernizing the United States’ AML laws is an important goal, particularly in light of the advances in blockchain and digital asset technology that enable people and industries to engage in commerce in new and important ways. Like any industry and any currency, these technologies can be used for incredibly important purposes; but also, in some cases, to engage in unlawful activity.

These AML guidelines and considerations are designed to assist industry to detect and deter illicit activity by:

• Stressing the importance of preventing money laundering and terrorist financing;
• Setting out the rules and regulations that certain categories of businesses must follow with respect to establishing formal anti-money laundering policies and practices;
• Highlighting OFAC requirements and sanctions screening; and
• Establishing a set of guidelines for token sponsors and token trading platforms to consider when crafting AML compliance programs.

Follow us on Twitter and LinkedIn as we introduce future segments including guidelines around cyber security and the introduction of legal landscapes surrounding additional countries and the laws that apply to digital tokens.

CLICK TO VIEW THE REPORT 

Chamber Releases Understanding Digital Tokens: Considerations and Guidelines for Consumer Protection

August 20, 2019

Today, we are pleased to introduce “Considerations and Guidelines for Consumer Protection” as part of our “Understanding Digital Tokens” series of guidelines focused on the rapidly evolving token landscape, the laws and regulations that apply, and the trends, facts, and figures behind them. The consumer protection segment complements the “Considerations and Guidelines for Securities and Non-Securities Tokens” and “Market Overviews and Trends in Token Project Fundraising Events”, which were published last week.

(Read our recent blog post describing the importance of this series of reports.)

Consumer protection laws may apply to digital tokens in certain circumstances. In the consumer protection segment, we identify those circumstances most likely to result in the application of consumer protection laws to activities involving digital tokens. We also describe the source and scope of federal and state consumer protection authority and provide guidelines to help token sponsors and token trading platforms avoid running afoul of consumer protection laws. 

Federal and state consumer protection laws may apply to activities involving digital tokens.

Its complex to be sure when you consider the number of agencies in the United States alone that must be considered. For example, at the federal level alone:

• • the Federal Trade Commission (FTC) prohibits unfair or deceptive acts or practices (UDAP) in or affecting interstate commerce;
  • the Consumer Financial Protection Bureau (CFPB) has the authority to enforce and prohibit unfair, deceptive, or abusive acts and practices (UDAAP) engaged in by any person offering or providing a consumer financial product or service; and
  • the Department of Justice (DOJ) has a Consumer Protection Branch that coordinates with the FTC, CFPB, and other federal agencies to enforce consumer protection statutes.

At the state level, state Attorneys General have broad consumer protection authority to protect their citizens from unfair and deceptive acts and practices. State money-transmission licensing laws have consumer protection aspects that may apply in the context of transmission activities involving digital tokens.

We invite you to read the Consumer Protection segment to learn more about how these laws can be applied. In the coming weeks, we also intend to publish guidelines around cyber security and anti-money laundering. We will be supplementing our legal landscape on a rolling basis with the introduction of additional countries and the laws that apply to digital tokens.

Read more about the work of the Token Alliance and view the series of “Understanding Digital Tokens” reports that have already been released on our website.

Chamber Publishes Series of Reports As Resource For The Token Ecosystem

August 8, 2019

The Chamber’s Token Alliance Introduces Second Edition of “Understanding Digital Tokens”

We are pleased to introduce a series of reports focused on the rapidly evolving token landscape, its complexities, the laws and regulations that apply, and the trends, facts and figures behind them. As demonstrated in our initial report released last year, the way in which digital tokens operate is complex and can maintain multiple characteristics – from an investment contract, to something necessary for utilizing a digital platform, to a form of payment or exchange. Today we are introducing the second edition of “Understanding Digital Tokens,” as a follow-on installment to that initial report. The second edition will be released as a series of reports, providing the industry and policymakers with an even deeper dive into the overall regulatory and market landscape of the token ecosystem.

“We are in a moment when technological advancement is pushing the boundaries of decades-long established law. These laws were made at a time when tokenized assets and instantaneous digital transfers of value were not contemplated. It is exciting to be a part of it, but it also entails risks,” said Amy Davine Kim, chief policy officer, Chamber of Digital Commerce. “We view this as an important resource to provide policymakers, regulators, and practitioners with the tools to make informed decisions when engaging in the token economy.”

To facilitate the development of token businesses as well as minimize incidents of fraud and compliance challenges, the next edition of the series will tackle a number of issues impacting this ecosystem.

The “Understanding Digital Tokens” reports will be rolled out as part of an ongoing series starting with the following segments:

• • • Considerations and Guidelines for Securities and Non-Securities Tokens – describes securities tokens with corresponding guidelines related to the legal and regulatory frameworks that apply to them. It also details the application of the securities laws, regulations, and rules of the United States for the issuance and trading of tokenized securities. This publication also republishes considerations and guidelines for non-securities tokens as published in July 2018.
  • • Market Overviews and Trends in Token Project Fundraising Events – presents economic and market trends, facts, and figures from 2013 to the present to better understand the scope of the growing token evolution.

We also intend to publish the following additional sections of the series in the coming days and weeks:

• • • • Considerations and Guidelines for Anti-Money Laundering (AML) Compliance and Combatting the Financing of Terrorism (CFT) – provides an overview of laws in the United States aimed at the prevention of money laundering and combatting the financing of terrorists, as well as the rules and regulations certain categories of businesses must follow to establish formal AML policies and practices. This section includes guidelines for token sponsors and token trading platforms to consider when crafting AML and CFT compliance programs.
    • • Considerations and Guidelines for Consumer Protection – evaluates how consumer protection laws may apply to digital tokens, the potential scope of federal and state consumer protection authority, and guidelines to help token sponsors and token trading platforms avoid running afoul of consumer protection laws.
    • • Considerations and Guidelines for Advancing Cyber Security in the Token Economy – considers the substantial rise in the frequency and impact of cybersecurity breaches across industries and how these events have extended into the token economy. This section discusses cyber security considerations for permissionless blockchains, policy and regulatory considerations, and guidelines for advancing cyber security in a tokenized economy.
    • • Global Legal Landscapes Governing Digital Tokens – an analysis of legal landscapes governing two additional countries, Japan and United Arab Emirates, along with an update from the United Kingdom related to tax. We will be supplementing our existing legal landscape overviews for digital tokens on a rolling basis with the introduction of additional countries.

We are excited to introduce these guidelines for securities tokens to complement our work involving utility tokens. We invite you to visit the “Token Policy Guidelines & Resources” page on our website and follow us on Twitter @digitalchamber and LinkedIn where we will announce the publication of future segments.

We hope you enjoy these publications and they serve to help guide your analysis and views of the evolving digital token ecosystem.

Chamber Weighs in: International Organization of Securities Commissions’ Regulatory Considerations Relating to Crypto-Asset Trading Platforms

This week, the Chamber submitted comments to the International Organization of Securities Commissions’ (IOSCO) consultation on Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms (CTPs). IOSCO, an association comprised of organizations regulating securities and futures markets, requested public comment to assist its members in evaluating the regulatory needs and risks surrounding CTPs.

The Chamber focused on advocating for meaningful industry dialogue and input, a key to creating effective and appropriate regulatory regimes for CTPs. By providing such dialogue, the Chamber hopes to clarify to IOSCO and similar regulatory authorities that not all crypto-assets are securities. Regulatory clarity in defining what constitutes a digital security is essential to CTP regulatory compliance and, in turn, the continued growth of the blockchain industry.

Our Recommendations:

The Chamber used this opportunity to advocate for the development of appropriate and effective regulatory guidelines benefitting ongoing engagement with industry participants and stakeholders.

1. 1. Recognize that a broad array of crypto-assets has emerged, and even more will emerge over time, not all of which are crypto-asset securities.
   2. Regulatory guidelines regarding the appropriate categorization and regulatory treatment of these assets will provide needed clarity to enable implementations of blockchain technology to flourish.
   3. Regulation should be technology neutral. Crypto-asset securities have the same legal character as traditional securities.

The Chamber advocates for the adoption of blockchain technology in a legal environment balancing regulation and innovation. Helpful guidance and regulatory clarity surrounding crypto-assets will lead to continued innovation and ensure industry success for years to come.

To view the Chamber’s comments to IOSCO, please visit here.

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.  

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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

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.

 

• • Visit https://digitalchamber.org/canada/ to view the full comments.