Intro (00:00:05):
Welcome to zero knowledge. I'm your host, Anna Rose. In this podcast, we will be exploring the latest in zero knowledge research and the decentralized web, as well as new paradigms that promise to change the way we interact and transact online.

New Speaker (00:00:27):
This week, Josh Cincinnati and I chat with Peter van Valkenburgh from coin center. Coin center is a non-profit research and advocacy group focused on the public policy issues facing cryptocurrency and decentralized computing technologies. In this conversation, we cover the various branches of the US system, how they interact with the crypt/blockchain communities, what the process is for making regulation and how coin center gets involved. But before we start in, I want to say thank you to this week's sponsor: The Interchain Foundation. Interchain foundation is a group focused on the research development and promotion of open decentralized network technologies like cosmos. Cosmos is a decentralized network of independent, scalable, and interoperable blockchains.

Anna (00:01:11):
It focuses on scalability, sovereignty, and usability. Now one of the most recent developments in the Cosmos ecosystem is the Stargate upgrade. Stargate is the largest Cosmos upgrade to date, enabling blockchains to connect with one another using the fast standardized protocol for inter-blockchain communication or IBC. We've actually had Chris Goes on the show, I think last year to talk about IBC. So I can add the link to that in the show notes, if you want to find out more. So the ICF is currently looking to fund projects that want to develop in this ecosystem. If you're looking to develop on the internet of blockchains, submit a funding application to the interchain foundation grants program at apply.interchain.io. I've added the link in the show notes and the deadline for this is February 14th, a bit of a side note. I'm actually a member of the ICF technical advisory committee and help to give follow-up feedback on these grants. So if you're submitting and your grant gets through selection, I should get a chance to see it as well. So thank you once again, to the ICF for sponsoring this episode. Now here is our interview with Peter from coin center.

Anna (00:02:22):
So today Josh Cincinnati and I will be chatting with Peter van Valkenburgh, who's the director of research at coin center. Welcome Peter.

Peter (00:02:30):
Yeah. Thanks for having me, Anna. Josh.

Josh (00:02:32):
Yeah. Great to have you on man.

Anna (00:02:35):
This isn't the first time you're actually on the show. You were the first guest of a combo episode. I did back in 2018. I want to say at Zcon0 in Montreal

Peter (00:02:47):
Yeah, it was great. I remember we like sat on some like crappy little hotel couch with a Tascam recorder and Antonie. It was, it was pretty fun.

Anna (00:02:55):
It was pretty good. Now a lot has changed since then. We're talking three years ago, I think almost three years ago. Wow. And actually for today's episode, we're going to be talking primarily about the work that you're doing at coin center, but I'm very curious to hear like what what's happened for you from that point to now. What's your journey been?

Peter (00:03:18):
Well, the last year has been strangely all indoors and with no travel, no more Croatia. That's sad. So yeah, my day job for those of you who don't know is Coin center. I'm a board member of the Zcash foundation, which is why we chatted in Croatia, but I don't spend particularly a large amount of time on that. You know, it's a fiduciary, just make sure that like Josh isn't screwing up when Josh was the ED and make sure that our new ed doesn't screw up, you know, that kind of thing. But most of my time is spent, uh, at coin center and coin center is a six year old organization based here where I live in Washington DC. And we are exclusively focused on public policy issues that affect cryptocurrency technology. So when someone in Congress wants to talk to Bitcoin because they have a constituent in their district, that's like, "ah, Bitcoins, you know, ah, the ransomware" They get angry and often rightly so.

Peter (00:04:20):
And they want someone to talk to and Bitcoin and also with Ethereum and Zcash. These networks are shared public goods, so they are available to all but unowned by, you know, anyone. And so who does a congressperson call or who does someone at the SEC call when they want to talk about one of these permissionless networks? The goal of coin center is to be their first call. We're a nonprofit, we're not a trade group or a membership association. So it's not like we have member companies, we get donations from some companies in this space, but we don't represent their interests. Our mission is to represent the raw technology itself and the rights of users to access and freely use those technologies and the rights of software developers to develop and maintain those technologies, assuming it's happening in open source development

Anna (00:05:11):
In that case, I mean, in the case of Bitcoin, this makes absolute sense because it is so very decentralized. There is no particular leader, but in the case of some of the other networks you mentioned like there, there is a foundation often associated with them. So like that actually has the founder and the people who originally created it, there they're around, they're known. Do you still fill a role for those, for those other networks?

Peter (00:05:35):
I mean, you know, it's important not to be too pedantic about these distinctions. Decentralization is always a spectrum, right? Uh, and there are projects with sort of like more granular contributions and projects with more lumpy contributions. As a general litmus test as to whether something fits within our portfolio of things that we're interested in representing to government defending from bad policies in government, the litmus test would be something like: it has to be, you know, fully based on open source software. So we're not going to go out and talk about some proprietary protocol that's developed by a consortium of banks and the software is not, you know, released the general public under common open source licenses. And we're also not interested in repping permissioned blockchains. We don't have any issue with that technology. Like I don't think it's bad technology, but if it's a permission, blockchain, there are identified as human identified rather - than sort of pseudonym or machine identified - there are human identified participants upon whom we rely for the continuation of the blockchain and the validation of the transactions or the data in the blockchain. Those people can speak for that tech. Now you're right with a project like Zcash, for example, there's the Zcash foundation. There's Electronic Coin Company. They can talk to government and I'm sure they do, but they don't speak necessarily for the rights of the users of those networks. And they don't speak necessarily for individual miners or unaffiliated software developers on those networks. And so I think it's right that, you know, if it is open-source based and permissionless blockchain based, you know, it has sort of a, an entity that's a nonprofit that's dedicated to repping the interests of the more dispersed parts of those communities. So, yeah.

Josh (00:07:18):
Yeah. I, for one think it's, I mean, just knowing what I know about the people in the past that have supported Coin center and the work that you've done, it seems to cut a clear line through many what you might consider even tribally opposed crypto communities. Uh, so I mean, I think from my perspective, there does seem to be this recognition that there's a common shared ground for this kind of advocacy and communication channel to regulators.

Peter (00:07:47):
Yeah. One metaphor we use to help people who are internet native, but maybe not crypto native understand the work that Coin center sets out to do is by comparing ourselves to the Electronic Frontier Foundation, which I'm almost nervous to do because they're my heroes. And I hope I'm living up to that comparison. But you know, the EFF was founded back in the nineties by, uh, greats like John Perry Barlow and amazing technologists and lawyers who felt that the internet was going to be this technology that would provide massive benefits for human society, for human dignity, individual agency, things like that. And I think they're right. Um, although it's gotten more complicated than any of them or us could probably have imagined. And it makes sense that the EFF was there. It's not like a trade association, like Google is not a member of the EFF necessarily. It's not like Facebook and the ISPs that are the constituents they represent. They represent the internet itself as a broad based protocol that has a lot of different moving parts, many of which are built for for-profit. But the thing as a whole, the system as a whole is this open resource available to all. And we think of permissionless cryptocurrencies as this open resource available to all. And we then are self appointed guardians of that shared and common resource of that public. Good.

Anna (00:09:05):
So you mentioned that Coin center was actually founded six years ago. Were you part of that original group or was it done.

New Speaker (00:09:13):
I'm Old!

Peter (00:09:15):
Yeah, I mean, to be really accurate Coin center is even a little older than that in spirit. So Jerry Brito and Robin Weisman our executive director and senior policy counsel, respectively, who are incredible, people were sort of going door to door informally in the halls of Congress seven years ago, or even eight years ago, and a few cryptocurrency enthusiasts and, um, people who wanted to see more mature representation in government reached out to them, uh, when they were at their respective organizations at the time and said, "Hey, you guys should take this show pro if you will, and dedicate an organization just to the work you're doing to represent bitcoin in technologies like it to government." And so that's when Coin center was sort of formally incorporated. Um, uh, but Jerry and Robin had been doing this work for years,

Anna (00:10:07):
Who now is the team like it's, it's changed, it's grown it's yourself. And these are kind of original founders.

Peter (00:10:16):
So the team actually hasn't changed much. As I said, Jerry and Robin were doing that work before Coin center was officially founded and then coin center was officially founded. Six years ago. I was hired as the director of research, not too long out of law school - to make some of them like my colleagues at NYU, jealous, like this was my first job out of law school and it's the best job I've ever had and I don't intend to leave it ever. And I'm super happy. I didn't have to do like a stint as a tax attorney or something like that. Not that there's anything wrong with tax attorneys. Um, but so yeah, I was hired as the Director of Research, which is this amazing opportunity that Jerry, the ed gave me because especially six years ago, but even to this day, the legal questions surrounding applying existing laws or developing new laws that could apply to cryptocurrencies are the hardest and most open-ended questions in all of legal academia, I think. So it's sort of like, I hope I'm doing well with this great gift, but it is a great gift to have such freedom to do research into all areas of law. So we look at constitutional law, first amendment, speech rights, fourth amendment privacy rights. We look at Administrative Procedure law like the recent FinCEN rulemaking and whether they were following the strictures of the Administrative Procedure act and just the way they announced the rulemaking and the period of time they were accepting comments, whether it was sufficient. We look at financial regulatory law, both from an anti-money laundering standpoint, which has all of the KYC requirements, which I sometimes prefer to use the word Financial Surveillance rather than anti money laundering, because it's less euphemistic and more honest. It's about warrantless data collection. We look at consumer protection laws, so like state licensing for money, transmission businesses to make sure that people don't run away with people's Bitcoins and things like that.

Peter (00:12:00):
And we look at Securities Laws because people started selling new tokens as if they were some sort of promise from a developer to make people rich, which is kind of the colloquial definition of a security. So, you know, like you can build the most incredible, elegant and terrifying law school exam hypos from this technology because exams in law school are all about issue spotting, right? When you come out of the exam, you talk with your friends and you're like, did you spot the Tort law issue or the contract law issue and someone else's like, that was all about Administrative Procedure. And everyone's like, Oh God, I didn't mention all of these well with crypto, if you had a crypto exam question, you've got to go through like every course you took in law school and talk about the issues and hopefully do it in a written exam. That's only two hours long or something like that. It's a nightmare, but it's also, it's also fun.

Anna (00:12:53):
Do you only focus on the US like, I know the primary focus of the US you're based in Washington, but are you looking around at other jurisdictions?

Peter (00:13:00):
We've done work in other jurisdictions, for example, the UK about a year and a half ago had a call for information regarding how they could potentially expand their anti money laundering. And they said some slightly ominous things in that call for information, like, should we expand it? So open source software developers, you know... obligations for open source software developers to build their tools in certain ways that enable surveillance or things like that. And that, that is right in our wheelhouse of things we don't want to see in the world as far as government policy is concerned because it will not work and it will be very bad. Um, so when something very bad happens overseas, we'll reach out and either work with competent lawyers in the jurisdiction, or we'll submit a comment or, or a letter from Coin center as this, you know, US-based organization with some experience weighing in, but generally speaking, you know, we're all us attorneys, we're all, you know, educated here and we can have the biggest impact here. And that is both good because American policy can affect Americans, but also good because American policy ultimately gets exported to a lot of the rest of the world through intergovernmental organizations like the financial action task force, which takes our anti-money laundering policy and applies it to the rest of the world or other international standard setting bodies. So if we can make a big difference in the US it's probably the easiest way to make a big difference globally, um, not to be jingoistic, but that's how the US still works.

Anna (00:14:30):
I'm wondering, like, do you, would you say that there's also an influence from outside? Like if, if some like really novel and smart regulation is passed in the UK, say. Like, would, would you take that and try to champion it within, uh, the US or is that even what you do? Like, would you bring the things or are you more like reflective of what's already happening?

Peter (00:14:54):
So when you start studying comparative legal analysis, which is like a nightmare of body of courses in, in law school, you realize that like, there's a lot of path dependency in the law and for software developers, which might be most of your audience. This kind of makes sense. It's like once you start writing a program in a certain language and the idiosyncratic nature of that particular coding language, it's a hell of a effort to port it to something else, right. Because a lot of it doesn't even make sense unless it's in the context of where it was born. And us law is very unique. And the US regulatory system is very unique. So the policies that we develop are in part path dependent on the way our system has evolved. Our system has evolved with a lot of respect for constitutional rights, which is great, but also with a deep fragmentation between state governments and federal governments, and even within the federal government, between subject matter specific agencies.

Peter (00:15:51):
So, whereas the UK, and this is how I'm bringing it back to your question about UK policies. The UK has the, um, the FCA, the Financial Conduct Authority and her Majesty's treasury. And they kind of just so bad-ass to say her Majesty's treasury and the two work very closely together. They're unified effectively when it comes to policy about financial regulation. And they deal with financial regulations that include anti money laundering concerns, so-called "market integrity concerns", but also include securities regulation. Like whether people are being sold, um, you know, fraudulent shares of a publicly traded organization or something like that. And they also do, um, the commodities derivatives laws and things like that, to the extent that UK has laws that govern those transactions. In the US that alone is three separate, um, regulatory bodies. It's the securities exchange commission = the SEC. Commodities futures trading commission = the CFTC. And FinCEN, a subdivision of the US treasury. And none of those organizations even do the chartering of banks and things like that, which the FCA also does. That's the OCC or the States, which can also charter Statebanks that can then operate federally. So it's like, like, like

Peter (00:17:00):
The FCA can, like with the sweeping wand, like her Majesty's treasury could just be like this shall be Bitcoin policy. In the US, it's like, okay, you got to get 52 States and territories on board at eight different executive agencies at the federal level to have a unified approach. And that just doesn't happen, which means we'll always have a fragmented approach, which can be bad. It means like, if you want to hold people's Bitcoin, you have to get licensed in 53 States and territories rather than just one license in the EU or something like that. And it can also be good sometimes though, because it means that without a coordinated response, if there was to be a coordinated response to do something bad, the lack of a coordinated response in the U S is an impediment to that, you know,

Anna (00:17:44):
And consistencies and that fragmentation, uh, I I'm, I'm wondering if you think, whether any of the, like, if that didn't exist in the U S whether there would have been as much development in the cryptocurrency industry for like the first, you know, five years after Bitcoin became an open source project, for example,

Peter (00:18:04):
You're, you're, you're asking if, if it was, if the government response was less fragmented, would have there, would there have been less development?

Josh (00:18:11):
Yeah! Like would there have been more fear of, of, uh, sort of enforcement, um, you know, cause I, I, I mean, I'm just thinking about the rhetoric that one would read on the Bitcoin talk forums, right. And seeing the, uh, ascension of some of these assets. Uh, I just wonder to what degree, and not that it's primarily based - you know, not the development is primarily based in the US but, uh, you know, I think, I think that there's something to be said about the good side of that fragmentation, that it takes a longer time for regulations to catch up. And by the time that they do, the innovation will have maybe been allowed to happen. And then there can be a more sensible regulation. Yeah.

Peter (00:18:50):
Yeah. I think there's an element of that. That's definitely true. Um, but it's also worth pointing out that in some areas the US despite having a more fragmented regulatory system was on the vanguard of imposing rules and regulations onto this technology. One thing that's always bothered us at Coin center is when people go around saying like "Bitcoin, the unregulated cryptocurrency". Our responses, well, no, actually it's pretty heavily regulated and has been for various purposes since sometimes as early as 2012, 2013. So FinCEN, the US regulatory agency that focuses on anti money laundering regulations like suspicious activity reporting and know your customer rules for, for money transmitters, they issued guidance in 2013. They were one of the first agencies globally, let alone within the U S to say anything about Bitcoin. They said, look, if you are moving, people's Bitcoin around for them, you are a money transmitter, just like PayPal moves people's dollars around for them, assuming you have control of the money. And that's very reasonable, but it took a lot longer in Europe to reach a similar conclusion. And I think the reason for that is not that the US is fragmented, but that also we have flexible rules. So there's another comparative legal analysis distinction. You can draw apart from federalism and fragmentation, whether it is a Civil or a Common Law jurisdiction, and civil law was like French and Louisiana here in the U S which is super weird.

Anna (00:20:23):
Yeah. It's in Quebec as well in Canada,

New Speaker (00:20:25):
Right. That's right. Where it's all about the code. It's all about what was written down by the legislature and judges and to a lesser extent, but also true executive officials they're allowed to interpret what was written down by the legislature, but they're really not allowed to make it too flexible and to bend it too much, to fit things that the legislator legislature didn't imagine it would fit too. In common law jurisdictions, there's this tradition of judge-made law, where there might be something that a statute says about some behavior, like the height of a curb should be five inches. And if it's below five inches and somebody trips, because it was a too small of a step then we expect, then there might be liability, but a judge can also take that rule and, through the common law process, evolve it. So create different standards of liability case by case and leave a record of that opinion. And this creates this flexible standard. You're like, yeah, the curb was too short, but it was well illuminated. And there was a sign. So actually there shouldn't be liability in this case. And then the next judge will say, okay, this one was well illuminated, but there wasn't a sign. So what will we set the rule at?

Peter (00:21:32):
And it kind of evolves in an organic process like Wikipedia or something weird like that. And that is something that's actually, I think very good. Um, not to be like sort of an Anglophile cause this is Anglo-Saxon common law. Um, but I think it's something very good about the American and British systems, because it allows for flexibility. So when FinCEN, which is not a judge in this case it's a executive official, looks at the money transmission rules that were laid down by Congress. They have wiggle room to say, look, this is about moving currency or currency substitutes value from one person to another. We can interpret that to apply that to Bitcoin because it fits in there. Even though the legislature wasn't thinking of Bitcoin, when they wrote this. It is a flexible standard that the legislator set out and we can apply that to this new thing.

Peter (00:22:20):
And that has, again, its benefits and its risks. It allows for early responses, it allows for sort of equity when something fits or doesn't quite fit. You can make arguments one way or the other. You're not bound by the statute. And it also creates uncertainty, which is another problem. So in securities law context, this is why people often complain about American securities laws, because we have such a flexible test for what is a security that a lot of cryptocurrencies may or may not fit into that bundle, which means they're subject to a whole different suite of regulations from the SEC. So, you know, I think sometimes we've had earlier responses from US regulators because they're able to operate in this flexible, um, common law, like legal tradition. And sometimes we've had later responses because at the end of the day, they have to coordinate with other agencies and other and other States and jurisdictions in order to come to some policy decision.

Josh (00:23:12):
As you know, Peter, I have a bias of being a bit more on the cypher punk side of the spectrum on these sorts of things. And I, uh, you know, I'm maybe not the biggest fan of any kind of regulatory action, a lot of the time. And, and what I'm wondering is, I mean, your, from your perspective, there's obviously, I mean, I think there's has been positive engagement with regulators on the part of coin center. Obviously you guys are doing tremendous work, uh, but I am wondering your own personal opinion, you know, going back to the technological development over the last five or six years and especially, you know, on this being the Zero Knowledge podcasts, the, uh, kind of privacy and scalability improvements that are being pioneered by these new Zk systems suggest that, you know, one day it will be possible to have a private decentralized exchange of equity-esque assets on blockchains that literally cannot be surveilled upon because of the cryptographic primitives and systems being used. And I'm wondering, like, to what degree you feel like, how are, I mean, how are regulators going to face that, you know, what responses will they have and, and is it possible that like this technology will really, will eventually evolve to a kind of escape velocity where, you know, my, my own personal, maybe cypherpunk dreams might come true, but it might be a bit of a nightmare for people trying to draft legislation and the like.

Peter (00:24:47):
Yeah. The first thing to point out is financial regulation, especially, but almost all regulation is done through pressure points through intermediary regulation or intermediary liability or intermediary chartering, uh, like a bank is allowed to do the things that banks do because they're effectively a government corporation they're chartered by the government and you're allowed to be a sort of marketplace for equities if you register with the SEC as a national securities exchange. Um, now your cypherpunk future involves, uh, a necessary lessening of the power of intermediaries. Right? Right. Like we want to be our own bank. We don't want a bank. And it also involves not just a lessening of the power of intermediaries, but to the extent that you replace intermediaries with some sort of data structure, uh, which is the blockchain, it also involves making that data structure not publicly auditable or, or not fully transparent.

Peter (00:25:54):
Like you want everyone to be able to see certain facts, like, "yes, I received this transfer from this other person. I know that I have it now. And they don't. And I know that there's maybe only so many units of this in circulation". All the sort of economic guarantees that we hope we get from Bitcoin. But we shouldn't be able to see individual transactions. Right. So it should be more like Zcash and Monero and less like the Bitcoin blockchain, ideally. So where does regulation fit into that picture? You've removed the ability of the regulator to apply regulatory pressure through intermediaries because they can't really apply pressure to a data structure - that doesn't make sense. Uh, and you've removed the ability of them even to use open data, to get a sense of what's going on in the economy from a regulatory perspective. And so, yes, you know, if these systems succeed, which I think lots of people, even lots of people in government, you'd be surprised, hope that they will because they see the obvious benefits of these systems as far as privacy and individual human agency. It will necessitate a lessening of some of government's power over markets.

Peter (00:27:02):
Now, there are nuances to that statement though, because I don't think we'll ever get rid of intermediaries. And I think that's the most important part of the message that we have for government is even as the internet evolved, we kept intermediaries. We kept, you know, Google and other powerful corporations - and that has its risks - that can be used to exert some, some consumer protective or, or regulatory policy upon the users of those intermediaries. And so even as we go into a cypherpunk future with markets, I don't think Coinbase is going away anytime soon. I don't think Kraken and other exchanges are going away at a time soon, even as decentralized exchange gets better and better, it's not going to be the tool that mom and pop necessarily use to deal with their Bitcoin. Right? They're going to want the legal comforts of having an entity with their interests in mind, acting, acting in their interests, hopefully, and legal recourse to sue that entity, if that entity is not acting in their interests. And so the cypherpunk future hopefully allows someone like you, Josh, to be on the burning hot edge of the tech and do everything yourself, like a mountain man in the wilderness, you know, like downloading the entire Ethereum blockchain.

Josh (00:28:20):
That's right. That's why I have this beard. I wouldn't have it otherwise,

Peter (00:28:24):
But you will be a special person. You are a special person. And the vast majority of people that government is there to protect, especially like those who are more vulnerable because they're less technologically competent or sophisticated will continue to use intermediaries, which can remain a proxy, hopefully for the interest of their customers. And also a pressure point for regulation to make sure that they remain a proxy for the interest of their customers. So I think there's a balanced way forward that allows us to have the best of both worlds. For people who need it, you can have individual sovereignty over your financial existence. Like for people in mainland China who are not favored by the communist party, they need Bitcoin, right? They need, and they need Bitcoin with privacy. So they maybe need Zcash or something, something like it. Um, but for, you know, your average mom and pop in America, maybe they shouldn't be holding their own keys and maybe they won't want to. And so that's where regulation will still be important and where regulation will still find purchase and an ability to affect the world.

Josh (00:29:27):
I mean, I, I actually, as, as a cypherpunk bearded mountain man running nodes and holding keys and the, like, I think that's a reasonable path forward. And that makes sense to me. Uh, but there is this constant nagging fear I have. And especially, I mean, as you've seen recently with lots of, particularly on the Bitcoin side, all these big name, financial institutions effectively, you know, voting with their portfolio distribution and saying, this is a legitimate asset. So we're going to include it on our books. And we're going to bring this into the traditional financial system. Uh, I think in the world that you portray, I definitely feel like as long as the mountain men can have their exit option than it is a good path forward, but I wonder to what degree there will be a division between those two systems where the effective fungibility guarantees of some of these assets are called a question because you have the good clean Bitcoin or other assets in the regulated financial system. But then as soon as any of that touches my mountain man node or addresses on my mountain man node, the government says, "Oh, wait a second. That, that person, there is a, you know, he's a mountain man. We have a mountain man list. We keep this long mountain men list of sovereign individuals"

Peter (00:30:48):
"Touches my mountain man node" is one of the more disgusting phrases I've heard in a while and probably should trigger regulation to. Stop touching my mountain man node man.

Josh (00:31:01):
Good point.

Peter (00:31:03):
So you raised a very valid concern and we do worry about this. We worry about, so in the most recent FinCEN rulemaking that, uh, has caused a bit of a kerfuffle here in DC because it was being rushed by the Trump administration. Short answer for your audience - that's following this current event, it's now been slowed down, but not frozen by the Biden administration. So that's good news. We get more time to sort of give input and hopefully make it sensible.

Anna (00:31:29):
What's the name of that? Do you want to just -

Peter (00:31:31):
yeah, so, so the, the we've referred to it as a sort of, uh, icon as the midnight rulemaking, because it was promulgated during the midnight period between the Trump administration and the Biden administration.

Peter (00:31:44):
So if you Google FinCEN midnight rulemaking, you'll find more information about it. Uh, the official name of the rulemaking, it's a notice that was filed in the federal code of regulations. And I actually can't even remember what title they chose, something about, uh, reporting and record keeping requirements for convertible virtual currencies or something like that. Lots of abbreviations and things that get complicated quickly.

Anna (00:32:04):
What does, what does that one do?

Peter (00:32:07):
So the original, the original proposed rule, and this is all still proposed. It's not going to be finalized for at least another 60 days during which time we can affect its outcome, hopefully, but the original proposed rule would have required a few things, a fairly common sense thing, which is currency transaction reports that are equivalent to cash transaction reports in the traditional financial system. So this rule only applies to intermediaries. It applies to like Coinbase and it applies to a bank to the extent any normal bank wanted to deal in crypto.

Peter (00:32:39):
It says, "if your customer takes in or withdraws more than $10,000 worth of cryptocurrency, you have to report that transaction to FinCEN" - which is the Financial Crimes Enforcement Network. It's the part of the government that monitors for illicit funds transfers through the economy and things like that. And it's just a report. It says, Peter van Valkenburgh withdrew more than $10,000 in assets right, Now, that's already the law. If I withdraw $10,000 in cash from my bank, it's going to trigger a report. If I structure a bunch of transactions to equal 10,000 or more, it will also trigger a report. That's just the way things are. It happens without a warrant. It happens with that individual suspicion. And because of that, I don't like it. Cause it kind of seems to go against the fourth amendment rights that I have to privacy and rights against warrantless searches and seizures of my private papers. But that's a whole another debate to have that includes the whole financial system, not just crypto stuff. Like do we like this kind of surveillance, but so

Josh (00:33:37):
That surveillance was, I mean, it was originally for a lot more money, because of inflation.

Peter (00:33:40):
Right? That's right. Yeah. When, when the bank secrecy act, which is the law from Congress that started this surveillance regime was passed, was passed in the 1970s and in the seventies, $10,000 was, uh, I, I looked this up once before. I think it's, it's at least $40,000 back then. It's a lot of money. Like you're talking like I'm buying a car, not I'm buying, uh, you know, I, don't something that's $10,000. I can't think of what else.

Josh (00:34:05):
Air conditioner.

Peter (00:34:06):
That's an expensive AC but I guess you're right. Like, like whole house HVAC.

Peter (00:34:10):
I'm actually renovating right now. Yeah, yeah, yeah. There we go. Yeah.

Josh (00:34:14):
Got 'em steam pipe system for your heat. Maybe I don't know about.

Peter (00:34:17):
I am thinking about how poor I am because of this house, but I'm sorry.

Peter (00:34:23):
Inflation has whittled that threshold down because it's still nominally the same amount, $10,000, but what does it actually buy you: a lot less! So it means there's a lot more data collection on the part of government per transaction, because smaller transactions are now swept up into this reporting regime. But anyway, this is all sort of an aside to say, look, that that regime has been in place since the 70s. This is a Supreme court, actually rubber stamped it as constitutional, despite the fourth amendment. Although there's some counter-arguments that we can get into later. If we're going to have this in crypto, because right now we don't right now, if you remove $10,000 in Bitcoin from Coinbase, it doesn't trigger a report. At the very least, let's just say it's equal treatment with cash because crypto is a lot like cash. Uh, it should be, at least Bitcoin should be electronic cash, Zcash should be electronic cash.

Peter (00:35:09):
And so the same reporting requirements for, for regulated intermediaries makes sense. As long as they're not more burdensome or more invasive of people's privacy than the reports that already exist for cash. So at that part of the rulemaking, I don't love because it's still is warrantless surveillance, but I don't hate it because it's parity with traditional traditional financial systems and with cash withdrawals. The other half of this rulemaking is the really problematic one, which gets back to Joshua. You were saying about fungibility and a bifurcation between the mountain man crypto land and the, you know, Grayscale or Bank of America, crypto land, the institutionalized crypto land. So the other part of the rulemaking would have done this. It would have said any intermediary that handles crypto, if they have an incoming transaction or an outgoing transaction over $3,000. So even lower than the $10,000 threshold. They need to know the name.

Peter (00:36:02):
And physical address, not just of their customer, who they're receiving it or sending it on their behalf, but also their customers counterparty, the person who's paying their customer or the person their customer is paying. So like, you guys are making like confused faces because you're absolutely right. Like that's not how Bitcoin or any of these systems work. When I tell Coinbase I want to pay this Bitcoin address, they don't know, nor do they have any way to discover the name and physical address behind that Bitcoin address? Indeed. It could be a robot. It could be a multisig account for five people, or it could be a smart contract that is not a person with a physical address at all. So this is not just nonsensical in the context of cryptocurrencies because it would involve them getting information they don't have the ability to get, it's also highly invasive of privacy because now the intermediary is being deputized by government to spy on someone who isn't their customer. Which is weird on a new level and probably unconstitutional from a fourth amendment perspective on a new level. Because that person never agreed to hand over their private information to Coinbase simply because a Coinbase customer paid them at their personal address.

Anna (00:37:15):
Ya

Peter (00:37:16):
It could lead to this bifurcation of the financial system. Um, this lack of fungibility, because what is Coinbase going to do? They're going to say, you know, if we can't comply with this, we're just going to block transactions from addresses that aren't other financial institutions. And that means that what we end up with is Coinbase and Kraken Bitcoin, which only goes between the financial institutions and mountain man Bitcoin, which only goes between the Josh Cincinnati's of the world. And that's not a good system for, for several obvious reasons. The most compelling point I think we made in our comments to FinCEN explaining why this was a bad rule is not only is this bad for many reasons. It's bad for law enforcement law

Peter (00:37:58):
Enforcement doesn't want a world where these systems get fragmented and bifurcated into. Cause yeah, they'll have tons of visibility into, you know, the institutional side of Bitcoin. But if that side never crosses this boundary to the peer-to-peer side of Bitcoin, then you lose all that data. You lose the ability to track what's going on in the peer to peer side. You get a real going dark situation over there. And so I think that's a, that's a compelling argument that this isn't even something you'd want for your purposes as a, you know, surveillance organization, as a financial data collection organization. This is just bad for everyone. And you know, the bright side is it looks like this rule is getting slow balled. Now it's finally, it's not, you know, it's not this rushed process over the Christmas holidays that it originally was when we first started fighting it. And I think there are reasonable people at FinCEN who now with a longer process can have their voices heard and say, look, we should just have parity with cash. We shouldn't be going for this extraordinary requirement that would break these technologies.

Josh (00:39:04):
Would you out of curiosity, because I fully agree with your, um, your statement that the original BSA laws is borderline unconstitutional. And you know, that that ultimately that that law has enabled so much financial surveillance. If it let's say if, if Vincent does create this parity, um, to cash, would it be within coin center's purview to, to fight to change the cash policy there? Or do you think that that's sort of the role of another organization to work on that?

Peter (00:39:36):
So ... I would want to, but this gets into something that's increasingly an issue for us. There are things about the world from a crypto policy standpoint that exists solely to cryptocurrency, right? Sure. And it's obvious that we want to affect those things. And usually that means not arguing for special treatment, not arguing for special pleading, like, "Hey regulator, you've always done this with the Bank of America's of the world. So treat Coinbase the same." "Hey regulator, you've always done this with physical cash, like dollars in circulation. So treat Bitcoin, that's moving peer to peer this same." But then there's things about the world that are just bad for, you know, the way banks have traditionally been regulated or the way cash has traditionally been regulated. And it's hard as an organization that's really dedicated to crypto stuff to be on the vanguard of changing those policies, which affect everyone even outside of crypto, because it weakens our ability to just focus on good crypto policy.

Josh (00:40:43):
Yeah.

Peter (00:40:44):
So, you know, I, I, I'm especially sympathetic to this idea that we should just fight the bank secrecy act. We should go back to a world where law enforcement just needs to do good old fashioned policing in order to stop crime, rather than making the movement of money related to crime itself, a crime like, cause that gets Orwellian really quickly.

Josh (00:41:05):
Yeah.

Peter (00:41:06):
But there's also areas where like in the securities law context, and this is I'll, I'll go into this briefly because I think it's instructive of this problem. Lots of people in the crypto space want to be able to raise money to fund projects that have tokens, right. And they want to be able to promise tokens to fund the development of those tokens. And that's seen as an innovation in this space by some, and by others it's seen as like a sacrilege, like, you know, no pre-mine, no pre-sale fair distribution anyway, there's religion here and I don't want to get into that, but for the people, for the people who want to raise money on a promise of a token. They see the SEC getting involved here and charging them with things like unregistered securities issuance as an attack on crypto.

Josh (00:41:53):
Hmm.

Peter (00:41:53):
It is not an attack on crypto because that law, which says you can't promise people, things that are going to make them rich without registering with the SEC is not crypto specific and applies to anyone promising future value to investors. And so your problem isn't with the way people are treating crypto, the way the SEC is treating crypto, your problem is with the way the securities laws have been drafted in this country since the 1930s, you know, full stop. And it doesn't matter if you're selling like a paper token or a digital token or a paper stock certificate or a digital stock certificate.

Peter (00:42:30):
Your problem is with securities laws. And there are legitimate arguments that there's something wrong with US securities laws. They don't have this problem in Europe, per se, in Europe. The definition of what is a security is pretty black letter. Again, the civil code versus the common code of distinction in international comparative legal analysis. So in Europe, we know more clearly when something's going to fit into the definition of security and when it's not. And if you're someone trying to do something on a crypto network, you can more easily work around that definition. Do the things that won't sweep you into securities regulation for better or for worse. Maybe that's better for innovation, but little worse for investor protection. I don't know. In the US we have this flexible standard for what is a security it's it's court made. It's common law. It's called the Howey test from a case of the same name that the Supreme court heard in the 1950s.

Peter (00:43:23):
And that just says, "is there an investment of money in a common enterprise with an expectation of profits reliance on the efforts of a third party promoter?" And so, yeah, most ICO's fit directly into that flexible standard. So of course the SEC is going to apply this stuff to crypto stuff. And so if you don't like that, you don't have a problem with what the SEC thinks of crypto. You have a problem with a 70 year old Supreme court case and a hundred year old (almost) securities law tradition in this country. And maybe we should overturn that and be more like Europe, or maybe not. I don't know, but that's well beyond like the more small questions that coin center needs to focus on to defend this tech and much more into the realm of like, what should an ideal government be?

Anna (00:44:11):
I want to quickly make a distinction though, because so earlier on you were just talking about the FinCEN ruling, and then you mentioned the sec, these are two different bodies and they focus on two different things. I know earlier on you did actually kind of run down what they were and what the distinction was, but can you do it again because I know that like one is financial and the other one's financial somehow. Yeah, yeah,

Peter (00:44:36):
Yeah. So, so, you know, in the UK or in most EU member nations, there's like one financial regulator. In the US the sec focuses on securities regulation and, and anything that is a security is therefore subject to the SEC when you issue it, like when you create a new promise to your investors and sell that as a tradable stock, uh, or share if you will, or when you're an intermediary that helps people trade other people's securities, like Apple stock for Tesla stock or something like that, you know,

Anna (00:45:11):
But like wallets, would they fall under SEC rules? Do they help to exchange?

Peter (00:45:18):
That's a good question. So less so, um, you know, you are allowed in US securities laws to hold your own stock certificates. Nobody really does. They all trust the DTCC, which is a clearing house that there's a whole history here that even, uh, that I'm not particularly well-versed in about dematerialization. Stock certificates used to be all paper. There used to be like giant basements in Manhattan and full of paper.

Peter (00:45:43):
And people would just lose the paper all the time. And they like pushing the paper with a broom.

Anna (00:45:48):
Isn't that why in 1929 people through papers into the air with where those news stocks probably,

Peter (00:45:54):
maybe who knows easy times back then.

Anna (00:45:58):
Like those images of people throwing paper into the air.

Anna (00:46:00):
It might be the ticker tape to which had the prices on it, but it could add, right.

Peter (00:46:06):
So, so, so we got rid of paper stock certificates in most cases, but you can still technically have your own, custody your own stocks. Um, so far as I know, it might be difficult from a practical standpoint, but there's no law against that. So the sec is generally not going to look at like whether a wallet is helping people secure their own stocks in the right way. Um, but they are definitely gonna look at a place that sets itself up, puts a shingle out that says, "we'll help you trade crypto token a for crypto token B" if either of those or both happened to meet the definition of a security. So they're much more interested in the exchange side and an awkward thing as far as what's going to happen in the next few years with Securities laws is the definition of exchange from this from the sec is not as focused on whether someone actually has custody of the certificate of the stock being traded and more focused on just making the marketplace, which means a lot of quote, unquote decentralized exchanges that are non-custodial still might be centralized in some way where they're making the marketplace, keeping an order book or maintaining the software that keeps an order book.

Peter (00:47:15):
And so they kind of start to fit into that definition of securities exchange, which is going to be very weird.

Josh (00:47:21):
Do you think, do you think there is, there will be a case where the SEC actually like mandates like a smart contract update?

Peter (00:47:29):
Yeah. So this is where it gets really tricky with constitutional law. So the sec has already gone after a decentralized exchange, they brought a settlement against, um, Oh shoot. I forgotten his name, the fellow who was one of the developers or the main developer of EtherDelta. And he had already sold EtherDelta to someone else, which is why EtherDelta is still running today as a decentralization. I don't think it's widely used. In fact, it might've finally given up the ghost just in the last six months. But it continued to be used for awhile after this settlement agreement , the settlement agreement was between the original author - who was also maintaining the website for a time, had the DNS in his name and things like that - and the SEC, and it said like, I won't do this again. I'm sorry for creating an unregistered national securities exchange. Uh, here's a little bit of money. (I think there was money involved in settlement). Uh, please, please, please don't hurt me. And so that happened, and the question is like, what's, what's next? Because there are lots of other decentralized exchanges and they may fit into the SECs definition. Now a lot of them might be able to be okay if the centralized parts of their systems, like the person who registers the DNS or does other things really genuinely intends their DEXs only to be used for non-securities trading, because that is okay. You're allowed to set up a marketplace where people trade oranges and apples. Those aren't securities. You're allowed to set up a marketplace where people trade Bitcoin and Ether, because those are almost certainly not securities, uh, even according to the SEC itself.

Peter (00:49:08):
But once you start helping people trade, uh, tokenized versions of Tesla stock. Let alone maybe a cryptocurrency that had a big pre mine and somebody owns all of it or most of it and is profiting off of it by promising things to investors, then you run into trouble. And so in those cases where there is a smart contract that is facilitating, let's take the easiest case, literally tokenized real securities, like a tokenized version of Tesla stock that somebody, somebody has the stock certificates and they've created ERC 20 tokens one-to-one with all the stock certificates that they have. If those things are trading on an unregistered exchange, the SEC is going to have to do something about it, to save face and to just enforce the law that Congress sent them to enforce. And so just to your point, like, does that mean they're going to tell someone you need to rewrite the smart contract so that it doesn't deal in these assets.

Peter (00:50:00):
That's hard. The counter-argument that they can use at that point is if all they did was write the smart contract, right? This let's assume away DNS and a front end for the smart contract and things like that, then telling them they have to rewrite this code a certain way... Now, first of all, it's going to live on the Ethereum blockchain. You can't take it down, right? So that's a problem, but telling them they need to create a new version and direct everyone to that one, instead of the other one is really "compelling them to speak." It's saying "you have to write code that does, that looks like this instead of code that looks like that". And compelled speech is one of these things in the US that we think is unconstitutional. The government can't tell people to express certain beliefs in writing or in code or in song, or even in cigarette packaging. So like interesting thing to show you the gravity and the complexity of the first amendment compelled speech law... In a lot of parts of the world when you buy cigarettes and I don't buy cigarettes, um, I swear I don't, uh, but there's nothing wrong with it if you do well, no, there probably is lots wrong with it...

Speaker 4 (00:51:05):
But anyway, I've gotten into a normative territory that I shouldn't have gotten into when you go

Peter (00:51:11):
For fun to buy cigarettes, just to see what it's like in most of the world, you'll find a package that has like, like decayed teeth on it, or like, like a lung that's like withered and become black. And there's these like graphic illustrations that are meant to frighten people away from buying cigarettes. And there, there probably is very good reason for frightening people away from buying cigarettes. If you notice in you buy cigarettes in the US there is no such graphic pictorial warning of all of the terrible things that are going to happen to your body when you smoke these cigarettes. There's just like a nice, uh, you know, well, typeset font, you know, surgeon General's warning, "You're going to die" but no pictures. And the reason for that is the US constitution, the first amendment, which says that the government can't censor people in certain ways - prior restraint - and says that it can't force people to speak in certain ways, was found by the Supreme court to say like laws that force cigarette companies to disclose facts about their products found to cause cancer. Those are okay laws. Because you're just forcing them to disclose facts, but laws that force those cigarette companies to express a creative viewpoint or something that's not purely factual, which these frightening images of, you know, cancer patients are. Those are unconstitutional in the US wow. Yeah. So, so what is forcing somebody to rewrite their Ethereum smart contracts so that it only trades asset A instead of asset B. Is that facts? No, that's viewpoint. That's like, we want you to, to whitelist these assets with your software to write a book about how these are good things that people should learn about and write a book about how these are bad things they shouldn't learn about or deal with.

Speaker 4 (00:52:54):
Weird. So you can make a credible argument that would be unconstitutional to force that kind of speech. There's a lot more nuance to this. Um, but we don't have like, like sometimes things that are speech aren't really speech they're technically "conduct" like new dancing or flag burning. And then they can be regulated a bit more than just pure speech, like "writing a book". And so maybe computer code is more like new dancing. Josh, you would know a lot about that.

Speaker 4 (00:53:20):
Yeah. Why, why are you following me on TikTOK, Peter? That's a separate world.

Anna (00:53:27):
All right. I want to, I want to bring it back to this comparative thing, because I think you've just given some fantastic examples of places where the SEC or things, objects that the sec potentially has some reach over, but going back to that comparison SEC and FinCEN, what does FinCEN, like, what are the parts that FinCEN might have oversight on too? Like, would they look at wallets or what is their exact purview? They don't deal with securities, I guess.

Peter (00:53:55):
So FinCEN has a different subject of its regulations. Instead of securities, they're focused on more traditional monetary assets moving through the economy, not these equity assets. And they also have a different purpose behind their regulations. They're not there to protect people from bad investments. They are there to surveil the financial system, the movement of non-security assets through that system, in order to detect the flow of illicit funds, both funding of terrorism and money-laundry from crime, in order to ultimately interdict and stop those, those bad flows of funds through the economy. So FinCEN is interested to an extent in wallets because a wallet may not be a place where you exchange Bitcoin for Ethereum. It may just be a place where you park your Bitcoin in order to move it later. And so that's part of this flow of funds in the economy. And FinCEN has to this date been very good at narrowly interpreting its rules to avoid too broad coverage of their regulations beyond obvious intermediaries.

Peter (00:55:07):
So they've made this distinction and a lot of people in this space don't like it. And I understand because it makes it sound like these things are more real than they are between so-called self hosted or unhosted wallets, and so-called hosted wallets. Uh, and, and what they mean by that distinction is simply "look, sometimes a company holds your Bitcoin for you, and sometimes you hold your own Bitcoin." And that's true. We even, you know, even cypherpunks agree that that's a, uh, a good portrait of the space, although it's a better way to just say, I hold my own versus I have a company hold it. Then it's "unhosted". It's like, it's like the wallet in my pocket with a hundred dollars. And it is an unhosted leather wallet.

Peter (00:55:49):
But anyway, so we're actually lucky that FinCEN has been careful about drawing this distinction thus far, because it's always made this distinction in the context of, we only regulate companies that hold people's Bitcoins. We don't regulate individuals who hold their own Bitcoins. And you know, they're doing that because they're taking a sensitive reading of the law that, that gives them power. The bank secrecy act, which says that this is a law to regulate financial intermediaries for the illicit flows of funds. It doesn't say that every American needs to spy on every other American to collect information about the flows of funds. And so this is the right distinction for them to be drawing. Now, it's getting more complicated now, when FinCEN says, yes, we only regulate intermediaries who hold people's Bitcoins versus surveillance purpose, but we want them to know about the name and physical address of their customers' counterparties, which is the rulemaking we described earlier.

Peter (00:56:44):
Even if their customers' counterparties aren't financial institutions, are individuals. And that's why we need to stop that part of this rulemaking. And also challenge it under perhaps the 4th amendment, which says that, you know, the government can't search and seize information that we keep in our homes, or that we keep private to ourselves. And if I'm not giving my information to Coinbase, that information is still here in this beautiful attic, uh, on a ledger or a Trezor or something. I mean, I'm kidding. That's not what's here. It's not here. Don't try and come here, but I should get the 4th amendment protections that I would have for any other private papers in my house. And that means there can't be this bulk warrantless surveillance collection, unless I start handing information over to a corporation at which point, maybe there's an argument that there can be this bulk collection of information.

Anna (00:57:32):
And yet this is something that there, that the case that you mentioned before, this is what they're actually trying to change. Then they're trying to rethink that if you're actually calling for the disclosure of an address of one of these unhosted or self hosted wallets.

Peter (00:57:48):
Correct. Uh, and I'm just going to be a little bit politic in how I say the next thing that I say, but, you know, when you say "they are trying to change that". Agencies are people, there's lots of people. And there are some people that I know in treasury and in FinCEN, let alone the rest of the government that might've been in favor of this. And there are some that are not. And we've seen already, just in the first few days of the Biden administration, a pretty profound change in the way this rulemaking is proceeding. It was originally a rushed 15 day - this is going to happen, give us your input, but we don't even necessarily need to read it, to actually, we're going to extend this to another 60 days and where we want a flexible approach. If you make good arguments about why this doesn't make sense, technologically, or from a public policy standpoint, the final rule might not include it. So like government is a bunch of people. And I think a lot of them actually have the right idea about this tech. I know that's surprising to people in the cypherpunk community, but we might still be okay as far as, um, what FinCEN chooses to regulate and not regulate.

Anna (00:58:57):
Where is the STABLE act in all of this, this Stablecoin Tethering And Bank Licensing Enforcement act. I think they got it into an acronym. Hilarious. Um,

Josh (00:59:11):
Which is impressive. And are you in, are you in Rohan, still friends, Peter?

Peter (00:59:15):
Yes. Yes. Although we haven't chatted much, uh, since, since then, but I still hold him in high esteem. Yeah. Um, Josh is referring to Rohan Grey, who is probably the most visible advocate for this STABLE act on Twitter. Um, he's a very smart guy. He and I agree a lot with respect to privacy. Um, in fact, he thinks the Bank Secrecy act is just an abomination which should be immediately overturned. So he, he, he doesn't mince words like I've been mincing words on this podcast. Oh yeah.

Josh (00:59:47):
And, and actually, if people want to see more about that, there's a great podcast that you and Rohan did that I listened to some time ago, I think, through coin center. So I'm sure we can probably add the link to if people want to hear more about it.

Peter (00:59:59):
Yeah. Yeah. Now we're Rohan and I probably do disagree pretty vehemently is with respect to, um, how money that is actually like the government's money dollars should be regulated. Rohan takes what is referred to as a "charter list view of money," which is if the government accepts it as taxes, that is the only thing that is really like money, money. Uh, he has a modern monetary theory background, which is, you know, we don't have to get into, but it's certain principles of how macro economic policy can be done, uh, and should be done at basically that the government should get much more involved with financing public works and other projects using money creation, uh, fiscal policy, and he in the STABLE act helped representative Talib in the house of representatives, come up with a policy for how this state money - So we're not talking about Bitcoin - but anything that claims to be a dollar or dollar backed should be regulated when it is issued by.

Anna (01:01:05):
Aka. Stablecoin.

Peter (01:01:06):
Exactly. So that law, what it would do is, would put anything that is a stablecoin, and that's not just like USDC, like, uh, asset backed stablecoin issued by a corporation, but also in theory, anything that claims to maintain parity with the dollar. So possibly even something like DAI, Maker's DAI. Anything that claims to be pegged to the dollar shall only be issued by a federal reserve bank. So it would put all of that activity into the exclusive purview of the banking regulators of the federal reserve and maybe the OCC and state banking charters. So not FinCEN and not the sec to answer your question, the other suite of federal regulators that focus on banking, but not financial surveillance and not equities.

Peter (01:01:55):
Yeah. And this was something that for obvious reasons was very controversial in the crypto space. And the coin center spoke out against. It's still only a bill that was introduced in the house last legislative session. So it could be introduced again this session, but this is nowhere near becoming law. That said it's from a democratic representative in the house. And the Dems now control the house and the Senate and have the presidency. So there's a slight, slightly better chance that something like this could become law, but this is still very speculative. And quite honestly, um, it's coming from the left wing of the democratic party, Rashida Talib - she's, um, very vocal about the need for very strong consumer protection regulation with respect to the financial system. And there are good reasons for that, but this is, this is not necessarily the mainstream of the democratic party.

Peter (01:02:50):
So that's all to say this, this is still very remote. This might not become law, but it's problematic because of how broadly it sweeps. It basically says that DAI because it's not issued by a federal reserve bank - And obviously never would be because that doesn't even make sense; It's a smart contract based asset; It's not, it's not issued by any company corporation, public or private - is not allowed to exist because the only things that can claim to be dollars or maintain parody with dollars must be issued by the federal reserve banks. And beyond that, in order to enforce that it shall only exist if issued by a federal reserve, it would create liability for people who assist in the transactions that facilitate this other thing. So if you were in theory, a miner or a staker on Ethereum and you promulgated, or even just relayed a new block on the Ethereum blockchain, that includes a DAI transaction.

Peter (01:03:51):
You have probably without knowing it - because he probably didn't look at every transaction in your block - facilitated this transaction, which is not supposed to happen anymore because it's a transaction of a dollar based asset that doesn't come from the federal reserve. So while creating liability for people who maintain open blockchain networks is one of those sort of lines that we don't think government policy should ever cross, because these people are simply like relaying data on the internet. It's not an activity where they have intent to defraud. It's not an activity where they have intent to break the law. It's really a function that is necessary if we're going to have these shared networks. Uh, and just as we don't impose liability on an internet server because they're relaying other people's data and that's why the internet works. We can't have that kind of liability on a person just relaying, you know, blockchain data. Yeah.

New Speaker (01:04:45):
The government shouldn't be piercing the mountain man node veil. It's in the mountain for a reason. Um, okay. So when you say this though, I mean, this is so fascinating to start to see this picture emerge in the kind of American ecosystem of the SEC, FinCEN and the banking... You sort of said when it comes to banking, there's a number of institutes. yeah.

Peter (01:05:10):
Yeah. There's, there's, there's the OCC, the Federal Reserve, the FDIC, which does insurance and the three of them always need to agree with respect to federal banking policies. And that's, that's a hell of a thing. And then there's state chartered banking regulators like the New York Department of Financial Services, or I don't know, the Kansas financial chartering authority, you know, like there's a lot,

Anna (01:05:32):
Lots of them, but why, why is the STABLE act an act? Why is that already, like, why wouldn't they be able to use one of these kind of government organizations? Like when you talk about the work that FinCEN doing, like those aren't laws that are going to Congress, are they aren't, they just sort of internal to the organization?

Peter (01:05:51):
So this is another, uh, complicated area of legal theory is that.

Anna (01:05:58):
I'm learning a lot about the American legal system right now. The government.

Peter (01:06:03):
And this is something goes beyond just the American legal system. It's pretty global, but so legislatures are the democratically elected representatives, the people, at least in theory, right? And we have this idea in open liberal societies that only those democratically elected legislatures should be making laws because if random people not elected make laws, there's no accountability. And there's no voice of the people in the political process. Now, the problem is that legislatures are made of generalists. There are people who come from all walks of life, and they're not specialists in crypto or securities, or the way that FEDwire moves money between banks are all of these idiosyncratic nuanced parts of the global economy and just the world that we might want to regulate. And so Congress has a tendency ever since the 1930s, I'll just leave that out there as some important crap happened in the 1930s that you might want to like look into - ever since then Congress has started passing these much more general laws that empower an executive agency, that's probably also created by a law from Congress - to sort of fill in the gaps of how to make policy. Because we can't learn about all of the details that we might need to regulate as far as like the stock market. And that's hard. And so we're going to create a law that says you people in the executive branch, the presidential half of government, or third of government, not the legislature, can fill in the gaps in order to protect markets or surveil for illicit funds. And then those executive agencies, whether it's the SEC, FinCEN or whatever they make rules based on the power that came from the laws passed by Congress to enforce the will of the legislature. And that is not a democratic process because that's just people - appointed by the president who is elected, but the appointees aren't elected - choosing exactly how to enforce the laws and what we've said in this country.

Peter (01:08:04):
And in most other modern democracies is some amount of gap filling is okay, but the agency, the unelected people can't simply make up all new policies. They have to stay faithful to the original intent of the statute in creating this gap filling of how exactly to achieve the policy mandate that they've been sent by Congress to do. And so with respect to financial surveillance, the bank secrecy act actually offers the Treasury and FinCEN, a division of treasury, extremely broad authority to just do whatever you think is right from a rulemaking standpoint, to stop the flow of illicit funds and to detect money laundering and terrorist financing. And in fact, the breadth of the power they've been handed to just make rules undergirded by that law from Congress is probably beyond the pale of our constitutional system, where we say only Congress makes laws. Because effectively they can use that power to do almost anything because almost anything, um, as far as surveillance of our financial system could be justified as stopping money laundering or stopping the flow of terrorist funds.

Peter (01:09:12):
And so it's sort of this unbound principle that if they were to take too far, they'd be in jeopardy of a constitutional challenge saying: this violates the separation of powers. Only Congress can set this kind of fundamental policy. You, the executive branch are allowed to fill in the gaps like this report should have, you know, this kind of information on it versus this you're not allowed to generate whole new sets of reports that require whole new entities, like say a Bitcoin node operator or something like that, to file a whole new sets of information. Cause that's beyond the gap filling that Congress enabled you to have. The STABLEact would empower the federal reserve, one of the banking regulators, with a new set of powers that they probably don't already have. They might be able to look at the existing national bank act, the NBA, which goes all the way back to like the 1850s or something crazy and empowers the OCC and the federal reserve and a few others, well, not the federal reserve because it didn't exist back then.

Peter (01:10:12):
But, but anyway, there's a lot of legal authorities, um, that empower them to regulate these chartered entities called banks that do certain things, but it probably, and I'd have to look at the entirety of the banking laws to tell you for sure. And I don't want to do that. Uh, but it probably doesn't empower them to, to make illegal, uh, the relay of data related to a dollar back to asset on the Ethereum blockchain, that would be too much of a stretch of the existing authority Congress has granted the banking regulators. And so that's why the stable act needs to be passed as a law in Congress, rather than just created as a regulation by the banking regulators.

Anna (01:10:46):
Got it. This leads me to kind of one of my last questions that I have for you today. We've done an amazing journey by the way, through this entire thing, but it comes back to Josh's earlier point about privacy, privacy tech, and privacy regulation, because now that we've sort of mapped out some of these groups that, you know, we hear a lot about, I, I hear about them. I'm Canadian living in Germany. I have nothing to do with the American system, but I know about the SEC and I about finCEN. Like I've heard these names, it's really helpful to see where they live. But now say we go back to that topic of privacy and regulation. Say you are looking to create a system where individual privacy, like your, your personal financial records could be kept private, but still potentially give authority for auditing purposes, if need, be say, that's what you want. Where, how do you go about that? Like which organization should you start talking to? Who could use their rules to help enable something like that? And basically speaking right now for like a lot of the privacy projects who maybe aren't yet doing the lobbying and stuff, but ...

Peter (01:11:56):
Yeah, you know, it's interesting, despite all this talk of regulation, the US is still a country that believes in private enterprise. I think, right. And still believes that a lot should be done from an innovation standpoint in the private sector. And doesn't need to be government sanctioned to proceed, right? There's this principle again in common law of that, which is not prohibited is allowed. Because you don't want that statement to be reversed because then you have to ask permission whenever you do anything, right. You could, you should be able to assume that if there isn't a law specifically outlining what you want to do, you're allowed to do it. And so, you know, it's tough because we've ended up with this mess of financial regulations and there are still gaps that allow for innovation and those gaps are critically important. And that's like Bitcoin fit into that gap.

Peter (01:12:55):
There was no law that said that you can't create. I mean, it would have been quite the, uh, omniscient legislator who would have seen Bitcoin coming before it existed and said like, you can't create a blockchain of hashlink transactions, that would be based on proof of work in order to solve the sybil problem. You know? So, so, so the brilliant people out there, and if you want to do brilliant work, you need to become good at finding the gaps and building in the gaps. And that's sounds uncomfortable and awkward because you're going to need a general counsel or some friend who claims to know the law and isn't a general counsel, but hopefully he's right. Or she's right. I'm telling you like who you could try going here, but don't go here. You're going to get sued and you're going to get ruined, but, but that's still, I know this sounds bad.

Peter (01:13:43):
That's still better than China. Like I don't mean to be, you know, to just call out a whole nation of millions of people, but the Chinese government, not the people, is the reverse there. You can't start a business without being, or having a member of the communist party in your inner circle, effectively sanctioning what you're doing. If you try and do that and do something that the communist party of China doesn't want built, or doesn't want changed, you will be in a world of hurt. You know, you, you will lose access to all of your power from wherever, from the, the, the ability to transact or the ability to just move freely within the country. And so, like, there's lots of talk about China's building a new central bank digital currency, right? And there's, there's even some level of detail as far as the technical architecture of all that.

Peter (01:14:32):
But I honestly, that's the wrong approach. We should not be hoping that American innovators get jobs at the federal reserve. And then the federal reserve issues a new digital dollar. Even folks at the federal reserve agree that that's not the way we do things in America. We should have companies that are experimenting with this tech either from a centralized standpoint, like USDC, we're from the glorious, like truly American, rough, and ready. I'm just going to do it myself, make a smart contract in Ethereum MAKERDAO type world. I don't know if those guys are mostly European. They might be. Yeah.

Anna (01:15:05):
I think they're European.

Peter (01:15:08):
There's still something kind of like core to the American experience there as well. Cause it's a little bit like, like there's something missing I'm going to build it. Yeah, yeah, yeah. Like, like the frontier, the electronic frontier, if you will. And you know, if these systems get, battle-tested doing things that are somewhat toy like - and granted, actually some of these things aren't very toy- like anymore, cause they're moving billions of dollars one day - I do not think it's unrealistic in if we continued to have somewhat enlightened, um, politicians

Peter (01:15:43):
And that statement is giving me pause ...

Peter (01:15:46):
That American regulators might at one point say, "okay, I see we have these options. We have these options with respect to KYC and AML where there's now self-sovereign identity because there's identity systems built on open blockchains. And we can use that to tokenize identity and, you know, credential people, but do it in a private way that respects their dignity. And doesn't give one corporation like Facebook, the ultimate power to decide who was who," or we could see regulators say, "okay, we've got this new technology that allows people to, um, lock certain valuable assets and algorithmically adjust them to equate to a dollar." And it's going to take a long time before we get there, but maybe that should be some component of our national monetary system. And that kind of work combining government authority with innovation and free enterprise should be what America, the American system's about it. Shouldn't be about, um, convincing the Fed to use this technology or that technology. It should just be the private sector builds things and the government regulates them by putting guard rails up, by putting safety rails up. And that's how we get the tools in the world that we want. Not that they're just descendant from some enlightened, um, politician or communist party or what have you.

Anna (01:17:39):
I think that's a, that's a super useful thoughtful answer to the question that I had about how to kind of incorporate privacy. And I wonder, I mean, I, I feel like that's potentially going to speak to a lot of the people who are listening to this show who are working in privacy, but also on the building front that they, they need to be smart about it, but they should kind of keep going. Hopefully that that space for innovation remains open. Um, and not only in the States, but all over the world.

Peter (01:18:05):
And that's that more than anything is coin center's mission is to preserve and to open and widen that space as much as possible so that innovation can continue.

Anna (01:18:15):
So let's just come back to coin center. Um, what can someone do if they actually want to like participate or be part of this work that you're doing or may potentially support it?

Peter (01:18:26):
Yeah. So all of our public resources from an educational standpoint or from a policy advocacy standpoint, we make public because we believe, and I think rightfully that we're doing public work, we're doing work for, for the general good. And so you can see everything that we provide to regulators. And we provide to lawmakers in congress at coincenter.org. And if there's something missing there, as far as a resource. Maybe, or something that you think is not well phrased, like maybe you're working intimately with self-sovereign identity technology, and you think that there should be a better explainer on our site for how that tech can be built using a particular protocol, you know, reach out I'm peter @ coincenter.org. If you think that something should be different, this is how we build this advocacy effort is by bringing brilliant people in front of government to help them explain things. So that government doesn't get the wrong idea and doesn't make policy out of ignorance.

Peter (01:19:21):
And then the other way that you can help is, um, we are a 501c4 nonprofit. So that means we're publicly funded by donations. And, uh, if you like the work that we do now, February is actually a great time to donate to coin center because Grayscale, um, has generously agreed to match every donation we receive in the month of February up to a million dollars. In addition to giving us a million dollars. They're sort of making a tradition out of what crack in generously did two years ago in supporting coin center's efforts and doing a matching campaign. So we can't thank them enough. And those donations are what helps us keep the doors open hopefully for years to come so that, you know, when someone wants to call Bitcoin, they're not talking to some rando.

Speaker 4 (01:20:08):
They're talking to this random. Cool. Well, Peter, thanks so much for coming back on the show and sharing all of this with us. Yeah. It's been my pleasure. Yeah.

Josh (01:20:20):
Thanks Peter. This is a super fun.

Anna (01:20:21):
And Josh, thanks for co-hosting.

Josh (01:20:23):
Yeah, of course. My pleasure.

Anna (01:20:27):
And to our listeners. Thanks for listening.