Bitcoin Regulation Landscape
Transcript By: Bryan Bishop
- Elizabeth Stark
- Jerry Brito
- Constance Choi
- Christian Catalini (moderator)
MIT Compton Labs - Building 26, room 100
Okay guys, we are getting close to the time for the next panel. Head back to your seats. You may bring food in with you. We also started 15 minutes late. People have 15 minutes .. we ended lunch on time. One of our speakers literally only came for 30 minutes today, 2 to 230.
It’s going to be escape. I don’t know how to use Macs. It will be minimize and then just go to panels and it will be the seventy first in there. I think the livestream is not filming that though. Do you want to do it before we announce it? Did we find her? Yeah, we found her. Okay, that’s fine. Oh, we have water for them. Nice. Talking to Constance then. Let’s do one more run.
Hello everybody. We are going to get the next panel started focusing on Bitcoin regulation. Christian focuses on equity crowdfunding and the MIT Bitcoin project. If you would like to submit a specific question, tweet it @ccatalini. We are going to hand it off now.
Christian: I would like to welcome the panel. This will be difficult because we are after lunch. Talking about regulation at MIT, a place known for building things and breaking things, will be challenging but we have some great help. We have Constance on my left, she has a JD. She was the general council and CCO for Kraken. She is a digital currency expert and has founded data. Next is Elizabeth, a graduate from Harvard at Coin Center which we will hear more about in a second. Last and not least we have Jerry, an adjunct professor of law, also the executive director of Coin Center, an institution trying to bridge the gap between research, academics, practicioners and policymakers. This panel will be about policy.
Christian: I want to start with a controversial … ((Sorry, interrupted))
Christian: We should try to avoid market failure. We should avoid destruction of public goods. As we move into other forms of intellectual property, we really need to rethink how we deal with regulation and how we go about the process of regulation today. On that positive note, I would like to open it up to our panel to hear if you had a blank slate, knowing what you know about this space and the dynamics of intellectual property and regulation and policymakers, how would you go about reinventing the debate for the modern era?
Jerry: If I had a blank slate and if I could do anything, so much of the problem with regulation is path dependency. Okay, now it’s on. So the question is, if I had a blank slate, so nothing there, and a magic wand, those pieces are important. The blank slate is important because so many issues with regulation today that makes regulation inefficient is path dependency and bureaucracy that makes it difficult to change. What I would do is think about the purpose of regulation and then see if technology allows us to achieve that purpose without a prescriptive approach. Money transmission regulation which each of the states does for itself is a type of regulation that effects Bitcoin business. If you want to start an exchange, or hold custody, you need to have a money transmission license. Ultimately it is an information asymmetry problem. The regulators are trying to address this with regulation. If you are a low income person with a checking account and you get paid, let’s say you cash your check, you need to pay your electric bill. But they don’t take cash. Okay, you get a money order from the money order company. You buy a money order, you send it to your electric company. When they go to cash it, it bounces. Why? Well the company went out of business. They didn’t have enough reserves. You didn’t know that going in. But the regulator sees this as an information asymmetry problem. So they think they will license the business and require that they have a bond and see on a regular basis when they audit them once a year that they are solvent. But the technology now allows us to see transparently on a minute by minute basis whether the company is solvent. So therefore you don’t need the regulation as it once was. I think we would look at the regulation and then determine whether we need permissioning from the government.
Elizabeth: I think that regulation is a boring word. To me this is much more of a question of the feature viability of the ecosystem. As Jerry stated, this is about what the technology is capable of doing. And how it can serve a community and consumers. Our current regime is built for an analog age. We didn’t have cryptography. The early internet has been instrumental in a lot of my work. We are lucky particularly to counter the statement about AT&T. Telecom was substantially different from the development of the internet. Arguably the internet has become more centralized but maybe the blockchain technology can take us back. Early internet had safe harbors. They were laws that enabled or often promoted uses that say comply with the law but did not hold intermediaries liable. So if I am youtube.com or facebook.com and someone posted an infringing image, I could still operate that platform as long as I comply with those laws. Ultimately anyone could startup a new site, an open source project, a business, and they don’t have to ask permission from the government. Well, in money transmission you must ask permission. So we have seen relatively little innovation. Our current regime is flawed in the idea that once must ask for permission. Blockchain solutions, multisig, real-time continuous auditing will promote to regulators as the way forward as opposed to the idea… by the way, $5k per startups per 50 states, and all the legal fees involved, is a lot of money for a startup that only has $100k and a few coders working in a basement. We need to reshape the conversation regarding what’s possible and what the community can build.
Constance: The internet offers us a lot of really great lessons on how we can deal with nascent technology and how permissionless innovation is not only good for people but also good for the market. The problem of course is that, you know, we’re running internet technology technologies straight into financial regulations which are the most draconian and most rigorous of regulations. The two don’t quite meet. So you are also meeting a problem of translation, with policy goals that are now trying to be adapted to this decentralized world and the analogies do not bare. So we need an entirely new conversation about what the goals are of these rules and how we can build the right rules rather than complying with existing broken rules. Law moves very slowly ,as Christian mentioned. It’s based on analogy and precedent. Transformative technology challenges lawmakers and lawyers to make that active translation. On the regulatory front, there’s a misalignment of incentives. You have one federal agency focused on security of finance, and then others that are evaluating firms for soundness, and then another one about horizontal access to the developing world. Everyone has their own specific mandate and a limited idea about the technology. As public policy concerns are being brought up, it’s a challenge for lawmakers. So what would I do with a blank slate? The problem with these exponentially transformative technologies is that it exacerbates the governance gap. So we have to, because these issues are complex and multi-disciplinary, you can’t have one regulator talking to a technologist and expect the right policies will emerge. I think on one hand we need to build our products and services in such a way to provide security and to provide sound products to consumers and address the usability issues. On the other end, we need to steer that conversation as both Jerry and Elizabeth have mentioned, we need a collaborative rulemaking process rather than one agency coming out with a proposal, the community reacting, and a conversation based on old paradigms and issues.
Christian: If I was to summarize all three of you, it sounds like safe harbor is key here. The internet analogy is useful, but we need to not forget that getting safe harbor right or wrong could determine the policy. So it is about policy. If it is too narrow, then the safe harbor is useless. If it is too broad, then we run into market failure issues or damages to consumer confidence. So how could you envision a better process where you have policymakers on one side, and developers, hackers and platforms on the other side trying to come up with new technological solutions? Yes we can envision the fruits of this wonderful technology, but there’s years of development on the way, for smart contracts, intellectual property.
Constance: I think that is a problem we all identify. Technologists are building. The regulators know what the concerns are but they have no idea what the capabilities are. So the two must meet. So what we’ve done is we put a multi-disciplinary workshop at MIT and Harvard this January and we had a group of technologists, subject matter experts across four days distilling what the state of the technology is, talking about the regulatory concerns and mapping the goals of these rules to these means. And so we have working papers now across various subject matters like smart contracts, DAOs, oversight for decentralized networks ((what?)). This is also at Stanford at the end of March. We are bringing in policymakers, lawyers, legal experts, privacy experts, cryptographers so that we can substantiate what the technology is capable of now and perhaps the policy goalposts have moved.
Jerry: I think there’s a two-pronged approach. I think we need processes. We need to articulate exactly what we envision as an alternative to regulation. But at the same time, we have to recognize that regulators are people who have incentives that they are responding to. Those incentives are things like a statute that they are required to enforce. They are reading the statute, they may not think it applies, but their job is to enforce. So we have to be ready with these ideas to, in short terms, thinking, you have to figure out how to get it as good as you can get it. I think ultimately there are some laws some regulations that are impossible to comply with if you use.. using this technology. I think this is going to bring some conversations to a head. I think those will come soon enough. If you are talking about money transmission, AML (anti-money laundering), yes I am slipping into jargon. You do have to be reactive sometimes. I think you try to anticipate, but sometimes it is waiting to see what the regulators want to do. Hopefully you have tried to shape their thinking about it, that they have the right information so they are not misinformed about what they are regulating.
Elizabeth: I am concerned right now. California just this last week released a law saying that no virtual currency company can operate in the state without a license or an exemption for banks or a big corporation. New York has released a proposal that would stifle innovation in its state and beyond. Regulation is the biggest threat to the Bitcoin ecosystem. Part of why I am so concerned, this community, and there are some people that don’t want regulation.. People need to band together, and they need to say we can do things better. For example, the recent Bitstamp hack I am sure people have heard about. It is inexcusable that Bitstamp wasn’t using multisig. We can do better as a community. We can implement this. We can show policymakers and regulators that we can be more secure and more efficient. That is our job right now. I invite the community to engage and get involved. Tell policymakers and regulators that we can do better, and that the laws they are proposing will not work for our space. There is an argument that maybe some investors will invest, but much of the VC funding is here in this country. The internet is global. Australia and the UK are far more friendly and open minded to Bitcoin. They want to compete on this level. People will leave. Entrepreneurs are leaving this country to go elsewhere.
Christian: Yes, regulation can stifle innovation. How do we get the problems that the regulators have to comply with, because of old laws? Or there is still an issue that they have to pursue? How do we get those problems into those communities?
Jerry: Multisig, and proof of solvency, are already working. How do you convince regulators? I think it is hard to show up and talk to them about a futuristic vision about replacing regulation (there job) with an algorithm. I think you need to just do it. Just build it. I think that’s what we’re seeing. And then it’s a matter of.. trying to get rid of that vestige.
Constance: I do think that it is also a problem of, the ecosystem is small and we are dealing with powerful incumbents. There is so much innovation in Bitcoin that there needs to be more coordination and collaboration. If this fulfills a slightest fraction of the potential that we all suspect, there’s more than enough market share for everyone. If we can raise the common floor of practices in this space, if we can prevent these badly executed hacks, implement best practices like multisig or proof of reserves, these would stop bad news stories that is feeding into a very misleading news narrative about what Bitcoin is. We should collaborate and share practices. It is incredibly powerful to the regulators when the ecosystem does act like adults. When you look at when MtGox went down, and the leading exchanges and wallets in this space,
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Constance: it is powerful to the regulators when .. I remember when I was young, I overheard that 10% of the role earned 90% of the wealth. That was inconceivable to me. So now you are seeing an acceleration of that inequality, which I think is systematic. I think the financial rails have contributed to that. One of the exciting things about the blockchain is the ability to have an immutable incorruptible data trail ((this is not entirely true though?)). Many people think that GDP is the cake and everything else is the icing. The truth is that the GDP is the icing. The actual value creation is what counts. What would be very interesting and what I would like to see is people creating value systems that count the actual value creation. That would be an interesting exercise.
Elizabeth: It gives us a chance to start over. This is why this discussion is so important.
Q: There’s different kinds of regulation. It’s not so black and white. Look at for instance healthcare. Regulation, traditionally was primarily at the edge through licensed professionals. Accountants the same way. Lawyers too. It was only recently that regulation has focused on more on the central, the hospital, the vendor, the FDA. Where could that kind of to the extent that Bitcoin is a distributed environment could there be an intermediate regulation where there is a professional licensed as a profession rather than capital intensive infrastructure?
Jerry: So, you know, regulators are always going to try to find the choke point that is easiest place with the least amount of effort to get what they want done. That is going to be an intermediary. So Bobby, sorry, Charlie Lee was talking earlier about online gambling and how the way gambling is regulated is through payment processors because there’s four or five payment processors you can go to and say don’t allow gambling. If you have a decentralized system like Bitcoin and everyone has their own bank, it becomes difficult. It’s not impossible, but it’s much more costly to regulate those endpoints. We see new intermediaries.
Hopefully we can get around market failures and … a perfect market I know we heard one, I know that economists believe that market failure reasons exist, I think we have enough talent in this room to tackle those challenges thank you very much.