Thursday, January 04, 2018

Getting into the Bitcoin weeds at CFTC Talks

By Brad Rosen, J.D.

Episode 24 of the CFTC Talks podcast featured Peter Van Valkenburgh, the research director at Coin Center, a leading Washington D.C. based non-profit research and advocacy center focused on the public policy issues surrounding cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Coin Center seeks to educate policymakers and the media about cryptocurrency technology, engage in policy research to develop smart regulatory approaches to questions raised by the technology, and advocate for solutions to keep cryptocurrency networks open, decentralized, and permissionless. The podcast interview was moderated by CFTC Chief Market Intelligence Officer Andrew Busch.

During the course of the interview, Van Valkenburgh explored some of the technical Bitcoin weeds, but did so in clear, concise and readily understandable manner. The discussion focused on some of the key innovative features underlying Bitcoin including the consensus mechanism, and bitcoin mining, as well as some of the key issues Coin Center will be pursuing in the year ahead.

Consensus mechanism. Van Valkenburgh noted that the consensus mechanism is one of the main components that makes blockchain technology work. He observed, “in short, is we have all these networked computers. We have data that they are all compiling together, that shared data structure, that Blockchain. The consensus mechanism is how to get all those network computers to agree.”

He also observed what was really innovative about the introduction of Bitcoin in 2008 and 2009 is that its creator (whoever that might be), found a way to have useful consensus over data that did not require all of the participants or even any of the participants to be previously identified and given prior authorization with respect to access or having the ability to modify the data in the ledger. Van Valkenburgh observed, “The consensus mechanism is how to get all those network computers to agree, even if some of them are on the other side of the world, even if some of them go offline periodically”. He concluded, “[a] consensus mechanism is just a series of protocol rules and if data is processed by the software that doesn't fit those rules, it is rejected by the participants.”

Bitcoin mining. Bitcoin miners play an important role in verifying transactions on the blockchain and securing the ledger. In turn, a miner is compensated for the effort expended. Van Valkenburgh stated, “[n]ow, mining is not the best name for it because miner's kind of just do something that has no social benefit. They make giant holes in the earth in order to enrich themselves with gold. In the case of Bitcoin, you are doing something of social benefit. You are securing that ledger of transactions. You're participating in an open consensus mechanism to agree on important data on the order of payments and you are rewarded for that participation if it is verified and honest.”

Top Issues for 2018. According to Van Valkenburgh, Coin Center will be focusing its energies on largely on state money transmission licensing issues, as well as the ongoing role of the Securities and Exchange Commission in the year ahead.

With regard to money transmitters, Coin Center will be continuing to work with states to help them rationalize legal requirements for these business that are involved with exchanging dollars for Bitcoins and other cryptocurrencies. Presently, such activities might or might not be subject to regulation depending on particularities of a given state’s law.

On a related front, Coin Center has been working with the various states to exclude software developers from being deemed as regulated money transmitters on the premise that these entities are not holding money, and risk is not being created for customers. The organization has worked with Uniform Law Commission to draft a model state regulation of Virtual Currencies Businesses Act which has been finalized after almost two years of notice, comment, and debate. Coin Center will be working towards further implementation on this front in 2018.

Van Valkenburgh is also keenly aware of regulatory controversies surrounding ICOs, issues related to SEC registration, as well at the outright fraud that frequently occurs in this space. He concluded, “we will continue to do as much education and outreach to the SEC, to the commissioners, to the staff, to make sure they have the tools necessary to go after the scams and really the unregistered securities issuance activities without, in an overbearing way, crushing the fundamental innovations here.”