Jerry Brito

The Case for Electronic Cash in an Open and Free Society

We’re joined by Jerry Brito, Executive Director of Coin Center. Having discovered Bitcoin in 2011, Jerry was among the first lawyers to talk about crypto in the U.S. capital. In 2014, he founded Coin Center, a leading research and advocacy center focussing on cryptocurrencies.

In this enlightening conversation, we talk to Jerry about his paper titled “The Case for Electronic Cash,” in which he articulates why private peer-to-peer payments are essential to an open society. We also discuss Libra and the possible regulatory challenges the proposed private cash system may face. Finally, Jerry explains the recent FinCEN guidance on cryptocurrencies, which broadly follows the recommendations of Coin Center.

Topics we discussed in this episode
  • Jerry’s background as a lawyer and his crypto beginnings in D.C.
  • Coin Center, it’s mission and the primary battles which the organization is fighting
  • “The Case for Electronic Cash” paper and why cash is vital for a free and open society
  • The main dysfunctions of cashless societies
  • Jerry’s high-level views on Libra
  • How Libra is different from other cryptocurrencies and electronic payment systems
  • The backlash immediately following the announcement and how it was received by governments
  • Ways in which Libra could be regulated
  • The recent FinCEN guidance and how it affects cryptocurrency users and companies
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Sebastien Couture: Hi, so we’re here with Jerry Brito. Jerry is Executive Director at Coin Center and previously was at the Mercatus Center at George Mason University. And today we’re going to be speaking with Jerry about a whole lot of things including Coin Center, a paper that he wrote titled ‘The Case for Electronic Cash’, we’ll also talk about Libra since it’s on everyone’s minds and finally, we’ll talk about the recent finCEN Guidance and how it relates to cryptocurrencies, exchanges, wallets and things like that. So Jerry, thanks for joining us today.

So to start off, tell us a bit about your background and how you got involved in the crypto space?

Jerry Brito: Sure. So, you know, I’m a lawyer and my whole career has been in technology policy. I was as you say before coin center at to Mercatus Center at George Mason University and there I directed in the technology policy program. So focused on all kinds of tech policy issues. So old-school Telecom issues, but also copyright privacy and increasingly towards the end of my time there emerging technology issues. So sharing economy, drones, 3D printing, and then Bitcoin. So I sort of chanced upon Bitcoin in 2011 and when I saw it, I just fell down a rabbit hole as so many people do and I think what I saw from my vantage point was all the regulatory questions that Bitcoin raised and at the time nobody was really, certainly not in DC nobody was thinking about these questions. You had people sort of the main question people are asking on Bitcoin Talk I remember was how can this be legal? Because only the federal government has the power to coin money and you know, that’s not actually correct, and nobody was really thinking about this and I was just very lucky to be right place right time and start writing about it and talking about it and publishing about it and pretty soon just sort of became a person in DC the folks on Capitol Hill and at the agencies would go to ask questions about Bitcoin early on.

Sebastien: And as an early lawyer in the space and and DC talking with lawmakers and regulators what were some of the questions that they were asking you at that time?

Jerry: Very early on they just didn’t understand it at all. And so it was very much just how does it work. Then you started getting the questions of is it anonymous? That was you know, a question that we would get a lot and then you started to have things like Silk Road. So you started to get questions around illicit use and so early on I was part of a task force that the Center for Missing and Exploited Children put together with law enforcement folks at different think tanks and folks in the crypto community and it was good because the report that came out from that task force ultimately pointed out that hey while there are illicit uses there are a lot of positive uses here. There are ways to deal with the illicit use etc, and eventually that led to the First Congressional hearings on cryptocurrency that were I think really good for for Bitcoin because essentially with law enforcement and the FEDS said that hearing is that they had it under control that it’s fine. So yeah, that’s kind of this kind of what the questions were always real about early on.

Meher Roy: And what led you to start Coin Center?

Jerry: So this is a sort of after those hearings actually, those hearings were in late 2013 and just as the amount of attention and interest from government on Bitcoin was at its peak right after that you had Mt Gox collapse and you had the Silk Road bust and so you had a lot of attention a lot of it was negative and at the same time really at the only institution that Bitcoin had, the Bitcoin Foundation, was also kind of falling away and so there was no institution to really basically answer the basic questions of policy makers need answers and to develop policy thinking here. And so there was just an obvious gap and so it was just a confluence of events where different people sort of recognized that gap at the same time. So Alex Marcos, so I think you’ve had on the show before who now is a Bitcoin developer, Balaji Srinivasan, myself, our Co-founder Robin Weisman who runs our lobbying for us. We all kind of saw this and we’re just thought that this needed to happen.

Meher: Maybe just an update on Coin Center. So what are some of the key battles that the organization is fighting today from a policy perspective?

Jerry: So it’s interesting, we have I think been pretty successful on the different policy initiatives that we’ve been focused on for the past four years. So big policy issues I think you probably have talked to Peter about in previous episodes before was Securities regulation. And so they’re after all of the it was I think for lots of folks I felt it was a pretty slow process, but actually I think relative to how the SEC usually operates it was a pretty quick. We got some pretty good clarity on how they view cryptocurrencies as far as Securities Law, so they have stated clearly that Bitcoin, Ethereum, and things like them are not Securities. So for us that’s just a huge victory. There’s still some outstanding questions that I think affect a lot of folks but for us I mean that was something Bitcoin, Ethereum are these Securities or not. That was an open question just a little bit over a year ago and it’s not anymore. So we’re very happy with that there with anti-money laundering and Bank secrecy act regulation. We you know finCEN came out with guidance in 2013 that explained how they applied the bank secrecy Act and the regulations to cryptocurrency and the ecosystem but there are still a lot of open questions about them and we thought that they were sort of continuing to interpret it right but as we’ll talk about in a minute they issued guidance a couple months ago where they’ve kind of clarified that the way that we’ve been interpreting it and suggesting to be interpreted is the way they interpreted. So that’s a huge victory. And on the money transmission side, which has been a perennial issue for cryptocurrency we’ve worked with a uniform law commission to develop a model act for State regulation of cryptocurrency money transmitters. That’s now making its way to different states, California cross your fingers might be adopting it soon which would be a huge one. And we’ve also worked with some members of Congress to introduce legislation that would preempt state my transmission licensing for non-custodial users. So if you’re running, you know, some service does not take custody you wouldn’t be subject to my transmission. So we’re pretty happy where we’ve been and so it’s like what battles do we have? It’s a pretty good position to be in. The two big battles and I wouldn’t call them battles, but the two big challenges I still see, one is tax, IRS unfortunately has continued to drag its feet and issuing guidance about cryptocurrency. And so there are a lot of open questions related to de minimis transactions related to how do you do hard fork accounting lots of different things. So there we worked on a report that highlights one of the open questions. We’ve delivered this and briefings to Congress to the treasury and to the IRS and we’ve worked members of Congress to introduce a couple of bills that would try to get it some of those problems. So tax is a live issue for us. And the other is, it’s not so much a battle that we’re fighting. It’s just a battle that we think could come and we want to be prepared for it. And that has to do with privacy. So to date cryptocurrencies have tended to be very public and transparent and so that’s been a very simple thing to explain but of course that’s not a good solution for anybody, you want to have individuals to have privacy in their financial transactions and that increasingly we’re going to see an upgrade to the cryptocurrency so that their private right? It’s kind of like when we went from http to https, right? And that’s a good thing. We want to make sure that policymakers understand it. So this is this paper I think that we’ll discuss, we’ve sort of taken a two-step approach, one is my paper where I sort of make the case to policy makers that they make sure they understand why we called it digital cash, which is digital currency that is peer-to-peer censorship resistant and private which is what a dollar bill is, why that’s important for a liberal open society, which I think we can all agree we want to have/ So that’s one paper that I wrote in. I think I was published in January February this year and in the second paper that we published was by Peter and there he sort of explains if you wanted to put regulations to curtail digital cash you would find that there are constitutional barriers to doing that. So it’s sort of two, one is we’re saying hey, this is a good thing you shouldn’t regulate it and number two, but if you are trying to regulate it understand you’re going to be limited in that.

Sebastien: Right, we’ve also had Peter Van Valkenburgh also from Coin Center a number of times on the podcast. And so, you know, we’re not gonna spend too much time digging into Coin Center because we’ve covered that organization at length and there’s so many things to talk about but those who are interested in learning more about Coin Center and sort of diving deeper into what that organization does would invite you to listen to our two episodes with Peter Van Valkenburgh, which are 182 and 227.

Jerry: And feel free to go to

Meher: It’s also interesting to me that when I go through the old blogs of Coin Center, 2015 mostly, many of these blogs are about how law enforcement uses the transparency of Bitcoin. There’s a blog on that. And I think like some of the early arguments that Coin Center made was around leveraged Bitcoins transparency to you know, embellish its position in front of law enforcement but it feels as if in 2019 that plank, because of the technology developments, that plank is going to get weaker in Coin Center and therefore there has to be a different thrust a different way of arguing for the development of these technologies.

Jerry: I think that’s right. I think it’s definitely what happened. But I also think that those positions are completely consistent. So in 2015, when a member of Congress would come and ask us and say hey is Bitcoin anonymous or can police catch the bad guys. The correct answer is no it’s not anonymous and let me explain to you how indeed law enforcement has used the blockchain with forensic analysis to catch bad guys, and that satisfies a member of Congress. Of course, you know in the back of my mind I might think it might speculate you know, but I can also imagine that in the future it’s not always going to be anonymous and so we always knew that at some point we would have to address that and so that time has finally come, and so that’s what we’re doing.

Meher: Interesting. So I think we’ve never covered this topic with Peter so it will be nice to start with you. Tell us about this paper which is the case for electronic cash. What’s the main thrust and the argument of this of this paper?

Jerry: Sure. So the papers actually not completely about cryptocurrency, cryptocurrency kind of comes in at the very end and the paper is actually just a case takeaway electronic. It’s really just a case for cash because I was telling you before when I write a paper. I usually try to imagine a reader that I’m writing for. And in this case my reader was a mid-level official at a law enforcement agency or a regulatory agency, somebody who maybe instinctively thinks cash is something that maybe could be eliminated or that it’s problematic because they’re always dealing with bad guys and you have to say no actually cash is essential to a liberal open society, the preservation of which is the reason that many folks in government who are true patriots go into government service and law enforcement service to protect. They want to preserve an open liberal Society. They care about the values is country was founded upon and that’s what they’re dedicating their lives to preserving and I need to explain to them that cash is an essential component of that and that’s what the paper tries to do and and the argument is pretty straightforward. I think it’s one that I think it’s pretty intuitive to cryptocurrency enthusiasts, but I think regular folks in government probably don’t think about it. And we are moving to an increasingly cashless society and I described how we’re seeing more and more transactions moving to basically credit cards or mobile payment systems and you can look at certain countries, Nordic countries for example, Korea, where cash at this point is really a relic right? It’s something that is very rare. ATMs are rare, bank branches don’t carry cash and everywhere you go you basically pay with a credit card in the look at you weird if you pay with cash. And what I point out is in that world that a cashless society is an intermediated society because if you remove cash as an option that means every single transaction that you do is going to be intermediated by some bank or some corporation some payment provider and what that means is that every transaction is going to be surveilled, it’s going to be seen by a third party and the transaction can be blocked or you know, either selectively or you can be blocked completely from the ability to transact. When you have that that is a real challenge to a liberal open society and so then I basically give some examples of how for example in China this is being used, in China is really a remarkable case study because in the span of really just a few years cash has been almost eliminated, people have just moved completely to using Alipay, WeChat Pay and those two account for I think like 90% of all mobile payments in China, and so what you have there is a world where all transactions are visible by those two companies, which are basically means it’s visible to the state and they will block you if you’re trying to do things that in the words of what an executive from Alipay, are not healthy. The other thing that they’ll do is that they, you know, this feeds into the Chinese social credit scoring system. And this means that you know what you buy and what you do is going to feed into your social credit score that then go into what schools you can send your kids to, what flights you can take etc. . So really this is kind of having an intermediated society really opens up a door for a more authoritarian control of one’s life. That’s the state control. You also have corporate potential misuse and the example I gave is Target. There was a case study that I highlight where there was a, this happened I think like five years ago. There was a father of a teenage girl who walked into a Target. This is in the New York Times. Walked into the store and basically chewed out the manager said, you know, he had a mailer in his hand that was for baby products right and said what are you trying to do? This was sent to my house address to my daughter and she is 16 years old. What are you trying to do, do you think she should be pregnant? The manager’s looked at it, didn’t know what it was, he apologized and the father went away. A couple days later the manager called the father and said hey I’m just calling to apologize again, and the father said no, actually I owe you an apology, turns out there’s been some activity my house I didn’t know about and my daughter’s due in a couple months. How did Target know that that girl was pregnant? They know because every time you buy something at Target, Target is tracking you and making a dossier on you. And so what they would do is when you use you don’t even have to opt into this by the way, whenever you shop at Target you are assigned a customer number unbeknownst to you and this is tied to for example, whatever credit card you use that is associated with you and they keep a list of everything that you buy and so what Target did is that they they had a program for expecting mothers where they give them discounts and stuff. And so they knew that this cohort of people who had opted in were pregnant. They then basically just correlated the purchasing activity of those people who they knew were pregnant with their wider universe of customers and just using data mining they could figure out quite specifically who was pregnant and even when they were probably due, based on just the shopping habits. And so this girl was deprived of her privacy and she was deprived of her autonomy, right? She was deprived of her ability to tell her father about her pregnancy on her own terms and she didn’t opt into anything. So what is the only option that you have if you don’t want to participate in that, it’s cash, right? She could have paid in cash. So as we move to an increasingly cashless world we need to preserve a form of cash. And that’s as we all know, that’s cryptocurrency. Right? That’s cash that is to me cash isn’t does not just mean money cash means very specific kind of money. It’s money that is person-to-person, its bearer, it is censorship resistant, permissionless, and it is private. And so that’s important.

Sebastien: I mean cash is one option. Another option is having companies that don’t like exploit data and especially for something as sensitive and touchy as like a possible pregnancy. Like I mean that just feels totally unethical and I mean from the European perspective just seems like completely absurd that this actually happened. There’s something kind of paradoxical though, but when you’re talking about the idea that a cashless society tends more towards surveillance and payments potentially being blocked, of course like this is rampant in China. I saw a video recently. I don’t know if this was real or not. I always sort of question these videos but there was a video of someone seemingly in China paying just with like a face ID. So with no phone. So there’s some sort of facial recognition and their account is being debited. I don’t know if this is true or if it’s not I’m sure it’s coming soon. But this idea obviously makes sense to us but if you’re addressing your paper to a law enforcement officer or a lawmaker, it seems like these are things that they, I mean from for my perspectives these are things that they would probably want right like a law enforcement professionals say hey, yeah, it’s great that I can track, you know, the bad guys and a lawmaker of course yeah, we want to block people that are not I don’t know like paying the taxes or you know, it seems like these are tools that given the regulatory landscape it seems that those directives go in the sense.

Jerry: I don’t think so actually. Yes. I think that’s their initial instinct right is to say we do want to be able to track, we do want to be able to block, I want to be able to do my job well and more efficiently and so that’s our initial Instinct. But what this paper tries to do is to point out to them, if we eliminated cash that your job could be very easy and you got all the tax cheats. What are you giving up? And when you point that out to them people who work at finCEN people who work in law enforcement, again, as I say the reason they’re in those jobs is because they’re patriots who care about this country and the values that this country was founded on and if you point out to them, do you want to be more like China? Or do you want to be more like what the US is meant to be, they get it. They don’t want to be like China, right? They want to be able to surveil people with a court order, right? They understand that with a court order is important right there, whether they’re not for getting rid of court orders, right? So I think that’s what you have to point out to them. And so look I point out to them in the paper, there’s another sort of case study that I point out that I think for a policymaker they should understand. So I explain what’s happening in New York with the National Rifle Association, right? So the NRA whenever you think about the NRA, whatever you may think about gun ownership or whatever, the NRA is a what is it is a free association of people, so nonprofit, a free association of people that engages in what? It engages in free speech. All the NRA does is publish.Publish papers, they lobby Congress, right? So they’re engaging in constitutionally protected activity to do what? To stand up for another enumerated constitutional right, which is a right to bear arms. So what they’re doing is basically just a non-profit engaging in free speech. That’s the NRA whether you like them or not.  The governor of New York Andrew Cuomo, after a school shooting, he put out a press release where he announced that he was directing the Department of Financial Services in New York, DFS, to basically tell all financial institutions that do business in New York, which means all by institutions in the world, right, to essentially stop doing business with the NRA or they’re basically their licensing would be in jeopardy. If you cannot get a financial institution that does business with New York to service you, you’re dead. You’re out of business completely, right? So what is this? This is the governor of New York using his power to basically silence and shut down a political opponent because he doesn’t like their political views, not because they’re doing anything wrong. It’s just shut them down completely. And so today that’s Andrew Cuomo and the NRA, tomorrow it could be Alabama and Planned Parenthood, right? We don’t want that in this country.

Sebastien: They are very US-centric views I must say. I mean from this side of the pond it just seems of course you’d want to stop the NRA. But yeah, I mean I understand from a US perspective, under the constitution of free speech that yes this does seem absurd.

Jerry: Yeah, and you’re right. So we’re definitely making US-centric arguments here. Right? These arguments may not be very persuasive to people in China, maybe not to people in France either. But yeah, so what is the NRA engaging with, it’s engaging in free speech.

Meher: Four or five years back I would have had difficulty empathizing with this argument, but I empathize with this argument ever since I’ve founded a cryptocurrency company and have had to search for bank accounts in the US. Trust me it’s like a huge challenge. Even after you get a bank account, every three months, there’ll be a an email from your banker asking you a bunch of questions and you’ll wonder oh am I going to be shut down now. You’re paying all your taxes, you have all of all of your legal documents in order, you have lawyers in your team everything. But still it’s a constant worry that one of these few banks that are willing to give a bank account is going to shut it down and then we can be completely ostracized from the American Financial system. This is a possibility view will lift through as a law-abiding member of the US Society. I I live through this possibility and then you realize well if I am living through it, maybe there have been other people that are also living through like situations like these, and and then then you realize that like, oh the cryptocurrency is actually a tool for freedom because like there are people like me they might be doing other things, not doing cryptocurrency, but they have this risk and this tool set serves to alleviate that risk.

Jerry: I think that’s right and look you understand from from that position if you don’t have a bank account, you can’t do business and you’re not doing anything wrong. You’re doing everything by the book as you say and because you’re perceived as a risk, you’re just shut out like basically, you can’t engage in business. We can then query whether you should be seen as a risk or not. But put that aside in the case of you know, the case with New York. The reason the NRA is being targeted is for their political views. There’s no there’s no risk they’re not doing anything except publishing books and videos and the governor’s deciding to single them out unilaterally and say we’re going to just turn you off and so pointing that out to folks who otherwise might say yeah this is a great tool for law and order is to be able to track and shut down people when you point out to them. Yeah, but then somebody could just use that and for political purpose, you know, they might begin to understand and look we don’t say I don’t think the cryptocurrency, for it to be a tool for freedom as you say people have to switch completely the cryptocurrency. It just has to be an option. It has to be an escape valve right so that if you’re engaging in activities that might be politically incorrect and tell me wants to shut you down or you don’t want to be observed, you’re this girl. You don’t want to in a cashless Society. We no longer have paper notes. You need to have that option, the people in to retain that option to transact privately and to transact in such a persistent fashion.

Sebastien: Yes, this I absolutely agree with and wholeheartedly I mean think that like, of course we need to have that option and there are still strongholds like Germany for instance is a place where although it frustrates the hell out of me every time I go there, because I have to remember to take out a bunch of cash before I go there, and I’m there quite often I still forget to do it. But yeah, it is after a while it does feel sort of satisfying to be able to say hey, like people here sort of hold this very dearly like they hold this right to pay with cash very dearly and it is disappearing because even the European Union is passing directives to you know, try to make card payments easier, cheaper, faster and at some point, you know, like even here in France like it’s illegal to pay for anything in cash for more than one thousand Euros. I think we do see this clamp down on cash.

Jerry: Oh totally. Germany is very interesting because as you say, it’s sort of the opposite, it’s a country that until a couple of years ago. You could not pay in anything except cash at Aldi or Ikea. They did not accept anything except cash, which is amazing. Right? So I don’t have to tell you this right many places in Germany are cash only. What’s interesting about that is why is that? And I you know, I don’t know I you know, we should ask some of our German friends but my intuition is that it has to do with Germany’s experience with two kinds of authoritarian regimes. Germany was subjected to both communism and nazism and they’re very sensitive to the kind of control that you can experience that way and you know, they try to always retain that option. It’s interesting you point out in France you can’t pay in cash where certain things above something that I discovered in my research for this paper is that the reason you had a 500 euro note, which is something that so many members of the European Union are trying to get rid of is because Germany insisted on it and Germany would have had it thousand Euro note, but we’re talk down to just having a 500 euro note and that I think is ultimately going to get phased out.

Sebastien: Yeah, of course and the 500 euro note is in fact used quite a bit for organized crime so I think it probably will get phased out just because of sheer like numbers right? Like nobody uses a 500 euro note. I’ve never even seen one.

So moving on to our next topic today, which is Libra, of course Libra was announced a couple of weeks ago, mid-june and it’s generated a whole lot of buzz and acclaim and anger and a whole lot of things, a lot of opinions from a whole lot of different angles and perspectives. I’d like to ask you what are your thoughts on Libra at a high level?

Jerry: At a high level it’s just very interesting what they’re doing. I think the bottom line it’s a net positive for cryptocurrency if it launches and it gets adoption where people begin to get used to having a mobile wallet where they have a token that is not denominated in their country’s currency, right? They get used to that you can imagine that opens up the idea space for other cryptocurrencies. And so that’s all a net plus. On the flip side I’m a little concerned on the regulatory front or on the on the policy front that, cryptocurrency has been sort of a minor policy issue in DC and again, very US-centric, but I can imagine this is the same in capitals all around, you know, cryptocurrency is an issue that policymakers pay attention to but it’s not the top issue and there isn’t any major player that is sort of like the base of crypto you have lots of different folks building lots of different things. And so you have this vibrant ecosystem and when you have Facebook coming in with a project like this, I think there is a possibility that one cryptocurrency all of a sudden gets a lot of attention for policymakers, and number two Facebook becomes the base of cryptocurrency, even though what the project that they’re building is, I would say not a cryptocurrency and completely unlike any of these other things, and so we’ve begun to see folks who reach out to us a little confused about the distinction between something like Libra and Bitcoin or ethereum. And so part of what we’ve been trying to do is explain these things are completely different, there’s some similarities but they’re very different, and what’s important is that those technical differences drive different policy outcomes.

Sebastien: Explain how in your view Libra is different Bitcoin and is Libra cash?

Jerry: No, I would say Libra’s not cash. I’ll tell you how it’s different. Number one, Bitcoin does not have a company that issues it and redeems it, Bitcoins emerge from a network of peers who joined together and validate transactions for each other. So there’s no company that controls or runs or issues the Bitcoins. Bitcoins do not have a reserve of “real world assets” that back the token and that are redeemable, right? That is what Libra is. So Libra has a company that runs. It’s called Libra Association. That company issues the crypto, I wouldn’t say complicated, issues that digital currency and manages a fund of assets that back that thing. These are completely different things. One is a company issuing a token the other is a network that is open permissionless and nobody owns or controls. And again these you would think would have completely different regulatory regimes. Whereas because in one case there are no intermediaries and because there are no intermediaries, it poses fewer risks, and because there are fewer risks there’s less regulation is necessary, with the other there is a major intermediary, the operator, the administrator of the network, that also custody and manages a fund of real-world assets and so that’s a risk and that’s where regulation might be appropriate.

Sebastien: So so you’re saying then that the the Libra Association which is this Consortium of companies among which we see Uber, Facebook and a whole bunch of others are essentially the administrators of this cryptocurrency because they issue the currency So based on this this basket of currencies and real-world assets the the currency the labor currency will look at its value and then presumably they will be issuance and I don’t know if you want to call it quantitative easing on the other side, but whatever like that the destruction of the currency in order to assure like a stable price, at which point do you think, because the paper does say that they want to make it more decentralized but you know, should that logic then become I don’t know like a smart contract, or governed by a smart contract that is administered by the Libra blockchain and the different companies part of the Consortium are merely validators. So you something akin to Cosmos. At which point do this this this Association cease to become an administrator and just you know, another another cryptocurrency that just happens to have a mechanism that adjusts based on, you know oracles that fetch the to the price of other other assets.

Jerry: I think the main sticking point for so yeah, as you know the Libra Association in its documentation to make a commitment to move towards a permissionless network within five years, I think that’s fantastic. I really struggled to see how that’s going to be possible while maintaining everything else that the that is true about Libra. I think that there are technical challenges about how you do on chain governance, but I think those are probably solvable. I think that there are incentive problems, because you’ve got a couple dozen companies at the moment who have paid 10 million dollars to be investors in Libra and they are going to be paid back based on the interest of the reserve. In order for us to become permissionless they’re going to have to grow the number of validators to hundreds, thousands, infinity. Right? Well, that means that they are going to just voluntarily give up their shares in the ownership and dividends of the reserve. So query what incentive they have to do that. But putting all that aside, assume that they just out of the goodness of their heart they just want to give that up. The last thing that I think makes this kind of impossible is if you have a reserve of real-world assets, those real world assets are going to be kept where, they’re going to be kept at financial institutions. Financial institutions do not open and maintain bank accounts for DAOs right? There has to be a legal person’s name who owns the assets, that backs the currency, that’s going to always be a company run by people. Maybe those people want to always abide by the decisions of the DAO of the network, but what if they get a court order? So as long as this is backed by real world funds kept in financial institutions it’s not going to be permissible. One way you might see it is if you can imagine completely permissionless Central Bank coins being issued then you can imagine what something like what you’re doing, but we don’t have that.

Sebastien: Queue David Andalfatto on this one.

Jerry: Yeah, that’s right.

Meher: It’s almost as if like to be permissionless to avoid the regulatory regimes, you need to have assets that untethered to any of the any of the Fiat money systems like Bitcoin, like Z Cash. If you tether it will reside in some financial institution and then they can be court orders and there’ll always need to be like these people that are that have that bank account and that will always be this point of control,  trust in that system and you can’t get rid of it.

Jerry: I think that’s right. And I think that that brings up basically two types of regulation one is control in the sense of being told you have to freeze these particular address and these funds or you have to block these transactions or whatever that kind of control, but I think also if you are managing, you don’t have as a Bitcoin, right? In Libra there is a company that has a fund of billions of dollars potentially, hundreds of billions of dollars so this is very successful of whose money? The public’s money. And they are managing it for the benefit of the public and to keep a promise that they’re going to manage it to have a stable value. That’s a big responsibility that they’re taking on and I think most governments would see that as an activity that probably would be regulated and then the interesting question is well, who’s the right regulator? What’s right regulation? What is Libra? I think is a very interesting question.

Meher: What’s the US-centric answer to who regulates Libra in the US?

Jerry: Yeah. It’s not clear. So you might think you know, is it a bank? It looks like a shadow bank right in some sense. It’s not a bank because it doesn’t have a bank charter. Right? Is it a money transmitter or in the European sense is it a money company? I’m not sure it can be because state money transmission. So number one, it would mean that the Libra Association would have to go state by state and get money transmission licenses, which it’s not doing. Calibra, the subsidiary Facebook is. Libra Association is not but if they did money transmitters are only permitted to keep their customer funds and very specific specified permissible investments, right? This is a problem at Coinbase had in Wyoming and Washington State in Hawaii where Bitcoin was not one of the permissible investments listed and so they would have to hold like a two hundred percent reserve requirement. So they just got out of those States. So these are very very limited things that you can keep the money in. As far as I understand, foreign currency and foreign issued government debt is not one of the things that’s permitted. So I’m not sure how they could be a money transfer. So what are they? The thing that just jumps out to me is if you take away all of the blockchain and crypto and tech lingo from what they’re doing and you just look at the activity. What is the activity that you’re doing? What are they doing? They’re taking money from the public and they are investing it in a fund of foreign currencies and government debt so that everybody has a share of that basically and they’re actively managing this fund to maintain its value. What is that? I mean, it sounds to me like a mutual fund. That’s a security right? And if you look at the definition of security in the Securities act it’s yeah, there are a lot of broadens like debt instruments just plainly are securities. So this is actually you know, it could be that this is security and if it’s a security how does it work as a currency because security is can only be traded on National Security exchanges. So anyhow, there’s a lot of questions there that to be sorted out through.

Sebastien: Well, you heard it here folks Libra is a security.

Jerry: No, I’m not saying it is I’m saying I don’t understand, I’m saying tell me why I’m wrong.

Sebastien: No, that’s really interesting. I mean the most interesting part of that is and how to use a security as money. And I think that’s a question that lawmakers will struggle with for and Libra probably will struggle with for a while.There was one point that I want to bring up which is which is interesting and you sort of touched on it and that’s how Calibra is going getting all these money transmitter licenses. But but the association is not and you tweeted in response to an interview on the Unchained podcast with Laura Shin where she interviewed Dante Disparte who’s the head of policy at Libra and she asked him Okay, we’ll send then, you know if Libra is regulated and they have to abide by OFAC sanctions list then there’s a whole question of okay well what if the US for instance wants to sanction Iran, and you know, Europe doesn’t. And his answer was well, you know, that’s not up to the association that’s really up to the companies that are operating as money services businesses so for instance Calibra, and presumably others that are operating wallets and applications like user applications, but they have the association isn’t concerned with this sort of thing and you argued that it was probably wrong about that. Could you break that down for us?

Jerry: Sure and look I hate to be this guy but I’m not so much time arguing against it. I’m just asking questions as they say because I don’t understand how it could be otherwise. So look, you’ve got the Libra Association, the Libra Association is again the company that is issuing the coins and redeeming them. Under fence guidance a company that issues and redeems digital currency is a money transmitter. Is an administrator of a centralized virtual currency. And so would be subject to Bank Secrecy Act regulation. So I don’t see how they escaped that. I think what Libra Association is saying is that the on ramps and off ramps to Libra will be regulated and that’s absolutely true. This is the same thing as Bitcoin, right? So Bitcoin the network is not regulated, but Coinbase or Bitfinex or whoever it may be these are regulated and they do have to know their customers and hey do have to do suspicious activity reports and arrest and so Libra’s right when they say that the honors in the off ramps the exchanges that trade and Libra will be regulated, but the question is what about the Libra Association, right? And so with Bitcoin, OFAC a few months ago added a few Bitcoin addresses to the sanctions list, right just the addresses themselves. And so this means that regulated parties have an obligation. In fact, not just regulated parties. Everybody in the world has an obligation, everybody in the US anyway, all us persons have an obligation to not do business with those addresses and if they happen to do by mistake, they need to report it immediately. So that’s the kind of thing that Coinbase and Bitfinex and the rest will block transactions with those addresses, but there is no company. There is no Bitcoin company that can do that at the network master level. With Libra it is. And so I don’t see how they escaped a court order or just having to comply with OFAC and block sanctioned addresses. Does that make sense?

Sebastien: Yeah, that really makes a lot of sense actually.

Jerry: Because they have the ability, right? As the validators, they could push a software update that blocks particular addresses that they’ve been told to.

Sebastien: And then they have the obligation to.

Jerry: Yeah, if they have the ability then they have the obligation. With Bitcoin, there’s no ability, right? So that’s why there’s no obligation.

Sebastien: Right. So very quickly again on this topic of Libra because we are conscious of your time here. So there’s been a lot of pushback by regulators and lawmakers in the US and Europe. Particularly in the US there is this committee on Financial Services who wrote a letter to Mark Zuckerberg, Sheryl Sandberg, and David Marcus asking them to stop all development of Libra. What does this letter mean in your opinion?

Jerry: I think this letter means that politicians members of congress from both parties, really really don’t like Facebook and you know the different parties have different reasons to be upset with Facebook, but that’s just a political fact that members of Congress from both parties just do not trust Facebook, do not like Facebook and so when they are confronted with this announcement, we’re going to build a new Global Currency. You know, I think that they are, you know, kind of scoring political points a little bit but I think also, you know, expressing their distrust of Facebook. Members of Congress can you a letter and ask you to stop doing something that carries no weight obviously and I think it is actually a little bit unamerican to use a phrase that without any legal process you be told to stop until Congress can think about what you’re doing. That’s not the way things work here. That said, I think it kind of highlights the political reality that Facebook faces.

Meher: Very interesting. I think the Libra experiment is going to teach all of us so much about how these systems are going to work and I suspect maybe the conclusion in the end might well be that’s why Bitcoin is designed the way it is.

Sebastien: I think you might be right.

Meher: Yeah, so moving on to finCEN. So finCEN which is the financial crimes enforcement network. They recently issued some guidance on how the bank secrecy act applies to cryptocurrencies and its users. So we like to unpack this guidance.  But before we unpack this guidance, perhaps it’s nice to know about like what is finCEN, what is its role? And what does it regulate?

Jerry: Sure. So in the US you have the Bank Secrecy Act. The Bank secrecy Act is a financial surveillance statute. It requires financial institutions to know their customers, to register with finCEN and to provide information such as suspicious activity reports to finCEN. And so finCEN is the regulatory agency within treasury that basically manages the Bank Secrecy Act to make sure that all financial institutions are doing KYC reporting to them etc, and so when you have cryptocurrency the question is what obligations and to and to which actors in the cryptocurrency space does the BSA apply, who has what obligations and finCEN in 2013 was the first federal agency to come out with any sort of official pronouncement on cryptocurrency on Bitcoin at the time. What it said is basically the network itself has no obligations because there’s nobody running it but on ramps and off ramps, exchangers of cryptocurrency have our basically our financial institutions are money transmitters and so therefore their financial institutions that are regulated. It basically had three categories of people, it said there are users of cryptocurrency and users of cryptocurrency have no obligations, there are exchangers of cryptocurrency and they have regulations, and it has a third category which does not apply to Bitcoin but only applies at the time to things like e golden liberty reserve called administrators, and administrators are those who administer a centralized virtual currency and put into circulation and redeem from circulation digital currency and they’re also a BSA regular. So they put this guidance out in 2013 and it’s a pretty I think fair settlement for who has what obligations in crypto but they were all kinds of questions that once you start applying that to what people are doing in the real world, they’re kind of open questions that remain. So is a DEX a money transmitter etc. And what they did just a few months ago with your new guidance is nothing changed from the from the existing guidance, they just restated the guidance as it was in 2013, but answered a lot of the questions that have sort of been bubbling up since 2013 and the way they did that is by taking the original guidance and applying it to fact patterns from business models that have emerged and say, okay. well, how does it apply to this, how does it apply to this and we were very happy to see that the approach that they took matches what Coin Center has been advocating for since 2013.

Sebastien: So what have you guys been advocating and what are some of the major points in this guidance?

Jerry: So the big headline takeaway is that if you are simply building software, writing software and deploying software, you’re not regulated. It is only if you’re engaging in money transmission that your regulated and money transmission means receiving and sending and making that super clear I think is the big takeaway. There’s still some ambiguities that kind of remain because, so imagine that you build a DEX building and deploying the DEX may not be money transmission, but then if you use it that might be money transmission so it’s interesting, but look, I think it’s again a pretty fair settlement of where we’ve got to.

Sebastien: And I would encourage our listeners to go to Coin Center’s article detailing the contents of this guidance we’ll link to that in the show notes and a whole bunch of other content that Jerry and Coin Center have written including Jerry’s tweet storms about Libra, which are always great to read.  Jerry thanks very much for joining us today.

Jerry: Hey, my pleasure. Thanks for having me.