Blockchain,  Tech

Blockchain & Money: Session 8: Public Policy by M.I.T. Sloan School of Management with Professor Gary Gensler

Blockchain and Money–Class/Session 8-Public Policy-Prof. Gary Gensler MIT Sloan School of Management

Session 8: Public Policy

  • Session 8 Study Questions:
    • How do key public policy frameworks–guarding agains illicit acticities, ensuring financial stability, & protecting investors–relate to blockchain technology and crypto finance?
    • Under tax, bank secrecy, securities & commodities laws, what is the relevance if crypto tokens are deemed property? Currencies? Something of value? An investment contract? A commodity? What is the essence of the U.S. Supreme Court ‘Howey Test’?
    • How might the ‘Duck Test’ guide thinking of blockchain technology and crypto finance?
  • Session 8 Readings:
    • ‘Cryptocurrencies: Oversight of New Assets in the Digital Age’, Gensler.
    • ‘The Future of Money’, Carney.
    • ‘Nobel-Winning Economists: Authorities will bring down ‘hammer’ on bitcoin’, CNBC.
  • Overview: Crypto Finance; Public Policy Framework; Guarding Against Illicit Activities; Ensuring Financial Stability; Protecting the Investing Public; Public Policy Development; Conclusions.
  • Incumbents Eying Crypto Finance:
    • Crypto’s market cap, trading volume, volatility & spreads are drawing attention.
    • So has Coinbase’s 20 million account, about as many as Fidelity Investments, twice Charles Schwab, and nearly as many as Vanguard.
    • Startups more willing to beg for forgiveness while incumbents often need to ask for permission.
    • Incumbents interested to serve customer interest; gain a share of profits; & protect their franchises.
      • Exchanges–CME; Eurex; Intercontinental Exchange; Nasdaq
      • Assest Managers–Fidelity
      • Investment Banks–Goldman Sachs
  • Public Policy Framework [*Some (many) think that any broad economic activity with crypto will require public policy frameworks!]
    • Guarding Against Illicit Activity (i.e.–Tax Evasion; Money Laundering; Illegal Trafficking; Sanctions; Terrorism.)
    • Financial Stability
    • Protecting the Investing Public (i.e.–consumer protection; investor protection; Watchdog groups)
  • Public Policy–View From the Top:
    • “Authorities need to decide whether to isolate, regulate or integrate crypto-assets and their associated activities.” –Mark Carney, Governor of the Bank of England, March 2, 2018.
  • Global Approach to Crypto Finance: (Still Early Stage, but Confidence is Built upon coming within Public Policy Norms)
    • Guarding Against Illicit Activities
      • Broad Consensus on Policy
      • Inconsistent on Implementation
    • Financial Stability
      • General Consensus to Monitor
      • Different Perspectives, though, on level of risk.
    • Protecting the Investing Public
      • Wide Range of Views on ICOs & Exchanges
      • Japan, U.S., & Others Moving to Regulate Exchanges
      • U.S. & Canada seeking to bring ICOs within Securities Laws.
  • Bank Secrecy Act
    • KYC–Know Your Customer
    • AML–Anti-Money Laundering laws
  • Crypto Public Policy Challenges–Guarding Against Illicit Activity
    • Tax Compliance and Reporting
      • Definition–Currency or Property?
      • Tax Treatment–Mining, Exchanges, & Forks?
      • Reporting–Individual, Brokers, 1099-Bs & FBAR
    • Bank Secrecy Act
      • Money Transmission Laws (AML, CTF)–Users vs. Administrators or Exchangers
    • Challenges
      • Pseudonymous Addresses
      • Privacy Coins & Mixers or Tumblers
      • Compliance and Reporting
      • Crypto to Crypto Transactions
      • Decentalized Exchanges
      • Dark Markets
      • State Actors (other governments)
  • Property vs. Virtual Currency
    • Dept fo Treasury refers to it as both:
      • Virtual Currency, which happens to be property for tax law.
  • Crypto Public Policy Challenges–Financial Stability
    • Financial Stability Board– Initial Assessment
      • Crypto Finance Still Modest in Relation to Global Capital Markets
    • Capital Control Countries–Concerns on Maintaining Stability.
    • On the Horizon for many countries though…
      • Crypto Leverage
      • Blockchain Market Infrastructure
      • Central Bank Digital Currencies & Stable Value Tokens
  • Central Bank Concerns on CBDC
    • Potential of pro-cyclical runs to CBDC
    • Changes to commercial banks’ deposits & funding models
    • Effects on credit allocation & overall economy
    • Monetary policy implementation & transmission
    • Resilience of open payment infrastructures
    • Guarding against illicit activity
    • Central Bank Digital Currency, though, likely will be seen in adoption
  • Crypto Public Policy Challenges–Protecting the Investing Public
    • Crypto Markets Readily subject to Fraud, Scams, and Manipulation
    • Custodial Arrangements–Exchange and Wallets
    • Definitions–Securities, Commodities, or Derivatives?
    • Tracking Beneficial Ownership of Crypto Assets
    • Remediation of Non-compliant ICOs & Exchanges
    • Personal Data Privacy
    • (Securities & Exchange Act 1933 & 1934)
  • Investor Protection
    • Investor Protection goes beyond Consumer Protection:
      • Investors get Full & Fair Disclosure from Issuers
      • Fraud & Deceptive Sales Practices Prohibited
      • Secondary Markets Promoted with Price Transparency & Anti-Manipulation
      • Advisors’ Conflicts of Interest Disclosed and Minimized
    • Investor Protection Bolsters Confidence in Capital Markets
    • Economic Growth, Issuers, & Investors all Benefit!
  • U.S. Securities Law
    • The Howey Test (1946):
      • Is it an investment of money or assets?
      • Is the investment in a common enterprise?
      • Is there a reasonable expectation of profits?
      • Is it reliant on the efforts of a promoter or others?
  • The Duck Test
    • “When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.” –James Whitcomb Riley, poet
  • Initial Coin Offerings–Crowdfunding for Investment & Consumption
    • Proceeds used to build networks
    • Tokens usually issued prior to being functional
    • Development, while open source, is largely centralized
    • Promoters allocate themselves ‘premined’ tokens
    • Tokens are fungible & transferable
    • Scarcity is fostered with preset ‘Monetary policy’
    • Purchasers anticipate profits through appreciation
  • Initial Coin Offering–Investment Schemes Warranting Investor Protection
    • False Distinction between ‘Investment’ & ‘Utility’ Tokens
    • Most ICOs, Currently Issued Outside of Investor Protection Laws
    • Significant ICO Fraud and Scams–Est. of 25% or as high as 81%
    • Over 70% have Declined Value
    • Investor Protection Frameworks go beyond Consumer Protection Laws
    • Economic Growth & Issuers benefit from Investor Confidence
  • Crypto Exchanges
    • Critical gateway to implement public policy & instill confidence.
    • Responsible for vast majority of crypto secondary market.
    • Greater than 30 million direct members.
    • Lack brokered access or meaningful market integrity rules.
    • Custodial wallets are honey pots for hacks.
    • Decentralized exchanges present new opportunities & policy risks.
  • Crypto Public Policy Challenges–General Considerations
    • Adapting Existing Laws & Regulations, where appropriate.
    • Staying Abreast of Technological Developments
    • International Regulatory Arbitrage
  • Public Policy Development
    • Messaging + Politics + Analysis = Policy!
    • “Personnel is Policy”
  • Conclusions:
    • Blockchain Technology has potential to be a catalyst for change
    • Addressing challenges could lower Costs, Risks, & Economic Rents
    • Broad Adoption requires coming within Public Policy Framework
    • This is consistent with Technological Innovations in the Past
    • We still must guard against illicit activities & ensure for financial stability.
    • Public Confidence can only be built on Investor Protection
    • Consumer Protection Frameworks will not be enough

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