Hester Peirce: Tell Me How to Improve My Safe Harbor Proposal

Hester Peirce is a Commissioner at the Securities and Exchange Commission. The views here are her own and do not necessarily reflect the views of the SEC Commission or her fellow Commissioners. She can be contacted at CommissionerPeirce@sec.gov. Read on for reaction from lawyer Preston J Byrne.

Earlier this month, I proposed a securities law safe harbor for token distributions. My motivation was the fear that many crypto entrepreneurs have: that a token distribution might be deemed by my agency – the SEC – to be a securities offering.  How, then, is a would-be network supposed to mature into a functional or decentralized network? Network effects are unlikely to take hold until tokens are distributed to, and freely transferable, among potential users, developers and participants of the network. The securities laws cannot be ignored, but neither can securities regulators ignore the conundrum our laws create.

The safe harbor seeks to balance the objectives of protecting token purchasers and providing the regulatory flexibility that allows innovation to flourish. Accordingly, the safe harbor protects token purchasers by requiring disclosures tailored to their needs, preserving the application of the antifraud provisions of the securities laws, and enabling purchasers to participate in networks of interest. The safe harbor also provides network entrepreneurs the time and regulatory flexibility to build their networks. 

Underlying the three-year grace period is a premise that the nuances and ambiguities in determining whether a token transaction represents a security transaction exist primarily in the earlier stages.

The safe harbor would provide network developers with a three-year grace period – exempted from the registration provisions of the federal securities laws – within which they could facilitate participation in and the development of a functional or decentralized network, so long as the following conditions are met:

  • The team must intend for the network to reach network maturity –defined as either decentralization or token functionality – within three years of the first token sale and undertake good faith and reasonable efforts to achieve that goal.
  • The team would have to disclose key information on a freely accessible public website.  
  • The token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network.  
  • The team would have to undertake good faith and reasonable efforts to create liquidity for users.  
  • The team would have to file a notice with the SEC to rely on the safe harbor.

When I announced the safe harbor, I emphasized that it is a work in progress, one that would benefit from the power of decentralized wisdom. The thoughtful discussion I had hoped the proposal would prompt has begun already. Reactions have ranged from enthusiastically supporting it, to dismissing it as unnecessary.  Suggested improvements include clarifying how the safe harbor interacts with the laws of other domestic and foreign jurisdictions, allowing issuers to provide liquidity directly rather than through a third-party trading platform, and recasting the safe harbor around specific contractual obligations. Briefly, I will address two emerging themes in the conversation.  

First, some commentators have worried that the proposal would reignite the 2017 [initial coin offering] craze. The safe harbor is designed to provide a safe path forward for legitimate projects and to make attracting funds more difficult for fraudulent projects. The safe harbor requires the disclosure of specific information about the project and development team, preserves the SEC’s antifraud authority over safe harbor token sales, and excludes bad actors.  

“If this is it, please let me know . . . if this is it, I want to know.” If this is not it, I want to know that too.

A second area of concern is the lack of a bright-line test for whether a token is a security at the end of three years.  To avoid the securities classification at the end of the safe harbor period, the network would have to be decentralized, which means it is not controlled and is not reasonably likely to be controlled, or unilaterally changed, by any single person, group of persons, or entities under common control.  Alternatively, the network could be functional, which means holders can use the tokens in a manner consistent with the utility of the network.  

Underlying the three-year grace period is a premise that the nuances and ambiguities in determining whether a token transaction represents a security transaction exist primarily in the earlier stages of a development of a network. The lack of control over the network or the functionality of the network should be demonstrable within three years, and if not, the development team must be willing to take a clear-eyed look at the viability of the project as originally envisioned in light of our existing regulatory structures.  

My preliminary responses to these early concerns should not be taken as discouraging further dialogue on these and related issues. I continue to urge people – this time in the words of Huey Lewis and the News – “if this is it, please let me know . . . if this is it, I want to know.”  If this is not it, I want to know that, too. Give me a call, send me an email, stop by my office, provide feedback at the SEC’s FinHub webpage or post your comments online so that everyone else can see them, too.  

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Preston Byrne: Peirce’s Safe Harbor Proposal Would Be Hilarious If It Weren’t So Serious

Preston Byrne, a columnist for CoinDesk’s new opinion section, is an attorney at Byrne & Storm, where he advises cryptocurrency miners, decentralized protocol developers, custom software development shops, and interactive computer services businesses. This is his bi-weekly column, “Not Legal Advice,” an opinionated roundup of bigger legal topics in the crypto space. And, yes, it is not legal advice. Hester Peirce’s CoinDesk op-ed about her Safe Harbor proposal is here.

Much ink has been spilled over the last six years about the extent to which U.S. securities laws can and should apply to the sales of cryptographic tokens by protocol developers.

The default position that a conservative law firm will follow is that in the U.S. the sale of a token by a protocol developer before a token network is launched is the sale of a security. Current Securities and Exchange Commission (SEC) policy appears to say that, in the life of any cryptocurrency, there will come a point when the token has been distributed to sufficiently many hands and the network’s architecture is sufficiently distributed – or as SEC corporate finance director Bill Hinman put it in 2018, “sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts,” and thus the token ceases to be a security.

SEC Commissioner Hester Peirce, aka “Crypto Mom,” thinks the government should facilitate startups that want to have a go at turning their definitely-are-securities-today into maybe-not-securities-tomorrow. She has proposed a safe harbor to achieve this, whereby token startups will be given a three-year head start to take an ICO coin and turn it into a “decentralized” network, i.e. one which:

is not dependent upon a single person or group to carry out the essential managerial or entrepreneurial efforts… (such that) the tokens must be distributed to and freely tradeable by potential users, programmers, and… secondary trading of the tokens typically provides essential liquidity for the development of the network and use of the token.

The three-year safe harbor period will allow protocol devs time to:

facilitate participation in, and the development of, a functional and/or decentralized network, unrestrained from the registration provisions of the federal securities laws so long as [certain] conditions are met.

In other words, under the proposal, crypto projects would be able to sell securities to the public and work towards “decentralization” by, among other things, selling still more of these securities and creating a robust market for these securities, in the hope that engaging in the sale and marketing of these securities will turn them into non-securities, despite the fact that they will function in the marketplace exactly as securities do today at all relevant times.

This proposal would be hilarious if it weren’t so serious.

The most significant issue is that the proposal relies on a standard for “decentralization” which isn’t entirely certain today. Although the SEC has “decentralization” guidelines in print, projects that appear technically indistinguishable receive differing regulatory treatment for reasons that, to industry experts, are not immediately apparent.

Take, for example, Block.one, Sia and Telegram. Block.one claims to have raised north of $4 billion in a yearlong, rolling ICO for the EOS blockchain that kicked off with the purchase of billboard advertising in Times Square at the Consensus 2017 conference. Sia did an unregistered ICO also, raising roughly $150,000. 

Telegram, by contrast, endeavored to sell its tokens to U.S. persons via the Rule 506(c) exemption of Regulation D. At a predetermined future date, Block.one’s and Sia’s presale tokens converted to live network tokens. At a predetermined future date, Telegram’s presale tokens were to convert to live network tokens.

Block.one was fined $24 million, or about 60 basis points on $4 billion, and walked away, and its once-were-securities-but-I-guess-now-they’re-not coins continue to be listed on major exchanges. Comparatively smaller offender Sia was fined $250,000, or twice what they raised, and walked away. Telegram, by contrast, drew an emergency injunction in the Southern District of New York and the project has ground to a halt.

Of course, there are reasons why the SEC might be friendlier to some startups and less friendly to others. For example, startups that approach the SEC and cooperate will be treated more gently than those that do not. But, fundamentally, the real problem here is that the SEC’s “decentralization” test, as currently used, and as proposed to be used in the future, is unquantifiable to the point of being unconstitutionally vague.

There is no agreed statutory or technical definition of what makes a project more or less “decentralized.” When prominent developers and industry marketers cannot agree on a uniform definition of the term, which more often appears to be marketing-speak than as a definite, measurable quality, I struggle to see how the government should be in a better position to do so. For this reason, I would struggle to advise a client seeking to adhere to the “decentralization” test whether they are decentralized or not. 

The only thing that is made clearer by this proposal is that, to paraphrase an industry colleague, “’blockchain technology’ and Mom & Pop investors don’t have lobbyists. Coinbase does.” This proposal is fantastic for startups who need capital, market venues who need trading volumes to survive and the lawyers who advise them. For this reason, I don’t expect that many U.S. law firms will raise significant objections to this proposal which, if adopted, would almost undoubtedly be the single greatest creator of transactional legal work since the invention of securitization.

It would facilitate a headlong rush of issuers into the lightly-regulated crypto-capital markets as every company in the world sought to obtain American investors’ capital without selling them so much as a single basis point of equity or taking on a single dollar of debt, all without needing to sort out the details for 36 months.

If that’s the rule the SEC wishes to adopt and the result it wishes to bring about, that’s the Commission’s prerogative. I might suggest that a simpler approach would be for the government to approach tokens like it approaches bitcoin: treat coins sold in an initial coin offering as something sold, a securities sale, and treat a mined coin as something made, a mere commodity, which will still allow for a great many experiments in blockchain tech to flourish without creating incentives for every company in America to launch its own token.

Crypto scam numbers on the rise

The Wall Street Journal reports on Feb. 8:

Seo Jin-ho, a travel-agency operator in South Korea, wasn’t interested in exotic investments when a colleague first introduced him to PlusToken, a platform that traded bitcoin and other cryptocurrencies. But the colleague was persistent.

His investment grew at a dazzling rate. He invested more—a lot more. In less than five months, he bought $86,000 of cryptocurrencies, cashing out only $500.

The story ends in a familiar way, with Seo Jin-ho losing all of the money he invested.

Crypto-analytics company Chainalysis estimates that after a fairly busy 2017 in which $1.83 billion was “invested” in crypto scams, 2018 was a quieter year. This is perhaps understandable given the noises that the SEC made from January through November.

In 2019, however, a staggering $3.99 billion – that’s billion with a B – was reportedly lost to crypto-investment scams. This suggests that regulatory intervention in 2018 was not aggressive enough to deter the continuing growth of “scam” activity.

Clamping down on scams is almost universally understood as an important prerequisite to mass adoption and acceptance of cryptocurrencies as a viable payment and financial services technology. When asking why investors seem so uniquely susceptible to crypto scams, it bears mentioning that each of the top ten coins in circulation was issued otherwise than through a regulated channel, with the SEC and Department of Justice, at least as far as the public is aware, declining to take action against ethereum, tether, XRP, litecoin, Binance Coin, bitcoin cash, bitcoin SV and tezos, and taking a $24 million punt on EOS, despite there being identifiable promoters for each project (usually a notionally non-profit foundation but sometimes a for-profit entity).

The absence of an adequate regulatory regime means that a new “scam” project is virtually indistinguishable from one that has shed that label through accidental success. The marketing material for, say, ethereum and for any “scam” currency are primarily found on informal channels such as internet fora and Twitter promotional posts rather than in the form of an offering circular. The closest thing to “legitimacy” that any particular project can obtain is a listing on Coinbase or Binance, commercial actors with commercial interests that call for them to list and trade more coins in greater volumes, regardless of the gain or loss to investors.

A “safe harbor” that made it more difficult for retail investors to distinguish bona fide projects like Blockstack from known scams like OneCoin for a three-year period would likely undo much of the progress towards mainstreaming crypto adoption that has been made to date, which has seen large institutional players like Bakkt or Fidelity Digital Assets enter the space.

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DeFi Project bZx Exploited for Second Time in a Week, Loses $630K in Ether

Bad actors have made off with $630,000-worth of the ether (ETH) cryptocurrency after exploiting a price feed of the ethereum-based lending project bZx.

The attack – the second in less than a week – began at just after 03:00 UTC Tuesday, when attackers apparently took out a flash loan of 7,500 ETH (approximately $1.98 million), using 3,518 ETH (~$939,300) to purchase synthetic USD stablecoin sUSD from the issuer that they then posted as collateral for a bZx loan, according to an analyst on Twitter.

They then used 900 ETH (~$240,000) to bid up the value of sUSD through an integrated price feed from liquidity provider Kyber Network until the dollar stablecoin spiked at $2. Using this inflated collateral, they then took out another loan of 6,796 ETH (roughly $1.8 million) which they used to pay back the original 7,500 ETH loan, pocketing the remaining 2,378 ETH.

The total amount stolen is worth approximately $633,000, according to CoinDesk’s Ether Price Index. In its entirety, the attack took just over a minute from beginning to end. The exploiters have left an open loan with half the required collateral now sUSD has returned to its dollar-pegging.

The total amount of ether locked in bZx lending contracts has nearly halved from 40,000 ETH (~$10.7 million) to 23,000 ETH (~$6.1 million) since the exploit took place, according to statistics site DeFi Pulse.

Source: DeFi Pulse

The official Twitter account for bZx confirmed at 04:38 UTC the project had suspended trading after it detected “suspicious transactions using flash loans and trading on Synthetix.” A bZx spokesperson confirmed on the group’s Telegram channel that the company itself, rather than any of the platform’s users, would cover the shortfall.

The attack comes days after bZx fell victim to a similar flash loan-based attack that saw more than $350,000-worth of cryptocurrencies extracted from the platform. It’s unclear whether the two attacks were carried out by the same person or group.

What are flash loans?

The vast majority of DeFi lending facilities rely on overcollateralized loans: borrowers can usually only borrow around 75 percent of the value of their collateral. Although that incentivizes users to pay back loans, it also requires lenders to have very high liquidity – sometimes in a diverse range of assets – in order to quickly liquidate loans.

Flash loans are instruments that allow traders to liquidate the loans on the lender’s behalf. It works by having the trader take a loan out from the lender – this time not posting any collateral – paying back the borrower’s debt and collecting the deposit. Using the deposit, they can then pay back the original loan and pocket the remaining funds.

Flash loans were already available on other DeFi projects such as the non-custodial lending platform Aave Protocol, which has offered them since the beginning of the year.

bZx only launched its own flash loan instruments on Monday. CEO Tom Bean has defended the decision to introduce flash loans onto the platform. “By all accounts, the flash loan code on bZx was not what allowed this attack. It was just a tool used that functioned correctly and could have been swapped out for dydx and Aave flash loans,” he wrote on the company’s Telegram channel.

Kyle Kistner, bZx’s chief visionary officer and operations lead confirmed, also on Telegram, that the flash loan hack was “completely tractable.” He also highlighted that bZx would accelerate plans to integrate Chainlink to diversify price feeds and prevent oracle manipulations from happening again.

A representative for bZx told CoinDesk the team was trying to resolve the exploit with its team of engineers. CoinDesk has approached both Bean and Kistner for comment and will update the article should we hear back.

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Boerse Stuttgart Subsidiary Launching Institutional Crypto Custody Services

Blocknox, a subsidiary of the second largest German stock exchange Boerse Stuttgart, is expanding its cryptocurrency custody service to institutional players.

According to an announcement from the bourse on Tuesday, Blocknox already provides custody for crypto assets on an “escrow basis,” and has made the service available to users of Boerse Stuttgart’s BISON app and its digital assets exchange, BSDEX.

The firm is now aiming to expand its services outside the group’s own offerings, planning to safeguard cryptocurrencies and “other digital assets” for institutional clients such as banks and asset managers.

“As a pioneer in Germany, blocknox has already been operating as a custodian of cryptocurrencies for more than one year,” said Dr. Ulli Spankowski, managing director of Blocknox. “Now we want institutional clients to benefit from our experience and set-up as well. They can use blocknox’s reliable custody as a building block for their own services around digital assets.”

The firm said it has already built and deployed a “multilevel security concept” to protect assets under custody.

With new rules for Germany-based cryptocurrency services introduced in early January, Blocknox said it has already informed regulators of its intent to apply for a license, which means it can offer custody services on a provisional basis. The firm plans to submit the final application before the set deadline to become a regulated financial services provider.

Spankowski said the new rules will bring “further professionalisation” to the crypto industry and will likely encourage more institutions to enter the market.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Golden Cross Gives Little Relief as Bitcoin Risks Fall Below 2020 Bullish Trendline

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  • Bitcoin is struggling to draw bids despite a confirmed “golden cross” pattern on the daily chart.
  • That, coupled with bearish short duration indicators, suggests scope for a convincing break below the 2020 rising trendline currently near $9,700. That would expose the next support at $9,200.
  • The bearish case would weaken if prices return above today’s Asian session high of $9,825.
  • A move above Sunday’s high of $10,051 is needed to revive the short-term bullish setup.

While a long-term chart indicator has just made a bullish call, bitcoin is struggling to gather upside traction and looks vulnerable near the seven-week rising trendline support.

In what was possibly going to gift bitcoin prices a lift, the 50-day moving average (MA) has crossed above the 200-day MA, confirming a golden crossover – a long-term bull market indicator.

The development has got the crypto-market community excited, as the same pattern saw bitcoin rally from $5,050 to $8,300 in the three weeks to May 16, 2019, following confirmation of the golden cross in late April.

“Don’t be late to the party,” popular research analyst and blockchain enthusiast @crypto_blkbeard tweeted early on Tuesday, while drawing attention to the golden cross on the daily chart.

Meanwhile, @themooncarl informed his 21,000 Twitter followers that the golden cross is a sign that momentum has shifted in favor of the bulls.

So far, however, the buoyant mood surrounding the cross event has not translated into keener buying. That’s evident from bitcoin’s failure to keep gains above $9,800 during the early European trading hours and the subsequent drop to levels below $9,700 – the support of the trendline rising from Jan. 3 and Jan. 26 lows.

Prices now risk falling below the 2020 uptrend line. At press time, bitcoin is trading close to the trendline support at $9,723.

Daily chart

Bitcoin defended the ascending trendline on Sunday with a doji candle, neutralizing the immediate bearish view put forward by Saturday’s close below $10,000.

Sellers did penetrate the rising support on Monday, but the breakdown was short-lived, as evidenced by the cryptocurrency’s UTC close back above the level.

The two-day defense of the key support has so far failed to entice the bulls – as has the golden cross. Instead, the cryptocurrency charted a shallow bounce that later fell from the Asian session high of $9,825 to $9,700, a sign of weakening of bullish sentiment

Additionally, the 5- and 10-day averages have produced a bearish crossover and the MACD histogram is printing deeper bars below the zero line. So, a deeper drop toward the support at $9,200 cannot be ruled out.

On the higher side, a move above Sunday’s doji candle high of $10,051 is needed to revive the bullish setup, as discussed Monday.

Hourly chart

Bitcoin’s upside break of the descending trendline confirmed during the Asian trading hours was short-lived. The failed breakout, coupled with the rising-wedge breakdown, suggests scope for an extension of the ongoing sell-off from recent highs above $10,400.

Supporting the bearish case, the relative strength index has formed a downside break of the rising trendline.

The bear case would weaken if prices rise above $9,825 during the U.S. trading hours. That would shift risk in favor of a move into bullish territory above Sunday’s high of $10,051.

Disclosure: The author holds no cryptocurrency at the time of writing

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Enjin Launches Game Development Platform on Ethereum

Enjin has announced the launch of its game development platform on ethereum, enabling potentially millions of developers to integrate crypto assets into games and apps with no knowledge of writing blockchain code.

The company announced the news Tuesday, saying the Enjin Platform allows game engineers to take advantage of decentralized inventory, to integrate blockchain-based gaming and non-gaming assets, and to manage economic game play mechanics.

“Our platform is designed to integrate seamlessly into new and existing games alike, providing a competitive edge to studios of all sizes and across all genres,” said Enjin CEO Maxim Blagov in a press release.

The Enjin Platform is a suite of tools and services based on a web interface that natively supports ethereum’s ERC-1155 token standard, which developers can use to integrate both fungible and non-fungible tokens (NFTs) in a single smart contract. NFTs, often used for so called crypto collectibles, are tokens that are able to have different and unique characteristics.

The platform also utilities the firm’s own token, Enjin coin (ENJ), which is used as a “minting resource” to back the value of of in-game assets.

More than 2,500 projects making use of ERC-1155 have already been created on the testnet version of the Enjin Platform. The standard is the same technology behind Microsoft’s Azure Heroes blockchain-based contributor rewards program.

The blockchain gaming company has more in the works too, with Enjin confirming that its development roadmap for Q2 2020 includes the public release of the blockchain software development kit (SDK) for Godot, its open-source game engine.

“For the last 12 years, minting, deploying, and managing blockchain assets has been a challenging process that required specialized knowledge, but this all changes today,” said Enjin’s CTO, Witek Radomski.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Erik Voorhees: Within Five Years There Will Be a Major Financial Meltdown and Crypto Will Be Ready

I first met Erik Voorhees in Amsterdam, back in the summer of 2018, while covering a fintech conference called Money20/20. The conference was a circus. (Literally a circus, complete with trapezes artists, mimes, and a unicyclist.) The panels focused on stuff like artificial intelligence, biometrics at the cash register, and how to use big data.

But where was bitcoin? Where was blockchain? Sure, there were some panels on cryptocurrencies – maybe 15 percent of the total – but if we’re predicting the “future of money,” why didn’t blockchain have a starring role?

This is where Voorhees comes in. After his panel in Amsterdam, I asked the ShapeShift CEO why crypto didn’t have a stronger presence in the conference, and whether that bugged him. He basically told me, in a friendly way: you’re looking at it wrong. “I went to the second Money 20/20 in Vegas a few years ago, and we were the only crypto-company there,” he said. “No one knew what bitcoin was. It was just a joke to some people. And now there are a couple dozen panels here. Money 20/20 is about the banks, but even here, crypto is making a big impact.”

Voorhees looked at the conference, and the world, with a wider lens. He zoomed out. This strikes me as a useful metaphor for today’s blockchain space. It’s easy to look around and grumble, Why aren’t more people using crypto? Where’s the merchant adoption? Where are the use cases? It’s easy to get jaded.

Yet Voorhees has been around since near the dawn of crypto (or 2011, technically), and he’s been enriched and bruised by the ups and downs. He survived the collapse of BitInstant, one of the first bitcoin exchanges. He created SatoshiDice – which, for better or worse, remains one of blockchain’s most successful implementations. The Wall Street Journal accused him of laundering $9 million at ShapeShift. (He disputes this.) In 2018, against every one of his libertarian principles—but for legal survival – he swallowed the medicine of implementing KYC on ShapeShift, and says it “gutted” the company, and was forced to lay off 37 employees, a third of his staff.

Yet here he is. Still looking at the bigger picture, still bullish, still the happy-warrior-libertarian who rails against taxes (“I am morally opposed to taxation”), government (“I don’t think the federal government should exist at all”), and certain cryptocurrency regulations (“totally crazy,” “nuts”). Now, in the wake of the revamped ShapeShift exchange (which he frequently touts as zero-fee and non-custodial) and new FOX token, Voorhees feels primed for a comeback.

So I headed to the top secret ShapeShift offices in Denver, something of a blockchain hub, for a leisurely conversation with Voorhees. (Why Denver? I had assumed it was because of Colorado’s crypto-friendly regulations, but Voorhees tells me, with disarming honesty…not really – Denver is just a pleasant place to live. He’s not wrong.) In a wide-ranging interview, he opens up about the mistakes he made at ShapeShift, why the maximalists are short-sighted, why Libra could be good for crypto, his thoughts on Bernie Bros (not a fan!), why the price of bitcoin will hit $1 million (not a typo), and how we will soon – in the next several years – see the crumbling of the financial systems and the “twilight of fiat.” 

COINDESK: You’re both the CEO of ShapeShift, but you’re also a “thought leader” who promotes bitcoin and crypto. How do you balance this? 

Erik Voorhees: It’s hard. I can’t be as outspoken as much as I would like on controversial issues. As CEO, I have to be extremely careful about what I say, in terms of regulations and government. And I love talking about that stuff. So that’s been really hard. But building a business is the greatest challenge that I’ve ever come across, and is really rewarding. 

Pictures from Voorhees’ office

Well, since you mentioned regulation… Your current thoughts on BitLicense in New York?

Voorhees: I mean, it’s the worst thing that New York has ever done in terms of financial regulation of cryptocurrency. There have only been around 15 licenses issued. Imagine the entire state of New York, one of the most populous in the country – and with the largest financial industry – and you only have 15 startups that have permission to do crypto projects. Totally crazy. The BitLicense application itself – I would recommend you try reading it, if you never have. It’s 35 pages.

Just the application?! 35 pages?

Voorhees: Just the application and questions. And it does things like making every shareholder get a background check. Let’s say your grandmother invested in your little crypto startup, because she thinks you’re great, and she gave you $10,000 to start your business. If this was in New York, you would have to have your grandmother go do a background check with the FBI.

I mean, my grandma’s pretty shady. 

Voorhees: For most of the companies that have applied for BitLicense, the application ends up being like 100 to 300 pages of documents. Just to apply for the permission to build a new business! And then there’s the whole story of Ben Lawsky, and what he did there is pretty atrocious. He created the regulation, and then he leaves and starts his own practice where he’s helping companies navigate the regulation. So he enters private practice, charging companies to help navigate the rules and restrictions that he created. Horribly corrupt. And I don’t know how that’s not some kind or fraud or corruption crime, but apparently, that’s totally legal. 

Then after he did that for a couple years, he goes and joins the Board of Ripple. So Ripple’s paying him a gazillion dollars to basically help advise them on how to avoid these kind of regulations. The whole thing is just so corrupt, and the idea that the BitLicense was helping consumers is nuts. Like, ShapeShift actually built something that helped consumers, by not holding their money and not taking their personal information, which almost always gets hacked. We actually built something that protects consumers, and then the BitLicense basically made our business illegal. 

So those are my thoughts on BitLicense.

We actually built something that protects consumers, and then the BitLicense basically made our business illegal.

Other than that, you love it.  On that note, what do you think about the Federal Reserve, or Central Bank, potentially adopting digital currencies?

Voorhees: Yeah, so this is a hot topic in the last month or so. Their currency is already digital. The dollar’s already digital. It’s backed by nothing. So when people bring up things like “Central Bank digital currencies,” what are they actually talking about? Are they talking about the dollar being on a blockchain? And if so, obviously the blockchain would not be permission-less, or open. It’s going to be a permissioned blockchain that the Fed controls.

Voorhees: And obviously, the Fed is not going to limit its own ability to create money. So basically, the two reasons that bitcoin is so cool – 1) the openness and the permissionless-ness,  and 2) the fact that you know exactly how many units exists, and no one can inflate it – are all gone. So what the hell is the point of a digital dollar? It’ll be no different than today’s digital dollar, which just exists in bank accounts.

Voorhees: It’s not that I’m not a fan. [Laughs.] It’s just not anything different than what dollars are now. It’s kind of like this marketing gimmick for the Central Banks to feel like they’re doing something. But dollars are already digital. Euros are already digital. 

So you’re saying it might not be any worse than the current system, but it won’t add much value? 

Voorhees: It will be worse than the current system, in that it will be easier to surveil and control. So it’ll give the government more power over controlling it. 

Pictures from Voorhees’ office

You’ve been critical of the maximalists, calling them shortsighted. What do you mean by that?

Voorhees: Yeah, it’s shortsighted because if some of bitcoin’s virtue is its decentralization, then you have to realize that other blockchains increase the decentralization. They’re different communities, different people, they have different mining algorithms, they have different incentive structures. They optimize for different features. So if you’re for decentralization, but you’re in favor of just one single monolithic chain, there’s something in your brain that’s not connecting. 

Okay, on the subject of “different communities,” what do you think about Libra?

Voorhees: Yeah, I think Libra’s awesome.

Wow, “Awesome?” I wasn’t expecting that!

Voorhees:  Because first of all, it’s freaking out all the governments of the world. Anything that does that is good. 

But it’s not open-permission…

Voorhees: It’s not all open permission like bitcoin. But it’s also not just a digital dollar. It’s actually a new currency with a basket of assets that back it. Some fiat and bonds and securities. And that new asset is sort of a super national currency, created not by a government, but by a private company. And I think that’s an amazing step for society.

If it becomes widely adopted, the dollar loses some of its value. Facebook has more users than the U.S. has citizens.


You’re not concerned about potential bad actors at Facebook, or too much centralization?

Voorhees: I mean, none of it’s more centralized than the dollar. So I see it in contrast to how the dollar works, and in fiat. Everyone around the world is using fiat, and then here comes, finally, a private money created by a private company. It’s still centralized, but a private company’s money I would take any day of the week over a government money. So in that way, I think it’s superior to fiat. 

And it helps people think, Okay, well maybe it’s not just governments that can make money. If they broke out of that spell, then they would realize that, Okay, there are different monies out there, and they have different attributes. And maybe I should be thinking more about what makes money good or bad.

Do you have any sense, in your gut, of whether the Libra will succeed? 

Voorhees: So one big question is, will it launch at all? And that’s maybe 50/50. The other big question is, will it launch in its current form, or will it get watered down to basically just be a digital dollar? And there’s a strong chance that that will happen, which would suck. The reason the government, especially the U.S. government, is so concerned about it is because, if it becomes widely adopted, the dollar loses some of its value. Facebook has more users than the U.S. has citizens.

That’s a staggering fact. 

Voorhees: By a significant amount. Facebook’s coin is a credible threat to the dollar over the short term, over five-ish years. I think bitcoin’s a credible threat over 10 or 20 years. 

So, on to bitcoin: Are you concerned at all that there’s not more merchant adoption?

Voorhees: I think we got it backwards. So in the early days of bitcoin, it was all about merchant adoption. It was like, okay, this is a better form of money. When enough merchants accept, it’ll just start to become ubiquitous, and that’s how it takes over. That hasn’t happened for a number of reasons, and yet bitcoin and crypto, as an industry, has grown at least as much as we hoped it would. I think merchant adoption will end up being at the tail end of the adoption.

Voorhees: That will occur when lots of people have crypto. Because merchants will say, “Well I should definitely accept this, because there’s 50 million with it.” And that’ll sort of be the tail end, not the leading. And I think we all were wrong about that.

Interesting. Are you more or less bullish of cryptocurrency now than you were, let’s say, in 2018?

Voorhees: Each year that goes by that it hasn’t failed, it’s more likely to succeed. Each year that goes by, it becomes more normal. Nowadays, if you ask a random person on the street if they’ve heard of bitcoin, nine out of 10 of them will say yes. In 2011, 10 out of 10 would have said no. And it has shed some of its shady perceptions. 

What excites you most about the space right now, besides things you’re personally working on?

The DeFi [Decentralized Finance] stuff that’s happening is so cool. The DeFi stuff built on top of stablecoins. 

What about it, specifically?

Voorhees: It’s a real use case, and it works really well. A normal person can turn $10,000 of dollars into USD stablecoin. No volatility, backed by Coinbase, which is at least as reputable as a bank. And then they can be earning 3 or 5 percent interest on that. Sometimes in a trustless way. And anyone in the world can do this. Someone in Australia or Africa or Asia can all access these open money markets just from a phone. That’s really powerful.

Okay, getting to ShapeShift – you often mention that the exchange has zero trading fees. I get the sense from you that it’s not just a marketing gimmick, but something deeper there about no fees…almost a philosophical principle. Am I right on that?

Voorhees: No, you’re not. 

Voorhees: Zero fees, we implemented for two reasons. One, because we needed a better messaging hook to get people to understand what the new ShapeShift was. 

Voorhees: Trading is very much a commoditized business. And those fees are going to decline over time. So why not just get out ahead of that?

Voorhees: What matters more ideologically to us, at ShapeShift, is the self-custody aspect. Nearly all of the major crypto companies are custodial – the Coinbases, the Binances. And if the whole cryptocurrency movement just results in a bunch of new custodians, nothing really changes, right? But people go to what’s easy. So I see ShapeShift as building the easy interface for crypto, that’s self-custody. 

What can we expect to see in the future from ShapeShift?

Voorhees: We’ll go mobile. That’s the next obvious area that we’re totally missing right now. 

What’s the timeline on that? 

Voorhees: Two or three months. Before Consensus, shall we say.

You’ve said that your long-term vision for ShapeShift is “social change.” What does that mean, exactly? 

Voorhees: The way I think about it is that I am part of the startup that is crypto. And my long-term vision is that crypto actually changes the entire financial system of the world. My job in that startup is building a piece of it, which is ShapeShift. And ShapeShift’s job is to build the best self-custody platform for people. So that crypto doesn’t evolve into something where you just have a bunch of new PayPals holding everyone’s funds.

Where would you say you are right now as a company?

Voorhees: We’ve had to rebuild everything from scratch. So in some ways, we’re almost a six-year-old company, but in other ways, we’re a nine-month-old startup, because we just launched a new product in July.

At CoinDesk Consensus

Right. Can you talk about the KYC implementation, and the fallout?

Voorhees: The KYC stuff happened in fall of 2018. So no longer could we let someone trade one asset for another without an account. Obviously we didn’t want to do that. Our customers did not want us to do that. Our partners did not want us to do that, but we felt that it was too legally risky not to do it. So we made that change. It gutted our business, because all of our partners didn’t want to use us anymore. They just went with alternatives. So we knew that we would have a huge hit. And it did. It destroyed our entire business.

Not to make you relive one of the worst chapters of your life, but can you elaborate? How much did you lose? 

Voorhees: Most of our volume came from these partner wallets that plug into our API.

Voorhees: You know, like Edge or Coinome, or Exodus, or Jaxx. There are a number of these. And their users in their wallet would be able to trade coins seamlessly through our API. Once we required accounts [implemented KYC], that user experience totally broke, because then the wallet would have to send them to some other company, to us, to get an account signed up. And it’s just not a good user experience. So I can’t say I blame them. But those wallets just dropped us and went with competitors that don’t KYC. So what do you do?

In 2017, all our numbers were flying, but we didn’t know how to run a business. Now our numbers suck, but we know how to run a business.

What percentage of your customer base did you lose? Was it over, say, 50 percent? 

Voorhees: Yeah, I mean, over 95 percent.

Whoa. And yet, hear you are, rebuilding… 

Voorhees: Well yeah, so we were already working on the new platform by the time we knew that we would have to do KYC. It was sort of something happening in parallel. It was basically the 2.0 ShapeShift that we conceived in early 2018, and we were already starting to build. And then there was a weird period from the fall of 2018 through July of 2019 when the old product was totally gutted. The new one wasn’t out yet, and we had a nine-month period where we were just kind of working on it.

Not to mention, you were in the depths of the bear market. 

Voorhees: Right, in a horrible bear market, and that was during the time when we had our layoffs. So that was a shitty time for sure. But it was also fun, because we were rebuilding the new thing, and building new products is always the best. 

All of that said, most CEOs talk about the importance of failure, and how their success comes from the seeds of these setbacks. What lessons have you learned?

Voorhees: Oh, yeah, we made so many mistakes in 2017 when we were growing. When you’re growing that much, you don’t notice the mistakes. 

Voorhees: Most of us were first-time executives trying to build a business. So we’re learning this stuff as we go. Everything from hiring toxic people that shouldn’t have been here, to ignoring some of the operational things that a business should do. Like on-boarding and off-boarding new employees. This is something unrelated to crypto. But it’s very important. Most people think that if you need someone, you go hire them. But there’s actually a whole art and science to finding good people, bringing them in while onboarding them, acclimatizing them into your culture, and teaching them. 

We’ve learned all that stuff now. We’ve got the business stuff down. In 2017, all our numbers were flying, but we didn’t know how to run a business. Now our numbers suck, but we know how to run a business. 

On the personal front, how do you stay on top of the latest crypto developments? What’s your news consumption like?

Voorhees: So my pattern is generally Twitter, CoinDesk, and then osmosis in the office. Twitter is very shallow but broad information about everything. CoinDesk is for deeper articles about specific things. And then people in the office, that’s the entropy. That brings random things to me that I wouldn’t know about. But I don’t stay on top of it all. I constantly feel like I’m behind. I know a smaller portion of the industry today than I did six years ago.

Really? How is that possible?!

Voorhees: I spend all day, every day in this stuff, and yet I know less today, relatively to the industry than I used to.

Oh, so you mean your absolute knowledge has grown, but because the entire industry has grown so much, the percentage of what you’re current on – the percent of the pie – is smaller?

Voorhees: Right. There’s like…entire new chains that are really cool and I know nothing about them.

What are your work hours like?

Voorhees: My hours aren’t too crazy. I tend to work 9 to 6 most days. 

How do you relax? Are you Netflix binging?

Voorhees: Yeah, Netflix, reading, and just hanging out with my little daughter – those kind of things. I like to go out into the mountains, skiing, and snowmobiling. Mountain biking.

What are you reading these days?

Voorhees: I’ve been reading Dune. And usually I’m reading both a fiction and a non-fiction book. So for non-fiction, I’m reading that Andy Grove book, High Output Management

Let’s talk politics. Do any of the Democratic candidates excite you at all? 

Voorhees: They’re all horrible. All of them want to grow the government. All of them. Every single one of them will just grow the government. Every president grows the government. So the Democrats wanna grow it a little bit to the left. The Republicans wanna grow it a little bit to the right. They’re actually pretty similar in almost every way. So yeah, I despise all of them. I don’t think the federal government should exist at all. And I won’t be voting for any of them.

You’ve been critical of the Bernie Bros …

Voorhees: I mean, all they want to do is steal money from other people. Right? They want to get their guy into power so he can take money from group A and give it to group B.

Okay, prediction time! I want three predictions from you: one for the short-term, one for the medium-term, and one for the long-term, like 20+ years from now. 

Within five years, you have a major financial meltdown. And crypto will probably be ready enough to be a credible alternative for a lot of the world.

Let’s start with something we’ll see in the crypto space this year, in 2020.  

Voorhees: I think ETH gets back to all-time highs and DeFi goes a little bit parabolic in growth—I mean in user growth. I also think there will be a bitcoin rally this year, but I don’t know if it will get to all-time highs. But I think Ethereum will be. 

I think DeFi will be the theme this year. There will be a new set of… sort of ethereum-killer-type chains that are viable now. So there’s Cosmos, Cardano, EOS, and maybe two or three others that are credible chains. (And maximalists will hate me for saying that.) They work as they’re supposed to, and they’re not just forks, and they’re innovating in different directions. 

How about everyone’s favorite topic, coin dominance?

Voorhees: So I think this year, we’re gonna see sort of bitcoin in the lead, of course. Ethereum the clear number two. And a set of other smart contract chains that are all proof-of-stake that are vying for that number three spot.

Got it. Predictions for the next, say, three to five years? 

Voorhees: In three to five years, the next financial crisis has definitely happened. Now I may have said the three or five years ago also. But I’m gonna restate it now. 

How bad do you think it will get?

Voorhees: This debt bubble can’t continue. I think within three years, but certainly within five, you have a major financial meltdown. And crypto will probably be ready enough to be a credible alternative for a lot of the world. Not that any one chain can suddenly support every transaction of every person. But there’s enough chains doing it, in enough different ways, that have evolved by then, with enough good UX and basic understanding, and trust from the public, that it will become a credible alternative.

This is fascinating. Can you break down a little more what, specifically, that kind of financial crisis would look like, and how crypto benefits? Because I think for a lot of people, they hear that idea and it sort of makes sense, but it also feels really abstract? 

Voorhees: So I think there are three levels of financial crisis. There’s a normal recession. Which happens normally, and isn’t that big of a deal. That’s where equities will go down for a while, and there’s a year or two of recession. 

Then there’s sort of a really severe recession like the 2008 and ’09 kind of thing, where people start losing trust in financial institutions. There are large bankruptcies and bailouts of companies. 

Then there’s a third level, which is what I think will happen. And that is where you’re actually getting the collapse of sovereign bond markets. When people realize that there’s zero way that those debts get repaid. The only reason people are willing to hold U.S. government bonds is because they assume they can sell it to somebody.

They assume it’s rock solid, yeah.

Voorhees: Yeah, because they can always sell it to some other guy. Which is the definition of the greater fool theory, right? That falls apart at some point. The math doesn’t work. So when bond markets fall apart, interest rates will spike, because people will demand vastly higher interest rates to loan money to people, especially to governments. 

And this will destroy the whole financial system. Ultimately, what it will mean is the governments will end up printing money to try to solve the problem, just like they did in the last financial crisis.

If this does indeed happen, you need to make sure you’re not caught on camera like Mr. Burns in The Simpsons, rubbing your hands greedily, saying, “Excellent. Things are proceeding as I had planned.”

[Both laugh.] Be careful.

Voorhees: So they’ll print money like they always do, but the quantity that they’ll have to print will—in combination with the loss of trust in the bond market—cause actual currency collapses of major fiat currencies. 

And that’s the inflection point…

Voorhees: It’s that last step that’s really the lynchpin for people to just get out of that stuff, that nonsense, and use real money. Open, transparent blockchains that can’t be manipulated by any party, and that you know exactly how many there are. That’ll happen within five years. It’s gonna be a disaster.

So what happens to the price of bitcoin in that environment?

Voorhees: I mean in that environment, bitcoin is at $1 million.

But it would be crazy and violent and volatile. And it would be very surreal, because at the same time that basically these elites of the financial world are all falling apart, these banks and all that value is getting destroyed, you’ll have all these other people—from the whales in bitcoin, to someone who just had a few thousand dollars of bitcoin hanging around, to little startups all over the world in the crypto industry. They  suddenly become 100x more powerful.

Lots of wealthy dudes in hoodies! Wait, this is all going to happen in three to five years? 

Voorhees: Yeah, three to five years is when this crazy transition starts. The transition itself is probably five or ten years long. There will be a really weird wealth and power transformation in a very short amount of time. And that won’t happen in some kind of peaceful way. That will be really kind of scary and probably violent, where the people losing power do everything they can to prevent this process, but it’s inevitable and can’t be stopped. That transition will be the financial story of the century. That will be written about for hundreds of years. This is the twilight of fiat. 

“Twilight of fiat.” Nice turn of phrase.

And after that happens, when people look back on how fiat and banks worked, and children are taught about this stuff in school, it’ll all seem so preposterous that people used money that was created out of thin air, and they thought that had value. And the government could just make as much of it as they want. And people were okay with that. And you had this high council of high bankers that every couple weeks would release statements in which algorithms all over the world would look at each little word to see what changed, and billions of dollars in the markets would move based on the slight edits to the words coming out of the Federal Reserve. That will look absolutely preposterous.

This is how I feel about self-driving cars. Decades from now, people will look back at manual-driving cars and say, “What?! You people actually DROVE those things yourselves?!” Because manual-cars cause so many accidents! 

Voorhees: I know. It bothers me too. I look forward to when all the cars are automatic. There’s some scary surveillance stuff with that, but it’s inevitable.

All right, on that note, give me a long-term prediction. How about 20 to 40 years from now?

Voorhees: So at that point, 20 years on, finance will work with purely digitized open systems. And I don’t know if it’ll be blockchains or something that’s surpassed them by then. But open, decentralized transparent systems where they are algorithmically trustworthy.

I appreciate your open mindedness, that the ultimate solution might be blockchain, but it might not. 

Voorhees: It doesn’t really matter. The point is that the good features in bitcoin and blockchains will be there. And maybe it’ll still be bitcoin, and maybe bitcoin is still the standard 20 years from now. But the point is, it’ll be open, anyone will be able to use it, it will be borderless, and it’ll kind of be like… mathematics, or language. Maybe language isn’t a good example…

Voorhees:  Or music, right. Where there’s a set of rules that everyone in the world uses, and math and music are not set by nation states. They’re cultural and they’re open. Money and finance will work like that. 20 years from now, people will not have fiat bank accounts.

Governments will still be around though, right?

Voorhees: Of course. I’m not that lucky. [Laughs.]

You’re well-known as a libertarian. I’m guessing you must be frustrated that people have certain stereotypes of libertarians, or have some misconceptions? 

Voorhees: The biggest misconception is that libertarians, and/or anarchists, are against order and against governance. I’m very much pro-order and pro-governance. The key theme for a libertarian is that that stuff should emerge through peaceful means, versus coercive means. 

What do you mean, exactly?

Voorhees: If you look around you, there’s order all over the place, right, in markets and in nature. A tree grows, and it has order to it, and structure. But no one commanded the tree. It was an organic process that was decentralized.

That feels almost Buddhist. 

Voorhees: There’s a lot of overlap and themes in nature, and how the markets work. So I think the best kind of libertarian is someone who’s just seeking order through peaceful means, versus coercive means. So the haters are always like, “Well you hate poor people and want them to die without health insurance.” It’s like, “No, I would love everyone to have health insurance. I just don’t think you should steal from some other person to give this other guy health insurance.” I don’t think that’s charity, I think that’s theft.

So yeah, that’s the major misconception. It’s a misunderstanding of the fact that order can emerge, rather than being imposed by force.

What’s blockchain’s role in all of this? 

Voorhees: I think it is a demonstration of this emerging order. Exactly that. There are all sorts of forms of money in the crypto world. Bitcoin is the major one, but there are lots of different competitors with different attributes, and it’s messy and chaotic. But there’s an order to it, and a rationality to it. And these various projects from all over the world, there’s no central person coordinating all this stuff. There’s no person setting the monetary policy of crypto. It’s an emerging order and it’s peaceful. 

This is what’s so powerful about that: It takes the major way that governments control people, which is through control of the financial system, and it provides an alternative that even the most powerful government in the world can’t stop. And there’s something incredibly magical about that.

[The interview has been condensed and lightly edited for clarity.]

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Craig Wright Doubles Down on Satoshi Claim, Says Bitcoin Core Infringes His ‘Database Rights’

The Australian entrepreneur who claims to be the inventor of bitcoin has suggested he might take legal action against the cryptocurrency’s developer team over claimed infringement of his intellectual property.

In a blog post published last Thursday, Craig Wright said while forks of bitcoin would be allowed under the open-source MIT license under which bitcoin was released, copying the database would not.

“As the sole creator of Bitcoin, I own full rights to the Bitcoin registry. People can fork my software and make alternative versions. But, they have no rights to change the protocol using the underlying database,” Wright wrote.

However, Bitcoin Core (the group that maintains and develops bitcoin) and Bitcoin ABC (the team behind bitcoin cash) “have sought to use my database without authority,” Wight claimed.

It should be noted that Wright’s claim to be Satoshi Nakamoto, the pseudonymous inventor of bitcoin, has not been proven either legally or to the satisfaction of many experts in the crypto community. He is also the backer of a different cryptocurrency, bitcoin SV (for Satoshi’s Vision).

In the post, Wright appeared to suggest he might attempt to take legal action against Core and ABC, saying: “Those involved with the copied systems that are passing themselves off as Bitcoin … are hereby put on notice. Please trust me when I say that I’m far nicer before the lawyers get involved.”

Based on his claim to be bitcoin’s inventor, Wright said Core and ABC infringe his intellectual property rights under the MIT open-source license under which bitcoin is issued. That, however, allows use of the code “without restriction” as long as the copyright notice and permissions notice are “included in all copies or substantial portions of the Software.”

“Permission is hereby granted, free of charge, to any person obtaining a copy
of this software and associated documentation files (the “Software”), to deal
in the Software without restriction, including without limitation the rights
to use, copy, modify, merge, publish, distribute, sublicense, and/or sell
copies of the Software, and to permit persons to whom the Software is
furnished to do so, …”

Wright also asserted that he has “database rights” in the EU and the UK. “As a part of distributed global partnerships, senior partners within Core or ABC reside within Europe and the UK, presenting the opportunity to incorporate them in the matter without any jurisdictional challenges,” he wrote.

Elsewhere he claims to have issued all 21 million bitcoin and that nodes are in effect “agents to my network.”

“If you negotiate with me, arrangements can be made allowing the continuance of selected copies of my network, with a set of restrictions. In other words, I am willing to license … the Bitcoin database. I will do so on my terms,” he wrote.

In May 2019, Wright registered a copyright claim in the U.S. for the bitcoin white paper and original code, with a press release appearing soon after that claimed his authorship had thus been recognized. The Copyright Office responded days later, saying it had not recognized Wright as the author of the works and that it “does not investigate the truth of any statement made” in filings.

CoinDesk has reached out to multiple Core developers for comment, and will update if we hear back.

Disclosure Read More

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Russia’s Central Bank Proposes New Token Framework, But Labels Crypto Transactions ‘Suspicious’

The Central Bank of Russia (CBR) has formally proposed a legal framework for tokenization, but also plans to label cryptocurrency transactions as suspicious activity, it said in a press release Monday.

The CBR announced it had successfully piloted a platform that allows users to tokenize assets, including equities and currencies, and issue them to investors.

Ivan Zimin, director of the CBR’s financial technology department, said in the release that the bank had now proposed using the platform as a framework in the country’s upcoming cryptocurrency law, which will act as guidance for legitimate businesses wanting to tokenize assets.

“Based on the results of the piloting, the Bank of Russia proposed to include in the draft federal law “On Digital Financial Assets” the provisions necessary for the introduction and development of such decisions in the emerging digital assets market, which were supported by government bodies and businesses,” Zimin said.

This coincides with local media reports that the CBR is planning on updating bank guidance on what constitutes criminal activity, for the first time in eight years. According to business news site RBC, both the sale and purchase of cryptocurrencies could be considered suspicious under the new guidance.

Still undergoing in-house assessment, the guidance would ask commercial banks to flag activity and authorizes them to block transactions, and even close the accounts, of any clients found to be trading cryptocurrencies.

CBR’s move has been met with some pushback from industry figures. Don Guo, CEO of technology and liquidity provider Broctagon, has criticized the fragmented approach. Speaking to CoinDesk, he said the two decisions on Monday will only create more uncertainty in the digital asset space.

“Russia seems to have taken one step forward, two steps back when it comes to crypto,” Guo said, adding it would leave “Russian traders scratching their heads” as other major economies, such as the U.S and China, continue to offer conflicting advice on how to regulate cryptocurrencies.

“Where China has been advocating for Bitcoin and creating its own digital currency, other countries like the US seem to be fighting a losing battle to squash it,” Guo said. “Whether regulators like it or not, the adoption of digital currencies will continue, and dismissing cryptocurrencies comes with an opportunity cost.”

Since 2017, the Russian government has been drawing up a bill that would regulate cryptocurrencies and related activities such as initial coin offerings (ICOs) and trades with fiat currencies, like the ruble. Although officials have previously indicated the bill was nearing completion, Binance CEO Changpeng Zhao hinted in a speech last October that Russian officials were being indecisive.

The Russian parliament passed a digital rights bill in early October that outlined basic “digital rights” in Russian law and also provided legal definitions for smart contracts and cryptocurrencies.

Monday’s news now suggests Russia is now trying to create a regulatory distinction between asset tokenization, which can more seamlessly be integrated into existing financial law, and cryptocurrencies, which cannot be as easily supervised and managed by the authorities.

Last October, the CBR backed a potential ban on cryptocurrency payments, claiming they carried significant risks and could not be equated with legal tender.

Reportedly one of the largest projects to ever come out of CBR’s regulatory sandbox since it launched in April 2018, the tokenization platform was developed by Nornickel, a Russian mining and smelting company. Also allowing organizations to mint “hybrid tokens” backed by different assets simultaneously, the platform will go into operation once Russia’s cryptocurrency bill passes into law.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

China’s DCEP Unlikely to Impact Crypto Markets in the Long-term, eToro Analyst Says

China is taking a great leap forward to develop a central bank digital currency, with more than 80 patents filed by the People’s Bank last week.

The 84 patents filed on Feb. 13 include proposals related to the supply and issuance of a central bank digital currencies (CBDC) as well as interbank settlements using the digital yuan and the integration of digital currency wallets into existing retail bank accounts, according to a recent report by the Financial Times.

While the Chinese government is still largely quiet on the initiative, the new patents signify China’s efforts to ramp up development work on its digital currency electronic payment (DCEP) system in a bid to outdo other major economies such the U.S. and the EU.

The latest developments are unlikely to impact crypto assets in the long-term, as the issuance of a digital yuan would be tightly controlled with no public mining or trading with existing cryptos, said eToro analyst Nemo Qin.

“Unlike most crypto assets, the DCEP will be a centralized, government-issued digital currency … with these factors, the DCEP should not have a direct impact on the crypto asset market,” Qin said. 

The price of crypto’s largest asset, bitcoin (BTC), rose more than 40 percent, from $7,435 to $10,350 in October, 2019 after Chinese President Xi Jinping stated that his country should “seize the opportunities” afforded via blockchain technology.

As the markets digested the news and began to understand the intentions behind China’s move, prices for the bellwether crypto dropped by more than 37 percent before recovering by January of this year.

Indeed, China’s ambitions have encouraged more players to enter the space, with the Bank for International Settlements (BiS) setting up a group to discuss potential cases for interoperable CBDC’s. 

“We can expect more central banks to announce developments in their own crypto assets using blockchain technology,” Qin added.

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.