Blockchains and Cryptocurrencies: Privacy, Regulatory Certainty, and Innovation

Scott Wallsten: 00:00:00 Thank you all for coming. Thank you to our panelists for participating in this event. We know lots of new technologies go through what some people call hype cycles and blockchain was certainly one of them for a while. There was nothing blockchain couldn’t do, including selling iced tea. Bitcoin went to $18,000 per bitcoin. Then that sort of thought passed and that’s probably a good thing. Now we may be at the productive side of that so-called hype cycle, where people are actually figuring out what it’s good for and what we could do with it and policy makers are thinking about it in productive ways. We had, for example, last week the Colorado Digital Token Act was signed which defined a cryptocurrency for the state of Colorado, and it said what rules apply to it and what didn’t. And those are useful developments without saying anything about particular law itself people are talking about these issues in serious ways. And of course I have to say that one of the biggest developments in cryptocurrency is that we have launched a TPI coin. It’s the TPIx. Just as a preview. It’s live. We will be using it at our Aspen event this summer. So be ready for that. But I’m just here mostly as the warm up act and to introduce Sarah Oh, who is the brains behind the coin and everything else. Lots of other things, not just crypto. She will be the moderator today. She organized this. She’s a senior fellow at TPI, and I think one of the smartest and most creative economists and lawyers working on policy issues today. She has a BS in science and engineering from Stanford and a PhD in economics and a JD from George Mason. And with that I’ll hand it over to her.

Sarah Oh: 00:01:45 Thanks Scott. Thank you all for coming today. Our program is called Blockchain 201: Policy Questions for 2019. We’re hoping to elevate the discussion to kind of more advanced policy questions for Congress and regulatory agencies. Now that blockchain and cryptocurrencies are under kind of exciting development- it’s beyond the hype cycle. I thought I would start by introducing our panelists. We’ll go through kind of a lightning round and I’ll ask each of them to share two policy questions or policy priorities that they’re focusing on this year for 2019 and then we’ll discuss some questions that they might have and I have for them as well. But just before I begin here are our speakers.

First we have Daniel Gorfine. He’s Chief Innovation Officer and Director of LabCFTC at the U.S. Commodity Futures Trading Commission. The LabCFTC is dedicated to facilitating market enhancing financial technology innovation and understanding of emerging technologies. So LabCFTC has really been at the forefront of a lot of thinking from the federal government about crypto.

Next we have Jerry Brito, he’s executive director of Coin Center, a nonprofit research and advocacy center focused on the public policy issues facing cryptocurrency technologies such as bitcoin. Coin Center really is at the leading edge of thinking about cryptocurrencies.

Next we have Mark O’Riley, he’s technology policy council in IBM’s General Counsel’s Office, Worldwide Government and Regulatory Affairs Office and IBM’s Public Sector and Systems group. He’s done a variety of sales management and executive positions. In his current position. Mark is responsible for worldwide focus on emerging technology policy strategy and the supportive strategic initiatives including advanced computing and software platforms.

And we have Diego Zuluaga who is a policy analyst at the Cato Institute Center for Monetary and Financial alternatives, where he covers financial technology and consumer credit. And before joining Cato, Diego was head of financial services and tech policy at the Institute of Economic Affairs in London.

Before we go down the row and hear from each of our panelists first, I just wanted to give a brief overview of what I take to be the state of blockchain and crypto in 2019. Basically, right now we’re kind of in a crypto winter. The hype for blockchain and crypto was really at the beginning of 2018 and now that prices are down and the bubble has burst, it’s called a winter. But actually there’s a lot of exciting development and investment happening in this space. And so just for my own research and maybe from your own reading of the news, we’ve recently heard about private blockchains putting out products like the JP Morgan Chase coin where they’re kind of redoing inner bank settlement internally to try and shift away from the swift network and to do their own interbank settlement.

We’ve heard of other private investments in blockchain like IBM’s Hyperledger and I read just yesterday that the French court system is using Hyperledger to register corporations over there. And on the public blockchain side for open protocols, I’ve just been doing research and learning about the 0x protocols where they’re analogizing these different open protocols to like the early days of the internet, like SMTP allowed email or TCP/IP allowed packet exchange. And so these open protocols on the blockchain are really going to enable connectivity that we haven’t seen before. And that’s very exciting. I mean it’s technical, but there is actual development happening that could really change the way people interact on the internet globally. Also on the public blockchain, I’ve just been learning about different applications on gaming. And maybe you know about just the different types of tokens where you can have nonfungible like characters on your gaming systems like crypto kitties.

And so there are innovations happening in gaming that are very interesting. You might also have heard of stable coins where there are fiat dollar backed coins that are tagged with the dollar. Internationally there’s just a lot of competition. Asia if you just dig around, they have a lot of blockchain crypto development happening out of Singapore, Korea, China. So this really is kind of a global picture of crypto development and private blockchain development. Given that I just wanted to go down the line and ask each panelist to describe their two top questions or policy priorities this year and maybe just try and keep it to a few minutes each and then we’ll discuss more.

Daniel Gorfine: 00:07:29 Great. Thank you, thanks for having me and all of us. I’ll start a little bit higher level. I’ll give some of the policy or market developments that we’re taking a look at, but it not necessarily all exclusively something that the CFTC as an agency would be focused on. Broadly, I think you’re right on stable coins. This is based on the fact that there has been a lot of price volatility as you’re all aware in a lot of the early crypto coins, so there are many folks that are trying to think about ways you can create a more stable crypto asset that may be able to power a lot of the networks that people are contemplating. The interesting angle there from a CFTC perspective, as you mentioned, yes, you can create stable coins that are anchored to a potential fiat currency, but you can also anchor with other types of physical assets like commodities.

Certainly, through our LabCFTC function and we meet with folks, we are hearing a lot of hypotheticals around potential anchoring of a crypto asset to gold or to other types of physical assets. And that could be depending on how those are structured you can start to hear things that would come in to CFTC world. For example, if there’s a coin that’s redeemable for kind of future delivery of a physical asset, that would be something that may satisfy the futures definition or a swap definition. So I agree, I think stable coins are pretty interesting. The other big areas, I think as you also pointed out, the high water mark for a bitcoin pricing at least was at the end of 2017 early 2018 and that caused this kind of deluge of projects and ICOs. And a lot of that was seems to have been quite frothy. I think a combination of CFTC and SEC general guidance as well as some enforcement actions has chilled some of that extra froth. That being said, I think this is going to be the year that you start seeing projects that are structured given existing guidance. So it’ll be interesting to see what kinds of projects emerge. My last point kind of shifting away from public blockchain to private, and I’m going to call this more broadly just distributed ledger technology. I think we saw again over the last couple of years, a lot of testing and pilots and proofs of concept of trying to use DLT as a way to make just private networks more efficient and enhance the efficiency of transactions, but very little of that has scaled to date. It’ll be interesting to see if folks are able to overcome technological barriers to scaling as well as justify kind of the upfront investment because it’s a big investment to shift your existing computer architecture over to kind of these interoperable databases, which I’m sure Jerry will tell you are very different than kind of a public blockchain but potentially inspired by that.

Jerry Brito: 00:10:14 As Dan was just mentioning, Coin Center is focused on open public blockchain. So things like Bitcoin, Ethereum, z cash and the like. The reason for that is that these networks, like the internet or like the web, are open and permission-less: they’re public networks. And so as a result they are public goods. Anybody can use them without seeking anybody’s permission. If you’re Mark Zuckerberg and you have an idea for a website you want to build called Facebook, you don’t have to go to AOL and say may I please build this thing and launch it. You can just launch it on the web and people can just come to it without any permission from anybody and use it. Because it’s open and permission-less and nobody owns it, number one, that raises a lot of policy questions because a lot of functions that, before these networks, were done through intermediaries are now done disintermediated fashion.

That raises policy questions because those intermediaries usually tend to be regulated. And now there is no intermediary to be regulated. And secondly, because these networks are open and permission-less and nobody owns them, you need a nonprofit public advocate for these networks. What we advocate for is a number one the freedom for users to use these networks, and number two that were government regulation is appropriate, and there are many areas where it is appropriate, that it be thoughtful and it be done in such a way that does not affect the continued development of the technology.

That’s what Coin Center does, and as far as policy issues that we’re looking at. So over the past couple years, probably one of our top issues has been securities regulation. There’s a question of you have all these different kinds of tokens. You’ve got bitcoin, you’ve got Ethereum, and then you’ve got tokens that run on top of Ethereum, like TPIx. What are these things? Are they currencies? Are they commodities? Are they securities? What are they? One question has been, are these things securities or not? That has been a question that’s been pretty open, but over the last 12 months, at least, we’ve gotten a lot of good clarity on that. Now we can say with pretty relative certainty that bitcoin is not a security. Ethereum is not a security. These things are pretty clearly commodity given that commodities is a very broad definition and that gives us a lot of certainty. So as a result, there’s still a lot of open questions related to securities or to the SCC. So for example how do we get a bitcoin ETF? There are ETFs for much more exotic and volatile goods out there. How do we get a bitcoin ETF or, and if you’re an ETF, there are questions about how do you custody these things to be in compliance. If you are a venture capital fund or a hedge fund and you want to hold a cryptocurrency along with other other things like securities or commodities how do you do that in a compliant way? So that while those are still open questions at Coin Center, at least, looking for the broader interest of public networks, we think we’ve gotten some pretty good clarity that public decentralized functional networks, not securities. So that frees us up and being crypto winter. This is not my first crypto winter. Crypto winter is a great time because developers get to develop and be heads down on, on the work and they build really great things and folks like us got to focus on sort of long-term policy thinking.

For us, the two big issues are number one, privacy. Increasingly, these networks are being built to be more and more private. And so that raises all kinds of policy questions. We’ve been looking at that. And number one, making the case that more private cryptocurrency is socially beneficial. And number two, what are the appropriate policy responses to more private cryptocurrency and what are the constitutional limits to what a regulatory approach could be. And then the second thing is tax. There are any number of open tax questions that the IRS has not answered and that it would be relatively simple for them to answer. Some might require congressional action. And so we’re looking at getting some answers to those. Those are kind of what we’re working on right now.

Mark O’Riley: 00:14:04 Good afternoon to everyone. I think that Jerry may have taken my thunder pointed out my questions. IBM focuses more on private blockchains enterprise blockchains, but some of the policy questions that we face are similar to what you’re facing in the crypto arena. We are depending upon the industry concerned about regulatory certainty as to how a business should act and react and utilization of a blockchain, particularly when you’re dealing in global markets. And our customers are going from country to country with their business transactions. They need certainty as to how they act, leaving the United States, how they were received in another country and vice versa.

Our question always becomes one of dealing with and, I want to put this to you all as staff. We’re looking for ongoing discussions when it comes to policy and understanding distributed ledger technology, be it public or private, we think we’re in the same basket. We don’t think it’s enough to just have one discussion and walk away for a couple of months and a bad thing happens on either side. Then everybody wants to run and have a hearing and talk about it. As Sarah mentioned, I deal in emerging tech for the company. So I’ll give you a couple of examples. Last year this Congress passed a law in quantum computing- a bill. When you look at it in detail, they passed the entire eco system. They talk about development from soup to nuts. They talk about all of the considerations in between from this, then standards from the National Science Foundation and to the Department of Energy.

They left no stone unturned that has to be considered to make the process complete. It’s the same thing that they’re doing with artificial intelligence, no stone unturned. And that’s the same thing we’re looking for in distributed ledger technology. We think you have to look at the whole of the network, how it’s supplied, be it public or private so that anybody who enters into this business, including our clients, can have some certainty that when they do certain things, be it a smart contract or deal with a coin, that they’re going to be treated in a certain way. Tax questions are obvious. How was that coin treated? They all want to know, want to engage within the business, that they’re following the letter of the law, but they’re not necessarily saying regulate. They would rather have open dialogue and discussions to talk about guidelines and positions as position papers you all put out.

That helps and I’ll tell you the challenge you have when you regulate and you all have heard a GDPR, right? Europeans put up that privacy legislation and immediately my colleague in Brussels says, the first headache they had was how do I apply it to blockchain? It doesn’t work. So now they’re having to go back and figure out how do I justify saying you have the right to be forgotten, but in a blockchain I can’t take the date out because you defeat the purpose of the chain. That’s an example of if you rush to regulate and not really understand what you’re dealing with, you can have a bigger problem on the backside. That’s the position we’re in.

Diego Zuluaga: 00:18:22 Thank you. I concur with much of what has been said. I would say my two policy priorities for 2019 as far as crypto and blockchain are concerned, are payments and money transmission and then financial privacy, which is I think something that we are all concerned about and sharing. The reason those are my two priorities is that I think those two areas have been neglected by policy makers over the years and we have a lot of legacy regulation from another era that hasn’t been looked at enough. And that is if you look at surveys, if you look at assessments of the cost of complying with them and the effectiveness of that regulation, they don’t look very good at all. I’m thinking about the Bank Secrecy Act and AML regulation when it comes to financial privacy. And when I think about that question with regard to decentralized networks, the immediate point that comes to mind is that regulators are uncomfortable allowing privacy in a network that nobody owns because for a long time privacy legislation or sort of bank secrecy, privacy sort of undermining, hopefully, for the public good but still undermining legislation has relied on an entity that has liability, whether it’s a bank or a money services business or a broker dealer.

They are the ones providing the data, collecting the data and the ones who are liable if something bad happens. Now, to an extent that’s already happening in the crypto world with exchanges and other venues that have to collect certain customer information. But if we’re talking about dealing in a decentralized way and users having at least the ability to engage with these networks independently, then the question of privacy that Jerry was raising becomes very interesting and one that I think we’re going to have to fight hard because working in financial regulation, cost benefit analysis is something that is gradually seeping into regulators minds. But when it comes to national security and terrorism issues it is very difficult to get across the notion that there is a limit to how much information you can demand from people even when we’re very concerned about what the deleterious consequences from not having enough information might be.

It’s a tough question, but we have to address it. It’s a major, major issue in financial regulation. And then as far as payments in money transmission, my main concern there is that we are through regulation  impairing financial inclusion because a lot of our money licensing laws at the state level, a lot of our data access laws and the operation of banks and managed services of payments systems fall hardest on the poor because they’re the ones who are at the limit, living paycheck to paycheck, have to pay the fees of a clunky payment system that takes two days for funds to come through, they have to pay the cost of monopolistic systems that because of licensing or other anticompetitive rules make it difficult for new entrants to come in. And you know, at the end of it, some of the projects that are involved in cryptocurrency are trying to provide payments.

To the extent we don’t know what these tokens are going to be regulated as, they have somewhat of an inability in serving the retail customer. I’m thinking of projects like Ripple or other, you know, it’s not the only one, but other payments projects, I mean, bitcoin itself is mainly a payments network. I think to the extent that we can allow more easy provision of these services, by decentralized networks, we’re increasing competition. We are putting pressure on regimes that are very fragmented across the United States in terms of allowing these businesses operate. And we are creating an opportunity for say, people sending remittances abroad, people trying to get money to their relatives in another country, sending funds abroad, uh, to do so more cheaply and faster than they currently are. And I think that technology is available and it’s mostly a regulatory question. So financial privacy, payments, and money transmission. Thank you.

Sarah Oh: 00:22:00 Great. Thank you so much for teeing up those topics. I thought we could just proceed with our discussion in two buckets. We talked about privacy and we also talked about money transmission laws and traditional financial questions. They’re both very exciting. I think maybe the first we can address is money and then we can go to privacy. In Colorado for example, the Digital Token Act exempts crypto assets- I believe, you can correct me- from state money transmission laws because they’re crypto assets and they’re not considered money. And there is kind of mature thinking that custodial firms are under the Bank Secrecy Act laws. If some firms like Coinbase, if they are holding dollars and crypto, they’re regulated like a bank, but then noncustodial exchanges where- and Jerry might correct me- are not engaged in money transmission and so they’re exempted. Is that correct in thinking about custodial versus noncustodial exchanges and then the treatment of crypto assets?

Jerry Brito: 00:23:20 Sure. I’m not sure about Colorado specifically, but the way states look at this typically is if you are in the business of holding funds for customers and you’re not a bank, banks are regulated separately, but if you’re PayPal or Western Union or Coinbase and you’re holding funds for customers, even if it’s for a brief period of time- so you’re Western Union, it’s between the time that you hand it over and your brother across the country picks it up, right. When you’re holding those funds, you’re putting the customer at risk because you can lose those funds, you can run away with the funds, you can be hacked. That custody aspect creates a risk that the state addresses through licensing in some states.

The thing to say though is that this is a state-by-state regulation. And if you are a business that provides this kind of service, you have to get a license in every state in which you do business. So over 50 states and territories require this. They all have different standards and different ways of complying. Some states have basically said that cryptocurrency and crypto assets are not funds under the definition. And so as long as you are only dealing in crypto and not in dollars, you don’t have to get a license. That’s just a few states. Most states do treat it as funds and so you do have to get a license. The main issue there is getting more clarity about how it applies to cryptocurrency firms. And I can go into detail, about that if you want. As far as the Bank Secrecy Act goes. The Bank Secrecy Act basically requires financial institutions to register with FinCEN, the Financial Crimes Enforcement Network at Treasury and to know their customers, to collect information about your customers and file suspicious activity reports and other routine information, etc.

The question is, are you a financial institution? A financial institution is defined in the rules as somebody who accepts and transmits funds on behalf of a customer, which means you’re a custodial entity. If you’re accepting and transmitting, you had custody for that period of time. So custodial firms are subject to the Bank Secrecy Act. If you are in the business of providing software that customers can use to transmit funds, but you’re not doing the transmission, you’re not custodial, you’d never have access to the funds. And so as a result, you are not subject to the Bank Secrecy Act and you should not be subject to state money transmission licensing. Although in some states, it’s funny, it’s not called money custody licensing. It’s called money, transmission licensing. And the way the statutes are written are if you are in the business of transmitting funds, you need to get licensed.

Why is it written that way? Why isn’t money- if custody is the risk that is a policy rationale for the license- why is it money transmission licensing, instead of money custody licensing? It’s simply because these laws are written in the 60s and 70s before the invention of Bitcoin. And before the invention of Bitcoin, the only way that you could transmit funds was by necessarily taking custody of it. But today these laws, you read them, and it says, if you are in the business of transmitting funds, you have to get licensed and you look up well what does transmitting mean in the definition. And transmitting means sending by any means. Basically, you could be providing simply software, never having custody of consumer funds, but you technically could be transmitting. It’s never really become a big issue. That’s been enforced against pure software providers, but it’s a real big ambiguity that exists.

Daniel Gorfine: 00:27:03 Just one point to add on this. I think what’s making this really tricky is the dual nature of the way certain crypto assets to date have either been traded or utilized. And let me unpack that a little bit. So you’ve got capital markets, regulators that think about market activity and trading, and then you have kind of the retail banking regulators that think about things like deposits and payments. So picture what’s happening right now in capital markets world from either an SEC or CFTC perspective. We have kind of a traditional sense of what’s supposed to happen to assets that are part of transactions. So you’ll hear this term that’s kind of come out of the securities framework, the so-called Qualified Custodian. Qualified Custodians are these intermediaries that the securities markets have utilized to hold assets that are part of securities transactions.

In CFTC world, it’s kind of a really interesting landscape because we’re dealing with commodities. When you’re dealing with commodities that the way that commodities were traditionally custodied or warehouse was quite varied. I mean if you’re dealing with things like corn and wheat, you’re literally talking about warehouses where those types of custodians. You have the capital markets, regulators thinking about custody or safeguarding of assets in a certain way. But then what’s happening I think is that these instruments may become part of trading activity that’s occurring within capital markets, but then the next day you could be turning around and using it potentially as a payment mechanism. And as soon as you do that, you’re starting to think, well wait a minute, we’re back in the world of payments and banks and trusts. That’s I think the state of play and where there’s a lot of, I don’t really want to say confusion, but people are working through that.

Certainly this topic of custody has become a big policy and market issue over the last six or so months because I think a lot of institutional capital that wanted to start to participate in this space, they have rules that say you can only be parking your assets with a so called qualified custodian, this concept that comes out of that securities markets. And then everyone’s trying to figure out, well, what exactly does that mean? Does that mean a traditional broker dealer that’s regulated by the SEC and FINRA? Is that going to be a place where we feel comfortable? Should it be at a bank? Should it be in a trust? Where does it fit? Some of it may end up- I should say these are all my personal views- I mean, I think some of this may sort by the way the market moves. I suspect that, as I mentioned at the outset, you have increased clarity as to maybe what’s a security, what’s not. You may get the tokenization of securities, but that might get applied through a very kind of traditional lens of securities markets. So some, this may become less of an issue if that’s how the market evolves. If it doesn’t, if I’m wrong and this stuff really does continue to play this role where it could be in the capital markets one day. And then kind of traditional banking and payments the next, these are tough questions.

Mark O’Riley: 00:29:57 I want to take up a little bit different twist but similar, Jerry and I’ve talked about this early on. For our company we build in networks and we service networks. And the question we run into, as you alluded to, is as a builder and servicer of the network, what is your liability for transaction on that one network, which we don’t have clarity on at this point. So I’m speaking not just for position of IBM, but anyone who is a software provider that builds an infrastructure and supports it also would need some clarity as to what their responsibilities are for once something breaks on that network or something goes wrong. What are we held accountable for?

Diego Zuluaga: 00:30:40 Just a brief comment because you know, I work in a libertarian think tank and we don’t particularly like centralization. So when I make the point about money transmitter laws being fragmented, people bring up the point about regulatory competition between states and how it’s good to have laboratories of democracy and so on. And I acknowledged that point. But I think in the case of crypto assets and in the case of money transmitter law fragmentation in the states, we don’t really have that laboratory of democracy. We have a mechanism by which states have a nice revenue source from licensing on such a basis. And that creates a barrier to entry for operators who are by definition borderless, may have few customers, but the distributed all across the geography of the United States. And that kind of structure makes it difficult for them to operate if we have that kind of system.

Now what a lot of us have in mind, certainly that would be my suggestion, is something akin to what we have for bank licensing. Meaning that you have some sort of national bank license and you have the option of a state bank license if you like that better. In terms of money transmission, you would have something similar. No one is forced to go to the federal alternative. But there is a federal alternative for those people who have that kind of business model. And to me it seems like the, not only the least costly way but one that overcomes some of the political issues about revenue raising versus creating barriers versus promoting competition, which states run up against all the time.

Jerry Brito: 00:32:00 I totally agree with that. I think the one area where you need, or it should be super easy to get immediate certainty, is noncustodial uses of cryptocurrency. So if it’s not custodial, you’re providing a service that’s purely software based and you’re never taking custody of consumer funds, crypto or otherwise, so you cannot possibly lose it or run away with it. You’re not presenting a risk. There should be no question about whether you have to get a license or not. And so one way to address that from the federal level is what Representative Emmer has introduced, which is the Cryptocurrency Regulatory Certainty Act-I think that’s what it’s called, Landon- Blockchain Regulatory Certainty Act. What it would do is basically say, hey, state money transmission regulators are doing a terrific job regulating custodians of consumer funds, but here’s this set of actors who never pose a risk to consumers because they never hold funds. So you may not require a license from this set of folks. That is very targeted, very reasonable preemption of state money transmission licensing, which I think is just fantastic.

Sarah Oh: 00:33:23 As a follow-up question about stablecoins: there are some innovations about collateralized loan obligations off of crypto assets. Would that fall into a bucket of noncustodial exchange if you’re trading a stable coin that’s fiat backed? I guess that question is two parts. One, what are the rules of stablecoins? Firstly, are they pretty much money market accounts that are backed by reserves and a qualified bank in order to peg a stablecoin to the dollar? And two, would that stablecoin be considered if it’s exchanged and let’s say if lending happens with it is that considered a noncustodial exchange because it’s a coin by a company that doesn’t hold funds?

Daniel Gorfine: 00:34:27 I can start with the wonderful a regulatory response to that, which is, it’s going to depend on its facts and circumstances. But let me actually unpack that because that’s an easy throwaway statement. But it’s true. I mean, so when, and as mentioned this at the outset, when you talk about stable coins, the devil really is in the detail as to how you’re structuring it. You can envision a world where as you just said- you could make an argument some of this starts to sound a little bit like a traditional money market fund where you’re actually issuing what seems like a share in response for a dollar and you’re hoping to maintain that mark. That’s an interesting way to shape it. Others are when we get into whether it’s dollars or again, physical commodities, I mean, the idea of backing it with gold, something else to make it stable, it’s really going to depend on what that means. Are you tokenizing specific ownership over gold? So just digitizing your warehouse receipt effectively? Or are you saying that we’ve got this warehouse and you can come and bring this in and we’ll deliver that goal to you at some point in time, those details really will matter. So I don’t think it’s to answer that question right now, but most likely these different permutations I think will fit within some existing regulatory box. And it may just be that you’re just digitizing or tokenizing ownership, in which case that looks like a, at least if you’re doing a physical commodities, that’s a spot market that becomes a cash market, which is not really regulated at the federal level, at least from an oversight perspective.

Jerry Brito: 00:36:02 So when talking about stablecoins, it’s important to- details really matter and important to ask what we’re talking about. So, first of all there I would say that our two broad classes of stablecoins, there are what I would call algorithmic stable coins and then there are fiat back stable coins. So fiat backed stablecoins is basically you have a firm. The firm will take a dollar from you and create, at that point, issue a dollar token and give it to you. And then in the future they’re happy to redeem that dollar token for a dollar. Basically that’s kind of a centralized model where you have a firm that is holding dollars and then the question is about how they do that and under what legal umbrella. Then you have algorithmic stable coins where you don’t have a firm, necessarily, and basically using a series of smart contracts, you can lock up capital, but we’re using other assets of, for example, Ethereum and through different market mechanisms and incentives you create a token that should remain stable or basically a token that maintains purchasing parity with the dollar. I’m a little skeptical about the feasibility of a completely algorithmic stablecoin. But anyway, those are the two ways you can do it. I think you’re asking you about the fiat-backed. And as far as the fiat backed ones go, there any number of different companies that are doing this and they’re doing it under different legal theories. I think some of the most interesting ones are things like Paxos or Gemini dollar where basically they are New York state trusts that have had the product approved by the Department of Financial Services and have acquired a bit license. Basically they keep a dollar in trust for every token at the issue. So that’s one.

Then you have things like a TrueUSD, which is a token that’s being issued by a company called Trust Token. And they do something very similar, but instead of a trust what they use our escrow accounts at different banks. They can’t touch the dollars. The dollars are held in escrow for the customer. So as the customer goes to any one of the different banking partners, deposits dollars and Trust Token will issue them a TrueUSD token. Then you have other stable coins where there’s a company, you give them dollars and they give you a token and query what they’re doing. There are lots of different ways that this is happening.

Sarah Oh: 00:38:59 Any final thoughts about money transmission?

Diego Zuluaga: 00:38:59 Can we talk about JPM Coin at some point?

Sarah Oh: 00:38:59 Yes. Why don’t we transfer to private blockchain and then privacy?

Diego Zuluaga: 00:39:13 Yup. There are two thoughts I wanted to raise, which didn’t really fit my two priorities earlier. I wanted at some point to get the opportunity to do it. And the first thing is I made this point about how this technology allows us to overcome- just like mobile phone technology made it possible to overcome the natural monopoly issue with landlines where you would have a single provider that was regulated like a utility by the government. If you like in for example, transactions clearing and settlement, we can move from a model that is quite centralized that emerged- it’s the model of its time from the late 60s, early 70s- in terms of how transactions are processed then rather than mailing people their security deposit certificates every time they engage in a transaction, a centralized body would take account of all that information and either netted out or you know, keep account of it in some way.

Because of the cost structure of that business, it made sense to have only one or a few in a very large jurisdiction. I don’t think that it’s as much the case now that we have decentralized networks emerging and so we can overcome the liability side of having a single provider, which is you don’t get as much innovation and competition and perhaps as much of a downward trend in prices as you do in a competitive environment. And JPM Coin, I see as potentially an evolution of this cause it’s supposed to be initially an internal database system for JP Morgan. I mean, when I saw the news, I didn’t even see where the coin was. You know, people say sometimes that crypto projects are scummy. Well, you know I mean, JP Morgan, it’s telling us they have a coin and where is the coin?

As far as I can tell it’s an account management system for their institutional clients, which is great. I’m all in favor of it. But you know, it seems like a bit of marketing there. Now, my point being that because JP Morgan is so large, when they start having something like this for themselves, it may make sense for the smaller guys to deal via JP Morgan because the marginal cost of serving them is quite low. And so that creates an alternative record keeping mechanism that is privately provided by a firm that already has all of the, hopefully, a lot of the required licensing and kind of compete with existing firms in a, in a different way. So that, that I think is the, the exciting development here.

Daniel Gorfine: 00:41:22 Just to jump off of that, I do think we talked before about DLT and I refer to that kind of as distributed ledger technology that’s been inspired by blockchain. And the reality is that has made this topic of like interoperable databases an actual hot topic, which is somewhat humorous because, I mean this is back office stuff that we’re talking about, but potentially very compelling. And I think that your point is exactly right. It seems to me that everybody’s starting to realize the benefits of having kind of standardized data formats, fields that could be interoperable. You can increase the size of those permissions, private networks, but that can drive large efficiency gains. So, you know, maybe it’s not revolutionary, maybe it’s evolutionary, but I think it’s significant. So I completely agree. I think it’s a good way to bridge from the public blockchains to what that’s inspiring within the private context.

Jerry Brito: 00:42:11 Can I just make the pitch for open public networks for a minute and just say this: without taking anything away from like what JPM Coin is doing because it makes perfect sense for them, right? They can create- it’s basically an evolution of interbank settlement. And given their size, they’re going to cover a lot of territory. But at the end of the day, it all goes through JP Morgan. They own it, which is fine. That’s terrific. But I think where the real revolution is, is imagine a world where you can have competition among firms that will offer stable coins that are fiat backed. So, you know, you might even have the Fed issue a coin, or different companies around the world and but these are all a standard token on an open public permission-less network that nobody owns. So today I’ve got Apple Pay on my phone and if I send a dollar to Dan on, I see on his iPhone, he’s now got a dollar, actually Apple’s holding that dollar and he can send it somebody else. And Apple is always holding that.

If you want to send that to somebody using an Android phone, you can’t because it’s a closed network. You can send the dollar, your Apple Pay dollar, you can send it to anybody in the world as long as they are using Apple. And you’ve got these silos. Then you’ve got the Android and then you’ve got- so with JPM Coin it might reach big scale and might even begin to have retail use, but you’re going to end up with an oligopoly of a few, which is fine. But wouldn’t it be neat if we had an open standard where anybody could issue basically dollar tokens as long as you’re using this dollar standard. And then I could send that token to anybody who has, as long as they have an Ethereum wallet, which there are going to be many competing Ethereum wallets, as long as they all hold up to the same standard. It’s kind of like email. Email is an open standard. You use Gmail, I use Yahoo, you run your own email server, but we can all email each other. It’s better than having- imagine a world of a few years ago where you had basically AOL, Compuserve, Prodigy. And if you were on AOL, you can email anybody in the world as long as they were also on AOL. It’s better to have email as an open protocol.

Sarah Oh: 00:44:32 Now that we’ve talked about money and about open protocols, how about some more thorny questions about privacy? Mark raised an interesting point about GDPR and blockchain. How do you change a blockchain to comply with GDPR?

Mark O’Riley: 00:44:57 How does GDPR adapt to blockchain? I think that’s the debate they’re having a Brussels today. It’s, almost like, famous word, “oops moment.” Look what I did! And then, oh no, look what I did. And that’s what’s happening. Let me just digress a little bit on the private blockchain. The activities that we see and the companies that we work with, the clients that we work with, regardless of the staffers that are in here, whatever area you support, the requirements of whoever it is that industry sit with you. So we talked about agriculture, and we talked about private blockchains and agriculture, right? I will take a food trust as an example.

We’re working with Walmart on a food trust network from farm to fork. One of the biggest challenges they have, one is making sure they keep all parties on the network agreeable. Two how do we deal with government regulations in country, regardless of where we’re shipping the product, to be sure that we’re following all of these regulations. When you talk about privacy of information, it’s interesting to hear that, as I talked to representatives from different companies, some companies don’t want the government on their network looking at their data. And I alluded to earlier- my argument is if you have an emergency, then you ought to be able to break glass and let the government come in and see what they need to see on the data. I’m not saying Walmart’s one of them, they’re not. They understand the importance of having government engagement, but for you all, as you do agriculture, as you do financial services, as you touch commerce and supply chain, you really need to be cognizant of what the rules of the road are within that industry domestically and what the rules of the road are to impact US businesses as they go international.

Now, I’ll take two examples of situations that what we’re running into. China last year sent out draft legislation they say was on their public blockchain that said they want to be able to enter into that blockchain at any time to see what’s going on in that blockchain. They want to know who the participants on that blockchain are, down to your mobile number. We wrote a response to that and say that’s a chilling effect to any network, be it public or private. That’s not what business should be about. And from a business perspective, even though they say this was not a impacting a private network, you become uncomfortable in business knowing that the environment could one day turn that way towards how you do business. That’s one extreme.

I think a more meaningful process that’s going on right now in the European Union, and I hate acronyms. INATB is the International Association of Trusted Blockchain Applications where the European Union has gathered business entities who are not technology companies plus technology companies together and say in a pan European framework, what considerations, what we should take into account to build an effective blockchain network. Their point is that not regulation but guidelines and rails, ongoing discussions. We’ve joined that discussion with them and we see it as a positive step. I try to tell folks here as I introduced it today, that that type of discussion on this side of the pond can make distributed ledger technology that much more effective. Now I know I’m giving Dan a lot of work to do on an ongoing discussion. But as Jerry and I come from different worlds, we have to be together in this type of discussion to make us more effective. When you talk about privacy, these are the types of things that we think we need to take into consideration and avoid the extremes of a security nation on one side and look at reasonable privacy on our side.

Diego Zuluaga: 00:49:10 I just have one thought that came to mind after Jerry spoke and then Mark because one of the things that I see emerging as something that will determine how much public blockchains dominate over private blockchains is people’s preferences over immutability and privacy. Because most people, I mean a libertarian like me values privacy a lot and autonomy a lot so I’m very much a public blockchain kind of guy just because of my preferences. But I can see how a lot of people would rather rely on a system where bad decisions can be altered, where if someone makes a mistake, there’s a central authority that can change the ledger and perhaps even where they can acquire the right to be forgotten in some sort of way. And I think in those cases a private blockchain is perhaps more suitable for them. And so obviously government intervention will have a big impact on this because it depends on the choice that you are given. If governments make it very difficult, as in China, for privacy to actually be an option or you can choose from then we won’t have that. What I’m getting at is that even in an open and free market, we may well get a situation where private blockchains are what’s optimal for most people who don’t mind having someone have oversight over their stuff, don’t mind paying a little bit extra to a central authority who don’t want that that immutability as a sort of determinant of the future forevermore. Just a thought. I mean, it’s not my preference, but, you know, I digress.

Jerry Brito: 00:50:28 I completely agree with that. I think that for most people in most applications, they might use a private blockchain or just a regular database and it makes perfect sense. But the important thing is that we keep always an option on the table, the ability to use an immutable and private network because it’s the escape valve that allows for us to have an open society. Without that escape valve, you have a completely intermediated society where all transactions have to go through an intermediary that is either a corporate intermediary that is one of a few that has control over what- that they can see what you’re doing and have control over what you’re doing and one they can always be cooperative or directly owned by the government.

Let me just quickly talk about immutability or censorship resistant first and then I’ll talk about privacy and in the context of China. In China, a little while ago, there was a scandal with vaccines where there were a few factories that produced vaccines that made people very sick. People were hurt. Different bloggers around the country, were raising the alarm about this, they were blogging about it or writing about it in WeChat. And anytime they would write about it immediately it would be taken down because where were they posting? They were posting this to centralized intermediaries which are the platforms and the government basically controls those. So what did they do? Very simple. They took the blog post and they put it into a transaction on the Ethereum blockchain.

You can’t take it down. It’s there. You have to get through the firewall, the great firewall to have access to it. But once you do that, the message is there and it can be seen and it can never be taken down. And to me that’s a feature. It’s not a bug. And the right to be forgotten- you just can’t have a blockchain, a public blockchain, that can comply with that. And I think to the extent that the European Union insists on keeping the law as is, they’re basically banning the use of open public blockchains in Europe. I think they will be hurt economically if they insist on doing that. So having completely immutable or as immutable as you can get blockchains, I think it’s a feature, not a bug.

Then you have privacy. Again, take China. China has gone from over the past decade from a country where people use cash as a main form of payment, paper cash, to a country where cash is barely seen. You go to China and you try to pay with paper notes, they look at you like you’re crazy. Everywhere you go there a QR codes and basically there are two apps: WeChat pay and Alipay, and all transactions go through that. What that means is that these two companies, which I’ll say are closely linked to the Chinese government, they can see what you’re doing, and they know everything about you and this feeds into the social credit scores system that China’s developing. What that means is that you’ll be assigned a score based on- the paper that I wrote recently, that I encourage you all to look at, I cite a WeChat pay or is it an Alipay executive who talks about this. And he says, yeah, you know, if you are buying a lot of video games, and potato chips and things like that, you’re probably not a very socially productive person, so you get a lesser score. You’re buying a lot of diapers and that you probably a mother and you’re probably going to be… The more chilling thing is this: is that in a world that’s completely cashless where you have no access to person, to person cash that is censorship resistant and private, what this means is that the intermediary, whether it’s a corporation or the state via a corporation can turn you off. They can say, and this happens in China, you can no longer buy plane tickets. You’re not allowed to fly anywhere. Or they can say you’re just turned off, until you turn yourself into the authorities. Think about it. If you have no cash and all your payments have to go through this and they turn you off, what do you do? So we need to keep money, a version of money that is, as we move to a more digital world where there’s more electronic commerce and paper money goes away, we need to keep a version of cash that is person to person, that is censorship resistant and that is private. That’s what electronic cash like these open public blockchains are.

Daniel Gorfine: 00:55:12 I’m going to quadruple down, by the way, on this public versus private blockchain first and just make the point. Yes, these are not mutually exclusive concepts. And from my perspective, seeing both of them kind of evolve and see where different innovations take place I think is a positive thing. I personally think that there are certain areas where private blockchains may have at least a technological advantage for now, perhaps that surmounted by some public blockchains, but maybe not. I mean, it also depends how many areas public blockchains will completely make sense.

I got to pose one question to Jerry and then I will go over to privacy. But you know, it’s interesting. So I was thinking about it. You’re talking about the right to be forgotten. And that tends to be something that is actually a very strong kind of privacy advocates position, right? That people… are afraid of having certain information that’s just kept in whatever repository, whether it’s a government that holds it or otherwise. My question for you is going to be, what about in the context of like defamation? So imagine someone starts posting to the public blockchain, ridiculous false hoods about you, but now you can never take that down. Maybe it’s because I just watched that movie yesterday, “The Circle” or “In the Circle” or whatever it’s called. It’s got me thinking like this, but how do you solve for that kind of privacy concern with a public blockchain?

Jerry Brito: 00:56:24 I wouldn’t call it a privacy concern. That is more of a defamation kind of concern. There’s all kinds of information that we would want the ability to take down and you can’t with this data. And so you don’t solve for it. You don’t solve for it that way. It’s something that you’re going to have to make a decision- do the socially beneficial uses outweigh the cost and there are costs. Yeah, you’re right, that is a fact.

Daniel Gorfine: 00:56:52 I’ll shift over to privacy and give it at least a little bit of a perspective from a regulatory view. To be blunt, when we first started hearing about things like Monero and ZCash, these are, these are perceived anonymity coins, right? From a regulatory perspective, as you can imagine, that’s quite troubling at first blush because you’re going to look at it and say, well, wait a minute, I mean, how are people transacting? And I’ve made the argument before too that the best anonymous tool is actually cash. People can exchange a briefcase of cash and that’s completely anonymous. Then again, I’m willing to concede when you’re talking about digital transactions and the amounts of money you could move and the types of transactions you may be able to engage in, it’s certainly facilitated by digital. I think there are some distinctions, but it’s a real challenge because at the end of the day we do have the Bank Secrecy Act, we have anti money laundering, know your customer requirements and for good reason. The last thing we want to be seeing is this turning into a tool or a mechanism for terrorists to use or other types of illicit purposes. It’s going to be a real challenge to figure out how do we apply and kind of a modern way the purposes or the requirements of BSA and AML.

I’m willing to concede my knee jerk was, man, that’s going to be a real problem. But then when you flip around and look at what the technology is trying to accomplish, it’s likely that some of the protocols that drive this are going to allow you to kind of think about encrypting medical records. If you want to be able to transfer your medical records on a public blockchain in an encrypted private way, some of these technologies may help to advance some of that development as well. I’m not an expert in BSA, AML. I can tell you that it is a real concern in a real challenge because if it’s utilized for harm, it’s going to be very difficult to see a non-very strong kind of government or regulatory response. But also trying to recognize, yes, there are real reasons why some of the software that’s being programmed, it’s really interesting what he can do.

Jerry Brito: 00:58:48 Let me just say that I completely agree with you that there is a potential that this technology is going to be used for illicit purposes and all kinds of criminal activity that is going to be harmful. Just like the Internet can be used, just like cars. The first people to really take the cars were bank robbers because the police were still on horseback and so they’ve got cars and they could run away. That’s absolutely the case, and so we need to have the right regulatory response. I think the cool thing is that I don’t think it’s a challenge. I think that we already have a regulatory regime that has served us well for decades that you could just drop it right in and it works. And it is how we treat cash. Cash as you say, is more anonymous even in crypto.

We have a regulatory regime for that under the Bank Secrecy Act. And that sort of simple financial institutions have to know their customers. If you take out $10,000 from a bank, the bank has to report that to FinCEN, etc. etc. We can apply the exact same regime to crypto. And indeed that is the regime that exists for crypto. A few minor things that could be done to improve it, but it’s kind of the regime we have now.

Daniel Gorfine: 01:00:18 That also assumes you’re going through regulated intermediaries, which some of the technology, I mean you can do this on a peer to peer basis and if that happens, it’s going to fall outside of one of the intermediaries it usually captures.

Sarah Oh: 01:00:22 I’ll just make one final comment or question and then we can open it up to questions from the audience. But a point about competitiveness and innovation. We talked a little bit about Asia, and I was just poking around myself, and Binance is this huge exchange and I think it’s out of China. We were talking about, yes, China has a lot of money going through their companies, but they’re also doing a lot in blockchain and open networks. One question that came up to me as well on these other networks coming out of Asia who are holding the tokens? The whales that hold the tokens really can move markets and manipulate markets on any of these open blockchains in crypto assets. So in terms of risk and consumer trust, the US needs to stay competitive and innovate in this space and maybe Asia is ahead, maybe the US is ahead, I don’t know, in terms of volume and growth in this space, at least for gaming.

Samsung, they have a wallet on their phone now, a crypto wallet. I read that recently they announced that they would have an Enjin coin. There are developments and it’s a global race to innovate. I guess that’s kind of the backdrop to have light-touch regulation to make sure that US companies are innovating but that there are also safeguards and guidance and risk management. So, I don’t know if you have any ideas about like the global competitiveness of US companies in this space vs. Asia. And then finally we can open it up to questions.

Diego Zuluaga: 01:02:23 In terms of the international regulatory regime, I think one thing that has become clear to me as I’ve looked at international regulation is that obviously the more financial services focused that jurisdiction is, the more likely they are to be a major player in this. But oddly, the larger the customer base in the jurisdiction, perhaps the more difficult it is for it to become a hub for crypto and blockchain technology. That is because regulators suddenly become almost as concerned about consumer protection as they are about making their jurisdiction a hub for innovation and a dynamic economy and so on. You see Switzerland and Singapore as emerging hubs, I think because these are historical financial centers, but also because regulators can be quite confident that a lot of what is developed there, any consumer protection risks to the extent that there are any, will fall on other people’s plates and they won’t be blamed for them. Whereas in the United States, in China, to some extent perhaps in Russia and certainly in the European Union, you have a much less clear situation in terms of what the priorities are for the regulator. We have, I think, much more regulatory clarity in those small specialists jurisdictions than we do. Well, I mean the Caribbean islands are another example of this, right. That would be my main reaction to your question.

Sarah Oh: 01:03:38 Do we have any questions from the audience?

Audience Question: 01:03:39 Hi, I’m Alan McQuinn and I’m with ITIF. My questions for you, Jerry. I was wondering if you would expand upon some of the tax challenges that you see that you briefly mentioned.

Jerry Brito: 01:04:07 We’re actually going to be publishing a paper in early April, just in time for tax day, on this that will have sort of like the top five open questions on tax and some proposed recommendations. I’ll just give you a couple. One that I think is very important just for everyday use of this technology is the following. It used to be the case is that if you were currency speculator and you bought a million dollars’ worth of euros because you thought the price was going to go up, the price did go up and then you sold it, you experienced the gain and you had to pay tax on that capital gain. Okay. But then it used to be the case that if you were going on vacation to France and you bought a hundred dollars’ worth of euros cause you’re going on vacation and while you were in France, the price of the euro went up that you bought, technically you experienced the gain cause you’ve disposed of your a hundred euros you had bought at a higher trading value.

Of course, and then when you experience a gain and meant it, you technically should have kept track of that gain, reported that gain and paid tax on that gain. And of course, nobody did this. You obviously can’t have a law that nobody is complying with. Congress fixed it in the mid-nineties, and they created a personal minimus exemption for foreign currency transactions. Anything under $300, any transaction or $300 in foreign currency, you don’t have to keep track of a report to pay taxes on. So that’s great. We need that for crypto. It does not exist for crypto and we need it because number one, if you want this for payments, so if I buy bitcoin today, and then a month from now price of Bitcoin has gone up and I used my bitcoin to pay for coffee (and Starbucks in a few months we’ll begin to accept bitcoin for coffee), if I pay for my coffee with Bitcoin, I’m in that situation where I technically need to report that I’ve made a 2 cent gain because I bought my coffee with appreciated bitcoin. Of course that you can see how this creates friction for the technology. But it’s not just buying coffee because quite frankly, I don’t think we’re going to be using bitcoin to buy coffee in a prevalent way in the US or in the developed world. But if you want to use the bitcoin network or the Ethereum network to run a smart contract, to do anything else on it, you have to pay a fee, the mining fee to the network. And those are transactions that are typically like pennies or sub penny transactions that technically you’d have to pay tax on. Last Congress, Congressman Polis and Congressman Schweikert put together a de minimus exemption bill for cryptocurrency, which we’re looking to introduce this Congress and I think that would be great. So that’s one big one.

Then some other ones have to do with understanding what your basis is. For example, there’s a bill that, also congressman Emmer has been working on that would create a kind of an exemption for hard forks.  If you have bitcoin and bitcoin forks, now you have bitcoin and bitcoin cash, is that a gain? If it’s a gain, when is it a gain- is that when the fork happened, is it when you had access to the coins, is it when you disposed of the coins? That’s another one, but there are lots of little ones like that.

Audience Question: 01:07:17 Just two questions. First one. Mark talked briefly about supply chain and I’m just curious a little bit more about, I’ve also heard anti-counterfeiting as an application for blockchains. I was wondering if anybody on the panel could talk a little bit about that, some of the applications that you’re seeing.

Mark O’Riley: 01:08:35 I’ll walk you through briefly through supply chain one on our side and the trade lens application we have with Maersk. The concept- and I did not realize this until I got into a good discussion with UPS about this- you all know the paper flow when we have a global supply chain is very archaic. And what ends up happening, and we love to use the word tulips to talk about value, but if you ship wild flowers from Kenya and you have a manifest to them, they go from Kenya to Amsterdam, then they get routed around the world. Well, the paper for all of that goes ahead. And the paper is resolved manually and the process of manually resolving that can take a full day for one person, and then the paper has flown again ahead to the next port.

You can kind of put together the idea of what the expense is. What Maersk came up with was the concept of smart contracts and building a network to move those transactions real time. Then to allow something not to be kept at a port for any length of time, if you imagine wallflowers will spoil, because someone hadn’t finished the manifest and move the paperwork. The savings that they realized and double digit percentages. But the challenges that they realize is negotiating this with each port of entry, each customs bracket to say, will you adhere to us using this type of technology? And we’re meeting your current rules and regulations. When I talked about guardrails, that’s the negotiation piece that comes up, but we have to sit down- Maersk has to sit down with each government around the world and say, you tell me your rules, I negotiate with you.

We will follow your rules. They will be built into the smart contract language that we execute and we can follow it. Some countries move quicker than others. It’s funny that the countries in Asia Pacific moved very quickly on it because they’re used to the change. Everybody was pretty much on board. We have obviously trade issues with China, so that kind of put a pause on it. But the efficiencies that are seen in a closed network of doing this with willing parties who will work together has been extremely productive. And you’re beginning to see copies of it being done by other shippers as well because of the efficiencies that they can realize on the market because of the savings from theft, from spoils. We’re realizing a significant change in how we do business digitally and getting away from paper manifest.

Same thing I’d say you could see what the food trust and the food trust network. Not just Walmart- you have Carrefour, Dole, Unilever all joining together and saying, I am going to move product globally. And the real issue is really when it comes to a fresh product as to how- what was the last recall we had announced was it turkey? I think recently we had a turkey recall. And always we have spinach or not spinach, lettuce. Lettuce recalls. Well, if you can begin to pinpoint the actual source and location of the spoiled lettuce, you’re not recalling back entire batches that were produced in a timeframe. That’s what we’re trying to try to get to.

Jerry Brito: 01:12:20 As to counterfeiting. I’m always skeptical when I hear about anti-counterfeiting uses of blockchain because the hard part is how do you tie the physical thing to the entry on the blockchain? Let me give you an example of one where it could work and that’s with diamonds. So when you have a diamond, looking at it under a microscope it has a particular (I don’t know how it works), but this particular pattern that you can see that is unique to the diamonds, kind of like a fingerprint. And you can code that in such a way that you can put it on a blockchain. And this goes back to the mutability where you don’t want it to be changed. You can imagine that you are either a producer of a diamond or you are a nonprofit that can attest to the social responsibility or the non-conflict status of the diamond. And you can say this diamond was produced by DeBeers at this place. This is not a conflict diamond etc. And then at any point in the future, a hundred years from now, somebody can come across as diamond in the store, look at it, look up that pattern on the bitcoin blockchain and know its status.

Mark O’Riley: 01:13:27 Can I pick up on that? On Hyperledger that’s what we do with DeBeers is to identify a diamond that way. And also on conflict minerals, we’re discussing doing that and countries that have minerals that we don’t necessarily want to trade with- the same pattern.

Daniel Gorfine: 01:13:43 The other element of this, which we’ve seen before in some basic prototypes is this ties to this idea of like Internet of things. The point that you guys are highlighting is that’s great that you can scan a box, but if you can’t ensure that no one’s tampered with the box, then it’s not that valuable. Sure you can show that the box got from point A to point B, but did someone change the inputs? Some of the technologies I think you’re going to see come out of this are tamper resistant little chips. I’ve actually seen some prototypes of this. It’s pretty neat- if someone were to tamper with the box that could communicate immediately to the blockchain and say something’s happened to this box.

At warehouses in general, you could start to do that cause the early days through LabCFTC, people were coming in saying we’re going to be able to transform how ag products are being moved and show that there is no theft or loss, and this was always the question we were asking: well how do you know? I mean like at the end of day it’s only as good and truthful as the person who’s scanning and saying this thing arrived. I can picture these future states where we’ll probably develop the tools to be able to weigh, measure detect tampering. I actually think in the counterfeiting a field, I have not thought a lot about that, but I can see it as an area that’s pretty interesting actually.

Mark O’Riley: 01:14:54 Now Sarah did get me excited about this question. We actually have technology that we can apply to an iPhone, let’s say that spectrometers that actually look at the fiber content, we can say, of mangoes and we can source where they were actually planted. When they get onto the ships we’ll use RFID tags to lock them down. What someone can say, well, no my mango came from let’s say West Africa. No, it really didn’t. It came from Chile. We can identify that using the technology. So we’ve gotten down to that point. So on the counterfeiting, we can see on a food product down to the fiber content.

Audience Question: 01:15:47 My question is for you, Mr. O’Riley, you brought up a really interesting and thought provoking question: what is the responsibility for those that create private blockchain systems, if there was breakdown, etc. From a regulatory standpoint, how would you approach that question? Because as you mentioned, if you’re going to have a couple of big private systems upon which smaller firms or rely on, that’s really at the core of situation. So how would you approach the responsibility aspect for software development?

Mark O’Riley: 01:16:26 We’re going through that now and when I started the discussion and I said the responsibility we look to for you all is to help us have ongoing discussions about the regulations that you have in a particular industry. As a member of that industry decides they want to digitize this technology, what are we doing to make sure we don’t step on ourselves with the regulations that are in place and make sure that the code that we built follows the pattern of the regulation of that government? That takes a lot of work. I will tell you, and I’m going through it now with one company, you have to get all of your partners that are within that industry to sit down and say, yes, we want to have this discussion and then we put together what the requirements are as to what we see the regulator has, let’s say, in the United States. We have to go to that regulator and sit down and have the conversation about it.

It’s no different than financial services. We have challenges there as we all do, but it’s the same with any industry. How do you get a customs and border patrol? How do you get the FDA? How do you get the USDA? How do you get the financial services players to sit down and say, look, you’re building a network, let me tell you where the guard rails are and how we should apply it to them. That’s where I think you all as staff people can help facilitate these discussions. As I said in the beginning, we’re not having them. Now we walk out of this room, everybody forgets about it, then something bad happens. Everybody gets up in arms. And you want to have a hearing about why did this happen? That’s reactive. We really, we really want to be prescriptive and get ahead of this. So that’s where you could help.

Daniel Gorfine: 01:18:11 So Mark, I would say the one area that that’s hitting us as in the context of regulatory reporting. Our chairman has been pretty vocal about the idea that if market participants were to utilize some type of DLT network and want to use that as a way to satisfy reporting requirements that could actually be a real win- win for both of us. And to unpack that a bit more. Right now market participants in a fairly analog way batch and push data to us as an agency. And then the agencies getting all of this data in a non-standardized format, they’re not standardized fields. It’s very difficult for us to consume. So this idea that you would have this shared system where you have agreed standards and formats where the regulator could be a node, we could be seeing the information real time in a format where it doesn’t have to be pushed to us because we’re seeing it live.

That could be very valuable potentially to us as well. So one of the things that we’ve asked and that we try to do through these, we have been called the technology advisory committee. It’s a FACA committee, thanks to legislation that allows us to do this, we have a subcommittee focused on DLT. One of the questions that we tried to pose to them is whether there is friction. Is there any ambiguity in our rules where you’re not sure whether regulatory reporting requirements could be solved through a DLT system? And if so we’d be interested in looking at that to make sure that our rules are tech neutral and agnostic as to how you’re satisfying the requirements. I think there are opportunities too, for these kinds of conversations with the agencies to, to look at the rule sets, figure out where the technology made bang into existing rules that envisioned a manual push of data or batching of data.

Sarah Oh: 01:19:57 Thank you to the panelists and we’ll continue this discussion in other events.