Virtual Currency Community Foresees Positive 2017 for Government Relations
The 2017 federal regulatory and legislative landscape at first glance is likely to be a net positive for the virtual currency industry, executives and experts said in interviews. That's despite concerns about the IRS bid to execute a “John Doe” summons on Coinbase’s customer records (see 1612010046), though stakeholders disagreed whether that will be an isolated incident. Virtual currency businesses appear likelier to end the year with more certainty about federal regulation of their businesses as money transmission services if an ongoing proceeding at the Office of the Comptroller of Currency ends well, experts said. Other regulatory actions involving virtual currency businesses are likely to slow amid President-elect Donald Trump’s push to cut federal regulations, including a temporary moratorium on most new rules, stakeholders said.
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
“Overall, I think it will be a very positive year for the virtual currency community,” particularly given the OCC ongoing proceeding, said Alan McQuinn, Information Technology and Innovation Foundation research analyst. The OCC launched a proceeding last month proposing a special purpose national bank charter (SPNBC) for virtual currency firms and other financial technology companies. The proposal, open for public comment until Jan. 15, would allow virtual currency exchanges and related firms that fall under money transmission rules to “bypass” the maze of states’ differing regulations of such services, McQuinn said. “Many virtual currency businesses are watching [the OCC proceeding] very closely since this could be hugely beneficial.”
Coin Center Executive Director Jerry Brito highlighted the OCC’s proceeding as one of his top issues for 2017 given the potential that an SPNBC would give virtual currency businesses more regulatory certainty. “States’ money transmission laws are the biggest regulatory challenge right now to develop of bitcoin,” he said. Coin Center and others have highlighted states’ disparate regulatory treatment of virtual currency businesses, which range from the New York State Department of Financial Services’ BitLicense regulatory framework (see 1410220023 and 1412220038) to light-touch laws in North Carolina and Wyoming.
The state-level regulatory disparity put virtual currency businesses “in a gray area,” which is “a really awkward position to be in,” Brito said. The OCC proceeding allows states to continue to consider how to handle regulation of virtual currency businesses while simultaneously offering those firms a “new alternative,” he said. It's also a top priority for the Chamber of Digital Commerce, said President Perianne Boring. CDC’s State Working Group is “taking the lead” in preparing forthcoming comments in the OCC proceeding, she said. The group encouraged the OCC last year to consider creating a financial technologies (fintech) SPNBC, since virtual currency business faced an onerous process of obtaining bank licenses in all 50 U.S. states and some territories.
A Quiet Turn
Brito and others said they're also watching for potential actions at the Commodity Futures Trading Commission and other agencies. They said they expect the federal regulatory landscape to largely turn quiet given the anti-regulatory tone of the Trump administration. Whether that expectation turns into reality will depend largely on how bitcoin and other virtual currencies fare economically and whether any sector businesses run afoul of the law, Harper said. A hot market for virtual currencies or business misdeeds “could spur on regulators,” he said.
The IRS summons of Coinbase records is a “fishing expedition” that Boring and others said they see as a response to a September Treasury Inspector General for Tax Administration audit that criticized the tax agency's virtual currency program. TIGTA found “it does not appear that any of the actions already taken by the IRS to address virtual currency tax noncompliance were coordinated to ensure that the IRS maintains a strategic approach to the tax implications of virtual currencies.”
The summons issue remains unresolved since Coinbase customer Jeffrey Berns intervened late last month to challenge the IRS’ summons request in the U.S. District Court in San Francisco. Berns argued the IRS’ summons is overbroad, could expose Coinbase customers’ personal information, and execution of the summons would have a “chilling effect” on the virtual currency industry. Berns said in a filing (in Pacer) last week there's no basis for the IRS “or anyone to conclude that it is likely that Coinbase’s customers are engaging in any tax avoidance conduct merely because they opted to transact with virtual currency.” A hearing on Berns’ challenge is set for Jan. 19.
Stakeholders disagreed whether the IRS’ bid for Coinbase records is the start of a pattern. Harper said the summons isn’t likely a “harbinger of things to come” on federal enforcement against virtual currency businesses, though the act remains concerning. Boring said she believes it’s “very possible that the IRS may go after other bitcoin-related companies on similar grounds” to those used in the Coinbase summons, though such actions are a “gross overstep of authority that compromises privacy and security.” McQuinn said he believes the IRS may follow other federal agencies in becoming “more reticent” to pursue similar “John Doe” summons against virtual currency firms unless there’s proof of “actual harms” being committed.
Whither the States?
The Uniform Law Commission is continuing the process of drafting model legislation for state-level regulation of some virtual currency businesses as money transmission services, said experts including former Bitcoin Foundation Global Policy Counsel Jim Harper, a Cato Institute senior fellow. The ULC is expected to adopt a final version of the model legislation this summer, Brito said. The ULC’s Drafting Committee on Regulation of Virtual Currencies began work on the bill in early 2015 (see 1602230071). Harper said he remains unenthusiastic about ULC model legislation, while Brito said he believes the model will provide a needed template for state legislatures to consider as they rewrite their money transmission laws. CDC also remains “very engaged” in the ULC’s work, Boring said.
Illinois appears to be the state where a change in virtual currency regulation is most imminent, Boring and others said. The Department of Financial and Professional Regulation is poised to issue a final version of its “Digital Currency Regulatory Guidance,” which focuses on decentralized digital currencies and their use in money transmission activities. The DFPR is seeking comment on the proposed guidance through Jan. 18, including on whether virtual currency businesses involved in money transmission must have a state money transmitter license.
The Washington state legislature is poised to consider during its 2017 session HB 1045, which would add transmission of virtual currencies to the list of services requiring a money transmitter license under state law. Coin Center supports the bill, Brito said. California also remains a potential hot spot for state-level regulatory development given the push last year for legislation that would alter the state’s regulation of bitcoin and other virtual currencies, McQuinn said. California Assembly Banking and Finance Committee Chairman Matt Dababneh withdrew his bitcoin regulation bill last year but vowed to reintroduce it after further studying the issues (see 1608180063).
Congress Learning
The virtual currency community is largely still focused on educating Congress about blockchain technologies and community issues, especially via the Congressional Blockchain Caucus, Brito and others said. House Monetary Policy Subcommittee Vice Chairman Mick Mulvaney, R-S.C., and Rep. Jared Polis, D-Colo., formed the caucus in September (see 1609260038). CDC is not “even recommending introducing legislation at this time,” Boring said: “There is a pretty big education hurdle around blockchain technology on Capitol Hill” that the group believes it still needs to overcome. It’s unlikely legislators will feel the need to pass legislation on virtual currencies this year “unless there’s big news” that lawmakers feel the need to act on, Harper said. “Legislators are even more predictable than regulators. They’ll go where the action is.”
It’s likely Congress will take the same deregulatory approach the Trump administration appears poised to use, though it may choose a “hands-on approach” to encouraging innovation in fintech, McQuinn said. Boring highlighted the Financial Services Innovation Act as a bill the virtual currency community will be monitoring. The legislation, originally filed last year (HR-6118), would mandate that federal regulators create financial services innovation offices through which fintech firms could apply for an alternative plan for complying with financial services laws. Rep. Patrick McHenry, R-N.C., is expected to reintroduce the bill, Boring said.
Coin Center will be pushing this year for a federal safe harbor for virtual currency businesses that never take custody of money to be exempted from states’ money transmission licensing requirements, Brito said. Businesses that would be covered under such a safe harbor include bitcoin miners and lightning network nodes, he said. Federal safe harbor legislation, though unlikely to make it through Congress this year, would be a good accompaniment to the OCC’s SPNBC proposal, Brito said. Congress also may consider a general resolution expressing the sense of Congress that virtual currency issues are important, he said.