Hot Takes

Good news: Ethereum’s CryptoKitties are probably not securities.

Ethereum just got overrun with cats; the cats are literally slowing down the network with their feline machinations, their idiosyncratic personalities, and yes, their breeding… lots of cat breeding… on Ethereum. The cats are called CryptoKitties. Just like bitcoins or ether, CryptoKitties are peer-to-peer tradeable, provably scarce digital items that are accounted for by an open blockchain network. Unlike those cryptocurrencies, each item (each kitty) is unique with its own set of attributes: striped, droopy-eyed, slow (yes, slow is one), and many more.

Rather like some of the ICOs you might have read about, there is a company that is selling some of these digital items and financing its operation from those sales. From their FAQ:

The CryptoKitties team releases a new “Gen 0” CryptoKitty every fifteen minutes (up until November 2018). The starting price of “Gen 0” CryptoKitties is determined by the average price of the last five CryptoKitties that were sold, plus 50%.

There are complicated and controversial legal arguments about why some ICOs might be unregistered securities issuance while other might not be. The SEC has yet to offer a bright line test but has identified a few specific projects as securities and indicated that it looks to the flexible test for an “investment contract,” the so-called Howey Test, in order to determine whether any particular token sale is securities issuance. Our framework for securities regulation of cryptocurrencies has outlined the nuts and bolts of that standard and advocated for an innovation friendly approach since 2015.

CryptoKitties look less like securities under that flexible test for a few reasons. One important prong of the test is whether buyers are relying on the managerial efforts of others for profits. First of all, CryptoKitties aren’t marketed as profit-making investments, and ownership of a Cryptokitty doesn’t give you a right to dividends or revenue streams from the Cryptokitty team or anyone else for that matter. Sure people might hope that they can flip a kitty for a profit but people feel that way about other non-securities like real estate, gold, or (appropriately) beanie babies. And sure you can breed two kitties to get more cats which you could of course sell, but that alone certainly doesn’t make them securities any more than real life purebred pets.

This is starting to sound a bit like an actual case about securities law and real life animals, the case was SEC vs. Weaver Beaver (yes, that’s the actual name). Here’s Bob Davenport, a regional director of the SEC back in the 1970s:

The beaver case was a case called SEC versus Weaver’s Beaver Association. One defendant appealed to the U.S. Supreme Court, which denied cert. A fellow in the Salt Lake area started a company called Weaver’s Beaver Association. They sold pairs of beaver, all over the United States and in foreign countries. These were purportedly domesticated beaver. You would buy a pair of beaver for several thousand dollars, and these beaver would have little beavers, called kits. Then these little kits would grow up, and they’d have more kits. And you would end up with this large herd of beaver. The beaver were to be sold to other purchasers. They had a marketing arm, where they would sell your pairs of beaver. There was going to be a tremendous demand for beaver pelts in coats, beaver hats, and everything—it’s coming back. So they sold millions and millions of dollars of these beaver. The salesmen represented that you could take possession of your beaver, and you can raise them in your own backyard, but if you don’t have the capabilities, we have beaver ranches all through the West—Montana, Wyoming, et cetera.

It didn’t end well:

We’ll take care of your beaver for you for a hundred and fifty or a hundred seventy-five dollars per beaver per year, until you can sell it. Nobody could take care of beaver; you can’t put it in your bathtub. The purchasers would have to leave the beaver on the ranches. What happened was that all these beaver and their kits that was being sold to people could not be re-sold, because the Association was too busy selling their own beaver to take time to sell your beaver.

So these people ended up with a large number of beaver, and they’re paying all these ranching fees. It was just a disaster. They really weren’t selling domesticated beaver; instead they were flying the beaver down from Canada and purchasing them from trappers in Canada at approximately twenty dollars a beaver. They’d fly them into Salt Lake, put tattoos in their back foot, in the web, and start selling them. They’d sell them for three thousand a pair and up.

The SEC came after Weaver Beaver because it was clear that the economic reality of the scheme wasn’t just beaver sales! Weaver was selling shares of a “profitable” beaver farm. You weren’t buying a beaver to take it home with you; you were buying it to get rich, and you relied on Weaver to take care of your beavers, breed them, sell the kits and give you the profits. Nobody actually took delivery of their beaver (you are shocked, I know).

So why are CryptoKitties different? Because you can and do actually take delivery of your CryptoKitty. You don’t have to keep them in your bathtub, you just connect to the open Ethereum network and check up on the blockchain to find your cats. You don’t have to rely on the CryptoKitty team to take care of your cats or breed them for you, the cats don’t eat and “breeding” is just an ethereum transaction that you (and only you) can make by using any free and compatible Ethereum software client and by signing the transaction with your Ethereum private keys. And you don’t rely on the CryptoKitty team to find buyers for your cats, or buy them back from you, all sales are peer-to-peer and any ethereum user in the world can find you and offer to buy your little bundles of kitty joy (or breed with it!). Also there’s no sad beaver relocation, caging, and tattooing, just happy little bits of digital fur ball coursing over the world’s increasingly renowned global computer, Ethereum. That last one isn’t part of the Howie Test but it makes me happy to live in the future we got.

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Coin Center statement on IRS Coinbase order.

While the court granted a narrowed version of the IRS’s original request for Coinbase customer data, we remain deeply unsatisfied with the lack of justification provided by the IRS. Without better rationale for why these specific transactions were suspect, a similarly sweeping request could be made for customer data from any financial institution. It sets a bad precedent for financial privacy. This is a perfect example of why clarity in the tax treatment of cryptocurrencies is needed, such as reporting guidance the IRS would be directed to issue under the recently introduced bipartisan Cryptocurrency Tax Fairness Act sponsored by Reps. Schweikert and Polis.

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Coin Center is hiring a government relations professional.

Coin Center seeks a government relations professional to join our team in our mission to build a better understanding of open blockchain networks and to promote a regulatory climate that preserves the freedom to innovate using these permissionless technologies. They will work closely with our Senior Policy Counsel in developing and implementing strategies to inform and educate public policy stakeholders. Ideally, they would also work with the Director of Research to develop policy position and write policy papers. The position reports to the Executive Director.

Candidates must be outgoing, results-oriented, have excellent attention to detail and the ability to manage multiple projects and deadlines. Successful candidates will be strategic, creative, self-motivated, and have a strong understanding of open source technology and an interest in cryptocurrencies. Capitol Hill experience and familiarity with basic economic principles are required.

Qualified candidates should submit their resume and cover letter as a single PDF to antonie@coincenter.org.

Responsibilities include:

  • Help plan and assist with development and execution of effective outreach strategies and programs that connect Coin Center research with policymakers.
  • Educate and prepare Coin Center staff on evolving policy debates and potential opportunities to advance our mission.
  • Collaborate with policy research and communications staff to ensure that Coin Center research is effectively disseminated to policy audiences.
  • Develop and strengthen effective relationships with policymakers and staff so that Coin Center research informs and improves public policy.

Qualifications:

  • A bachelor’s degree in technology, economics, political science or related field.
  • Minimum of 2 years experience on Capitol Hill.
  • Knowledge of Internet policy.
  • A desire to promote individual liberty, personal autonomy, and privacy rights through the defense and promotion of cryptography.
  • Strong interpersonal, networking, writing and public speaking skills.
  • Entrepreneurial spirit.
  • Must be highly organized. Experience managing and maintaining a database and related reporting skills.

Nice to haves:

  • J.D.
  • Experience developing and writing policy papers.
  • State legislative experience.
  • Deep understanding of blockchain technology, but failing that Internet technology and basic understanding of cryptography.
  • Deep understanding of the open source ethos

Culture:

We’re a small start-up nonprofit that punches way above its weight. We are passionate about decentralization, cryptography, privacy, and civil liberties. Looking for like-minded candidates who share our vision.

Salary range:

Commensurate with experience.

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Coin Center is hiring a summer legal intern.

The legal intern will assist Coin Center’s education, policy research and advocacy efforts, including legal research, drafting memoranda and policy reports, while also helping with public advocacy, and educational materials. Coin Center’s activities range across the legal landscape wherever regulation may intersect with cryptocurrency technologies, from state money transmission licensing to federal anti-money laundering policy, to consumer protection policy (FTC, CFPB) and investor protection policy (SEC, CFTC). Take a look at coincenter.org/our-work for details about our efforts to secure the freedom to innovate using open blockchain networks.

Qualifications

U.S. law students of all levels, including LLM students, are encouraged to apply. Applicants should have a demonstrated interest in and enthusiasm for regulatory policy, digital civil liberties, or technology-related legal issues, along with excellent research and writing skills and the initiative and energy to see projects to completion in a fast-moving environment. (Being a cypherpunk definitely helps, but isn't required!)

Details

  • Type: full-time, 40 hours per week minimum
  • Length: 10-14 weeks
  • When: mid-May through mid-August
  • Location: Washington, DC. We do not offer a remote internship.
  • Stipend: $7,500
  • Application deadline: February 1, 2018. We will notify the qualified candidate by March 15.

Application instructions

  • Fill out the form below
  • Please upload a single .pdf. Other types of attachments are not accepted. Multiple .pdf attachments are not accepted. This single .pdf will include: (1) a cover letter with three references* (2) resume** (3) writing sample***
  • Submit form

Applications submitted any other way will not be considered.

*Your cover letter should explain why you want to work with Coin Center and why we should want to work with you, followed by three references.

**Your resume should include your phone number and email.

***Writing samples on financial regulation, digital civil liberties, and privacy law, and/or intellectual property issues are highly preferred, as are advocacy oriented or otherwise persuasive writing samples.

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The Cryptocurrency Tax Fairness Act was offered as amendment to the House tax reform bill last night in Congress.

Video of the Rules Committee meeting is below and you can watch Rep. Jared Polis speak about the bill that he co-sponsored with Rep. David Schweikert. The amendment would have created a de minimis capital gains tax exemption for personal cryptocurrency transactions, and helped clarify how exchanges could offer third-party tax reporting.

While the amendment was not adopted, we applaud the bipartisan leadership shown by Reps. Polis and Schweikert. That they recognized this issue, introduced a bill, and got it this far means a lot and it shows the IRS that many in Congress believe that the existing tax treatment of cryptocurrencies needs to be updated. The bill’s language didn’t make it into the larger tax reform bill, but that doesn’t mean the bill itself is dead; it’s alive and well and we will continue to advocate for its passage by Congress, and we’ll continue to work to try to have the IRS adopt as much of it as it might be able to through rulemaking. For an ecosystem that is barely a decade old to get this far in Congress is remarkable, and we’re only just starting.

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We briefed the Senate Republican High-Tech Task Force.

Senator Orrin Hatch, chairman of the taskforce, convened a Blockchain 101 briefing for republican policymakers and their staff.

Coin Center executive director Jerry Brito was joined on the panel by four Blockchain experts from industry, academia, and government to discuss what Blockchain technology is, how it’s being used today, how it could potentially be used in the future, and how policymakers can best approach the issue. The other panelists were:

  • Robleh Ali, Research Scientist, MIT Media Lab
  • Jonathan Johnson, President, Medici Ventures
  • David Mills, Deputy Associate Director, Federal Reserve
  • Paul Snow, CEO, Factom
  • Alan Cohn, Steptoe & Johnson [Moderator]

Senator Hatch also gave remarks stressing the importance of understanding and fostering blockchain technology.

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Coin Center gave a regulatory update at Ethereum Devcon3.

At the Ethereum community’s largest conference, executive director Jerry Brito and director of research Peter Van Valkenburgh took the stage after the project’s lead developers to give the audience an update on Coin Center’s work and regulatory issues that could affect developers building on this technology.

The update covered Coin Center’s work in pushing for a more developer friendly money transmission licensing system, advocating for these technologies in Congress, and addressing questions about securities regulation for crypto-asset tokens.

[Image courtesy of Rhys Lindmark]

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CFTC commissioner: tokens that start as securities may “transform” into commodities.

Yesterday I participated in a panel discussion on cryptocurrencies at Georgetown University’s first annual “fintech week,” where the subject of ICOs was unsurprisingly much discussed. One thing that stood out for me were comments by CFTC Commissioner Brian Quintenz that echoed a policy view we have long held: that a crypto-token may initially emerge through a securities offering, but later be considered a commodity just as Bitcoin is. Here’s what he said, according to Politico:

Digital currencies "may actually transform at some point from something that starts off as a security and transforms into a commodity," CFTC Commissioner Brian Quintenz said at the event hosted by Georgetown's law school. "That's going to be a very difficult but important conversation for us to have to give the market certainty, to allow for innovation to flourish and continue, but to make sure that we're being consistent in how we apply commodity law and protection of consumers across all products."

And here is Bloomberg’s account:

“It was right to classify it as a commodity, but we still have a lot of work to do,” he said yesterday to reporters at the FIA conference. “ICOs, these things can transform. They may start their life as a security from a capital-raising perspective but then at some point -- maybe possibly quickly or even immediately -- turn into a commodity.” His comments were some of the most specific from the CFTC on the nature of ICOs.

“There are new challenges all over the place with virtual currencies and commodities,” Quintenz said.

This is a very welcome statement that helps clarify how regulators are seeing this innovative space.

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Two podcasts that will help you understand the token boom.

Our director of research Peter Van Valkenburgh has been invited on as an expert in two podcasts. These make a good primer on what is hot in the cryptocurrency world.

The Invest Like the Best podcast’s Hashpower series gives an overview of what cryptocurrency is, what is driving investment in the ecosystem, and the promise that open decentralized blockchain protocols have for improving the internet’s infrastructure. It includes some of the most prominent voices in the cryptocurrency community. Peter is in episode three. Listen here.

The StartUp podcast focuses on the token sale held by messaging company Kik. In the face of staggering competition Kik has turned to tokens as an inventive way to both fundraise for itself and incentivize meaningful user participation within its app. Listen here.

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The CFTC published a new report on cryptocurrencies today

A new primer released today by LabCFTC, the Commodities Futures Trading Commission’s FinTech initiative, is a helpful report that that outlines the agency’s relationship to the virtual currency and blockchain space.

The report explains that the agency considers cryptocurrencies to be commodities, what kinds of trading activities fall under its jurisdiction, what types of activities require approval, and how other agency’s jurisdictional interpretations interact with its own. It also outlines operational risks for cryptocurrency exchanges, and we’re happy to see that their conclusions mirror those in the report on cryptocurrency risk factors we developed for Lloyds of London.

Innovators building cryptocurrency businesses that may cross into the CFTC’s jurisdiction will no doubt be appreciative of the clarity offered by this report. We applaud the CFTC for publishing this articulation of its approach to cryptocurrencies.

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