De Facto Federal Legislation of Cryptocurrency is Nigh

An upcoming meeting of the Uniform Law Commission (ULC) is likely to change how law enforcement across the U.S. approaches bitcoin. Right now, the meeting is under the radar, but its fallout could soon make a pivotal debate flare on a state-by-state level.

Also Read: Scheduled Scaling Updates for the Bitcoin Network Are Getting Closer

To Regulate or Not to Regulate? – That is the Question

De Facto Federal Legislation of Cryptocurrency is NighIt is the wrong question because it almost always conflates two separate concepts: regulation and legislation. The real question is whether to regulate problems through the free market or to legislate them through the state. Government regulation is legislation and state control. Free market regulation is voluntary exchange and individual control.

Satoshi demonstrated the difference between government and free market regulation when he created a decentralized free-market currency that functioned through an immutable and transparent blockchain. The currency was regulated – that is, it had established knowable rules for customers who chose to accept them – and that goal was achieved without legislation. Indeed, bitcoin was created to avoid the control of finances by the state and central banking system which were corrupt and gutted individual freedom.

Those who advocate Satoshi’s vision are weakening their argument by conflating regulation with legislation. The reason: a common objection to “unregulated” – by which is meant “unlegislated” — cryptocurrencies is that customers’ need protection against scams such as the Mt. Gox fiasco. Too often, advocates answer “yes but…” They should respond “that’s exactly why state involvement is a terrible idea. It introduces the illusion of protection while providing no real safety mechanisms for customers.” By contrast, free market regulation includes such mechanisms as contracts, transparency, and reputation.

Where is the debate on regulation versus legislation likely to occur?

First, The Proximate Cause 

The Uniform Law Commission (ULC) is holding its 126th Annual Meeting in San Diego on July 14-20. The ULC is a body of legal experts who create model templates for statute law on issues that are considered to be inconsistently or insufficiently legislated throughout the various states. The July meeting will address how state statutes should define terms like “bank, create” and it will hammer out a draft proposal entitled the “Uniform Regulation of Virtual Currency Businesses Act.”

If the ULC succeeds in sculpting a final template, as it is fully expected to do, then the model act will be submitted to individual state legislatures for their approval. The legislatures have a long track record of adopting bills based on the ULC’s language with little or no change.

Consider a main thrust of the draft version. It seeks to;

Create a statutory structure for regulating the ‘virtual currency business activity’ of person [sic] offering services or products to residents of enacting states. In particular, the act would require licensure of and impose prudential regulations and customer protection requirements on businesses whose products and services include (1) the exchange of virtual currencies for cash, bank deposits, or other virtual currencies; (2) the transfer from one customer to another person of virtual currencies; or (3) certain custodial or fiduciary services in which the property or assets under the custodian’s control or under management include property or assets recognized as ‘virtual currency.’ 

The key words in the draft template for enforcing the choke point are “impose prudential regulations and customer protection requirements.”

“Prudent regulations” would almost certainly include a demand that Know Your Customer requirements be imposed; this would strip away the privacy upon which individual freedom and true protection depend. “Customer protection” means mandatory licensing of “businesses whose products and services” with those businesses being broadly defined.

De Facto Federal Legislation of Cryptocurrency is NighThe licensing requirements would have teeth. Eth News (June 28) reports, “The draft sets guidelines which suggest a maximum civil penalty of $50,000 for ‘a person [who] engages in a virtual currency business activity with a resident in violation of this [act].’ Material violations of the act could also constitute fines up to $10,000.”

Trusted third parties, such as digital currency exchanges, are the suggested choke point for at least four reasons. They are far more visible which makes them low-hanging fruit. They function in a manner that resembles the banks with which legislators are accustomed. They are a convenient collection point for financial data on customers who are the true target. Dishonest or incompetent third parties are where scams or losses of any real size occur which provides moral justification for imposing laws; bitcoin users who exchange directly can be defrauded, certainly, but it is almost always on a small one-transaction basis.

The preceding are some of the reasons why bitcoin was designed as a direct transfer system.

Where Will The Debate Occur?

If it occurs, it will be on a state-by-state level as the proposed statute law works its way to and through the various legislatures. Unfortunately, this process can be close to invisible to most residents of a state. Most residents are also confused by bitcoin and unlikely to oppose an attempt to control it.

The enactment by individual legislatures will not constitute federal law, of course, but the end result may resemble it closely. The ULC template could and likely will homogenize state statutes so that the same basic laws on bitcoin are enforced from coast to coast. Currently, an inconsistent patchwork of laws promotes freedom by allowing businesses such as digital currency exchanges to leave unfriendly states for more welcoming ones. (See “Prepare For SB1241’s Pit Bull Assault on Bitcoin Freedom” on parallel institutions as a freedom strategy.)

Does It Matter?

The direct exchange of bitcoin cannot be controlled in a meaningful manner any more than the direct exchange of ideas can be. But trusted third party exchanges are vulnerable, and they pass their vulnerability on to customers. The obvious solution may be to avoid them. Some businesses using bitcoin are structured to require their services, however. Moreover, new adopters often have few other means by which to obtain the currency; the less obvious avenues used by veterans can be quite confusing.

Merchants and other businesses who accept bitcoin are also vulnerable to being legislated in a way that makes cryptocurrencies less attractive to them. In fact, anyone who uses conventional financial institutions in transactions, such as cashing out, could be affected.

Ironically, another common reason given for pursuing the government regulation may achieve the opposite of its stated goal. The argument is that state sanction will encourage the spread of bitcoin by providing legitimacy.

Government approval does not confer legitimacy, honesty or customer protection. If it did, then the central banking system would be the most legitimate, honest and customer-respecting institution on the face of the earth. Instead, it is one of the most corrupt, dishonest and abusive institutions. Spreading bitcoin use while negating its intended advantages is no victory.

The ULC’s final template is probably a done deal even before the July meeting convenes. Enactment by all or most states may fall into the same category. Any solutions that ensure future privacy and financial freedom will occur on an individual level. That has always been the case.

What do you think about the de facto Federal legislation of cryptocurrency coming? Let us know in the comments below.

Images via Shutterstock, Pixabay, and the ULC.

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  • I have witnessed the most delightful libertarian fantasies in the Bitcoin community, but heading back into the real world as it actually is, you can bet they will legislate and make clear the role of cryptocurrency, especially as it becomes more used. That is just the way it is. We operate under nations with laws, using their currencies, which they will literally go to war to protect. I *hate* to be the bearer of bad news, but no amount of saying, “the banks are dead, we’re taking over!” will make it true. I can not imagine a worse scenario for the banks than 2008, but they sure survived that quite fine, unlike many people. If the governments protect the banks in order to protect themselves, what chance do you have of any sort of libertarian fantasy of a free, open, and actually anonymous (unlike BTC) currency?

    • Betty

      The question is, are these protocols resilient enough against gov regulations… We’ll find out. It only takes one or two biggish countries to be crypto friendly that could trigger a domino effect. Competition among nations may force the issue in our favour. They would otherwise have to all simultaneously collude against crypto which I can’t see happening. I’m already living in my libertarian dream…

      • The problem is that they *are* all colluding (or most all). It is called the global economy, and why the IMF has so much power. The Domino Effect within states that any (even small) nation-state that goes down will take the rest of the economy with it. That is why we bailed out Mexico and Thailand in the last few decades, and Europe bailed out Greece. So all countries are colluding to ensure the worldwide economy keeps spinning… and *that* is in all their interests. It would take a revolution in a major country, followed by a worldwide depression, for your scenario to occur I think.

        • Betty

          I think it’ll happen, +400 countries cannot collude effectively when they’re all squabbling amongst each other. Then you’ve got the impending global financial crash which would seal the deal and seal their fate.

          • BTCD

            When did the world add over 200 countries to its total. Last I looked it was a 190 ish. All it would take is for one or two of the g7 to ban or regulate it to death before you would hear a huge popping sound as everyone scrambles to get rid of their tokens for FIAT (if they can fast enough) before they are worthless and the whole idea of decentralized currency is re-imagined, another few people become billionaires out of the ether (play on words intended)….rinse and repeat.

          • I disagree. The G7 elites — and the US in particular — would not scrambling to impose restrictions globally if it did not realize the threat that freedom havens posed to their authority/wealth. We live in such an interconnected and fluid world that true freedom anywhere is a threat to totalitarianism at home. That’s why measures like FATCA exist. I also disagree that cryptocurrencies are the playthings of billionaires. Certainly, billionaires have been created. But cryptocurrencies empower the individual, the honest working person who wishes to control their own financial future. I have seen this in action and it is playing out in Venezuela where many people are able to eat and make payrolls ONLY because they deal in bitcoin and not fiat. Be contemptuous, if you wish, of cryptocurrencies but they are voluntary currencies for people who choose to work outside the system. As with an earlier poster…I’m not sure why you look down on people using their own money to control their own lives. But I wish you well in using yours to do whatever you wish in whatever currency appeals to you. Truly.

          • BTCD

            Disclaimer- I own, buy and sell cryptocurrencies on a regular basis as I make money on the frenzy of it all.
            The vast majority of cryptocurrencies up until very recently went to support illicit onion based marketplaces. It is also not, if you can be honest with yourself for a minute here, the average “joe” getting paid or “Betty” buying groceries with it. It is mostly speculators that have driven the pricing of many of these cryptocurrencies. It is easy enough to see by looking at the blockchain itself and seeing that the vast majority of transactions are not for a few satoshis. The exchanges are doing a brisk business and the majority is not for the reasons you stipulated in your response to my reply. I think that your utopian (or dystopian, depending on viewpoint I suppose) vision could/may arise but it is certainly not here today nor will it be for the near future.

            My comment was not meant to be contemptuous in any way. I support the idea of decentralized crypto-currency. How my comment “looks down on other people” is curious to me and out of context, as I certainly did no such thing anywhere in my reply. My reply mostly came from anger that those that are richest are manipulating the markets for their benefit at the expense of having the whole thing come crashing down due to government involvement to try and stop it. This does not serve neither “Joe” or “Betty” or Venezuelans. Your well wishes and final “Truly” statement I think held a just a tiny bit of contempt. Maybe it was my correction of your statement of how many countries there are in the world. I don’t know. I hope that you can re-read what I said and absorb the content for what it is and not interpret what kind of monster I must be from it. Have a good day though. Truly 🙂

          • Most of the people I know who own cryptocurrency are average people — perhaps more politically aware than most — who want more control of their own financial future. Most of them own between 10-50 bitcoins or an equivalent $ amount of another currency. Perhaps we run in different circles but I run in ones where the decentralization of currency empowers the average person and takes control from centralized institutions such as central banks. I frequently help people who do not use currency exchanges to cash out half or quarter bitcoins. The empowerment is not a fantasy. It is my daily world whether or not it is yours.

            You are by no means “a monster” (never crossed my mind) and, if you stick around the comment section, you will find that I do not take disagreements personally. But your comment: “I have witnessed the most delightful libertarian fantasies in the
            Bitcoin community, but heading back into the real world as it actually
            is…” is a bit contemptuous of the idealism of the original creators and those who share their very practical vision of greater freedom for the individual. I think you and I somewhat represent a divide in bitcoin right now between those who see it as a path to freedom and those who see it as a path to wealth. The two paths are not mutually exclusive, of course, but the travelers do have somewhat different destinations.

          • BTCD

            I never made this comment “I have witnessed the most delightful libertarian fantasies in the
            Bitcoin community, but heading back into the real world as it actually
            is…” You are mixing up my comments with someone else. Anyway, I’ll agree to disagree.

          • I made that comment, for the record.

          • BTCD…if I mixed up the comments, as I clearly did, then please accept my apology which I give without reservation. My fault. I need to slow down and read more carefully. Please don’t bear ill-feeling toward bitcoin.com just because one of its contributors can be a ditz.

          • And I live in a city where the *average* citizen, and this is the *average* USA citizen by stats, would find 1 BTC quite the gift. Remember Bush II’s $250 tax rebate? That was more than enough to make the masses happy. So, if you own 1 BTC, just sitting there for savings or investment, you are already in the middle class. Too few citizens are.

          • It is a possibility that they achieve a ‘seamless wealth transition’, but a hard one. That would allow a peaceful adoption of one or more cryptocurrencies, probably at such a point state-backed.

          • Betty

            woopsy, blonde moment

      • You go girl!

    • This is a strange attack not on the arguments but on the character of libertarians who are working on practical methods by which individuals can achieve greater personal freedom. Cryptocurrencies are not a fantasy, and it is not a matter of “taking control”…except of one’s own life. Cryptocurrencies demonstrate that you do not need a utopia or fantasy — a stateless society — in order for individuals to have more control of their lives. What is needed, first and foremost, are private alternatives to important social functions that are now dominated by the state…and usually dominated by law. You clearly have contempt for the “idealism” of a peaceful person who simply wants to control his/her own life. What’s your idealism? Should you or a state control the lives of peaceful people who wish to be left alone to live? Why does someone wanting to live and let live without harming anyone else rouse such contempt in you? Even if his/her attempt at freedom is only incremental and not absolute…it is still freedom.

      • Character? I hope I did not attack anyone’s character. Where did you get that from? Accept my apologies. I have quite the libertarian streak myself, though live in the real-world, which is so far from that utopia.

  • Liberty88

    These stupid monkey brains can’t regulate worth a damn!!!
    They come up with all these stupid ass regulations that banks write for themselves and then taxpayers have to bail them out. This is called privatizing the winnings and socializing the losses! Now these monkey brain know-nothings wanna regulate crypto-currencies?! Tell them to grab their best hold…. Take a long jump off a short pier.

    • Yep. You captured my emotional reaction. But they can harm good people in their thuggish attempt at legislating a totally free phenom. That’s the point at which I get stuck and start arguing…and I do so precisely because I do share your emotional response.

  • AmishBTC

    Welcome to New York, lol. Bitlicense has been sucking balls since 2015…

  • Good morning everyone. I will be dropping by today and tomorrow to answer questions and to chat. I hope you find my article enlightening,,,albeit a bit pessimistic. Most people have not heard of the Uniform Law Commission which is, arguably, the most powerful behind-the-scenes legal force in America. I’ve had the “pleasure” of dealing with it regarding a proposed state statute that would have drastically redefined what was “sexual consent” in America. I was part of a huge coordinated effort to block some of the worst and most state-intrusive language as and when the measure was being drafted; it was an effort that involved organizations of lawyers, judges, academics, etc. We were successful.

    I bring this up because that sort of long-running and massive effort at the drafting stage of ULC activity is what is required to counter a proposed measure. It is especially necessary to have law professional protesters who are part of the ULC because they can object from within. A fellow on bitcoin reddit tried various strategies to protest the template in the article…talking to the head of this particular committee, a petition, calling organizations, coordinating on reddit itself… But he didn’t have the mass power — especially the legal professional power — behind his drive. The head of this particular committee of ULC basically told him to f*** off and address the ULC statute on a state-by-state basis when it was up for being enacted in law. That is really too late. Ah, well.

    • Fu Manchu

      So how do we get law professionals on our side to act?

      • Here is the link to the reddit fellow who was trying to organize. He seems fairly well connected and I’m sure would welcome a contact from you in which you ask the same question. https://www.reddit.com/r/Bitcoin/comments/6jf7fi/uniform_regulation_of_virtual_currency_businesses/ Also there is a bitcoin attorney named George Greenburg 7674 West Lake Mead #245 Las Vegas, Nevada 89128 702 796 5221 who answers legal questions for free on a particular forum https://bitcointalk.org/index.php?topic=1724798.0;all and he encourages people to call him. I imagine he is looking for clients (and why not?) but he could be a valuable initial contact. I am not an expert but he seems solid in his knowledge.

        Unfortunately, the lawyers I know from my former encounter with the ULC are focused in an entirely different area of law and I doubt if they would be of use to you.

        • Fu Manchu

          Thank you for pointing me in the right direction. I’ve already reached out to both parties.

  • Fu Manchu

    I think we need to fund a counter-agency to this development. I would gladly contribute to a legal team that was dedicated towards fighting this bill on a state by state or Federal level.

    • I applaud your willingness to put your money where your beliefs are….but I think it may be too late on this issue to do a sweeping effort. It really should have been nipped in the bud at the ULC level and even that would have been very difficult. Rather than state by state, however, it could be useful to identify the state legislatures in which the model act could experience difficulty. If a few states do not go along with the model act, then the US will have havens in which exchanges etc. can function in a relatively unlegislated manner. If your state legislature could be one of the targeted ones, then I would advise you to cocentrate on that one because you will have far more “standing,” far more influence as a resident.

      • Fu Manchu

        How do you think this will bump up against Nevada’s recent pro-digital asset regulation? Between Nevada and Delaware (both places I have my digital token organizations registered) it seems we have at least the semblance of a bulwark against sweeping legislation.

        I just don’t live in either state so I may find myself in my states court system soon and finding a lawyer who understands my position and is willing to defend it may prove difficult.

        • Well, if my understanding is correct from past experience, each state considers a ULC template in light of its own laws and, if the existing law contradicts some portion of the template, then one of two things usually happens: 1) the model act is adopted with properly amended language; or, 2) the existing impediments are negated. I’m pleased you are in Nevada because the lawyer I recommended to you in another post here is in Las Vegas and he can give you a more precise answer. I think he’d be willing to have an initial Q&A with you pro bono in the hope of future paying work. He treats people on the other forum rather well and I’ve been impressed with him.

          BTW, I should have made clear in the article that the ULC is funded by the various states and so operates as a quasi-state agent. This gives it a legitimacy in the eyes of the legislatures. It is not quite a government agency, IMO, but it is certainly not a private one. My husband refers to the ULC as the most powerful lobby group in the US…and this characterization does capture the spirit of the agency whether or not it is technically accurate.

  • Brad R

    From the quoted draft:

    “In particular, the act would require licensure of and impose
    prudential regulations and customer protection requirements on
    businesses whose products and services include (1) the exchange of
    virtual currencies for cash, bank deposits, or other virtual currencies;
    (2) the transfer from one customer to another person of virtual
    currencies; ”

    So if a “business” facilitates my transferring some amount of bitcoin to another person, that business must be licensed and regulated? It seems to me that it’s a very small stretch for that to include miners. Indeed, nodes in the bitcoin network, and anyone who helps to maintain the blockchain. This is a terribly written law.

    • It is vague and open to interpretation, to be sure. These templates seem to be deliberately vague…perhaps because they attempt to “fit” the laws of every state in the union. With that goal, being specific and well defined is a bad thing.

  • Mattheus von Guttenberg

    Great article, Wendy. I was not familiar with the ULC.

    I am rather pessimistic that there is anything any actual, “real” human can do to prevent the state from engaging in its thuggish behavior. Fortunately, Bitcoin (and Bitcoin users) will continue to route around the damage as it has always done. It will take time, courage, and technical inventiveness, but the dream of crypto-anarchy will live on regardless of what these suits write on paper.

    Thanks for fighting the good fight!

    • Good morning Mattheus. I’m pleased that you found the article to be useful. I agree that the best way to deal with the state is to avoid it and make it obsolete in your life by replacing the few useful functions it offers and monopolizes (e.g. currency) with free alternatives. I still applaud people who pursue other freedom strategies, however, and occasionally engage in them myself. Only occasionally, however, because I find actually dealing with the state and its legal morass to be distasteful and the dynamic impoverishes my life. Life is to short to be defined by what you oppose rather than by what you enjoy.

  • Good Friday morning to everyone. I want to point out the posts by Fu Manchu in which he indicates a decision to challenge the ULC juggernaut — not too extreme a word, BTW — in his own state. I provided contact information to him re: a possible support system for the challenge. If anyone is interested in joining this effort, either with Fu Manchu or in his/her own state, I encourage you to post here and/or use the information provided as well.