By Lalita Clozel for American Banker
WASHINGTON — Virtual currency advocates are hoping a recent surge of support in Congress can help them accomplish a long-sought goal of creating a safe harbor for companies that do not directly hold customers’ funds.
The House voted last week to approve a nonbinding resolution by Reps. Adam Kinzinger, R-Ill., and Tony Cardenas, D-Calif., to “encourage the development of tools for consumers to learn and protect their assets” through technology in order to “foster future economic growth.”
It was a small step toward virtual currency firm’s eventual goal — the creation of an exemption from state money transmission laws for a certain class of bitcoin companies.
Many businesses involved in bitcoin or other virtual currencies are “just a conduit,” said Aaron J. Wright, a professor at the Cardozo Law School who penned a Medium post last year on the topic. “They just pass it along.”
To Wright and a number of other virtual currency advocates, bitcoin miners and multisig wallets — which allow customers to store their assets, but do not single-handedly control the funds — should be able to avoid the state-by-state licensing regime faced by money transmitters. “The question,” said Wright, “becomes, ‘Should they have the same level of regulation?’ ”
In a recent statement, Coin Center — an advocacy group for virtual currency companies — argued that those companies should not be on the hook for state-imposed bonding, minimum-capital and consumer protection requirements.
“These individuals and businesses do not hold customer funds, therefore they do not pose a solvency risk to consumers,” said Peter Van Valkenburgh, Coin Center’s director of research. “If such activities were clearly stated as not being subject to licensing there would likely be no enhanced risk of consumer harm.”
The question of which companies have actual ownership or control of their customers’ funds has come up repeatedly in debates over virtual currency regulation.
Last month, a California bill to establish a bitcoin license was shelved because of opposition from industry groups over its broadness.
Jerry Brito, the director of Coin Center, had told state legislators that the latest version of the bill could hurt a number of companies that do not directly control consumer funds — like multisig providers. The plan “not only provides no regulatory clarity, it will likely stifle innovation if enacted unchanged,” Brito said in a letter.
Meanwhile, industry groups have expressed high hopes for a virtual currency bill being developed by the Chicago-based nonprofit Uniform Law Commission that could serve as model legislation for states. In discussions over the draft law, industry groups have argued extensively about the types of businesses that should be included in any licensing regime.
The Digital Chamber of Commerce, an organization that promotes virtual currency, has urged the ULC to ensure that the technology behind bitcoin, the blockchain, would not be regulated.
Failing to precisely address blockchain in the law could have a chilling effect on the work of developers who want to advance the technology, or companies that provide simple structural services to the network, said Perianne Boring, the chamber’s founder and president.
“You wouldn’t want to regulate blockchain technology,” Boring said. “It’s open-source software.”
But a looming challenge for bitcoin advocates will be to explain these distinctions to policymakers in plain English.
“We have states that are trying the best they can with limited staffing, limited resources to sort through these issues,” said Carol Van Cleef, a partner at Manatt, Phelps & Phillips. There are “gaps in understanding some of the nuances related to the technology.”
Mike Belshe, co-founder and CEO of the multisignature wallet BitGo, tried to break down exactly why his business should not be lumped together with Western Union.
For one, he said, “unless you sign a transaction, you the customer, BitGo can’t make a transaction happen.”
Additionally, “BitGo could disappear off the face of the earth, and you would still have all your money,” Belshe said.