Jan 17, 2019
Jill Richmond joins us today to talk about the U.S. government’s somewhat mixed success to date in regulating cryptocurrency and the growing push by predominantly conservative political forces to reduce federal intervention and give states a bigger say in how this new economy is regulated.
Jill brings us up to speed on
how crypto trade and lobbying groups such as the Digital Asset
Trade Association (DATA), which she Co-Founded, are faring in their
efforts to ensure that states pass consistent laws across the
board. And she explains how the growing tensions between states and
Washington D.C. on crypto regulation involves the principle of
We’ll give you a report card of states and show how some states are doing better than others at this political gamesmanship. Tune in to find out what’s fact, what’s substance, and what’s grandstanding in the growing political battle over cryptocurrency.
Topics Covered in this Conversation with Jill Richmond:
– Patchwork of federal regulations
– Confusion and lack of clarity
– Complex woolly regulatory environment
– States trying to create clarity for companies
– Many states also creating patchwork of laws
– Difficulties of crypto companies to get banked
– Interest from banks to move to foreign jurisdictions
– Confusion over definition of cryptocurrency and ICOs
– Role of federalism in crypto politics
– Conservative groups working to give more power to states
– Digital Asset Trade Association (DATA) working to create consistent state legislation
– States Report Card
– How DATA was created and got involved in legislative activity
– States doing the most on regulation
– Gubernatorial races and impact on industry
– Wyoming becoming Delaware of crypto
– Rise of crypto banks
– Getting Congress to become more engaged
– Closing thoughts and key takeaways
Questions and Comments?
Guest Contact Information
Website: Digital Asset Trade
Transcript: Interview with Jill Richmond
Interview Recorded On: January 8th, 2019
Topic: Politics and Crypto
Chitra: Welcome to the show, Jill. It's great to have you.
Jill: No, it's great to be here. Thanks, Chitra.
Chitra: Thanks so much. So this past year there was a tremendous amount of interpretation and confusion it seemed on how different federal agencies were defining how cryptocurrency should be regulated.
Jill: Sure. So - and I think to lean into that a little bit more - I think you have everyone from the SEC to the CFTC to FinCEN determining whether we're looking at property, we're looking at commodity, or we're looking at a security, but none really turning around and saying this may be a new asset class. So, what you have is agencies that leaned in really hard without creating a lot of clarity and companies wrote reactively and proactively trying to respond to what was either coming down the pike as they anticipated it. And so, interestingly enough, what you've started to see as a result of this kind of complex woolly regulatory environment is states and hopefully on the federal side, trying to lean as heavy as they can and trying to create some clarity for companies, individuals, and otherwise, and obviously consumers in terms of how they need to behave, operate within a framework in the United States.
Chitra: Let's pause for a minute and talk about the current state of affairs for businesses and investors when it comes to pain points and friction in how they're operating.
Jill: Okay, sure. So, I guess you sort of need to define what you're talking about here, are you talking about cryptocurrency? Are you talking about blockchain technology?
Jill: Cryptocurrency, fine. Okay. So for cryptocurrency, you have a lot of companies that have very difficult time trying to get banked. So there are banks that are more or less unhelpful to companies that are operating in the US and companies are finding themselves having to find a jurisdiction and bank outside of the US. So there's this, I would say, this interest in moving to other jurisdictions. So that's a huge pain point for companies. Certainly companies who were trying to bank class last year had a very difficult time. I can get to that later. In terms of what legislation is on the ground, possibly in Wyoming to have a bank that basically is supporting blockchain and crypto-based companies.
There are pain points around, even companies, and I'm often uncomfortable in discussing it, but there were companies who essentially said, look, we want to do an ICO. Can we do an ICO in this country? Does that mean that we have to turn around and now only work with accredited investors?
Chitra: An ICO is an initial coin offering, which is a method of crowdfunding in cryptocurrency.
Jill: Yes. So, essentially, companies last year were producing utility tokens and treating those utility tokens effectively as an investment vehicle and running afoul of major securities law. Essentially treating a token, utility token, extensively, which needs to be treated as utility token. In other words, the token has utility consumptive value within the ecosystem.
Chitra: Unlike a security for instance, which the SEC says ICOs and tokens essentially are.
Jill: That's right. So there is still real value in having a utility. That utility token, however, should not, could not, cannot be treated as an investment contract per se. So it's the intent around what that token’s primary purpose is.
Chitra: And this is a source of great disagreement at the federal level.
Jill: It is still a source of great disagreement, although I don't know because the disagreement is such that, the SEC still looks at the how we test as-
Chitra: Which is a supreme court test that deals with securities regulation.
Jill: That's right. And so, in applying that test to, I guess a utility token, it can be very complicated. And as I said, it often is about the intent of the utility tokens. So, there was legislation that was created out in Wyoming. We can cover that, HB 70, which was a bill that was passed in a Wyoming last March that we helped. And I can tell you that we helped shepherd along, which really stipulated effectively what a utility or an open token is and that it is exempt from property taxes.
Chitra: So this is important because the SEC says that cryptocurrency is a security and is illegal unless regulated by the SEC, then you've got the commodities future trading commission. The CFTC says, oh no, cryptocurrency is a commodity. And then you have the IRS saying cryptocurrency is property. And then you have FinCEN which is the treasury’s financial crimes enforcement network saying that it is money. So you have all of these different interpretations. But now you have a state named the Wyoming saying, we believe that utility tokens can be essentially exempt from-
Jill: Property taxes.
Chitra: ...from property taxes. So it seems like this is a perfect example of federalism at play. So can you talk a little bit about how federalism is kind of playing a role here and eventually they'll, it seems that in situations like that often courtside with the federal laws and so how will this all play out?
Jill: Yeah, it's a good question and we haven't seen it yet. So yes, it is a perfect example of federalism, but you still have major issues that fall within, I guess financial markets to some extent, taxes and otherwise that are still at the purview of the state level. So, as long as you are working closely with the state securities, if you're working around securities law as it relates on the state level, you're extensively okay. Do I think that there's going to be a showdown about what's happening in Wyoming? I don't know. We haven't seen it yet and it's hard for me to predict whether we're going to start seeing the courts take on what's happening on a state level. It's still extremely nascent right now. I mean with Wyoming being probably the front runner and the most maybe controversial legislation on the ground in one particular state.
Chitra: Let's go back to the broader area. It seems that many states are now weighing in on how cryptocurrency should be regulated. And the Brookings Institute essentially categorized states in seven different ways. And they said there are states that are unaware, reactionary, appreciative, organized, actively engaged and recognizing innovation potential. And I know that your trade group, The Digital Assets Trade Association has also done a lot of work and done a report card on how states are fairing when dealing with cryptocurrency. Can you sum up what you’ve found?
Jill: Yeah, I think that's fair. So what you saw in 2014, is the first wave of kind of 20 states that came in and started to regulate or started to create legislation acknowledging cryptocurrency and more or less protecting the consumer. So you've got New York and California and the license. So, but fast forward to 2018 really is sort of the next wave of states that fall within those sort of seven categories. So for us at The Digital Asset Trade Association and I love the Brookings, I thought Brookings did a great job of breaking that down, at least for people who were slightly unaware of what's going on on a state level. What we did is take it a little, a step further, which is to say the elections are imminent and let's kind of highlight some of the governors that we know are either proactive. So in the case of Colorado, we had Jared Polis who we know as a state legislator, formed the blockchain coalition.
Chitra: And you're referring to the 2018 midterm elections.
Jill: [crosstalk] That's correct. Yeah. So anyway, the short version of a long story is that where seven of those states fit. So there are seven key states that are really looking into legislation that not only is acknowledging the technology, but are creating safe harbor legislation and also, trying to identify where blockchain technology fits around public and private services. So, can we have state records on a blockchain? Can we have... how are we treating smart contracts? So you have places like Delaware, Arizona was extremely progressive. Wyoming as we know which issued and passed six bills last year, extremely progressive and probably the most progressive.
So our scorecard was basically giving, we're giving governors and states, essentially an A rating or a passive rating or an A rating, so to speak. So at least voters started to understand where their state fit and where their legislators fit around adopting legislation that was probably creating job creation within their state. So it wasn't just about cryptocurrency, it was, look, we're taking a really strong position. We want companies to set up shop in the case of Wyoming and we want to be seen as an innovation hub.
Chitra: So what's at stake really here is the entire new ecosystem that's being built around cryptocurrency. So it's a jobs and attracting more companies to increase your tax base. There seems to be a lot at stake here.
Jill: Yeah, there is a lot at stake and I think there's still that pivotal moment where legislators are starting to see if they take action, they can retain talent, company innovation, staying either in-state and not fleeing to a new jurisdiction. That's the hope. That, that innovation, that sandbox legislation that gets put on the table in Colorado for instance, creates opportunities for new financial based or fintech-based companies to operate within their state and not flee and go somewhere else.
Chitra: What are the stakes for crypto businesses in terms of the friction we talked about, the pain points, what do they want?
Jill: Oh, well. I guess it was September of this year, there was a real, there was a round table on a federal level that was put together with a number of major players within the industry and above and beyond all else, it was clarity. It was just clarity. It was the, look, in order for us to have big money come into this industry, it needs to be regulated well, it needs to be regulated with clarity and their hopes in the friction at least as far as they're concern is as they're building new financial products and infrastructure, that clarity means everything in terms of, again, where that innovation is coming from. Is it in Korea or is it really coming out of the United States? Is it coming from Malta or is it coming from the United States?
Chitra: So you have at the federal level, a patchwork of guidance and confusion. And now you have states jumping in and every state is trying to issue its own idex on regulation of cryptocurrency. You have the underlying kind of a conservative political movement steeped in federalism that's tried to give more [crosstalk] power to the states from ALEC, the conservative organization, the American Legislative Exchange Council. So you have that underlying kind of political movement that's driving some of this stuff. And then we have groups like yours that's trying to wrestle all of this to the ground and finding some kind of consistency. So how is this all working out?
Jill: Well, it's complicated. So, and maybe it helps if I give a little bit of an information. Oh, I help you understand a little bit about DATA, so-
Chitra: Your organization?
Jill: My organization, which is The Digital Asset Trade Association. The Digital Asset Trade Association, let me just sort of give some context to bring you right back. Digital Asset Trade Association was really formed last year. End of January, we had a round table with the chief information officer at the CFTC and the SEC and we sat down in a private room with stakeholders from blockchain and crypto-based companies and said, what can we do to help you? In not so many words, what can we do to help you communicate directly to the companies and understand their pain points and help you understand how do you either both weed out bad actors or be compliant or operate in a way that is moving the needle on proactivity?
And so what came out of it, at least the timing, was Wyoming was really fast moving in introducing six pieces of legislation. And we as an organization that had just been formed, turned around and said, we're going to focus all of our energy and attention over to Wyoming. We're going to work closely with the Wyoming blockchain coalition. We're going to work closely with Caitlin Long and help them shepherd through kind of a stake in the ground and that's what we did and we did it very quickly. It was within two weeks. We sort of dropped in like a SWAT team, testified, introduced as much language, education, support as the state needed. Walked away and said, okay, we have our mission. Our mission is now to use Wyoming as kind of the ground zero, even though there were other states before, but use Wyoming as sort of the proverbial ground zero and say, now let's try and create federal language that takes HB 70, for instance, on a federal level and create consistency among states.
Chitra: [crosstalk] utility token definition.
Jill: This is utility token definition, exactly. And so, we started to get inbound requests from states and guidance and support and we went over to Colorado and started working in Colorado to help pass legislation that by the way, did not pass. But we have a very different makeup in the Senate and the House right now and we have a very progressive governor. And so the short version of a long story, is DATA was really formed to create consistency among states and we will be working with bodies like ALEC to help support that consistency among states.
Chitra: But at the moment, given this patchwork, the fact which of course is democracy at its best and worst as we know it, is this a blessing or a curse that states are jumping in willy nilly to try to change and shape this ecosystem.
Jill: Is it Pollyannaish for me to say it's a blessing and a curse? Because it is. It's a blessing because you almost need to do this pincer move. There's a little bit of a pincer move that needs to happen. States are going to jump in and they're going to try and clarify and they're certainly going to do that hopefully, or at least in their best interest, which is to attract companies and they're going to go head to, so Wyoming is going to go head to head with Delaware and you've got states that are going to start competing with each other to attract talent, to attract innovation. Now is that helpful for those companies? Probably not. The reasons why states are doing it versus why companies need to have some defining language. So, it's a blessing because now you have companies that are like, great, I feel like I can go move-
Chitra: They have a home.
Jill: They have a home, they can move to Colorado and there are a lot of major companies in Colorado. They can move to, you have kind of, you have companies that are now at least exchanges that have turned around and said, okay, we can move out to Wyoming and leave Washington for instance. So you're attracting talent, but you will have to create a serious pincer move around the introduction of a lot of that consistent legislation on the federal side now. And we hope as a trade organization to bridge, we've got many masters, but to bridge that chasm so to speak.
Chitra: And one of the things you're seeing is the education of politicians both at the federal and at the state level about blockchain technology and cryptocurrency and the midterm elections were significant for the cryptocurrency industry in that you had the election of three crypto savvy, crypto friendly governors, I guess it was Jared Polis of Colorado and-
Jill: Gavin Newsom.
Chitra: Gavin Newsom of California and you had the third one was Mark Gordon of Wyoming-
Chitra: ... of course. And then you had-
Jill: He was inaugurated last night.
Chitra: Yeah. And then you had two who were re-elected. One was Gina Raimondo of Rhode Island and Greg Abbott of Texas. So you've got five state governors now who are getting educated and are knowledgeable and supportive of cryptocurrency. And that seems to, that that's going to have an impact too.
Jill: Yeah, it will. I mean, you absolutely will. I mean, you're literally starting to see the movement of that legislation right now. You've got bills that are hitting the House floor in Colorado. You have new package legislation that we hope we expect to get very little push back on, but we don't know. There's now five bills that are hitting the House floor on Friday.
Chitra: In Wyoming?
Chitra: And what do they, just generally speaking broadly, what are they trying to do those bills?
Jill: So you've got, and I'm going to lose the number, but I think it's HB 76, so forgive me on that. We'll have to edit that. But HB 76, so you have clarifying legislation, which is just re-clarifying HB 70. It helps to clarify in terms of the utility and the exemption of property taxes. And the most important bill, I think that's hitting the floor is a banking bill. Which is setting up the establishment of a bank, which is-
Chitra: A crypto bank.
Jill: A crypto bank.
Chitra: The first of its kind?
Jill: It will be the first of its kind, which is not FDIC insured. So there will be no lending, but it is really for the purposes of depository and acts really for companies to be able to have a bank. I don't know, you've been in this industry long enough to see what it's like to try and set up a bank account. It's often your bank account is shut or frozen or you have a ton of issues and this is a huge pain point for companies. So, I think part of the package of legislation in Wyoming is again, to attract companies and talent.
Chitra: So, in essence is Wyoming trying to become for Crypto what Delaware is for traditional banking for instance?
Jill: It is. Yeah. It is. I think you saw 1977, Wyoming really was the first issue, the LLC. And so, I think there's always been a little bit of a rivalry between Wyoming and Delaware of sorts. But Wyoming has attractive reasons for companies to go. And, I will say that only because I'm watching companies that are relocating to Wyoming that are setting up developer communities across Wyoming that are setting up a secondary office or a third office or a fourth office so that they can take advantage of what Wyoming offers them. Not that I'm plugging Wyoming, I don't live there, but it's-
Chitra: It's one of the states that's proving to be friendly to crypto businesses.
Jill: Yeah, that's right.
Chitra: So let's look ahead to this year, 2019. What do you see happening in terms of federal legislation regulation, state legislation regulation, studies, business development across the spectrum? Where do you see us ending up at the end of 2019 compared to where we were a year ago?
Jill: I think you're going to get a lot more clarity. I mean, I do believe that there is so, I think on a macro level you've seen all of the pieces of the puzzle be put back together again to the extent that you have now strong movement on the state level. So you have a number of bills and key states that are moving. You've got New Jersey that's moving on legislation and Arizona as we know, has moved on legislation. We're getting inquiries from New Mexico and otherwise, legislation that is a little bit more closely aligned with either our agenda of our members or closely aligned with creating innovation etc and just clarity. And I think that the makeup on the federal side, at least in Congress, is such that we will start to move much more quickly in creating consistency as well. So I think-
Chitra: [crosstalk] If nothing else, maybe this is an invitation for Congress to jump in and start to provide some of this legislative language to clarify some of these issues and then reduce the confusion.
Jill: Agreed. I mean, I think this is a good year to see some, either groundbreaking movement or some clarity. So, I think you saw it was maybe December 11th and there was a lot of, it wasn't the most welcome move, but I think you saw the CFTC did a public request for input really around aspects of how Ether and the Ethereum network operates. You're starting to see the engagement at least open inquiries into, let's figure this out.
Chitra: Great. Any closing thoughts, Jill?
Jill: Yeah, I think, look, I'm a big proponent of my organization. We are constantly looking for support in companies that want to join our working groups, especially as we develop working groups post-Wyoming around really around banking and identity and otherwise. And so I would say please sort of visit us at digitalasset.org and keep an eye on what we're doing in Wyoming and keep an eye on what we're doing in Colorado.
Chitra: Great. And where can people learn more about you and the work you're doing?
Jill: So you can find, so digitalasset.org that's probably the best way. And you can certainly reach out to me directly at email@example.com.
Chitra: Awesome. Well, Jill it has been so great to have you on the show, and there's so much going on that a lot of us are not even aware of at the state and federal level.
Jill: Yeah. Thanks for asking. Yeah, thank you.