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A Blueprint for Reforming the Crypto Token Market

Michael J. Casey is the chairman of CoinDesk’s advisory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.


The token industry needs to grow up.

I’m not talking about financial growth, at least not for now. With $20 billion raised in “initial coin offerings” and an overall token market valuation of $300 billion, early participants in crypto finance have done a spectacular job of “growing” their monetary value as measured by the very fiat currencies many claim are being disrupted.

But if digital tokens are to matter and if they are to enable networks of distributed trust, the industry needs to advance to adulthood.

Only with a self-regulating system, in which broadly accepted norms of behavior, modes of communication and business practices are encouraged, can the industry shake off a Wild West image of Lambo-loving scammers and move from the fringe into the mainstream.

This, by the way, is also the only way to experience true and meaningful financial growth by which opportunities are distributed beyond a small set of early adopters to a wider array of participants in the $100 trillion world economy.

As such, it is encouraging to see proactive efforts to promote best practices. The latest such effort comes from the Token Alliance, an industry initiative of the Digital Chamber of Commerce that comprises 350 global industry participants, including blockchain and token experts, technologists, economists, former regulators, and practitioners from over 20 law firms.

On Monday, the Alliance will release its first white paper, one that aims to bring two important constituencies – industry leaders and regulators – into alignment around the appropriate business and legal treatment of digital token issuances.

In particular, it seeks clarity for tokens that are not intended to be investment contracts – typically those that have a “utility” value in driving a decentralized network of users – and for that reason, deserve to be excluded from existing securities laws.

According to a foreword from Token Alliance co-chairs Jim Newsome, a former chairman of the Commodity Futures Trading Commission, and Paul Atkins, a former commissioner of the Securities and Exchange Commission, the principles outlined in the report “are designed to help market participants understand the parameters around their activity and to act in a fair and responsible manner toward potential purchasers.”

At the same time, Newsom and Atkins add that these guidelines can help policymakers understand the technology better so as to avoid drafting draconian rules potentially creating “an environment of regulatory arbitrage, or even worse, unintentionally decrease the attractiveness of a jurisdiction regarding innovation and jobs creation.”

It takes two…

The key point here is that this is two-way street.

On the one hand, policymakers clearly need educating – as highlighted by California Democrat Rep. Brad Sherman’s ludicrous suggestion to ban bitcoin during Congressional hearings a week and a half ago.

But on the other, regulators are going to be much more willing to give the industry the regulatory space it needs to flourish if there isn’t widespread public anger over unsavory and exploitative behavior in the crypto community.

After all, as smugly satisfying as it was to read all the “Old Man Yells at Cloud” memes that mocked Sherman, his and other lawmakers’ misplaced proposals were prompted by some pretty shoddy industry behavior, especially in the initial coin offerings (ICOs) market.

Assessments of ICOs have concluded that as many as two-thirds of those in 2017 were scams. Notably, the lament heard most widely and vociferously about this problem is from within the crypto community itself, with serious developers complaining constantly about “shitcoins” and “vaporware” projects raising eight-, nine-, even ten-figure amounts without building a single thing.

Some in the community would much prefer that the whole “ICO” thing would go away. (In all fairness, “ICO” really is a terrible term, one that immediately labels tokens as purely a money-raising enterprise, substitutable for an IPO.) They want the world to recognize the relative purity of bitcoin and perhaps a smattering of other fully mined altcoins. (Ether is usually excluded from this list.) They view bitcoin and its ilk as the only true censorship-resistant systems, neither reliant on third parties to operate nor at risk of being shut down by regulators.

But token issuance can’t be wished away. It’s here to stay.

Irrespective of the debated legal distinctions between “securities” and “utility tokens,” sales of these digital assets have already proven to be an effective way to bootstrap the development of decentralized networks and the decentralized applications (dapps) that thrive within them. It’s not clear whether pure cryptocurrencies such as bitcoin bogged with scaling challenges will ever have the capability to support the smart contract functionality that dapps require.

The case for self-regulation

Once you accept the premise that ICOs are here to stay, it should also be apparent that in order to flourish they must operate within a constructive legal framework.

This is not to say that token projects shouldn’t be disruptive, but it is an acknowledgment of the need for pragmatism. It should be possible for crypto developers and entrepreneurs to hold true to their decentralizing and anti-corporate principles yet also foster a less cynical, more realistic relationship with government.

The best route to a constructive legal framework is to foster a reliable, structured system of self-regulation, which can be designed to soften the compliance blow for startups. Most of the responsibility for boosting public confidence in the technology should rest with industry participants rather than law enforcement, but fall within a predictable legal framework.

We must develop standards of accountability, attestation, reputation and certification (decentralized or otherwise) that weed out bad actors from the market and do so in a way that gives regulators confidence that the social objectives that define their mission are being upheld.

This is the basic principle behind self-regulatory organizations (SROs) at regulated exchanges and traditional certifying bodies in finance such as the Financial Industry Regulatory Authority (FINRA). This is not to say the crypto industry should follow these heavy-handed approaches, which are rightly criticized for overly protecting incumbents. Rather, it is to say that with the help of the kind of transparency and accountability offered by blockchain technology and crypto innovations such as multi-sig custody, an opportunity exists to build institutions that foster both public confidence and startup-led innovation.

For this self-regulatory approach to succeed, the authors of the Token Alliance paper argue, it is vital for governments to provide a supportive legal framework. Here, in their bid to educate regulators, they favorably describe the approach applied in the U.K. territory of Gibraltar, which requires “adequate, accurate, and balanced disclosure of information to enable anyone considering purchasing digital tokens to make an informed decision.”

The section on Gibraltar’s forward-looking framework for token regulation stands in stark contrast to preceding sections, which cover evolving legal approaches in Australia, Canada, the U.K. and the U.S. Put these together, and a picture emerges of continued uncertainty and contradictory perspectives.

On the industry education side, the Token Alliance paper takes a decent stab at laying down principles for how development teams that take on the role of “token sponsor” should bring their tokens into the world if they are to avoid having to comply with securities law.

Some of these proposed principles will be unwelcome to teams who’ve viewed ICOs as get-rich-quick opportunities. The authors argue, for example, that sponsors’ white papers “should avoid discussion of any allocation of tokens for investors, developers, founders, or employees,” since these facts would be more relevant to an investor than a token user – highlighting the token’s vulnerability to being regulated as a security.

This, however, is the price of growing up, and it’s a price worth paying.

Blueprint image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Card Operator Discover Joins Blockchain Trade Group

Global payments giant Discover Financial Services joining the Chamber of Digital Commerce (CDC) to boost the group’s mission of blockchain education and advocacy.

Joining the CDC’s executive committee as a full member, the firm, which operates the Discover Card, will “join the Chamber’s efforts to educate, promote and accelerate the adoption of blockchain technologies worldwide,” the organization announced Tuesday.

Discover’s payment rails operate in more than 185 different countries, making it one of the “largest card issuers in the United States,” according to a press release.

Perianne Boring, president of the CDC, said her organization was “thrilled” to welcome the new member, adding that it “is really a sign of the maturation of the blockchain industry, in that one of the largest companies is getting involved and I think it’s a positive sign.”

Discover and the CDC have previously worked together on a code-a-thon, she told CoinDesk, adding that the payments firm “started increasing their interest and their operations in the blockchain space, so it was kind of an organic relationship that formed.”

As a fully-fledged member of the group’s executive committee, Discover will work “with industry and government” in promoting the space, which is at present something of a legal gray area.

“The biggest policy issue that the blockchain technology ecosystem is facing today is regulatory uncertainty,” Boring explained.

She continued:

“With the plethora of regulators from the [U.S. Securities and Exchange Commission] to the [Commodity Futures Trading Commission] to [the Office of Foreign Assets Control], all of these regulatory bodies are taking their approach to the industry and there’s no central point of contact. No one knows who has jurisdiction over what.”

To compound the issue, state-level legislatures and regulators are developing their own rules, which is creating a patchwork system across the U.S., she said. Continuing to advocate for clarity in the regulatory space should help bring a more uniform approach, Boring said.

Discover’s membership of the CDC will help “strengthen our community,” Boring said. “It’s really telling that you have a regulated financial institution getting involved in such a public way.”

Discover card image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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Dubai 2020 Blockchain Dream Sees First US Govt-Backed Trade Mission

The Chamber of Digital Commerce (CDC) is leading the first Blockchain trade mission to Dubai in direct partnership with the US Department of Commerce.

The pioneering four-day visit, which includes participation from a number of Blockchain companies, comes as part of efforts to make Dubai a Blockchain city by 2020.

Representatives from Bloq, Cisco and Netki among others are on board what is the world’s first certified trade mission centered specifically on Blockchain.

Milestone of exciting time

“This mission comes at an exciting time,” the US Ambassador to the UAE Barbara A. Leaf stated in an accompanying release issued Tuesday.

“Leading US financial technology providers are here to share the latest in Blockchain technology developments with UAE banks, investment firms, and government agencies to ensure the integrity of financial transactions.”

The move also marks a milestone for the CDC itself, which has until now focused more on domestic advocacy of fair policy regarding Blockchain and cryptocurrency regulation.

Dubai has adopted an aggressive program of Blockchain and IoT innovation at state infrastructure level over the past few years, with multiple international partnerships aiming to make the 2020 Blockchain deadline come to fruition.

CDC founder Perianne Boring added:

“The UAE represents a progressive view in Blockchain adoption, and serves as a great example for other governments around the world. We look forward to creating new business opportunities and partnerships, thereby advancing global adoption of Blockchain technology.”

Dubai is also the home of a major Bitcoin-only real estate venture with the backing of the UK’s Baroness Mone, which will see apartments worth over $330 mln built for purchase with the virtual currency through 2019.

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US Commerce Department Backs Blockchain Trade Mission to UAE

Representatives from the blockchain industry are in the United Arab Emirates (UAE) this week on a trade mission backed by the U.S. Department of Commerce.

Organised by the Washington, D.C.-based trade group, the Chamber of Digital Commerce, the trip includes executives from a number of firms – including Bloq, Cisco, CMT Digital, Cognizant, Gem, Hogan Lovells and Netki – the organization said today. The effort will include meetings with public- and private-sector officials, taking place from October 1–5.

The mission signals the growing profile of the technology in the region, with Dubai among the emirates having taken what is perhaps the most proactive stance to date. Dubai’s leadership has charted a progressive course on public-sector applications in the past two years, investing in startups and looking to companies like IBM as it pursues use cases in areas like identity, among others.

Barbara Leaf, the U.S. ambassador to the UAE, said in a statement:

“Leading U.S. financial technology providers are here to share the latest in blockchain technology developments with UAE banks, investment firms, and government agencies to ensure the integrity of financial transactions. U.S. financial technology firms are uniquely poised to assist Dubai’s vision of becoming one of the world’s first governments to use this technology.”

According to the chamber, the trade mission will advance the role of U.S. companies in Dubai’s ongoing blockchain efforts, including its city-wide governance initiatives.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has ownership stakes in Bloq, Gem and Netki. 

Dubai image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Have breaking news or a story tip to send to our journalists? Contact us at [email protected].

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Trumping the IRS: Could the Timing Be Right for Bitcoin Tax Reform?

President Donald Trump’s push to overhaul the U.S. tax code could include a potential payoff for bitcoin users.

With the president and the Republican Party’s sights set on tax reform as a way to send a strong message to voters ahead of the 2018 term elections, it’s potentially a good time for a bill easing the tax reporting requirements for cryptocurrency to be included in a final package.

Since the Internal Revenue Service’s (IRS) 2014 decision that cryptocurrencies should be treated for tax purposes as property, the agency has been met with criticism for not adequately instructing consumers on how to report based on this conclusion.

And the Cryptocurrency Fairness in Taxation Act (CFTA), introduced earlier this month, aims to push the IRS into doing just that.

“The bill is kind of a reaction to the 2014 IRS decision that classified cryptocurrencies as property, and that means they’re subject to capital gains tax,” said Eve Lieberman, chief of staff to Representative Jared Polis, who with David Schweikert, introduced the bill.

By aspiring to make cryptocurrency transactions under $600 exempt from IRS reporting requirements, the bill would also require the IRS to provide additional guidance to customers on how they should report transactions above that threshold.

Speaking at a recent workshop on cryptocurrency taxation in Washington D.C., Lieberman said members of the Blockchain Caucus, which Polis and Schweikert co-chair, are strategically introducing the bill to the House of Representative’s Ways and Means Committee (responsible for taxation matters) before the drafting of tax reform starts rolling.

By getting the bill in front of Congress soon, the caucus believes they’ll be able to get the bill into the president’s final tax reform proposal.

Lieberman said:

“We need guidance in this area. There is a lack of clarity. This is an emerging technology, and good-intending taxpayers want to obey the law but they can’t because there’s this barrier [to compliance].”

Onerous requirements

For the Blockchain Caucus, the bill is a way to pressure the IRS into giving lawful, well-meaning cryptocurrency users the necessary tools to fulfill their tax reporting obligations.

And there are big challenges to this today. Case and point is the fact that only 802 Coinbase users reported capital gains from bitcoin on their 2016 taxes, a figured disclosed by the IRS in legal filings related to its “John Doe” summons of the exchange’s user information.

Jonathan Johnson, chairman of Overstock – which accepts payments in more than 50 different cryptocurrencies – said a chief reason for this is that compliance with the existing IRS guidance is extremely difficult, if not impossible, for most bitcoin users and businesses.

“Overstock is able to do it because we have scores of people on our finance team. Some people are charged with knowing the price of each bitcoin when it came in, how long we hold it and the price when we use it. That’s complicated,” Johnson said, during the workshop.

Further, Johnson suggested the IRS’s decision to treat bitcoin as property has not only reduced its utility as a payment system, but also has inflated its value as a speculative instrument.

Johnson said:

“Frankly, I think that’s what’s helping to create what I would say is a premature acceleration in the price of bitcoin, because people view crypto as investment rather than currency.”

In its defense, the IRS has stated it has not had sufficient resources to devote toward clarifying its cryptocurrency reporting guidelines.

However, Amy Kim, global policy director and general council at the Chamber of Digital Commerce, suggested the John Doe summons of Coinbase user information sends a different message.

“The IRS didn’t have the resources to apply to additional guidance, however, they clearly have resources to battle away on the enforcement side and in court,” she said.

Victory in sight?

While there are no guarantees the CFTA will make it into the final tax reform bill, having cryptocurrency taxation language drafted and on the discussion table is significant, particularly since Schweikert serves on the Ways and Means Committee.

Equally encouraging, the bill has not drawn any outcry from the more Luddite members of Congress.

“Usually when you introduce legislation you want to line up supporters and make sure you know the risks and benefits before introducing some legislation. There haven’t been any opponents to this legislation, and it’s gotten a lot of recognition, so I think that speaks for itself,” Lieberman explained.

And as President Trump and other Republicans look to change voter opinions about their lack of success so far, Grover Norquist, president of non-profit Americans for Tax Reform, said Republicans will look to develop a tax package that’s much stronger and more sweeping then would be otherwise necessary.

Norquist said:

“These guys get that if they want to come back in the majority, they need the biggest, whoop-ass, toughest tax cut they can pass as soon as possible.”

And as the cryptocurrency community continues to grow, reform in this area could be an advantageous target for politicians looking to secure more votes.

Democrats could also be in support of the bill, even though they’ve to date stonewalled most of the president’s legislative priorities, since the party doesn’t want to appear like they’re opposed cutting taxes.

Jonathan Williams, vice president and chief economist at the American Legislative Exchange Council, contends the tax reform bill will be finalized and signed into law by the year’s end, which puts significant pressure on the Blockchain Caucus to get the CFTA in front on Congress member’s eyes sooner than later.

A back door

While Lieberman isn’t as optimistic that tax reform will be a slam dunk, she hinted at other channels available by which CFTA could advance.

For instance, one common means is the so-called “omnibus spending bill,” which joins together smaller, regular appropriations bills into a single package, and is generally passed each year in December before Congress adjourns for the Christmas season.

Lierberman contends:

“Things in Congress move by getting attached to large pieces of legislation at the end of the year, so this could be attached to some spending bill or some other legislation. I tend to think a lot of things just pass in the omnibus package at the end of the year.”

While this commonly used way to attach and ultimately pass into law unrelated pieces of legislation – known as “policy riders” – is not without controversy, in this instance, it could prove a critical conduit for advancing the wider adoption of cryptocurrencies.

President Trump image via Shutterstock

The leader in blockchain news, CoinDesk is an independent media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. Interested in offering your expertise or insights to our reporting? Contact us at [email protected].