Peter Van Valkenburgh: Crypto regulatory mirrors showcase unregulated sports betting, the Blockchain Regulatory Certainty Act clarifies the power of crypto, and why decentralized systems are critical to AI development.

Important takeaways

• The current state of crypto is compared to unregulated online sports betting, highlighting the disconnect between its purpose and reality.
• Coin Center is dedicated to protecting the development of free and open source software in the crypto space.
• Common sense regulation is necessary for businesses that trust crypto, but not for software development.
• AI development should use decentralized systems for better ownership and reward mechanisms.
• The legal standards for distributing crypto code and AI will likely overlap under the First Amendment.
• The money transfer licensing regime is not suitable for crypto businesses due to various risk profiles.
• Equal treatment is encouraged by banks and crypto companies in terms of legislation.
• Software that provides a neutral infrastructure does not have to face the same licensing requirements as traditional financial companies.
• Forcing decentralized systems to register and report user information is problematic.
• Standardized systems reduce information asymmetries that exist in traditional consumer contexts.
• The Blockchain Regulatory Certainty Act (BRCA) clarifies the power of money transfers in the crypto space.
• The BRCA aims to provide legal clarity to FinCEN’s guidance, preventing it from being ignored by prosecutors.
• The prosecution of Tornado Cash has not been clear and should reflect software changes over time.
• The BRCA provides clarity to unregulated blockchain service providers, which is important for developers.
• Non-deterministic governance is important in determining obligations under existing securities laws.

Guest introduction

Peter Van Valkenburgh works as Research Director at Coin Center, a non-profit research and advocacy organization focused on public policy issues of crypto and blockchain technologies. He previously worked as a Google Policy Fellow at TechFreedom, writing policy and litigation briefs on technology issues. At the Coin Center since 2014, he has testified before Congress and briefed US and EU legislators on crypto regulation, including DeFi protocols and blockchain development.

The state of crypto and its regulatory challenges

• “The current state of crypto is like unregulated online sports betting, which is a shame for the industry.” – Peter Van Valkenburgh
• Coin Center focuses on protecting the development of free and open source software in the crypto space.
• “We are a freedom company dedicated to ensuring that people who want to develop free and open source software are protected from persecution or unfair treatment.” – Peter Van Valkenburgh
• There should be common sense regulation for businesses that are honest in crypto, but not for software development.
• “We believe in the reasonable control of trusted people in the space… what we oppose are attempts to license and permit the development of software or the operation of a truly neutral infrastructure.” – Peter Van Valkenburgh
• The money transfer licensing regime is not suitable for crypto businesses due to various risk profiles.
• “It’s ironic that Coinbase can be regulated in exactly the same way as MoneyGram or Western Union right because their risk profiles are different, consumer protection issues are different…” – Peter Van Valkenburgh
• There should be equal treatment between banks and crypto companies in terms of regulation.

AI and decentralized systems

• AI development should enable decentralized systems for better ownership and reward mechanisms.
• “I would be very comfortable if the way AI was built in the next few years was possible with decentralized systems like who owns the computing resources and how we reward the training data and things like that.” – Peter Van Valkenburgh
• The legal standards for distributing crypto and AI code will likely be the same under the First Amendment.
• “The same start that will be placed in the crypto world … will be the same with respect to the legal standards developed under the first amendment.” – Peter Van Valkenburgh
• Decentralized systems reduce the information asymmetries that exist in traditional trading environments.
• “The data disparity that we often worry about in a vendor subscription situation… starts to fall apart when we’re talking about truly decentralized systems.” – Peter Van Valkenburgh
• Forcing decentralized systems to register and report user information is a major problem.
• “The thought that we’re going to force you to read all the people who bought and read your book and report to the government … it’s starting to look Orwellian and it’s a problem.” – Peter Van Valkenburgh

The Blockchain Regulatory Certainty Act (BRCA) and its implications

• BRCA aims to clarify the power of money transfers in the crypto space.
• “The first provision to focus on in this question is the blockchain regulatory certainty law … it was intended to create a safe harbor for the prosecution of unlicensed money transfers.” – Peter Van Valkenburgh
• The BRCA provides legal clarity to FinCEN’s guidance to prevent prosecutors from ignoring it.
• “Tom Emmer’s bill, the Blockchain Regulatory Assurance Act, just took that FinCEN guidance and put it together and said we’re going to make this a legal rule so it can’t be ignored because guidance is guidance…” – Peter Van Valkenburgh
• The BRCA provides clarity on what constitutes unregulated blockchain service providers, which is important for developers.
• “I think BRCA’s definition of an unregulated blockchain service or service provider or software developer is much clearer than anything we’ve had in the past outside of that 2019 FinCEN guidance.” – Peter Van Valkenburgh
• The BRCA may exempt certain blockchain operations from the obligation to transfer money if there is no ongoing control of customer funds.

Legal challenges and developer liability

• The prosecution of Tornado Cash was not clear and should have reflected changes in the software over time.
• “The biggest problem with the charging of Tornado Cash is that they were not very clear about the facts because it is clear that Tornado Cash changed over time and they should have charged it accordingly.” – Peter Van Valkenburgh
• Developers of illegal software may face criminal charges due to the broad definition of money laundering.
• “I wanted to focus on the planning of the money laundering case because the reason I think it is important is because you know if we completely separated from 1960, the developers will not continue to face criminal charges in my opinion, the broad and wrong way the prosecutors used the conspiracy in money laundering cases.” – Peter Van Valkenburgh
• The DOJ’s interpretation of the conspiracy statute with respect to software developers is particularly problematic.
• “So to me that’s always been a very problematic reading of the federal conspiracy laws… I’ve never seen how we have all these elements in these cases.” – Peter Van Valkenburgh
• Software developers should not be held responsible for how their tools are used by others.
• “You should not be found guilty of transferring money and withdrawing money without a license just because other people use your software to transfer money.” – Peter Van Valkenburgh

Implications of the new bill and financial oversight

• The new bill will create categories of federally regulated financial institutions with BSA AML obligations.
• “This bill will create new categories of federally regulated financial institution that will have BSA AML obligations… it is essentially a regulatory bill that will create new data and data collection to enforce the law.” – Peter Van Valkenburgh
• The Blockchain Regulatory Certainty Act aims to focus law enforcement resources on actual criminals rather than software developers.
• “The bill in the committee that has just passed the house says that the brca rightly says that the brca wants to go after software developers so hopefully the scarce resources will be put to good use on police misconduct that harms victims.” – Peter Van Valkenburgh
• The DOJ needs better funding and resources to effectively prosecute serious financial crimes.
• “We highlight the importance of better funding to ensure we have the resources to prosecute hard enough to enforce these tough laws.” – Peter Van Valkenburgh
• Law enforcement needs to effectively prioritize resources to fight serious crime rather than chasing software developers.

Crypto reputation and future directions

• Crypto has a bad reputation and is often considered the biggest online casino.
• “We have to be honest that crypto has a bad name right now because it’s like a huge online casino which is unfortunate…” – Peter Van Valkenburgh
• Crypto needs to replace the existing financial system to avoid being seen as just online sports betting.
• “The basic level that needs to be the one that needs to change the existing financial system or we will always be slaves to… just online sports betting without a stupid regulator…” – Peter Van Valkenburgh
• The crypto industry must admit its shortcomings and work to build a better reputation.
• “We have to talk about how people don’t like it and find a way to love it and build it better so that it’s worth loving again…” – Peter Van Valkenburgh