Coinbase Chief Legal Officer: Analysis of three major regulatory directions in the cryptocurrency field in 2020

The blockchain and crypto communities ushered in legislative and regulatory attention in the new year, which was unimaginable a year ago. In a way, this is not surprising, as many people predict that after Bitcoin price fell 85% from its 2017 peak, cryptography disappeared a year ago. With the advent of Christmas 2018, remarks such as "cryptocurrencies are in trouble" have emerged, and the final conclusion is that cryptocurrencies are either dead or doomed to become a trivial financial note. This year has changed too much.


Last year, Facebook launched the Libra project, which attracted the attention of politicians and central banks around the world. Fidelity Investments has announced a series of new cryptocurrency plans. The Federal Reserve Board revealed that it is working on a crypto project similar to the "central bank digital currency".

Last year, more than 200 new crypto projects emerged. The price of Bitcoin has risen 300% from the bottom, and finally ended 2019 at a relatively average price, but still more than double the lows at the end of 2018. What have we learned? We may be in the early stages of cryptocurrency, but a big league is coming and this game requires rules.

However, in the process of rapid rulemaking, legislators and regulators often rely on assumptions, inferences, and prejudices. This approach exaggerates risks, underestimates benefits, or in some cases ignores current and historical facts.

Here are three cryptocurrency policy themes we can expect to see in 2020, and a discussion of the flaws behind them.

Cryptocurrency poses a threat to monetary policy?

After the announcement of Facebook's Libra project, the idea that cryptocurrencies may affect the central bank's ability to control the money supply was widely spread, but this is not a phenomenon unique to Libra. In July of last year, US President Trump made it clear on Twitter that the U.S. dollar is the only real currency in the United States. Even stablecoins like Libra have attracted a lot of criticism in 2019 because the weight of fiat currencies in the base currency basket may be favorable or unfavorable for individual currencies, but central banks cannot control them. In 2020, legislation on stablecoins will be used to respond to these criticisms.

But the assumptions behind such legislation deserve further study. A premise contained in it seems that the central bank is the most appropriate manager of the money supply. But is this really the case? The recent death of former Federal Reserve Chairman Paul Volcker reminds us of the era of the mid-1970s, when we had to raise interest rates to 20% in order to fight inflation caused by loose monetary policy.

Recently, loose monetary policy before 2008 may have promoted unsustainable credit policies, which led to the financial crisis. In response to the crisis, the Federal Reserve appointed by the president implemented a looser monetary policy.

In June 2010, the second round of quantitative easing by the Federal Reserve led to a sharp depreciation of the US dollar in the following 12 months, all of which happened in one of the world's largest and most stable economies. In other parts of the world, whether it is the euro zone or worse financial conditions such as Venezuela or Zimbabwe, it is doubtful whether the central bank will always be a trustworthy guardian of currency stability.

Another key question is whether a monopoly on currency issuance is one of the signs of a sovereign government? Obviously not, as in the "free banking" era of the mid-19th century, when privately owned banks issued debt instruments called "bank notes", which were currencies of that era. In fact, a recent study by the Federal Reserve Bank of Philadelphia concluded that the era of free banking "does not support the idea that more free entry (private bank bill issuance) will necessarily lead to instability." What will happen to cryptocurrencies?

From a monetary policy perspective, how is cryptocurrency different from other private trading units established through buying, selling, trading or transferring? In 2018, American Express issued more than $ 8.4 billion in member points (approximately equivalent to the circulation supply of the third largest cryptocurrency), a privately created currency, each time an American Express cardholder makes a qualifying transaction This currency is always produced. Like cryptocurrencies, the value of these points fluctuates depending on how and when they are used.

The "Frequent Frequent Flyer Miles" issued by United Airlines privately are worth more than $ 5 billion, and if it is a cryptocurrency, it will become the fourth largest cryptocurrency in the world. Privately issued means of value storage and exchange units are widely accepted and do not appear to pose a threat to the global monetary system.

Finally, there is another view that "currency basket-based" stablecoins (such as Libra) represent unique challenges to the monetary policy system, as the weighting of multiple currencies may be good for some fiat currencies and not good for others.

To be clear: My employer, Coinbase, is a member of the Libra Association, and we hope and expect it to make a valuable contribution to the world. But even so, "currency basket-based" stablecoins represent only a small portion of this market, most of which are backed by a single fiat currency, and various bills received by the Congressional Office restrict all stablecoins, not just Only those "currency basket-based" stablecoins.

Cryptocurrencies pose unique risks for illegal activities

Money laundering, terrorist financing and human trafficking are fundamental threats to the rule of law and our lives, but the main vehicle for these activities is the current banking system, not cryptocurrencies. In the 2018 National Money Laundering Risk Assessment, the U.S. Treasury Department listed a series of multi-million dollar money laundering fines against banks, ranging from $ 425 million at Deutsche Bank to $ 70 million at Citibank, as well as California Commercial Bank and Texas Lone Star Community banks such as National Bank.

However, no one really believes that the main purpose of the banking system is to launder money or to fund other criminal acts; we all know that criminals will use almost all systems to achieve their goals, and combating crime requires sound risk management and complex management Systems, rather than eliminating valuable services primarily for legitimate purposes.

As far as cryptocurrencies are concerned, recent research (performed by blockchain analysis companies Chainalysis and Elliptic respectively) has shown that less than 1% of bitcoin transactions on exchanges involve illegal activities. Nevertheless, it is clear that cryptocurrency exchanges and custodians are not mature enough for banks, for the simple reason that both technology and asset classes are relatively new. However, major crypto exchanges have been registered as currency service companies with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury and have obtained state-level licenses such as BitLicense in New York State.

Nevertheless, it is expected that by 2020, some policy makers will continue to select crypto industry participants for special review of money laundering.

Privacy coins pose a threat to national security and law enforcement?

At the end of 2018, the U.S. Department of Homeland Security announced an investigation into "privacy tokens"-cryptocurrencies that protect sender and receiver information. At first glance, these privacy features seem worrying; after all, if you have nothing to hide, why try to hide it? But it is not difficult to recall the earlier debate about migrating Internet sites from the old http protocol to the encrypted https protocol.

At that time, law enforcement agencies warned against adding a secure socket layer to the Internet architecture, citing that such changes would prevent law enforcement from investigating illegal activities. Without this change, however, e-commerce (which relies on consumer confidence in the security of credit cards and other financial information) may never experience exponential growth following the adoption of https. Ironically, after several high-profile hacks, the federal government eventually required a large amount of information stored by government agencies to be protected by government websites that support https.

By 2020, policy activity and regulation in the crypto space will definitely increase. These policy ideas may or may not be sound in themselves, so we must examine the premise behind them. These three themes, as well as others that will no doubt emerge, need to be examined more closely.