Pushing Back on FinCEN non-custodial Bitcoin Regulation

Hi, you're listening to Stephan Livera podcast. Today for episode two hundred and thirty-nine, we are talking about the proposed new rule in relation to FinCEN and non-custodial Bitcoin regulation. Jake Chervinsky, well-known lawyer in the space, joins me to discuss and explain a little bit further about what's going on here and what can- And be done to push back. This show brought to you by Swan Bitcoin. Bitcoin has emerged as a major player on the global stage. It has been significantly de-risked over the past year, with major investors, institutions, and companies making big investments. At this point, everyone should probably own at least a little. A common way people get started is establishing their initial position with a one-time buy, and then start dollar-cost averaging with automatic recurring buys. Swan Bitcoin was built to do just this. With Swan, you can create a recurring purchase plan like a hundred Dollars a week or twenty dollars a day, and you can make one-time buys. Swan supports bank wires for larger amounts and ACH transfers for smaller one-time buys. That's rolling out to members now. Swan is available in all states and territories of the US, including New York. They are the best place to send your friends and family when they're ready to start investing in Bitcoin. Send them to swanbitcoin dot com slash livera, and Swan will drop ten dollars of free Bitcoin in their account when they become a member. Knox is a Bitcoin custodian dedicated to ensuring comprehensive insurance coverage for client assets, much of what passes as insurance today isn't purchased for the sake of protection, but for pure marketing reasons. Knox believes insurance should exist to make fund recovery possible. There's no sharing coverage between customers. Knox takes a unique approach when it comes to purchasing insurance for customer assets. Coverage is set aside exclusively for every customer in a one to one capacity, all with a comprehensive policy covering a range of loss and theft events, including internal collusion. If you are a Bitcoin company, RIA, fund, trust, or family office Make sure to contact Knox to discuss Bitcoin custody and insurance. That's knoxcustody dot com. Lend at Hoddle Hoddle is a global Bitcoin backed lending platform, so you can lend and borrow anonymously on your own terms. It's a peer to peer lending solution with a secure and transparent collateral storage system using a unique multi signature escrow for each deal, so you can grow your savings and earn returns on your investment. So if you have stablecoins lying around, you can put up an offer and earn interest by lending. Lending on Lend at Hoddle Hoddle, or if you are a Bitcoiner and you need some liquidity but you don't want to sell, you can borrow stablecoins and keep on hodling by paying interest. With Hoddle Hoddle's Lend platform, you set your own terms and you put up offers depending on how long you want to borrow or lend and interest rates. Go and check them out, lend.hoddlehoddle.com. Jake, it's been a little while and I've been keen to get you on and finally we're making it happen, so welcome to the show. Thank you, it's great to be here. So Jake, before we get started, perhaps you just want to, tell us a little bit about yourself and also if you have any, you know, lawyer disclosures and things you need to do.

Yeah, for sure. so my name is Jake Chervinsky, I am general counsel at Compound Labs, which is an open source development company in the crypto space. I, I do have one quick disclaimer, which you've probably heard from lawyers on, on podcasts before, which is although I am a lawyer, I am not your lawyer, nor do I represent anyone in the audience, so nothing I say here is legal advice, just my thoughts on, on the issues we'll be discussing.

Of course. And so the hot topic is some of these new regulations. So can you give us just a, an overview?

Yeah, sure. So, I guess, to give you the big picture first, what we're seeing now is new developments in global anti-money laundering regulation, which is the set of rules that require financial institutions, so for our purposes, Bitcoin exchanges and custodians and payment processors to KYC IC or to collect due diligence information about their customers like names, addresses, social security numbers, other information, to record that information and then also to report it to the government, you know, depending on what jurisdiction you're in. here in the US, we focus most on the Bank Secrecy Act, which is the federal law that requires a variety of crypto companies companies, including money transmitters, to comply with those anti-money laundering obligations. What's happening now, and I think the reason, this is the right time for us to get together, is the Financial Crimes Enforcement Network or FinCEN, which is a bureau of the US Treasury Department, has proposed a new rule that would expand the anti-money laundering obligations of those crypto companies beyond where they've ever- ever been before. So up until now, the majority of the anti-money laundering regulations only applied to transactions of Bitcoin between crypto companies, as in you're sending Bitcoin from one exchange to another exchange or from one exchange to a custodian or some other regulated company. What FinCEN is proposing essentially is to expand those record-keeping and reporting obligations to transactions between institutions and wallets, meaning the company would have to do some KYC for transactions that a customer like you or me, would, you know, try to either withdraw Bitcoin from the exchange to our own wallet or deposit Bitcoin into the exchange from our wallet. So that's, that's what's happening right now here in the US.

So there are a few terms mentioned inside this new- new, proposed, regulation, perhaps you could just spell out what they mean. So they say CVC and LTDA, what do those mean?

Yeah, so those are sort of peculiar terms to FinCEN. basically every government agency comes up with its own acronyms to describe, you know, the, the types of things that we all talk about very differently in the industry. CVC stands for convertible virtual currency. It's basically just FinCEN's word for For any cryptocurrency or digital asset, and, you know, just as an example, the SEC, the Securities and Exchange Commission, uses the term digital asset to describe the same thing. So it's just a sort of a peculiar term for cryptocurrencies or digital assets in general. LTDA is actually a new one that I haven't seen before until just now. it stands for legal tender digital asset, which I think we would think- Think of as a CBDC, a central bank digital currency, meaning a cryptocurrency that is officially issued by a government and represents not just, you know, a stablecoin that reflects the value of a fiat currency, but actually is recognized as an official fiat currency.

Right. And while we're on this whole terminology thing, I think many in the community would perhaps bristle at some of the terminology going around. Obviously, we were- Joking on Twitter about self-hosted or unhosted wallets, why is there this big difference in the way the terminology is being used? Is this essentially an attempt to reframe the conversation around privacy and sovereignty in our wallets?

Yes, I think it is. so, you know, the government, as I mentioned, they adopt terms that sort of fit their narrative. I think virtual currency is actually one of them, right? Something that's virtual is- This, this sounds sort of lesser than something that is real. And similarly, the government has adopted the terms hosted wallet and unhosted wallet to describe what we, what we would think of as simply an account at a third party custodian or your own wallet. And I, I think the reason that they've done that in large part is something that is hosted, a hosted wallet, sort of sounds safe, right? It's hosted, there's someone in charge. It's all sort of neat and tidy, whereas something that is unhosted sounds sort of dangerous, right? There's no one hosting it, who knows what's going on, it's kind of wild and out of control. And I do think that's the signal that some folks are trying to send by using the terms hosted and unhosted. The, there's a third term that you mentioned, which is self-hosted. I think that one has been a little bit confused, you know, among folks on Bitcoin Twit- Twitter. self-hosted isn't a term the government has been pushing. It was actually the industry's response to the term unhosted in an attempt to say These wallets aren't some scary, wild, uncontrolled, unhosted thing. These wallets belong to real people who are exercising their rights of self-sovereignty and control of their own property by, quote-unquote, hosting their own wallets for themselves. And I think that wasn't received totally well because, I think you and I would agree we should really just call these things either accounts hosted at a trusted third party. Party or wallets, 'cause a wallet is the default, but that's sort of the genesis of that term.

Well, thanks for explaining that, and I think, for the listeners, maybe, save the firepower against the unhosted wallet term then.

Yeah, I think that's right. And, and you know, honestly, the truth is, I don't think it matters what you call them. What matters is the principles underlying this issue, and I think we should try not to get too distracted a-about semantics and really focus on the issues.

Of course. And so let Into exactly what the burden or reporting obligation rather is on some of these Bitcoin exchanges or companies that are regulated. So can you tell us a little bit about the typical reporting obligations and how that would shift under the new, proposed regulation?

Sure. So under current law Regulated institutions have to comply with something called the Travel Rule, which you probably hear about a lot. And what the Travel Rule basically says is, when a regulated institution sends Bitcoin or some other digital asset to another regulated exchange, along with the asset, must travel information about the parties who are making the transaction. So if an institution is sending Bitcoin to some other inst- institution, they have to include information about the customer who has sent that transaction. the travel rule essentially applies internationally, so it is a US law, but the same travel rule has essentially been implemented in every major jurisdiction, with the exception of some, places that you'd think of as offshore banking havens that the sort of Westernized, world is trying Trying to bring into compliance. But the travel rule hasn't ever applied to transactions outside the world of those regulated financial institutions. Anti-money laundering compliance obligations in general don't apply to individuals who are transacting on their own behalf. It only applies when there is a third party intermediary that's transferring funds on behalf of customers or on behalf of other people. The proposal that FinCEN has put forward now is similar to what has come to be known the Swiss rule. This is a, a sort of different implementation of the travel rule that Switzerland came out with earlier this year, which says that exchanges or other regulated institutions also have to collect information about transactions with wallets, not just transactions with other- Institutions. The Swiss rule says that in order to process a transaction between institution and wallet, the institution must verify the beneficial owner of the wallet, meaning to figure out basically who owns the private key so you can figure out who is the person receiving these funds. And the proposal from FinCEN is very similar. It doesn't use the word verify, but what it says is a regulated in- institution must obtain and retain the name and physical address of the counterparty of a transaction. Meaning, if you're, let's just say Kraken, for example, you're a Kraken customer and you wanna withdraw Bitcoin to your own wallet, you would have to provide your name and physical address associated with the public key that you are withdrawing Bitcoin to. And similarly, if you wanted to withdraw Bitcoin from Kraken Kraken to someone else's wallet, you would have to give Kraken the name and physical address of that person, even though they aren't affiliated in any way with Kraken or with whatever institution you're using. So it's an expansion of anti-money laundering obligations in a way that will jeopardize the privacy of more people who are using Bitcoin.

I'm also curious there because, well, maybe a typical way that Bitcoin- And companies and exchanges will try to comply there, is they will try to say to their customers, "Hey, now we want to do withdrawals only to you, and can you just certify this is only going to you and that you're not actually directly spending that out to, say, a merchant, for example?" Is that something we might see?

It's certainly possible. you know, the problem with these requirements is it doesn't make a whole lot of sense to prove who the owner is of a string of letters. Numbers, right? How do you prove the owner of a private key? And so what ends up happening is these regulated institutions get very confused about how they can comply with these regulations, but they have to comply one way or another, or they could be at risk of being penalized for violating the regulation. So one way to mitigate the risk of a violation is for an institution to say, "Look, we're just not gonna allow withdrawals." Or deposits involving some other third party who isn't one of our customers, someone who we don't have a business relationship with, right? Someone who hasn't signed our terms and conditions, potentially waiving liability or other rights in litigation. So we're only going to allow these transactions with our customer. that would obviously be a, a significant limitation. I think that the biggest fear, though, is that these institutions would say Even for our customers, we fundamentally don't understand how we can verify the owner of a private key, because anyone else in the world could have the same string of letters and numbers and therefore have access to the Bitcoin associated with that private key. So we're just not going to allow withdrawals or deposits at, at all. We're gonna essentially mandate custody and cut off transactions with people's wallets. That would be an extreme risk But I do think we need to be at least cautious about the possibility that that's where this is heading.

Right. And so it may be that that's not a, that's not where it goes straight away, but it may be that, yeah, there is a risk there that it would try to- Push us down this pathway of becoming a walled garden that nobody can leave, and then what would happen to the Bitcoin network at that point? And then there would be kind of the whole, all the bitcoins that are sort of outside of that walled garden, and it, it would just be a very weird situation. and I think probably an interesting example, and, you might have seen this also, is, I think in the Netherlands there was an example with an exchange called Bitonic, and they were asking for basically a wallet screenshot. Now, that doesn't necessarily- Verify that, you know, this person-- well, first of all, they could take a Jake, they could have just shown a screenshot from someone else's wallet, but I, I guess, what's your take on that aspect? Could that be a way that maybe some business-- Bitcoin businesses try to comply with this rule, even if it's not technically bulletproof there?

It certainly could be. I think this sort of gets back to theories of regulation. I mean, let's assume for a second that we think that regulation is appropriate in the first- First place, which I think maybe you and some of the audience might not agree with, but let's just accept that premise for a minute. What you want in good regulation is clarity about how the target of the regulation can comply. Generally speaking, businesses aren't that afraid of regulation as long as they know how to comply, as long as they're not worried that something is gonna go wrong and they're gonna get tied up in some lengthy investigation or enforcement action that's going to result in significant penalties. So you want your regulators to be clear about how companies can comply. And I think in this instance, it is very unclear, including in the case of, of the Netherlands, how a regulated institution can verify the owner of a private key, as you said, a screenshot could be from anywhere. Also, I could sign a message using a private key, that doesn't mean I'm the only one who has that private key. So I, I think that there are a lot of open questions about how, someone can comply with this rule. The hope is that regulators Users are providing some clarity to say, "Look, if you do it this way, if you take a screenshot, we're not gonna come after you." But again, in terms of good regulation, that should be made clear to the public, not just to companies behind closed doors, and, and we're not seeing that kind of public process that we would expect in the case of good regulation that works well.

So what is the impact then in terms of compliance burden and the potential chilling?

Well, it, it really depends on how regulators interpret this. I think if, if they were to say, you know, in FinCEN's example specifically, it is enough for the customer who is processing the withdrawal or receiving the deposit to simply say the name and physical address of the, counterparty to the transaction, and no further diligence is required. I suppose the compliance cost is, is fairly low, but the compliance cost is only one factor to consider. There, there are others. in terms of a chilling effect, I think first of all, this is a pretty significant infringement of privacy rights. I, I think that it's very different from regulations that have applied in traditional finance. It's sort of a very specific- targeting toward Bitcoin in the sense that when you withdraw paper cash from a bank, you don't need to prove anything about where the cash is going when you withdraw it, and similarly, if you deposit cash at the bank, you don't need to prove where the cash is coming from. And to have this additional burden on the individual to hand over more information about the people- People that they're conducting financial transactions with is, a significant infringement of their privacy rights, very different from what we've seen before. And you can imagine that customers who don't want to sacrifice their privacy rights would simply leave the jurisdiction, they would start patronizing companies in other jurisdictions, right? Bitcoin is a global phenomenon, and so I think that, that there's a sort of a, a chilling effect in that sense. I also think it may just discourage people from- Taking custody of their own assets, they may not wanna deal with these, compliance burdens, and they may decide, you know what, I'm just gonna leave these assets in custody, 'cause I don't wanna deal with it, and I think all of that is, is really harmful, to Bitcoin and, and certainly not worth the alleged benefits that these regulations would provide government.

It's a really interesting point you mentioned there around how customers can go jurisdiction shopping, because I know even in the case of a regulation like- FATCA, Foreign Account Tax Compliance Act, and essentially this requires businesses around the world to go be a tattletale back to the US government if there are any US customers. And so it kind of pushes people in certain ways because now those non-US Companies are often just saying, "We don't want you if you're a US customer, "because we don't wanna deal with that compliance burden. but in a similar way, like you were saying, maybe US customers will then go and be customers in some other Bitcoin business overseas so that they don't have to deal with as much of the compliance and, and, that aspect of it.

It's certainly possible. I, I mean, you make a great point. the more likely outcome is not so much that US citizens start using- Businesses abroad, but rather that US companies leave, and decide not to service US citizens. And I mean, as you point out, the US government tends to think that it has unlimited extraterritorial jurisdiction, that its laws apply all over the world, no matter where you are or who you are. And Fakas is the perfect example of how the US, used its, Basically, the weight of its ability to tax companies and to exclude them from the US economy, to force them to comply with US law, even though they were outside the US, we see the same thing with someone like BitMEX, where BitMEX was not based in the US and was at least making some attempt, although debatable how effective it was, to exclude US citizens from its platform, but because there were A couple of US citizens on the platform, the US government's view was, there's strict liability for compliance with US law. If you service one US citizen, then you must comply with the full panoply of US laws. And so it is very hard to escape US jurisdiction. And I, you know, I do perceive this as another attempt by US government to reassert its authority globally over the operation of the FinCEN financial system as a whole, US foreign policy is administered through the country's control of the financial system, and Bitcoin is essentially an existential threat to that control, or at least it could be perceived that way, I'm not sure it really is, but I think that's sort of why we're seeing this rising concern over a peer-to-peer financial system that doesn't require the operation of intermediaries that the government can't- Easily regulate.

From looking through the regulation, the proposed new regulation, I saw some discussion around what's called a foreign jurisdictions list, and I'm also wondering, what is the potential impact for non-US customers of US Bitcoin businesses?

Right, so, this gets straight to the point we were just discussing, which is the US government wants to make sure that its rules are followed globally, but there are some jurisdictions where their acquis- companies that simply refuse to comply, you know, especially in sanctioned jurisdictions like Iran or North Korea or Venezuela or Myanmar, places like that. And the requirement of the, foreign jurisdictions list basically says we're also going to extend anti-money laundering compliance obligations for record keeping and reporting, not just to transactions between institutions and wallets, but also between institutions that are compliant with the Bank Secrecy Act and institutions in jurisdictions that don't comply with the Bank Secrecy Act. So when an exchange, for example, Sends, let's say, fifteen thousand dollars worth of Bitcoin to another regulated exchange that is compliant with the Travel Rule, the sending exchange doesn't need to report anything to the government because the Travel Rule has been followed. What this new rule would say is, if the institution can't be sure that the other institution is compliant, then they do need to submit one of those reports to the government. So this is really- Another way for US government to get more control over institutions in those places that are refusing to play along with the rules that government is setting.

Stepping back, I guess Listeners might be thinking, "But hold on, wasn't there already an obligation for some of this reporting? So an example would be, suspicious matter reporting or, threshold reporting, where if the value goes above a certain amount, these transactions have to get reported to the government agencies like IRS or to other law enforcement?" Does this proposal mean-- it just means there's Kind of, it, it's more data and more information is going to those government agencies rather than the government agency having to colloquially get a warrant or to go through some legal process to ask for that information.

yeah, that's right. So there's a difference between, an exchange being forced, you know, under a subpoena, for example, to turn over information to government versus the exchange having an affirmative obligation to automatically report that information to government. And I think that's one of the big differences here. Under current law, an exchange certainly already has all of this information about withdrawal. wallets to, to folks' wallets, but they aren't automatically turning that information over to the government in the form of a currency transaction report. And in fact, many of the exchanges will even publish information about what kinds of requests they're getting from government, how many subpoenas they're getting, how many of them they're challenging, how many of them they're actually having to comply with to turn over customer information. This new rule would greatly- Greatly limit the ability of these exchanges and other companies to protect the privacy of their customers, and that's a really big concern, not only because in general we should respect consumer privacy and the privacy of people who are transacting in Bitcoin, but also because government just hasn't shown that they are either using that information effectively. I think we could have a really interesting debate about whether the anti-money laundering system We have, which depends on financial surveillance, is even working, if it's even helping law enforcement to detect and prosecute crime. But also government hasn't shown that they are able to safeguard that information. I mean, just recently there was a report of a massive hack of the US Treasury Department specifically, in which an extraordinary amount of sensitive information was lost to hackers. And, you know, as we record this, we still don't really have a good sense of what information was compromised and for how long. And I think that the idea that now is a good time to expand the government's warrantless mass surveillance and data collection operations in light of everything that's been going on is, is simply wrong.

It's a good example recently with the Ledger hack where initially there was a period where I think the number of email addresses and information That got hacked or, you know, leaked was much less, and then later it was found out that actually much more had leaked. And so now, if, let's say, in this example where a lot more information must be reported by the Bitcoin regulated company to FinCEN with all the reporting, then there's gonna be all this data out there of people's names, potentially their address, and which Bitcoin address they withdraw, with-- they withdrew the bitcoins to, that's a lot lot of potential information that could go to a very, dark place if that information were to fall into the wrong hands.

Right. And, you know, two things on that. One is this is really sensitive information. You know, this isn't, you know, we're not talking about something unimportant, we're talking about critical information, not just where people live, right? The, the FinCEN proposal calls for collecting the physical addresses, of- Of people who are withdrawing Bitcoin to their own wallets, it's very much like the ledger hack, right? If you're loading up a hardware wallet with a lot of value in Bitcoin, you probably don't want people to know what your home address is. It's very sensitive information. The second thing is what government would say about this concern that these jackpots of sensitive information are being exposed by hackers, what they would say is, "That's a..." cybersecurity problem. The problem is that companies aren't doing a good enough job of protecting customer data, so we need to pass even more regulation, right? The GDPR, for example, to require companies to do a better job of maintaining their customers' privacy. And I think the other side of that policy debate is the one that I would take and, and probably the one most bitcoiners would take, which is this data can't be protected, right? There is no perfect cy- cybersecurity system that is going to prevent these jackpots from being compromised. The solution is to simply not create the jackpots in the first place. And given that collecting all this information is yielding very little benefit to government in the first place, maybe we would be better served by simply not collecting it at all.

Absolutely. And so I guess we've got to think about also the broader context here as some, lawyers in the space, such as yourself and others have been commenting that this is like a midnight rulemaking. What is that?

So, midnight rulemaking is a term that describes, the circumstance where a policymaker is about to leave office, right? They have maybe a month of time left and they're trying to jam through some rule as fast as possible without following the regular order for considering whether the policy that they're trying to put into place is even good, to begin with. and typically this occurs in the US in the transition period between presidencies. So, you know, we had a presidential election at the beginning of November, Donald Trump lost the election to Joe Biden, President-elect Biden will take office on January 20th, and at that point, the Treasury Secretary, Steve Mnuchin, is out of a job. And really, this new regulation is- Is something that Steve Mnuchin uniquely wants to pass. this isn't really something that the entire Treasury Department is behind. It's, it's really something that Secretary Mnuchin believes personally is important, and it's something he wants to accomplish before he leaves office. So what he's done basically is to violate the regular order for considering a proposed rule like this. in the United States, there's- There's a federal law called the Administrative Procedures Act, the APA, which sets out the requirements for administrative rulemaking. And what it says basically is, a, an agency before they can put a new rule into place, has to give the public notice of what the proposed rule is, and has to give the public an opportunity to comment on whether the rule is good or not, whether it could be improved, whether it's flawed, what the cost benefit is of the new rule. This is called notice and comment rulemaking. And for a significant rule, one that's gonna have a really big impact on an industry or on society at large, an agency is supposed to give at least sixty days for the public to give comments. And then usually there's a long process after that where there's discussion and a back and forth between industry and the agency about whether the rule is, is good or not. And in this circumstance Because Secretary Mnuchin doesn't have sixty days, he has only thirty at the time that we're recording this, before he's out of office, he decided that for this rule, there should only be fifteen days for the public to comment. and not just 15 days, but 15 days at the end of December, leading into early January, over Christmas and New Year's, when most people are trying to take a vacation. So the fear is that this isn't a genuine process where Secretary Mnuchin is really soliciting input from the public that he will consider before deciding what he wants to do, but rather that he already knows what he wants to do, and he's just sort of trying vaguely to- To go through the steps required to defend the rule from a legal challenge, but really this is sort of a, a done deal, and, you know, probably truly at midnight, right, the day before he is out of office, he'll decide to make this rule effective.

And to set the context as well, as I have seen from the discussion, it seems that in other cases, for example, in, just in financial services or in the banking industry, there are some cases where the comment period is six Six years. Is that correct?

Yes, that's right. I, I, and, you know, sometimes it's not, the actual public comment period where the public can submit formal comments, but where the agency will then, after an initial sixty-day or ninety-day or, you know, one hundred twenty-day or something like that comment period, will then schedule meetings, they'll hold roundtables with industry, they'll do panels, they'll talk at conferences, they'll revise the proposed- Rule, and they'll republish it and solicit new comments based on the revisions to the rule. And certainly there are circumstances where it does take years to craft good rules. And again, you know, to the extent that we agree that it is appropriate to regulate something like Bitcoin, it is totally fair to believe that for something so novel and unique, something so different from what financial regulators have ever confronted before, there should be A really, considered and nuanced, intelligent discussion, not a rush to put in a new regulation that has very little benefit for government at the cost of a huge burden to the industry and to individuals just because, you know, one presidential candidate lost an election and doesn't have a whole lot of time left for his administration to put in the rules that they've already decided are appropriate.

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So I'll give you a few ideas, some in the short term and some in the longer term. right now we are confronted with this thirty-day sprint where this rule may become effective before- January 20th. And as the saying goes, laws are written in ink, they're very hard to erase. So what we really wanna do is stop this rule from becoming effective before January 20th. Once there is new leadership in charge of the Treasury Department, we strongly believe that we will be able to convince leadership at FinCEN not to make this rule effective. And when I say we, what I sort of mean is the group of policy, folks in Washington, DC who work on these issues. So that means Coin Center, which does phenomenal work, the Blockchain Association, which is the group that I do most of my work through, the Chamber of Digital Commerce, all of these, policy organizations are, are working very hard, to stop this rule from going into effect. The way that folks can help us achieve that goal is first by, submitting public- Comments. And, you know, I'll be sure to provide more information about how to do that over the next couple weeks. We don't have a whole lot of time, but, you know, whatever we can do to, to convey the message that the process behind this rule and the substance of this rule are both unacceptable, the better chance we have of convincing Secretary Mnuchin, that he shouldn't take this last shot at Bitcoin on his way out the door. I also think that, you know, in terms of what we can do, you know, through the Blockchain Association and otherwise, is we can consider a legal challenge to this rule if it does go into effect. And that is something that we are exploring now. we've hired one of the best lawyers in the country, Paul Clement, who was, the US Solicitor General under President George W. Bush, one of the most Respected lawyers in the country to help evaluate grounds to challenge this rule under the APA, and if it comes to it, I think that is likely what we will do. We will file a lawsuit and we will try to get a judge to stop enforcement of the rule, hopefully long enough that, that we can have a change of administration and then FinCEN will have some cover to walk away from this rule. So that's all sort of in the short term. I, I also just wanna say, in the long term, I think- I think we need to understand that this is just the beginning. Secretary Mnuchin is particularly hostile to Bitcoin, but that doesn't mean that once he's gone, everything is gonna be fantastic and great and wonderful. there are a lot of other policymakers in the US and globally, for example, within the Financial Action Task Force, the FATF, that believe in regulation like this. And so what we really need to do long term is get a lot better at boiling down our arguments of why Bitcoin is so important, why the benefits of allowing peer-to-peer transactions, of allowing self-sovereignty, why they outweigh the supposed costs to law enforcement, and furthermore, why this phenomenon can't be stopped in the first place, right? All, all a country can really do is push this activity into other jurisdictions. jurisdictions, they can't really stop it. So the better we are at making those arguments long term, the better we're gonna be at defeating this final boss, that is trying to over-regulate Bitcoin.

And is this potentially just a first step towards further regulation and increased surveillance? What kinds of future steps could be taken if this isn't pushed back on?

You know, I think, the worst case scenario that I see Right now is, a bifurcated market, very much like you described a little bit ago, where there is one market of clean custodial Bitcoin, right? Bitcoin that is held by regulated institutions that aren't really self-sovereign in any sense, that no person really gets to control on their own, that the government can censor the same way that they censor the traditional financial system. And then a separate market of dirty Bitcoin, that is Bitcoin that people actually hold themselves and are able to use and, you know, send in peer-to-peer transactions and custody for themselves. And then no bridge between those two worlds, right? Every bank and every exchange would be prohibited from allowing deposits or withdrawals to, to people's wallets. I, I think that that is an alarmist view, and I don't want to- Scare everyone too much, because there are a lot of people who will say that I'm being paranoid and that that's not really where we're going. But I fear if you listen closely to policymakers, that what you hear from them is they're okay with Bitcoin as long as it looks like digital gold in the same way as gold has been centralized in depositories that can be censored, as long as it doesn't pose a threat to monetary sovereignty, as long as it doesn't pose Any other risks of, terrorist financing or money laundering or other, illicit activity. And that to me would be the worst case scenario, a total prohibition on transactions with, with non-custodial wallets. I, I'm, I'm optimistic that we won't get there. I think that we have very strong arguments why that is a categorically worse world, and also why it isn't an achievable world. but I do think that's, that's sort of the final boss that we- We have to fight here.

As you mentioned earlier, FATF, Financial Action Task Force, seem to be very much a root cause driver of a lot of this kind of regulation around the world. So could you give us some background on what their influence is on all of this, and perhaps their influence on the domestic regulators around the world, such as FinCEN?

Sure. So the FATF is an international standard-setting body, comprised of, I think about forty or so- Member jurisdictions. So, you know, the United States and Australia and Germany and all these other countries are members of and send representatives to the FATF the FATF doesn't make any law, but what it does do is it makes recommendations for global industry standards that it then sort of expects all of its members to adopt, and it does reviews on a regular basis of whether its various members have, you know, sufficiently complied with those rules. And really the, the only teeth that the FATF has is they maintain a blacklist that basically says If there's a jurisdiction that is really out of compliance, then no other jurisdiction should be allowed to transact with that jurisdiction. It's very much like US sanctions, and there's a lot of crossover between US sanctions and the FATF blacklist. the interesting thing is the FATF sort of bounces back and forth between setting its own standards that the member jurisdictions follow versus following the lead of Of one or more of the member jurisdictions. It's sort of like a pendulum in that sense. So sometimes the US, for example, will decide, "Here's what we think the industry standard should be," and then they get the FATF to adopt whatever that is as its recommendation for the world. And sometimes vice versa, the FATF will actually generate some new recommendation that will bring member jurisdictions into compliance. Right now, what we're trying to figure out is, is the FATF going to recommend this Swiss rule or the-- something like this new FinCEN proposed rule that imposes AML obligations on transactions between institutions and wallets? Or not, and so far they actually haven't. So Switzerland and the Netherlands, which you mentioned, and the United States are actually out ahead of what the FATF most recently recommended. So in June, of this year, the FATF did its twelve-month review of its crypto guidance, and what it said basically was, "We considered whether any restrictions on peer-to-peer transactions were necessary, and thus far, we decided there's in- insufficient evidence to warrant such new restrictions, but some of our members expressed concern about this, and we will revisit this as we go forward. So one of the next big turning points that we're looking, to in the coming year is the FATF's next twelve-month review, which should be around June twenty twenty-one. If they adopt this new Swiss rule or new FinCEN proposal as the global industry standard, then you can imagine- Seeing what has happened so far in only a couple of jurisdictions, very quickly being rolled out to dozens of more jurisdictions and becoming the global standard. So I think we need to work very hard to convince policymakers at the FATF that that is not a good idea, but that's certainly something to watch.

So are there any domestic levers that people around the world can push on with domestic politicians to either push back on this or to- Change the way FATF is run?

Yes and no. Yes, there is a lot that people can do on the local level, and I think it's, it's always important to point out that politics is local, and ultimately, you know, although many of our democratic systems aren't functioning very well these days, our governments are at least supposed to answer to us, the people, and to the extent that we can support and elect policymakers, elected- Officials specifically who don't think that these requirements are necessary and who will push back on them if other members of the government are trying to advance them, the better off we're gonna be. So, you know, here in the US as an example, there are members of Congress who fundamentally oppose this new proposal from FinCEN. In fact, four members of Congress sent a letter to FinCEN, led by Warren Davidson, a member of the House of Representatives advising Secretary Mnuchin that this was a bad idea. And the more of that kind of support we can generate, just from a grassroots level by supporting politicians and officials who believe in the principles that we believe in, the principles that support Bitcoin, the more success that we're going to have. the reason I say also, you know, yes, but also no, is because in general, the FAFD is comprised of representatives who aren't all Elected, they are appointed. And Secretary Mnuchin himself isn't an elected official, he was appointed. So no one in the United States cast a single vote for this one individual who has more impact on financial regulatory policy than anybody else. And so it's very difficult to rein in the expansion of the administrative state. So it's really hard to get directly to the FATF, but much easier for us to focus on who are- What are we voting for? And what do they believe? And will they make sure that the appointed officials, who are part of the administrative state, will they make sure that those folks aren't, you know, doing things that compromise our privacy and our, our, self-sovereignty?

Now, I'm a libertarian, and I understand not everybody is a libertarian, and I can certainly appreciate that there may be some more cypherpunk or libertarian-minded people who think, "Hey, there's no use trying to even get involved in the political process." Let's just have technology only and just totally disregard them. and yet there could also be a good counter argument here that, well Whatever your view on that is, maybe you are better off trying to push back that regulation to give the self-sovereign and priv-- more private Bitcoin more of a runway. What would you say to that kind of idea?

I think that it's a mistake to view it as either or. I, I think that there is room for us to do both. I look, I share a, a lot of, the more cypherpunk values, and, you know, libertarian values that you do. I'm a huge fan of yours. I, you know, have listened, with great interest to a lot of your discussion about, you know, libertarian ideals and Austrian economics. At the same time, you know, I live in Washington, D. C. I'm very active in the policy community here, and I think there's room for both of us to do our, our separate work. I think That it, you can't deny that government has influence over the rise of Bitcoin. And basically, we can do this the easy way or the hard way, and I think we would all rather do this the easy way than the hard way. I, I totally appreciate that there is no way that government could ban Bitcoin. At the same time, I would rather not go back to a world where we have to meet up with people in back alleys in order to buy Bitcoin that we can actually custody. for ourselves, and that requires us to be engaged in the policy process. It's not for everyone, and there are some people who just don't want to get involved in a place like Washington, D.C. or, you know, any of the other, political capitals of the world. That's fine. That's sort of how, how I view, my purpose for being here. I will take that hit, and I will, you know, do the work of the swamp. and ideally what this leads to is More time for the industry as a whole to professionalize, to mature, to build more products and services that people can use to protect their own sovereignty and to protect their own privacy, so that if someday we do lose this battle from a policy perspective, and government just decides we can't get our minds around Bitcoin, we're just not going to allow this to happen, at least we've gotten as far down the road as we can before we have that. That adverse result. At the same time, I think that there is great opportunity, for Bitcoin to rise in a cooperative way, in a symbiotic way, in a way that doesn't result in, infringement of our rights, and, you know, I would at least like to hold out hope that we can make that happen.

What are the key points that Bitcoin proponents should be out here making, and who should they be making them to, such that the risk of- Of, you know, overly draconian or regulation is minimized. Wh-who sh-what, what sort of arguments should we be making?

Yeah. You know, I think there's, honestly, there's too many to, to list or even to keep track of, but I'll give you at least a couple of ideas and, and I think we can work on continuing to build this out as time goes on. I think one is about financial inclusion. I think that that's an idea that, that everyone can get behind, that most- People in the world as a whole don't have access to reliable financial services. we're talking about people who live in places where the banks themselves are the criminal enterprise, and there is no way to conduct commerce because there is no way to transact with other people in a safe way at a distance. And I think that Bitcoin is the greatest force for financial inclusion that we can imagine. I, I think one person to listen to very carefully Hopefully on that issue, for example, is Alex Gladstein at the Human Rights Foundation, because he does such a phenomenal job of highlighting cases where people are using Bitcoin not as a speculative investment, which is what I think a lot of policymakers in the developed world think that it is, but truly as a tool for commerce and a, and a tool to help them live better lives. I also think that there are arguments we can make about The ills of the financial system as it has come up around these very large, very powerful institutions that don't have our best interests at heart. and, you know, we're seeing this now with the rise of major tech companies that have started to dominate the internet in the same way that the megabanks have dominated finance. And really, what we don't wanna see is, with all due respect to Facebook, we don't wanna see the Facebook Of the world take over finance the way that they've taken o-over the internet, and Bitcoin is the response to that. It's public payments infrastructure as opposed to a proprietary platform run by a company that is serving its own bottom line at the expense of its customers instead of on behalf of its customers. Those are just two ideas, that I think are, are, you know, particularly persuasive. But I think one of the beautiful things about Bitcoin is Is there is an argument that will persuade anyone, if you can just figure out what principles matter to them and how Bitcoin addresses those principles, right? It's, maybe a little bit too much of a meme at this point, but, you know, Bitcoin fixes this. there's always some kind of argument that we can make to, to persuade folks to get on board, and I'm, I'm confident that the more we focus on, sharpening those arguments, the more impactful they will be.

Of course. And I guess in this instance, Although many of us aren't libertarian and we don't necessarily, you know, want big government, we want small or zero government. But in terms of meeting the other person where they are at, in some cases, if you have to make an argument to somebody who is in that sort of position, perhaps an argument might be something like, "Well, if you want your economy to be thriving, you've got to care about jobs and businesses, and if you create this regulation and this legislation that is too burdensome..." Bitcoin, you will create a chilling effect where people may not start businesses or they may be hampered versus international competition in terms of being able to compete. And so perhaps that is, an angle, an argument there as well in terms of there's gonna be an impact on jobs and businesses in your country.

I think it's a great argument, and right, it might not strike everyone, as the best idea depending on your view of government in the first place, but just as an example, Pierre Rochard put out a really interesting idea recently, which was that the US government should stop selling Bitcoin, it should start building a Bitcoin reserve. And look, that's a pretty compelling argument. And whether you want the US government to own a lot of Bitcoin or not is, is sort of besides the point. If you can get government to buy into the asset, then Bitcoin will sort of take care of itself on the other, on the other end, right? I mean, Bitcoin is in many ways unstoppable. So the more adoption there is, and the more approval there is, I think the more likely it is that we will end up seeing the kind of world that we think Bitcoin will usher in. The, you know, the-- there are other arguments that we have to think really hard about whether we want to make or not. One of the arguments is really for the, the defense community, right? Which is, Bitcoin is a very effective tool Of geopolitical monetary war. if you want to undermine an authoritarian or dictatorial opponent, well, sanctions are fine, it's what we've tried to do, but, I mean, really they're not fine. I'm, I'm sort of just articulating the way that you might describe this to a policymaker. better than using sanctions and cutting a country off from the financial system is to undermine their own currency, and the more you can promote use of Bitcoin point in that society, the less powerful the dictator or authoritarian will be. Now, whether we want our governments using Bitcoin as a weapon of geopolitical war, we should think very carefully about, but this is just to the point that there is always an argument about how Bitcoin can be used as a tool to accomplish an objective, and it, I think it behooves us to figure out what those arguments are, to promote the likelihood that Bitcoin will, you know, will- Lives, peacefully, at least, to the extent that it can.

Yeah, that's a really good one, and it reminds me of how the US government actually funded Tor, as a way to essentially have its own operatives be able to operate in, places more privately, and I think it's kind of a similar kind of thing where- You could sort of see it cutting both ways, but perhaps there's a net benefit to support it.

It's very similar, and I, I mean, you know, once we are able to dig a couple levels into the nuance here, what you realize is all technology is neutral, all of it can be used for good or ill, and just because a technology is used by some bad actors doesn't mean that you outlaw it, right? What it means is you use it for as much good as you can, and you try to limit, perhaps, It's used by bad actors to the extent you can. But this is the story of every technology throughout human history, you know, the, the first use of an automobile was for a bank robber to get away from the police faster, right? Like this is always what happens. the bad guys use technology first, it doesn't mean we throw it away. And I do think that, that if you can get to that level of nuance and admit that, yes, just like the internet, Bitcoin is open for use by anyone But the benefits of Bitcoin, the good that it does for the world, so far outweighs the harm that it may, that it may enable by some bad actors. You know, because of that, we should support Bitcoin's growth and adoption, not try to hinder it.

Right. And I think maybe then the, if I were to play act as a policymaker, they, they might say, "Well, fine, you can hold your Bitcoin, but just hold it in this custodial account." And I think in their mind And maybe they don't see the value so much as perhaps you and I do, and the other Bitcoin people do, of, you know, a, a strict supply limit and, the ability to use it in the self-sovereign way. And I suppose that's really the argument we have to make.

Yeah, I, I think that's absolutely right, and that's sort of why I give those two examples as, as maybe the best arguments for Bitcoin as a tool of self-sovereignty, not just as digital gold that you can hold in a depository, that is, the ability to use it in jurisdictions where there is no financial infrastructure that is reliable using intermediaries, and that is the majority of the world, right? There is no reliable bank in most places where people can just hold it. In custody. And, you know, the risks that centralizing all of this, not just information, but value, in institutions that can be hacked, that can't safeguard those assets, right? Think of Mt. Gox, as an example. I mean, every couple months we see a big exchange hack, right? Those are reasons why Bitcoin is much, much better as a tool of self-sovereignty, as something people can hold and safeguard on their own. And use on their own without relying on intermediaries, than it is as just something you can throw a few dollars in, the same way you might buy, you know, the S&P 500 index.

Jake, I'm gonna try to get this episode out in the next day or two, but in terms of how people can support you or if they can do a comment, have you got any suggestions for them in terms of how they can help?

Yes. So as of now, so, we're recording at about six thirty PM on Monday, December twenty-first. The rule actually hasn't been published yet in the Federal Register, so the public comment period isn't open yet. We think that it'll be published on Wednesday, the twenty-third. Once it's published, I'll make sure to put out, on Twitter, some advice about how to write a good public comment, just sort of a how-to of where do you go, how can you write something that's effective? right, simple things like, don't, you know, just curse at the regu- And call them statists, 'cause that's probably not gonna help very much. So I would say, you know, follow me on Twitter if you don't, and hopefully we can all work together to, to, you know, share the good arguments that we can advance. we can all get as many public comments submitted as possible before the period closes. and then we'll see what we can do from there. So, you know, I am very committed, to, to making the best use of my platform as I can, so I'll make sure I can- share any other ideas about how we can work together to, to keep Bitcoin as free as possible.

Fantastic. Well, thank you very much for really shining a light on this issue for us. I think there's a lot of complicated issues that you've really helped untangle for me and for my listeners. So Jake, thank you very much for joining me on the show, and I hope to chat again soon.

Thank you so much. This was a pleasure. Anytime.

I hope you learned something there from that show and Jake definitely does a great job helping explain some of those pieces there for us. So make sure you follow him on Twitter, get the show notes at stephanelivera.com/two-three-nine. That's it from me, thanks, and I'll see you in the citadels.