Key takeaways

• The current state of crypto resembles unregulated online sports betting, which is a negative perception for the industry.
• Coin Center is dedicated to protecting the rights of developers in the crypto space from excessive regulatory measures.
• Common sense regulation should apply to trusted entities in crypto, but not to software development.
• AI development could benefit from decentralized systems for ownership and reward mechanisms.
• Legal standards for crypto and AI code distribution may be similar under the First Amendment.
• The state money transmission licensing regime is ill-suited for crypto businesses due to different risk profiles.
• Software developers providing neutral infrastructure should not need to register or license before publishing.
• Forcing decentralized systems to register and report user information is problematic.
• Decentralized systems reduce information asymmetries compared to traditional brokerage contexts.
• The noncustodial nature of DeFi vaults raises regulatory questions about control.
• The Blockchain Regulatory Certainty Act seeks to clarify money transmission jurisdiction in the crypto space.
• The prosecution of Tornado Cash lacked specificity and should have reflected software changes over time.

Guest intro

Peter Van Valkenburgh serves as Director of Research at Coin Center, a non-profit research and advocacy organization focused on public policy issues facing crypto technologies. He previously served as a Google Policy Fellow at TechFreedom, where he drafted policy and litigation briefs. He has testified before Congress and briefed legislators in the US and European Union on crypto regulation.

The current state of crypto

• The current state of crypto is akin to unregulated online sports betting, which is a shame for the industry.

  — Peter Van Valkenburgh

• The average American feels misled about crypto’s promise as a force for financial freedom.
• Crypto needs to replace the existing financial system to avoid being subservient to banks.

• Crypto has a terrible reputation and is often viewed as a giant online casino.

  — Peter Van Valkenburgh

• The perception of crypto as online sports betting highlights the need for regulatory improvements.
• The industry’s current practices are compared to gambling, emphasizing the need for responsible regulation.

• The average American feels like they were rugged… all it is is just online sports betting without a regulator that’s stupid.

  — Peter Van Valkenburgh

• The negative perception of crypto is critical for discussing its future and potential improvements.

Coin Center’s mission and regulatory stance

• Coin Center focuses on protecting developers’ rights from undue regulatory treatment.

• We are a civil liberties firm focused on guaranteeing the people who want to develop the free and open-source software that makes these technologies are protected.

  — Peter Van Valkenburgh

• There should be common sense regulation for trusted entities in the crypto space.
• Coin Center is against attempts to license and permission software development.

• We do believe in common sense regulation of trusted persons in the space.

  — Peter Van Valkenburgh

• The distinction between regulating centralized entities and open-source software development is critical.
• Coin Center’s mission is to balance necessary regulation with software development freedom.
• The organization plays a pivotal role in shaping discussions around regulatory frameworks.

Decentralization and its implications

• AI development should leverage decentralized systems for ownership and reward mechanisms.

• I would be more comfortable if AI was built with decentralized systems for ownership and rewards.

  — Peter Van Valkenburgh

• Decentralized systems reduce information asymmetries in traditional brokerage contexts.
• Forcing decentralized systems to register and report user information is problematic.

• The thought of forcing decentralized systems to report user information is Orwellian.

  — Peter Van Valkenburgh

• The noncustodial nature of DeFi vaults raises questions about control and regulation.
• Decentralized systems offer a critical advantage by reducing information asymmetries.
• The balance between decentralization and necessary administrative controls is crucial for DeFi protocols.

Legal standards and regulatory challenges

• Legal standards for crypto and AI code distribution will likely be similar under the First Amendment.

• The same legal standards for crypto will apply to AI under the First Amendment.

  — Peter Van Valkenburgh

• The state money transmission licensing regime is not suitable for crypto businesses.
• Software developers providing neutral infrastructure should not be forced to register or license.
• The Blockchain Regulatory Certainty Act aims to clarify money transmission jurisdiction.

• The BRCA provides clarity on non-controlling blockchain service providers.

  — Peter Van Valkenburgh

• The prosecution of Tornado Cash lacked specificity and should have reflected software changes.
• The rulemaking for non-decentralized protocols will determine obligations under securities laws.

The Blockchain Regulatory Certainty Act (BRCA)

• The BRCA aims to provide statutory clarity to FinCEN guidance to prevent prosecutors from ignoring it.

• Tom Emmer’s bill, the BRCA, codified FinCEN guidance to make it a statutory rule.

  — Peter Van Valkenburgh

• The BRCA provides clarity on non-controlling blockchain service providers.
• The act may protect developers from money transmission liability if they don’t control customer funds.

• The BRCA gives clearance if you don’t have day-to-day control of customer funds.

  — Peter Van Valkenburgh

• The act is intended to focus law enforcement resources on actual criminals rather than software developers.
• The BRCA is not a deregulatory bill but a strongly regulatory one.
• The act creates new categories of federally regulated financial institutions with BSA AML obligations.

Challenges in prosecuting crypto-related crimes

• The DOJ’s interpretation of conspiracy law in relation to software developers is problematic.

• The DOJ’s interpretation of conspiracy law is highly problematic.

  — Peter Van Valkenburgh

• The application of conspiracy charges is a novel and concerning legal interpretation.
• Prosecutors rarely bring standalone charges under statute 1960.

• It’s incredibly rare to charge conspiracy to money launder without other charges.

  — Peter Van Valkenburgh

• The DOJ needs more resources to effectively prosecute serious financial crimes.
• The disbanding of the nsaid unit resulted in a significant loss of expertise in crypto prosecutions.
• The DOJ’s recent actions against cartel use of crypto may be undermined by a lack of expertise.

Liability and responsibility in the crypto space

• Software developers should not be held responsible for how their tools are used by others.

• You shouldn’t be found guilty of money transmission because others used your software.

  — Peter Van Valkenburgh

• The liability for publishing open source software should not extend to non-discretionary developers.
• The prosecution for unlicensed money transmission imposes strict liability on developers.

• The prosecution for unlicensed money transmission is a strict liability federal felony.

  — Peter Van Valkenburgh

• The government should be required to prove knowledge of wrongdoing in money laundering cases.
• Money laundering involves knowingly conducting transactions with proceeds from unlawful activities.
• The application of conspiracy charges in relation to knowledge of illicit use of tools is novel.

Implications of the new regulatory bill

• The new bill will create categories of federally regulated financial institutions with BSA AML obligations.

• This bill is not deregulatory but a strongly regulatory bill.

  — Peter Van Valkenburgh

• The BRCA is intended to provide clarity only for those not engendering trust from users.
• The bill impacts existing regulatory structures and the implications for various entities in the crypto space.
• The binary conversation of control versus no control in crypto is problematic for developers and policymakers.
• The current binary framework for assessing control does not address intermediary roles.
• The BRCA may protect developers from liability if they don’t have control over customer funds.
• The bill’s implications for regulatory frameworks are crucial for understanding compliance in crypto.

Law enforcement priorities and resource allocation

• Law enforcement should prioritize resources on serious criminals rather than targeting software developers.

• If you send DOJ on a wild goose chase after software developers, you’re not going after bad people.

  — Peter Van Valkenburgh

• The Blockchain Regulatory Certainty Act aims to focus law enforcement resources on actual criminals.
• The DOJ needs more resources to effectively prosecute serious financial crimes.

• You really need more people there to tackle serious financial crimes.

  — Peter Van Valkenburgh

• The act forecloses the pursuit of software developers, redirecting resources to policing bad behavior.
• Effective resource allocation is crucial for combating significant financial crime.
• The BRCA’s focus on actual criminals highlights a significant shift in regulatory strategy.

The future of crypto regulation

• Legislation should be principles-based rather than overly technical for clarity and adaptability.

• Technical terms in legislation won’t age well; it should be principles-based.

  — Peter Van Valkenburgh

• There is room for admin functionality in decentralized protocols without losing their decentralized nature.
• The binary conversation of control versus no control is problematic for regulatory frameworks.
• The prosecution of Tornado Cash should have reflected software changes over time.
• The need for adaptable legislation in the rapidly evolving crypto space is critical.
• The BRCA’s provisions impact how developers can operate without facing legal repercussions.
• The future of crypto regulation requires balancing innovation with necessary oversight.