Blockchain Ethics

Project Topic: New Cryptocurrency AML Regulation

Hi! My working topic for my project is to develop an industry consensus on what the optimum regulatory structure for cryptocurrencies would be. I often hear that the current regulatory structure for cryptocurrencies is inappropriate, since we are using rules based on the traditional fiat banking structure, but I am not sure exactly what to replace it with. I would like to survey several compliance / cryptocurrency analytic firms in the industry to understand what they think would be an approximate substitute to the current fiat regulatory structure based on their experience in regards to current criminal typologies in cryptocurrency, and the technical structure of the code. I would use the consensus feedback to try to understand what exactly needs to be changed in our current regulatory structure and report those requests to my office for further consideration.

I just started thinking about this topic, so I am in the process of interviewing some key firms in the industry to get their take on this subject. I want to make sure that I will get sufficient feedback to cover the topic in a satisfactory manner.

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I’d like to chat with you about this?!

Sure! Do you want to talk via the forum or would a phone call / email be easier? Please let me know what you would like to discuss so that I can be prepared for the conversation.

Just for reference, my initial step is to review the current position papers prepared by GDF, an industry trade group (https://www.gdf.io/). I just printed papers relevant to general KYC/AML issues to get a brief overview of some of their main positions. I did not review the papers related specifically to trading or custody since that is not my area of interest. I am going to read the papers this weekend. My next step is to follow up with the KYC/AML working group to see if they have anything that they would like to add. I also want to follow up with some compliance firms like BitAML, Elliptic, and Ciphertrace to see what they have to say about this topic. Please let me know if you have any suggestions! Thanks!

Denise

Maybe we could meet Mo at 5pm in E14-466 (our classroom - maybe it’s E15?). That way we could maybe involve others in the conversation. I really believe in face to face.

Unfortunately I can’t come on Monday. Can you come early on Thursday or stay after class?

What about a conference call on Monday?

Please text me: 781-354-4796, or Whatsapp

This is really cool! I honestly don’t know much about regulation but considering that you do I’m very excited to see what you come up with.

Project Name: Massachusetts Division of Banks (DOB) Blockchain Regulatory Review
Name(s): Denise Beighley
Date: 10/17/19
Weekly Update #1_

KEY REFERENCES
www.Coincenter.org; This is an virtual currency industry trade group that provides research and education related to virtual currency industry issues. They offer multiple resources but the initial primary reference is the State Digital Currency Principles and Framework https://coincenter.org/entry/state-digital-currency-principles-and-framework
• Uniform Law Commission (ULC); WWw.Uniformlaws.org. This is a group of lawyers who draft model laws for states on various common issues. They took the State Digital currency principles and framework provided by Coincenter and drafted a model regulation that states could use to implement a state regulatory scheme for virtual currencies.
www.CSBS.Org (Conference of State Banking Supervisors; this is an industry trade group of all the state banking regulators). They drafted a Model Regulatory Framework for virtual currencies in 2017. https://www.csbs.org/model-regulatory-framework-virtual-currencies

General Background
Most virtual currency businesses (VCBs), which potentially include exchanges, wallet providers, software developers, miners, and possibly others, are currently regulated under state laws that were originally intended to cover money transmitters such as Western Union. The key factor is whether the business has “control” of customer funds. They are required to be licensed, have key management members submit to background checks, submit to periodic examinations, and provide key protections for consumers. The failure to operate appropriately can result in fines or, worst case, the loss of their license or potentially even criminal charges.

Massachusetts currently only has a regulation for foreign money transmitters (businesses that send customer funds outside of the United States). We currently have a bill pending in the state legislature to amend Chapter 169 of the General Laws to include domestic money transmissions (receiving or transmitting funds within the United States); (House bill Number 924; https://malegislature.gov/Bills/191/H924) that apparently has been stuck in committee for the last 12 years.

Last week, CSBS published a new draft law that would cover money service businesses (MSBs), https://www.csbs.org/msblawcomments, which would potentially include VCBs, as well as other regular payment companies like Western Union and check cashers. This draft law is currently pending review by all interested parties, who have the chance to provide comments on the draft until November 1, 2019. The legal team in my office is currently reviewing the draft and will provide me a copy of their comments when the review is complete. This new regulation, if accepted by the DOB in whole or in part, could potentially require us to change our pending bill, or maybe add a new bill that covers the provisions in the MSB model law.
My office has published 4 “selected opinions” related to virtual currency to date; https://www.mass.gov/info-details/selected-opinions-of-the-division-of-banks-related-to-consumer-virtual-currency#past-opinions-of-the-dob-. The examples that were posted are all cases where we decided, based on the facts of the individual case, either that a license was not required, or we didn’t have enough information to make a decision. However, I have to follow up with our legal team to see what triggers require a license, which is a project for next week. For example, Coinbase is not listed in the National Mortgage Licensing System (NMLS); https://www.nmlsconsumeraccess.org/ as having a Massachusetts license, but they still let me open an account. On the other hand, Circle, has a Massachusetts foreign transmission license (FTL), like I would expect.
My preliminary research shows that there may be gaps in our state laws in the sense that we do not have a framework with the desired level of detail as described by the model laws recommended by Coincenter.org or even our own trade group, CSBS. I will update this analysis when I receive the response from my office on the draft MSB regulation, as this may address this gap, at least in part.
This Week

What Went Well
Received some preliminary information from my office on our current regulatory framework and the bill currently pending in the State House.
What We Learned
While the pending bill may be a step in the right direction, there are likely still other areas that need to be addressed with additional legislation
Experts Consulted
DOB legal team
Next Week

  1. Meet with our CSBS Fintech contact to get an update on the CSBS Vision 2020 that attempts to address concerns related to cryptocurrency and blockchain. Would also like see if I can get involved in my office’s efforts in this area.
  2. Get more information from the DOB legal team as to the regulatory framework and determine any additional regulatory issues or recommendations that need to be addressed
  3. Continue to review the recommendations from Coincenter.org, CSBS, and ULC to see how they apply to our efforts

Date: 10/23/19
Weekly Update #2_

This Week
What Went Well
• Sent request for interview to Coincenter.org
• Continued discussion with DOB Legal Team
What We Learned
From the DOB legal team:
• The concern is to ensure regulation of those who have control of consumer funds
• We are currently regulating at least one firm as a money transmitters that transmit funds internationally via cryptocurrencies conversion
• They would be willing to consider the recommendations from Coin Center and the Uniform Law Commission model law
Experts Consulted
DOB legal team
Next Week

  1. Request phone conversation with Caitlin Long
  2. Hope to receive the review of the CSBS MSB draft law from the DOB legal team
  3. Hope to have phone interview with Coin Center
  4. Continue to review the recommendations from Coin Center, CSBS, and ULC and develop list of possible gaps that should be reviewed by DOB legal team
  5. Identify state trade groups, business coalitions, or other entities who are trying to pass cryptocurrency legislation

Project Name: Massachusetts Division of Banks (DOB) Blockchain Regulatory Review
Name(s): Denise Beighley
Date: 11/7/19
Weekly Update #3_

This Week
What Went Well
• Talked to Gary Gensler about his experience with Maryland
• Made phone call appt with Josh Radbod, co-founder of Avantpay, for next Friday
• Connected with Nelson Rosario, Principal at Smolinski Rosario; will set up call
• Connected with Todd Maher, who has virtual currency consulting business
• Set up appointment for next week with Joe Ciccolo, from BitAML, who is working on the California VC legislation
What We Learned
From Gary Gensler - The commission he was on used the Coincenter / Uniform Law Commission framework as the basis for their bill

Experts Consulted
Gary Gensler
Next Week

  1. Compile bullet points to include with draft legislation using the Maryland model, and others
  2. Get more information on money transmission laws and legislative efforts from the DOB Legal Team
  3. Phone conversations with various experts

Project Name: Massachusetts Division of Banks (DOB) Blockchain Regulatory Review
Name(s): Denise Beighley
Date: 11/7/19
Weekly Update #4_

This Week
What Went Well
• Talked to the office Fintech coordinator
• Talked to several experts
What We Learned
• Our Fintech coordinator knows how to make policy!
• Learned that the ULC structure is intended for big, complex crypto companies; would be excessive for startups
• NY Bit License also considered to be excessive in most cases
• Preference is for graduated, risk-based approach; Illinois, Texas, Kansas and Tennessee are viewed to have an appropriate framework
• Texas issued a memo with a list of exclusions, but not sure if that is appropriate/sufficient for Massachusetts
• The California bill is based on the ULC and is considered to be excessive due to the demands that are placed on startups
• The DOB is possibly hosting a fintech event in December
• Vermont has a good bill

Experts Consulted
Todd Maher, Joe Ciccolo, Joshua Radbod and Nelson Rosario
Next Week

  1. Revise bullet points based on new info
  2. Get more information on money transmission laws and legislative efforts from the DOB Legal Team – still pending
  3. Phone conversations with CSBS