Decoded Law: Government Test Environments, Test Benches and Cryptomechanism Commitments, October 16-23

This week’s news highlighted how governments are testing new regimes for cryptomonies, which may be slow, but are certainly some progress.

One line from the immortal Calvin & Hobbes comic strip says „a good compromise makes everyone crazy“. When it comes to laws governing cryptomonies, the authorities usually ask for pretty big compromises because, in their best intentions, they are trying to solve things. While it is a rapidly developing area of law, honestly, it is a pleasure to cover it, that means it is developing rapidly in relation to law, not technology.

There is an innate conservatism in everything that has to do with the way people manage their money. That extends to the laws that govern how money and investments work. As a result, everything that regulators touch on cryptosystems develops more slowly than the industry would necessarily like.

However, it is not an unreasonable instinct for regulators to be determined to establish controlled ecosystems and test environments for all developments before releasing them into the wild. But restricting the technological capabilities of cryptosystems requires some compromises. This week’s top news stories have seen that dynamic around the world, as it all comes down to a test case.

PayPal’s crypto payments test New York’s conditional BitLicense and vice versa

After months of rumors, PayPal formally announced that the platform would incorporate crypto payments.

While Bitcoin Millionaire price jumped with the news, there is a catch. PayPal’s crypto currency will be blocked on the platform. No tokens in or out, a real Alcatraz. PayPal, meanwhile, will operate on a probationary basis.

PayPal’s crypto platform received the tentative green light from the New York City Department of Financial Services, possibly the world’s largest sub-national financial regulator and the issuer of the famous BitLicense. But in this case that license is conditional. Just as PayPal is testing crypts in an extremely limited capacity, the DFS is testing its new format to test companies seeking to obtain that coveted license.

A fascinating by-product of this new system is that it links companies seeking to enter New York cryptology with existing BitLicensees, in the case of PayPal, Paxos. This establishes a dynamic whereby established crypto-currency companies will act as mentors to companies that, like PayPal, may be much more important in all other areas of their business. This is great for the industry and puts any existing BitLicensee in a very advantageous position as more conventional firms follow the PayPal path.

The Bahamian Sand Dollar goes live

In what has become a global race for a central bank digital currency (CBDC), the Bahamas appears to have won. The island’s „Sand Dollar“ was launched across the country earlier this week.

Pilot programmes involving functional Sand Dollar wallets are running for months. But as with many things related to the Bahamian system, the central bank’s announcement was rather opaque, consisting of a Facebook post of only two sentences. The apparent restriction to national use is interesting. The country’s limited financial reporting standards have made it a popular place for shell companies and money relocation. The limited scope is possibly an attempt to no longer contribute to this reputation.

The announcement came at a time when US and Russian government officials made statements denying the need to be the first to publish a CBDC. And indeed, with due fear of being a patronising American, responsibility for the Bahamian dollar is not the same as responsibility for the US dollar. However, given its huge role in international finance, the Bahamas faces many of the same concerns as larger economies that are developing their own CBDCs. The central bankers of such economies will certainly be closely monitoring the sand dollar.

Mixers, beware

The US anti-money laundering watchdog, FinCEN, fined Larry Dean Harmon USD 60 million for operating the Helix and Coin Ninja blending services.

This is the first time FinCEN has taken action against a mixer or tumbler, services that combine and disperse crypto currencies across extensive wallet nexus to enhance privacy by hiding their transaction history. As you can imagine, this is often because the coins have been involved in illegal activities.

While FinCEN has long maintained that cryptomint companies must maintain the same type of customer records as banks, in reality, targeting a blending operator increases the stakes considerably. There is really no conceivable way for the mixer business model to incorporate the types of AML information that FinCEN requires. Even if you do not assume that the currencies involved have been caught up in some business that falls somewhere on the spectrum from grim to horrific, the function of a mixer is to strip the currencies of any features that may be linked to their owner.

To be fair, Harmon is a very easy target. An Ohio resident has been facing criminal charges for his mixers since February. As a result, FinCEN had access to repositories of information about Harmon’s blenders that the Department of Justice investigation had already unearthed. Not to mention that FinCEN obviously knew where to find him.

Despite the convenience of the action, this is obviously discordant news, especially for anyone running a privacy enhancing cryptomoney service, but generally for anyone who thinks that perhaps not all transactions should be packaged with personal information.

Further reading

The Electronic Frontier Foundation welcomes Coinbase’s new reports on its interactions with government and its compliance initiatives.

Lawyers at Vinson & Elkins review the DOJ’s framework for the application of crypto currency published earlier this month.

In her podcast Unchained, Laura Shin delves into the DOJ’s methods for tracking crypto criminals.

The government is frustrating because when it works properly no one gets exactly what they want. Balancing priorities, managing risk, improving compliance: writing about the law involves traversing such noxious slang swamps in search of some grove of what people are really saying. This is usually a compromise.