We trained Congress about Bitcoin vs Blockchain, Coin Center

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The Congressional Blockchain Caucus, which we helped kick off a duo of weeks ago, held its very first briefing on blockchain technology yesterday. The event was total to standing room only as lawmakers and their staff gathered to build their understanding of these technologies. Coin Center director of research Peter Van Valkenburgh demystified the buzzword “blockchain technology,” providing attendees a better sense of the difference inbetween permissionless blockchain networks, like Bitcoin or Ethereum, and the private blockchain networks being experimented with by corporations around the world. As we’ve stressed before, understanding this distinction is essential to understanding the critical role that open networks will play in the future of internet infrastructure and business innovation. Joining Peter on the panel were Reuben Bramanathan of Coinbase, Mark Wetjen of the DTCC, and it was moderated Robin Weisman of Coin Center.

A fresh report [PDF] from Deloitte may have some answers.

On August 1, 2017, Bitcoin block four hundred seventy eight thousand five hundred fifty eight was mined. At that moment, the Bitcoin network split into two similar but incompatible versions: the original Bitcoin and a fresh network called “Bitcoin Cash.” Every existing holder of Bitcoin private keys now had control of tokens on both networks that could be moved and traded independently of each other. It turned out that the fresh Bitcoin Cash tokens have considerable value too. So what are the tax implications of this? The report lays out some ideas:

The Bitcoin chain-split has no visible analogy for federal income tax purposes; however, whether or not it is a realization event, the chain-split has basis effects. While the conclusion may not be certain, the following can be said: There was no exchange of bitcoin for bitcoin cash; and, the receipt of bitcoin cash was a consequence of holding bitcoin.

An holder of bitcoin is entitled to bitcoin cash merely on the basis of his ownership. As a result, he may be treated as realizing ordinary income to the extent of the value of bitcoin cash. The value is normally determined on the date of actual or constructive receipt. Bitcoin cash was actively trading over-the-counter within hours of the chain-split. If it was a realization event, then the basis of bitcoin cash would be equal to the ordinary income actually recognized, and build up or loss on the disposition of bitcoin cash would be determined using that basis. Alternatively, it might be argued that the chain-split was similar to a property division. In that case, the basis in each bitcoin would be allocated inbetween it and the related bitcoin cash.

The utter report is a deep dive into the taxation of virtual currencies. You can access it here [PDF].

Coin Center has partnered with law hard Steptoe & Johnson to put on a half-day workshop focused on the tax issues that blockchain technologies raise.

The program will feature a presentation on blockchain technology by Jonathan Johnson, President of Medici Ventures and Chairman of Overstock.com, as well as presentations and panels on legislative and regulatory developments, including the work of the Congressional Blockchain Caucus. The program will also include discussions about tax compliance and structuring investments.

Tuesday, September 12, 2017

11:30 a.m. – 6:00 p.m.

11:30 a.m. – 12:00 p.m. – Registration

12:00 p.m. – Four:30 p.m. – Lunch and Program

Four:30 p.m. – 6:00 p.m. – Cocktail Reception and Networking

The weekly briefing from Coin Center.

Everything you need to know about cryptocurrency and public policy in one entertaining read.

An article in the Daily Caller claims that some in Congress are considering a digital currency bill, but the story is based on anonymous sources and has very few specifics. It seems related to something we’ve been tracking for a while and I wished to share some details in the hope that folks won’t be confused if this “story” gets more traction.

The article says that unnamed members of Congress are supposedly “looking at the compliant capabilities of AML Bitcoin, which is a compliant digital currency.” We’ll comeback to that odd phrasing in a minute, but very first we’ll note that “AML Bitcoin” is a product and a company formerly called AtenCoin. On its website, “AML Bitcoin” also describes itself as a “compliant digital currency.” It’s hard to characterize what exactly is “AML Bitcoin,” so I invite you to take a look at their site and determine for yourself. To be clear, however, AML Bitcoin has nothing to do with Bitcoin and, from what we can tell, it’s a petite altcoin project.

Now, here’s the joy twist. “AML Bitcoin” has recently teamed up with disgraced former lobbyist Jack Abramoff, who served time in federal prison for fraud, corruption, and conspiracy, to produce a reality TV demonstrate about lobbying Congress on digital currency. (Why can’t it ever be a abate day in this space?) As the Washington Post notes, “[t]he demonstrate will go after Abramoff as he leads a group from a cryptocurrency hard AML Bitcoin in a ‘boot camp’ that will convert the members ‘from techies to lobbyists ready to take on Capitol Hill,’ per the show’s creators.” Unluckily, the headline for that Post article is, “Disgraced ex-lobbyist Jack Abramoff to train bitcoin activists in fresh reality TV display,” which leads people to think Abramoff is associated with Bitcoin and not “AML Bitcoin.” Here is another article on Abramoff’s tie-up with “AML Bitcoin.”

Now, as far as the bill that members of Congress are supposedly considering, we’ve seen a document floating around the Hill that may be the supposed bill in question. It is an unofficial and inexpert draft of a bill that, if it were taken earnestly, would be very dangerous for cryptocurrencies. It’s hard to interpret because it is quote poorly drafted, but essentially it would sort digital currencies into two categories: “anonymous digital currency” and “compliant digital currency,” and then places AML requirements on merchants who accept digital currencies unless they use a “compliant digital currency.” It also has a “Possession Requirement” that requires merchants to “confirm that digital currency has been in possession of purchaser for at least thirty days[.]” Again, it’s hard to interpret the document because its drafting is bizarre and would create many unintended consequences.

We’re fairly certain that folks on Capitol Hill will see through all this, but we still think it’s significant to highlight these details. What folks in Congress and journalists may not know is the distinction inbetween Bitcoin and AML Bitcoin, and they may not know about the Abramoff reality TV showcase. We hope they’ll be careful as they look into any notional digital currency bills.

The Blockchain community’s night out is coming back to Fresh York City during Consensus 2018. We hope you will join us once again to knead shoulders with some of the best and brightest in the industry, all while supporting Coin Center’s critical policy advocacy mission.

768 5th Avenue, Fresh York, NY 10019

Tickets will be on sale in early 2018. For sponsorship information please contact antonie@coincenter.org.

That comports with the analysis of securities laws and crypto-tokens we issued two years ago. What the SEC did not say is that all tokens are securities. Rather, they suggest a facts and circumstances test but only analyze the facts and circumstances surrounding last year’s DAO token sale.

We believe that applying the same facts and circumstances test to other tokens will mean that some do not fit into the definition of securities, particularly tokens with an underlying utility rather than a mere speculative investment value. Our securities framework and other research explains why this is the case. We hope clear guidance from the SEC to that effect will be forthcoming.

Late last year the IRS petitioned to file a “John Doe Summons” for all Coinbase users active inbetween two thousand thirteen and 2015.

Coin Center was quick to react, calling out the dangerous precedent that that such a petition would create if granted:

The Fourth Amendment to our Constitution protects “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures[.]” It aims to accomplish that, in part, by prohibiting general warrants that give government agents broad authority to search unspecified places or persons. While the courts have weakened Fourth Amendment protections when a third party like a bank or business keeps your information, the tide has begun to turn back. Courts have begun to recognize that there must be some boundaries as more and more of our private data is stored not in our homes, but in “the cloud.” If the IRS can get a summons to search all users of bitcoin, it may only be a matter of time before it can get one targeting all movie gamers or all eBay shoppers and sellers.

Now, some customers of Coinbase who would be affected by the summons have petitioned the court to intervene on their own behalf. Yesterday we learned that the court granted their petition. In doing so, the court made some similar points:

[The IRS] contends that “there seems to be a substantial gap inbetween the number of people transacting in virtual currency (for which tax consequences might link) and those that are reporting such transactions.” (Dkt. No. Twenty eight at 13.) But that argument proves too much. Under that reasoning the IRS could request bank records for every United States customer from every bank branch in the United States because it is well known that tax liabilities in general are under reported and such records might turn up tax liabilities. It is thus no surprise that the IRS cannot cite a single case that supports such broad discretion to obtain the records of every bank-account holding American.

With this mobility granted, the users of Coinbase will have an anonymous representative challenging the IRS petition in addition to Coinbase. This means that even if Coinbase determines to drop its challenge, there will still be an interver challenge to the summons sticking up for privacy, and that’s a good thing. We will proceed watching this case and advocating for consumer privacy. For now at least, it seems as tho’ the court agrees with our assessment: that the IRS’s petition is riskily overbroad.

In an open letter to attendees of the Uniform Law Commission’s annual meeting this week, several major digital currency firms and investors called for the adoption of the “Regulation of Virtual Currency Businesses Act” as an official ULC model act, which states may then want to consider promulgating into law. For almost two years, Coin Center has been working with the Act’s drafting committee to ensure that the model act not only avoids the stifling overbreadth of previous attempts at crafting digital currency rules like the BitLicense, but also creates regulatory clarity that fosters innovation by:

  1. Fully exempting all persons and businesses who do not take control of others’ digital currency
  2. Have elementary and reasonable licensing requirements for those firms that do take control of customers’ digital currency
  3. Providing other exemptions and an on-ramp for petite businesses

We are optimistic that the ULC will adopt the draft model act when it votes later this week, and we’re glad to see such broad industry support for the act.

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