On November 15th, Elastos co-hosted a Compliance Meetup in San Francisco with legal experts in the blockchain industry. The event brought together representatives from the academic space, blockchain projects, and cryptocurrency exchanges with an audience that consisted of lawyers, startup entrepreneurs, journalists, and local enthusiasts of both blockchain and Elastos, including Bitmain COO, Phillip Liu . The event, which ran nearly three hours, encompassed a networking session, an opening speech, and two moderated expert panels with accompanied Q and A’s from the audience.
The opening networking session brought with it several clear indicators for the night’s direction and purpose: compliance and the legal landscape of blockchain and cryptocurrency has quickly become a popular and hot button topic in a space that is constantly shifting direction. Many attendees made it clear that they were in attendance for the purpose of researching legislation and educating themselves for their own successful execution of compliance at pre-existing and conception-stage startups. The impression many attendees gave was that not only existing projects, but especially projects in their infancy, must not only consider compliance, but make it a top priority when growing a business or idea in the blockchain space. This shift, from a “wild west” atmosphere to a strategic and legal compliant one, was not only evidenced by the event itself, but best exemplified by its host, Elastos.
After an introduction from host Fay Li, Steven Nam, Managing Editor of the Stanford Journal of Blockchain Law & Policy and Elastos and Cyber Republic advisor, opened the speaking portion of the night with a 15 minute talk expressing his views on compliance from an academic perspective. Nam noted, “For me personally, why I am speaking here, why we have a journal in the first place, is to advance discourse in the space. Dialogue is really important to us. We have a very nascent space. We have a lot of exciting activity going on, but there are no doubt, growing pains. We want to be there for legitimate projects that have concerns and questions.”
Steven continued by highlighting the establishment of the U.S. Securities and Exchange Commission (SEC) in 1914 along with its dual roles of guidance and enforcement, saying, “They may be a bit perturbed by the pace of the space, but they are not going to have knee-jerk reactions to anything. But perhaps, right now, the regulators control the narrative.” This point became a theme for the night: the regulators control the narrative in blockchain right now, and most people in the space are trying to balance forward progress with limited understanding on what is and what is not legally compliant for a project. “I think the entire space reacts as this monolithic whole and I’ve never seen anything quite like it.”
The monolithic movement is something all blockchain enthusiasts are aware of and yet something Steven sees as part of a greater issue in a technology still in its infancy. “It is so funny, in a lot of ways, the projects we have are quite siloed.” Yet even with the siloed nature of individual communities who “are always sniping at each other…always criticizing each other,” the industry (not to mention crypto markets) ironically reacts in a unified way in response to an attack on any one enterprise. Referring to the division within the space and the negativity projects’ communities seem to have toward each other in light of the greater, regulatory shared fate, Steven summarized his perspective in a single point, “If I could make a call, I would want to see a more united public policy front…It has come to the point where we need less unnecessary sniping at each other. Criticism is good if it is constructive, but a lot of it is not. A lot of these technologies are still building. What is the point of criticizing something if it is like the internet in the 1980’s… Are we just trying to become what we are trying to replace?”
After Steven’s talk, both subsequent panels were moderated by Chris McCann, the founder of RelayNode (www.relaynode.io), the largest crypto publication in the SF Bay Area, and an investor and VC in Silicon Valley. The first panel included speakers Lindsay Lin, Legal Counsel for Interstellar, Fay Li, CMO of Elastos, and Jason Somensatto, Strategic Lead Counsel for 0x. 0x is an open source protocol layer on top of Ethereum that allows trustless exchange between any two users. One of the project’s goals is to eventually hand the protocol over to the community of 0x holders. Stellar is a cross border payment technology that also allows for asset issuance and exchange.
After a brief introduction, the panel began by addressing Chris McCann’s first question regarding the biggest challenges a project faces in the area of compliance. The panelists agreed on several broad categorizations of legal issues blockchain projects face, with securities and money transmitter issues being the two largest for most projects.
Jason Somensatto of 0x said, “From a broad level I think those are the issues we are facing or that anyone in the space is facing…I think everyone gets anxious about the securities laws questions and a lot of those high level taxonomy questions are important and are going to define how the space moves forward, but from a day to day operations perspective, in some ways you just have to live with some of that uncertainty…I spend a lot of time thinking about what are some of the best practices or good actor things we can do within our company to minimize the risk as much as possible. One of our values that we put out as a mission statement is, “do the right thing, think long term.”
This best practices and good actor approach is a shared value among many projects and certainly has been a driving force at Elastos. The legal limbo that hangs over every project’s head has motivated some, like Elastos, to take initiative and lead on compliance instead of waiting for regulatory instruction. Fay Li spoke of the recent unwinding of the ELA unlock program and the thought process that went into the decision that runs parallel to the value of, “do the right thing, think long term.”
Fay went on to say, “The reason we are here today as projects is that we want to be compliant, we want to be fully compliant. But to answer Chris’s question, what is the biggest challenge, it is learning from regulators about compliance, because they are also waiting for us to give them an action for them to regulate.”
This proactive approach for Elastos has not stopped at the unwinding of the unlock program. Fay Li also spoke of teaching California Congressman, Ro Khanna, about blockchain technology, and their ongoing plans to build a United States Blockchain and Cryptocurrency Council, stating that things can move slower in government, but that educating leaders and building long term industry-wide initiatives for education and regulations is essential. She also stated that this meetup could serve a microcosm of the planned national council.
One area where the panelists shared a common practice lied in using their native tokens for network growth. While Stellar plans to give away close to 95% of it Lumens to people across the globe in an effort to “spur adoption and utility across the network,” the decision to concentrate the control of those funds in the hands of a single foundation or possibly in the hands of the community itself, is one that Stellar is still deciding upon. With these decisions will come more compliance related issues. Elastos has also dedicated nearly half of its ELA to Cyber Republic, a similar initiative to spur adoption and growth, yet with the completely unique mechanism of a democratic community where ELA is only awarded for positive contribution to the ecosystem. Stellar’s grant programs that award XLM and Elastos’ Cyber Republic that awards ELA are both community driven ideas that will best flourish with proper legal guidance, as they both lead modern and holistic approaches to the space. Cyber Republic has dedicated a “Crcle” for lawyers and much of that Crcle’s focus may hone in on these compliance related issues.
Jason Somensatto concluded by stating that he feels the space will start to move away from “blockchain lawyers” who specialize in specific areas and move towards a more general counsel approach to the specific project they work for. “I think you are going to see different lawyers who wrestle with the question of, “How do we set up decentralized governments, incentivizing network participation?” While many current lawyers in the space have financial expertise, the emergence of new forms of government and new forms of societies will draw the need for lawyers with a more imaginative and creative approach to the legal landscape of this modern space. Cyber Republic will certainly need to have creative and imaginative lawyers to help navigate the ambitious and modern society that has already begun to form.
The second panel of the night focused on compliance from the perspective of an exchange, with Chris McCann moderating a panel that included, Megan Monroe, Head of Compliance at HBUS, Carla Carriveau, Senior Regulatory Counsel at Circle, and Hailey Lennon, Director of Compliance at bitFlyer.
Chris McCann began by asking for some of the differences between launching an exchange in the United States versus another country. Hailey Lennon expressed the complexity of the U.S. landscape as such, “We launched looking to get into the space with the money transmitter license, the BitLicense. We were the fourth recipient of the BitLicense and so we accomplished all of that and then there were discussions of the SEC, the CFTC, the New York Attorney General sent a voluntary questionnaire to some of the exchanges…While our Japan team has the FSA as their sole regulator.” This opening remark set the tone for the sheer complexity of being compliant in the United States with several regulatory bodies overseeing the vast amount of actions that can be regulated when it comes to cryptocurrency. These actions depend on the state the exchange is in and the geographic location of its customers, not only in the state they reside in, but also, in some cases where the customer is physically located when accessing the exchange.
Carla Carriveau of Circle and Poloniex said of the U.S. landscape, “We struggle with it. One of our main struggles is just figuring out what we can and can’t do. It is one of the worst nightmares to deal with. We do deep dives on assets to see if it is a security, because we do not want to be in that space right now, but I don’t know if the SEC is going to come out tomorrow and say that something we listed is a security. So what do I do about that? It is like, what is your risk tolerance?”
Megan Monroe outlined the points one must consider when becoming a U.S. exchange, listing them as follows: Under the Bank Secrecy Act an exchange must register as a Money Services Business (MSB). After successful registration, an exchange analyzes the regulations in all 50 states and determines which laws apply and which do not. The state laws differ and are mostly based off of BSA or anti-money laundering laws. New York, Florida, and California are particularly interesting states with nuanced law for exchanges. While California has chosen not to regulate digital currency and is considered a “no action” state, New York goes further than the typical state and requires exchanges, even after getting a BitLicense, to get written approval to list any new currency. This requires exchanges operating in New York to get New York Department of Financial Services approval as well as SEC analysis to list a new coin. New York also has a broad definition of who is a citizen in regards to accessing an exchange. When a person accesses an exchange in New York, even if the customer is merely visiting the state, they are considered a New York state citizen under law for the purposes of compliance. In this example, if the customer accesses the exchange to trade a coin that is legal in their own state, this act would be out of compliance with New York law. Hailey Lennon concluded on this topic saying, “We are definitely on their radar and they are watching everything.”
Chris McCann then asked for a high level overview of what a potential project would need to consider when applying for listing on a U.S. exchange. Megan Monroe discussed the gray area pertaining to what a non-security coin looks like, stating, “with the exception of bitcoin and ether the SEC has not officially said anything about whether any other tokens are a security or not, so that falls on us as the exchange and it’s our responsibility to make that determination and support that determination. So what that means is that we’re going to ask for due diligence, information, evidence, and as much as humanly possible to help us support a decision to list you because we’ve determined you’re not a security. One of the interesting things that I have learned in this job is that a token can be a security and then three months later can not be a security.” Megan listed several key factors to look for when determining security status including having a main net launched, marketing principles, the way an entity interacts and communicates with their customers or community, and general management principles. Elastos has been through this gray area and is no stranger to the challenges related to grappling with token-identity ambiguity. The ELA token was able to emerge from ambiguity when the Elastos Foundation made the official decision to unwind the lock-in program, and resulted in Elastos’ first successful U.S. exchange listing on HBUS.
Carla Carriveau expanded on the issue of listing stating, “Circle’s founders really do just want to support tokens that are meaningful. So if you have a meaningful project, that is more likely something that we would take seriously than something that just has investment intent. That goes hand-in-hand with the actual securities analysis, if you are just throwing your token out there to get some money that is probably going to be a security…the more you can show it is decentralized, the better off you are going to be to say it is not a security.” This point is an important one. In the era of the ICO and the subsequent determination of which projects aim to be meaningful and which merely seek to raise capital, this consideration is paramount. For Elastos, being a decentralized and meaningful project has always been its top priority, and now with the specifics of its lock-in mechanism in best practice compliance, U.S. exchanges will be able to see the project’s uniqueness uninhibited.
At the moment, the entire industry is waiting for regulatory clarity on the Howey Test’s applicability to altcoins and ICOs, as well as “plain English” guidelines from the SEC. It is clear that many projects and exchanges are more than willing to be compliant but simply do not know how to define what that looks like without a broad and comprehensive regulatory document. Hailey Lennon expressed the problem of regulating the space quite elegantly when she stated, “This entire space is new technology into old law. So there has to be a more definitive guidance from regulatory agencies…We are literally trying to fit cryptocurrency into case law about an orange grove.”
The meetup concluded with Fay Li thanking everyone for coming and inviting everyone to expanded on the night’s discussion over food and drinks. All three rounds of speakers painted a very clear image that the space is nascent, opaque in regulatory clarity, and divided among communities. However, as Steven Nam stated, in these early stages, it is ever-important for the industry to leave bickering behind, and work together to share dialogue and relate common problems and goals, as blockchain pursues mass adoption and regulatory guidelines that work for everyone. Elastos has learned first hand just how difficult the western landscape can be for a coin to list on an exchange in the United States, and has made the important decisions as a foundation to work within the current framework for regulations. The guidelines are still very unclear, yet making the right decisions and leading in the space by organizing industry dialogue is a strategy that will not only benefit the Elastos community, but the space as a whole. Elastos plans to continue being a leader and organizer of the most important discussions that face the blockchain industry worldwide.