I want you to admit it. You were worried about me. Well, rest easy Dear Reader. There was never any danger at all. To be sure, I was up to my neck in GDPR–at one point, the “R” even touched my chin and I was afraid I might drown in the consonants and vowels, especially all those “s”s where there should have been “z”s (as in “organisational”)–but I am back with my hideous American English and more ready than ever. Let’s dig in.
Japan Bans Privacy Coins
One of the main problems in crafting any regulatory regime is the tendency to pick winners and losers in a non-market driven manner, usually leading to inefficiencies. It is rare for the regulation to effectively name the losers, but that is what is happening in Japan.
Japan’s Financial Security Agency has announced a ban on currencies that “provide a sufficient degree of anonymity to its users,” according to Coindesk. This means, for practical purposes, Dash, Zcash, Augur and of course Monero. It is worth remembering that Japan has been progressive and indeed aggressive in the licensing of exchanges. So this new regulatory maneuver cannot be ascribed to a general hostility to the movement. Rather, this is, in my opinion, an articulation of a direct concern, held by more than one nation-state, about the ability to track the flow of value. This may very well be the initial skirmish in a very large battle.
Taxes and Other Complications
When I was a young associate at Jones Day, I went to a conference organized by my firm for new lawyers in Washington, D.C. All the practice leaders from the firm descended on the place to pitch their work and their areas of expertise. It felt like you could choose anything. Looking back on it, it really was quite extraordinary. I hope they still do it.
The guy I remember the most was the tax guy. He said roughly this: “The tax code is really complex, and all of these statutes refer to and relate to each other in really unexpected ways, so that it is hard to know when your analysis is complete and if you have missed something. At least one night a week, in the middle of the night, I lurch upright from a dead sleep and scream ‘OH SHIT, I missed that.’ If you like this, you should be a tax lawyer.”
I went into the litigation group. More certainty, less pressure. But this description always stuck with me, and I always respected tax lawyers for it.
It appears their job is only getting harder with cyrptocurrency profits. Apparently, according to the Gray Lady, the IRS treats taxes all coins as property, while the SEC says they are securities, and the CFTC says some are commodities. It seems that cryptocurrencies make a great protagonist–everyone can relate and see a little bit of themselves. The consequences of this from a tax perspective are probably ruinous and definitely uncertain. According to the article, there were “more questions than answers.” Indeed. It is clear an industry can be regulated to death, but can it be suffocated with uncertainty alone?
Bringing a Howitzer to a Gunfight
Unsurprisingly, Ripple has the resources to defend itself. Ripple has retained the services of not one but two high ranking SEC officials, including former Chairwoman Mary Jo Wright, in a securities class action pending in California. This certainly sends a message, and the intended recipients may not be just the plaintiffs.
Permissioned is the Future?
I’ve said this more than once: The future is consortia, and big, bad, permissioned use-cases that make bohemouths more efficient. For all the sizzle that accompanies blockchain, this will be the steak. Shipping, supply chains of all kinds, resource authentication, etc. Forget about the consensus protocol, whatever you choose, all of this is easier if permissioned. Give up a little decentralization, get a lot of efficiency. This is the way forward for applications in-the-wild that just work in a host of industries, maybe even including banking.
Then again, maybe not. Blockchain firm R3, which raised a hundred million to help large banks build out blockchain applications, is foundering according to Fortune. Much of the story is devoted to the strong suggestion that travel, real estate and staff expense was out of control and that cost-management was generally a big challenge at R3.
But this statement in the story was especially interesting: “R3’s challenge is harder still because banks typically do not have a hands-on role in software development, and are not structured to make rapid collective decisions on new technology.” This sentence works for a lot of industries. Manufacturers, shipping conglomerates, pharmaceutical companies, and delis all “do not have a hands-on role in software development, and are not structured to make rapid collective decisions on new technology.” This, indeed, is why they join consortia in the first place, to solve these problems and to share costs while it is happening.
I have no personal experience in the area but I imagine running a consortium is an enormously challenging endeavor. To do it effectively, one must conquer the technology challenges of a startup in a brand new industry while placating competing constituencies who are used to getting whatever the hell they want and fast. It’s competing for tech talent with Google while engaging in philanthropic recruiting on steroids. It sounds really, really hard under the best of circumstances, so let’s resist the temptation to pronounce the demise of permissioned chains just yet.
Finally, I was fortunate enough to appear on the June 1 edition of This Week in Law, hosted by Denise Howell and Matt Curtis. There is a link above to the whole two hour extravaganza, and another to a portion of the talk on blockchain regulation. Don’t feel the need to watch the whole two hours. Just know that if you don’t, a puppy will die. As always, thanks for reading.