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Russian State Duma Defers Consideration of Bill On Digital Financial Assets

The State Duma of the Russian Federation has rescheduled consideration of the bill “On Digital Financial Assets” for April 2019.

The State Duma of the Russian Federation has deferred consideration of the bill “On Digital Financial Assets” to April 2019,  local media outlet TASS reported on March 20.

The second reading of the draft federal law “On Digital Financial Assets” has reportedly been rescheduled for April, following a decision made at the morning voting on the agenda of the plenary session. The initiative was taken by the Chairman of the State Duma Committee on Financial Market, Anatoly Aksakov, although he did not explain his motives.

The bill “On Digital Financial Assets” aims to formulate national cryptocurrency legislation, and was adopted by Russia’s parliament in the second reading earlier in March. Vyacheslav Volodin, the Chairman of the State Duma and coauthor of the draft bill, stressed then that the adopted amendments are aimed at fixing the difficulties related to the concept of digital rights.

The wording of the bill prepared for the second reading excludes the definition of a token, cryptocurrency, and smart contract. The document provides the definition of digital financial assets, saying that such assets are represented by digital rights, including liabilities and other rights, monetary claims, and the possibility of exercising rights in regards to equity securities and rights to require the transfer of equity securities.

As reported last December, Pavel Krasheninnikov, the head of the council and chairman of the State Duma committee on state building and also a coauthor of the bill, said that the bill had been pushed back to the first reading stage as it needed to be dramatically changed.

Recently, Russia’s parliament voted to enact new digital rights legislation in October of this year. The law reportedly establishes the concept of “digital rights” in Russian legislation with the addition of a new article, 141.1, of the Civil Code of the Russian Federation, and determines how digital rights can be exercised and transferred, as well establishes rules for digital transactions, including contracts.

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Russian Human Rights Commissioner Seeks UN Help to Extradite Alexander Vinnik

The Russian Commissioner for Human Rights has asked the UN High Commissioner for Human Rights to help extradite Alexander Vinnik to Russia.

Russia’s Commissioner for Human Rights has asked the United Nations High Commissioner for Human Rights to help extradite the former operator of now-defunct crypto exchange BTC-e, Alexander Vinnik, from Greece to Russia. The news was reported by Russian news outlet TASS on March 5.

At a meeting between commissioners Tatyana Moskalkova and Michelle Bachelet on March 5, Moskalkova reportedly noted that Vinnik has been in critical condition because of the hunger strike he started in November, 2018. Moskalkova also pointed out that Vinnik’s wife is seriously ill and is on the brink of death. The ombudswoman said:

“Given the extraordinary humanitarian situation, I would ask for help extraditing him [Vinnik] to Russia so that he could be closer to his family.”

In late February, Moskalkova called on Greek Justice Minister Michalis Kalogirou to extradite Vinnik to Russia following his deteriorating health and the institution of criminal proceedings against him in Russia.

Moskalkova also sent letters to the President of the International Committee of the Red Cross, Peter Maurer, the Greek Health Minister Andreas Xanthos, and the Greek Ombudsman, Andreas Pottakis, asking to provide Vinnik with medical assistance following the hunger strike.

Vinnik was arrested by Greek police in July 2017 at the request of the United States Department of Justice. Authorities accused him of fraud and laundering as much as 300,000 Bitcoin (BTC), (worth $4 billion at the time) over the course of six years.

French authorities also accused Vinnik of “defraud[ing] over 100 people in six French cities between 2016 and 2018.” Russia and France have since both sought the defendant’s extradition in regard to a further series of fraud allegations.

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Bitcoin Has a Florida Problem

Justin Wales is senior counsel and co-chairs the Blockchain and Virtual Currency practice at Carlton Fields.

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No one seems to know what to do about bitcoin.

Since its genesis, regulators and courts around the world have struggled with whether to and how to regulate it. Depending on where you are in the United States, for instance, it either is or is not illegal to sell your bitcoin for cash without a state license. That’s because depending on where you are, bitcoin is either money or it isn’t, and selling bitcoin is either money transmission or it’s not.

And in some places, it may be, but no one has decided. So, you need a license to sell your bitcoin… unless you don’t.

As a first-generation member of the rapidly emerging crypto legal community, I have seen how regulatory inconsistencies increase the cost of innovation and drive businesses from jurisdictions that lack clear guidance or take a hostile view of the blockchain and virtual currency industry. Following the Third District Court of Appeal’s Florida v. Espinoza decision, Florida now does both.

As explained below, this is due to a widespread and fundamental misunderstanding of the very nature of bitcoin.

Espinoza says bitcoin is a payment instrument

The recent appellate opinion decided that selling bitcoin requires a Florida money service business license, overruling the trial court’s order that dismissed criminal charges against Mitchell Espinoza who was alleged to be operating an unlicensed money service business by selling bitcoin.

The trial court dismissed the charges, concluding that bitcoin was not a “payment instrument” under Florida law, and that selling bitcoin was not money transmission. The Third District disagreed with both of these conclusions, holding that bitcoin is a “payment instrument” because the Court had evidence that individuals were willing to accept bitcoin in exchange for goods and services.

The Court cited no technical authorities regarding the development, uses or structure of Bitcoin for non-financial purposes, but instead focused on the fact that Bitcoin could be used as a means to convey value.

The Court compared the language of Florida’s Money Transmitter Act (Ch. 560, Fla. Stat.) to that of the federal law and, based on its reading of the plain text of Florida’s law found that it did not expressly require that a third party be included in a transaction for that transaction to constitute money transmission.

Accordingly, the Court found, selling one’s own bitcoin constitutes “money transmission,” which requires a license, a written compliance protocol, and extensive record keeping. Not only is this decision at odds with the Federal view of what constitutes a money service business, it also contradicts guidance from the state regulator, Florida’s Office of Financial Regulation, which stated in a declaratory statement in re: Cryptobase that parties who buy and sell their own bitcoin do not need to obtain a money transmission license.

It also demonstrates a fundamental misunderstanding of what Bitcoin is and how it is developing into a robust network supporting a variety of use cases, including non-financial uses.

Bitcoin is not money. It does money

Bitcoin lacks several fundamental characteristics that we recognize as required for something to be “money.” It is not centrally backed or technically fungible. Despite this (and likely because the word “coin” appears in its name), it is often described as “digital money” or “digital gold.”

In actuality, Bitcoin is neither of these things. It is a worldwide global network of computers that allows participants to
authenticate data without first obtaining permission from a centralized authority. The first application of that network just happens to be something like money.

The global network is called Bitcoin with a capital “B” and the public ledger that records and validates data entries on the network is called the Bitcoin blockchain. Prior to Bitcoin, secure peer-to-peer electronic transactions of data were impossible because digital information is easy to copy; digital representations of value could be copied and spent twice. Bitcoin solves this issue by using cryptographic tools, in a game theory based system that incentivizes participants that invest computational energy to validate new data by paying a reward for this work.

That internal network reward mechanism is confusingly called bitcoin (with a lower-case “b.”) Without bitcoins to incentivize mining, Satoshi’s network could not work. First, because users who wish to add or change data tracked on Bitcoin’s blockchain need to pay fees in bitcoin, there is a cost to add new data and therefore the Bitcoin network is unlikely to be flooded with phony or low- value transactions (essentially preventing a denial of service type attack).

Second, because miners that invest their resources to validate changes to the blockchain must be trusted to act honestly, and not certify false data, the bitcoin reward provides a monetary incentive to participants to only accept valid transactions.

The Third District’s decision and what Florida should do about It

The Third District’s opinion focuses exclusively on bitcoin’s financial uses. However, their analysis ignores other uses of the Bitcoin network, including as a censorship-resistant publication network, a time-stamping tool, a document authenticator, a smart contract platform (using RSK Rootstock) with broad application across many industries, and the ability to facilitate forms of micro-communications (utilizing Bitcoin’s lightning network) that are not otherwise technologically possible.

Each of these non-financial uses requires a user to easily obtain bitcoin to participate in both the financial and non-financial activities facilitated by the Bitcoin network.

By ignoring the State’s existing policy of permitting individuals to sell their digital property without obtaining a money services business license, the Court has transformed Florida from one of the more innovation-friendly states for the blockchain and virtual currency industry into one of the least. By not recognizing the value and developing uses of the Bitcoin network, the Court essentially made it cost-preclusive to start a business that helps to grow or facilitate the still-developing uses of Bitcoin’s global decentralized network and created higher burdens for parties who wish to transact on the Bitcoin network.

The State’s desire to prevent unlawful behavior is well founded, but it should be overly cautious when endorsing overbroad or technologically restrictive policies. The Third District Court of Appeal’s decision is at odds with Florida’s Office of Financial Regulation and its proper understanding of the many aspects — both non-financial and financial — of the Bitcoin network. Fortunately, a new bill has been introduced before the Florida House that would form a working group to advise the State, among other things, of how to regulate bitcoin. However, a legislative solution may take months or years.

In the meantime, it is imperative that regulators and courts take the time to understand the Bitcoin network’s applications beyond its use as value so they do not let Florida fall behind.

Florida image via Shutterstock

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Crypto Exchange Kraken Says US Subpoenas Becoming ‘Barrier to Entry’

San Francisco-based cryptocurrency exchange Kraken has said that the cost of handling government subpoenas is fast becoming a “barrier to entry” in the U.S.

On Saturday, the exchange tweeted an infographic from its “2018 Transparency Report,” indicating that the law enforcement and other inquiries it has received from various government agencies around the world have almost tripled year on year.

The firm received a total of 475 subpoenas in 2018 compared to 160 in 2017, with the majority (315) coming from U.S. agencies. The U.K. came in second with 61 requests and Germany third with 34.

“You can see why many businesses choose to block US users,” Kraken said in its tweet.

Source: Kraken/Twitter

Breaking down the U.S. figures, the agency making highest number of inquiries at Kraken was Homeland Security Investigations (HSI) with 91 subpoenas. That was followed by the FBI with 67 and the Drug Enforcement Administration (DEA) with 40. The SEC and the CFTC made 29 requests combined.

Kraken said in a Twitter thread that it gets requests for “all transactions, which could be petabytes of data when they actually only need the withdrawals from last week for one guy.” Such inquiries are “taxing” on the firm’s resources as they often require a “significant amount of education and back-and-forth,” it said.

When asked why it received more inquiries from the U.S. than other nations, the exchange replied:

“US is about 1/5 of clients but 2/3 of requests. US agencies are much more active and are much less surgical. For many requests, we have no matches. It wouldn’t be surprising to find that the same subpoenas go out to everyone in the hopes that a match will be found.”

The exchange is famously critical of U.S. officialdom. Back in April, Kraken CEO Jesse Powell told CoinDesk that the exchange would not be complying with an inquiry into crypto exchanges launched by the New York Attorney General (NYAG). “I realized that we made the wise decision to get the hell out of New York three years ago and that we can dodge this bullet,” Powell stated at the time.

Later, in September, when the NYAG report was released, finding that many crypto exchanges are vulnerable to market manipulation, Powell further tweeted that “NY is that abusive, controlling ex you broke up with 3 years ago but they keep stalking you…”

U.S. law image via Shutterstock 

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Business Models Should Be ‘Re-Imaged’ for Blockchain, Says Barclays Rep

A Barclays Intrapreneur said that blockchains should be built with regulatory compliance in mind during a recent industry event.

A Intrapreneur from financial services giant Barclays has expressed the idea that blockchains should be built with regulatory compliance in mind, tech news website The Next Web (TNW) reported Dec. 14.

Speaking at a Hard Fork Decentralized event, Barclays’ Julian Wilson stated that when building blockchains, developers need to “reconfigure our approach and way of thinking.” Wilson argued that not all business models require blockchains and that the tech should not be used, as TNW paraphrased his words, “as bolt-ons or additions to current business models.”

TNW also reports that Wilson presented an integrated concept of regulation and development, arguing that “to make a blockchain legally compliant, it should be built with the law in mind, and not the other way around.”

Speaking about using blockchain at Barclays, he noted that for a bank with over 300 years of activity, changing its business model to a blockchain-based one would not be simple, and that a blockchain solution would need to be “bespoke.”

As Cointelegraph reported in August, Barclays sponsored a blockchain hackathon to explore the technology’s potential in the processing of derivatives contracts.

While this summer Barclays denied plans to open a cryptocurrency trading desk, the banking giant demonstrated interest in crypto and blockchain tech recently, filing two digital currency and blockchain patents with the United States patent office in July.