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I Underestimated Just How Many Subpoenas I Would Get

Steve Beauregard of the Bloq talks about his favorite work: answering subpoenas.

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CoinDesk is the leading digital media, events and information services company for the crypto asset and blockchain technology community.

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Facebook Registers Secretive ‘Libra’ Cryptocurrency Firm in Switzerland

According to a Reuters report, Facebook registered a new company, Libra Networks, in Geneva on May 2. This coincides with the slow roll-out of their internal cryptocurrency that will define the company’s first foray into blockchain technology.

Facebook Global Holdings is a stockholder in the new company and it will, according to Reuters, “provide financial and technology services and develop related hardware and software, plans submitted on the Swiss register reveal.”

Facebook’s march towards crypto has been slow and steady. The company’s latest move, the hiring of two Coinbase compliance managers, happened on May 14.

The Libra project has ruffled some feathers in Congress, as well. US lawmakers sent an open letter to the company seeking clarification on the currency’s purpose and implications.

They wrote:

The Wall Street Journal recently reported that Facebook is recruiting dozens of financial firms and online merchants to help launch a cryptocurrency-based payments system using its social network. Last year, Facebook asked U.S. banks to share detailed financial information about consumers. In addition, privacy experts have raised questions about Facebook’s extensive data collection practices and whether any of the data collected by Facebook is being used for purposes that do or should subject Facebook to the Fair Credit Reporting Act.

Facebook declined to comment on the new company. Recent rumors pointed to a tentative $1 billion raise to be used to build out the technology.

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SEC Uncertainty Looms Over Token Summit – Again

It looks like Kik won’t sue the SEC after all, founder Ted Livingston told CoinDesk.

In a widely circulated story, the Waterloo, Ontario, company had promised legal action against an expected regulatory action, but the odds that Kik will pursue that seem to be diminishing, even if the company’s legal expenses are not. Nevertheless, Livingston would prefer the SEC take any action rather than continuing to delay.

“What we’re saying to them is, ‘Stop dragging this out, if you want to go to court, if you think there is an infraction, then let’s go to court,’” Livingston told CoinDesk at Token Summit 2019 in New York City on Thursday.

Livingston’s remarks fell in line with a major theme of the summit itself: regulatory uncertainty.

The topic had also been a major theme last year and at the summit’s prior iteration in San Francisco. In fact, it has felt like the endless conversation in crypto ever since ERC-20 tokens created a new fundraising strategy: selling access to new networks, rather than ownership stakes.

Jae Kwon, of Cosmos, gave a generally positive view of regulators’ efforts, though he still noted gaps. He said it made a lot of sense for regulators to tamp down an ICO market that “wasn’t sustainable.”

Still, Kwon noted, “There’s a lot of innovation that’s always ahead of the regulators.”

An investor in the space, Ash Egan of Accomplice VC, said this continuing conversation about what’s legal is “taking mindshare away.”

He told CoinDesk:

“You have to actually think about: Do you want to engage, like Blockstack is, or do you want to ignore it?”

Courses of action

Playing by the rules is not cheap.

Muneeb Ali of Blockstack took the stage to discuss his company’s Regulation A+ filing with the SEC. The Reg A+ is colloquially known as the mini-IPO and requires much of the same legal legwork.

Token Summit co-host William Mougayar said on stage that he had heard Blockstack had spent as much as $2 million to finalize its filing. While declining to confirm that figure, Ali said he expected that if Blockstack got a qualification for its offering to U.S. investors, then future companies would be able to take the same approach at a lower cost.

“We are considering it a donation to our industry,” Ali quipped.

Faith in Congress?

There are other approaches out there to dealing with regulatory uncertainty.

Many members of the larger crypto community appear to support redefining the terms, offering their support for Congressmen Warren Davidson and Darren Soto and their Token Taxonomy Act, which would exempt certain cryptocurrencies from securities laws.

Soto, a Florida Democrat, spoke briefly via video, urging attendees to press their own representatives to support his legislation:

“As I look to the future of our economy, more and more transactions will be done through cryptocurrency.”

For his part, Ali acknowledged the legislative process currently underway but said his company did not feel it could wait. He also said he couldn’t really conceive of following Kik’s approach and challenging the SEC to a courtroom showdown.

Timothy Massad of the Brookings Institution didn’t seem to believe the bill had much hope anyway.

He said that Soto is the exception among the House Democrats on the legislation because, he believes, most are uncomfortable with how much the bill undermines securities law.

An attorney who formerly helmed the Commodities Futures Trading Commission (CFTC) under President Barack Obama, Massad’s take comes from a Washington insider’s perspective.

He also disagrees with the approach.

“I wouldn’t agree that this industry is different, that it needs a special exemption from securities law,” he said. He conceded, however, that more clarity is needed and the present course, via enforcement actions, hasn’t been the most efficient.

And that’s left a bevy of other problems. One attendee pointed to protocols that suddenly forked themselves. Massad pointed to frontrunning and exchanges with trading desks that use their own customers’ info to make trades.

Massad noted:

“You’ve got all sorts of problems in the cash market for things that aren’t securities.”

Definitional delay

But, on that point, another lawyer on the panel noted there are a lot more issues beyond how the law views crypto.

Robert Rosenblum, an attorney at Wilson SAonsini Goodrich & Rosati, said his firm has typically seen most cryptos as securities. He said that his coworkers have always felt the gap then was, “So, now what?”

In other words, regulators need to explain, if tokens are securities, how the public should buy them and where trading markets can be established.

Kwon of Cosmos made a similar point. He noted that no one has any idea how to run a decentralized exchange in a way that’s OK with U.S. regulators right now. But Rosenblum seemed to feel this would and could be worked out.

“Only after we have a reasonably well-functioning market, will we have more experience, and a much better framework,” Rosenblum said.

How long will that take, though? And that became the underlying question. Slowness tortures a very fast-moving industry.

Andreas Glarner, an attorney with European compliance firm MME, said that the view from Europe is that this entire industry is confused:

“After roughly five years’ time, the answer is: It’s not clear. Otherwise, we wouldn’t be sitting here. That’s the outside view.”

Attorney Nancy Wojtas, a partner at Cooley LLP, said she agreed that the doubts are spurring companies to leave or at least domicile elsewhere, and that’s a concern.

Kwon concurred:

“If the U.S. is not careful, it’s going to lose its ability to participate.”

Additional reporting by Nik De.

William Mougayar and Muneeb Ali at Token Summit 2019, photo by Brady Dale for CoinDesk

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Facebook Hires Two of Coinbase’s Former Compliance Managers

Facebook hired two Coinbase veterans to work in compliance this month, and at least one of them is involved with the social media giant’s blockchain effort.

Jeff Cartwright left Coinbase in March after nearly five years at the U.S. cryptocurrency exchange in various compliance roles. He joined Facebook as a policy and compliance manager this month, according to his LinkedIn profile.

The profile does not address how involved he will be in Facebook’s blockchain projects, which include a secretive plan to create a price-stable cryptocurrency. Reached by CoinDesk Monday evening, Cartwright said he could not discuss his new role. Facebook spokesperson Elka Looks said the company does not comment on personnel.

Meanwhile, Mikheil Moucharrafie, who left Coinbase in April after more than three years, also joined Facebook this month. He is a compliance officer for blockchain at the social media giant.

A lawyer by training, Cartwright joined Coinbase in 2014 after working in compliance roles at American Express and Goldman Sachs and as an anti-money-laundering (AML) consultant at Big Four professional services firm KPMG.

He spent the first three years at Coinbase managing the startup’s AML and Bank Secrecy Act (BSA) compliance, was promoted to head of internal audit in March 2017, and then to director of regulatory risk and exams in December of last year.

Moucharrafie has a similar pedigree, having worked as an AML/BSA investigator, compliance manager and risk manager during his time at Facebook.

Facebook’s coin

The two hires’ legal and regulatory chops may prove valuable to Facebook given the scrutiny its cryptocurrency plans have started to attract in Washington.

Last week, the U.S. Senate Banking Committee wrote an open letter to Facebook founder and CEO Mark Zuckerberg, asking him to share details about the cryptocurrency project, with a particular focus on consumer privacy.

Little is known about the crypto initiative, called Libra. The company quietly began building up a blockchain research team last year, headed up by vice president and former Coinbase board member David Marcus.

The company has posted numerous job listings for the team since, and notable figures in the space such as crypto economist Christian Catalini, a researcher with MIT, have also joined the project.

The company is reportedly looking to raise as much as $1 billion for the project to use as collateral to back a stablecoin.

Anna Baydakova contributed reporting.

Facebook image via Shutterstock.

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Boston Fed Announces Plans To Design a Blockchain ‘Supervisory Node’

The Federal Reserve of Boston is starting a new blockchain experiment this summer.

The Massachusetts state regulator has been one of the earliest and most involved government bodies to dip their toe into the new technology. It has been quietly developing blockchain systems since 2016 but has said very little about their plans.

Now the first results of those trials are out and the Boston Fed published a white paper on its proof-of-concepts on ethereum and Hyperledger Fabric. Now it’s getting ready for the next stage, Boston Fed’s vice president of IT Paul Brassil told CoinDesk.

The team is going to look into possible opportunities to set up a “supervisory node,” a regulatory surveillance tool that should be able to connect to various banking blockchains in the future. This node will watch the money flows and settlements between different banks, Boston Fed’s senior vice president Jim Cunha said.

“If you look at the future, there might be one blockchain that is holding securities, one that is holding derivatives, one is holding cash or interbank transfer — how do you as a supervisor watch the traffic on all these platforms that also will be on different technology?”

Cunha adds, that Boston Fed is not looking at these explorations from a policy standpoint and that is expects to work with the central Federal Reserve on these rules. But in the meantime monetary authorities have to keep apace with the technology development.

“We are surrounded by very large financial institutions and banks and we know that all of them are experimenting with the blockchain technology. So the more we can work with them and understand their roadmap, the more we know that we’re moving in a right direction,” Brassil said.

First, the Boston Fed plans to set the agenda and determine the main direction of this experiment and the work on this ideological part will start as early as this summer. Cunha said there are no plans yet for the publicly releasing the project.

“Right now there is very little research on it, so our next goal is to look into what an audit node look like,” Cunha said. “What kind of data we should have access to, how to interact, how to update nodes, can you create operational problems with it? What kind of coding you will need to do to store the information about the movement of funds, so you can do analysis of the flows. We are really starting from scratch.”

In the future, it could be possible that we will see multiple blockchains by various banking institutions, Brassil said, so the Fed’s supervisory node should have a technical capacity “broad enough to cover all the platforms.”

“Startup in the basement mentality”

Boston Fed started blockchain technology trials back in 2016 by experimenting with ethereum. At that time, there were no specialized blockchain developers on staff, so the team of coders educated themselves watching relevant videos on YouTube. Cunha and Brassil called it their “startup in the basement.”

During that period, developers tried to put depository institution balances under the Boston Fed supervision on a blockchain and create mock transactions — a kind of a blockchain-powered back office model. They conducted the testing first on the ethereum blockchain and then on Hyperledger Fabric. In the end, the latter was considered a more suitable option.

Why did they pick Fabric? first of all, a permissioned blockchain is preferable for a government entity. Among other challenges, the necessity to maintain a supply of ether to pay gas in transactions complicated the task and they were also worried about speed limitations.

“The time necessary to create a block was slower than could be tolerated in a production environment,” the white paper said.

Now, with the project of the blockchain back office on hold and the “supervisory node” experiment in the pipeline, Boston Fed is hiring some professionals to ramp up its blockchain testing, Cunha told CoinDesk.

“We are trying to add stuff to do something more robust internally, we need more dedicated resources,” he said. The new blockchain team will not be large, though, only “a handful” of people.

Boston Fed is also actively talking to other monetary authority bodies, though Cunha and Brassil won’t name the particular institutions. That said, they are excited to spread the word about the project.

“We have to share information because the whole industry needs to educate itself,” Cunha said.

Image of the Boston Fed office — courtesy of the Boston Fed.