“It depends on what the meaning of the word ‘is’ is.”
–President Bill Clinton
As President Bill Clinton so memorably told a grand jury during the Monica Lewinsky affair, definitions matter, particularly when it comes to matters of law.
That’s why it’s worth noting that the U.S. Senate Commerce, Science and Transportation Committee voted to approve the Blockchain Promotion Act of 2019 on July 12, giving the Commerce Department one year to come up with “a recommended definition of the distributed ledger technology commonly known as ‘’blockchain technology.’”
The bill has bipartisan support in both houses of Congress, and is seen as a vital step in developing blockchain technology in the U.S. by adding clarity to the regulation of the industry. Definitions play a key part in the law, as is made clear by the text of the bill itself, which begins by defining “Federal agency” for the purposes of the legislation.
“Blockchain can be a great resource for innovation and technology, but as the technology develops, we must reduce regulatory uncertainty by figuring out whether there is a common definition and how the technology can be used,” said Rep. Brett Guthrie (R-KY) in a statement introducing the House version of the bill.
A good part of that regulatory uncertainty comes from the fact that many states are farther along in regulating both blockchain and cryptocurrency technology, he noted, adding that, “states are considering legislation that includes different definitions of blockchain.”
This is a cause of concern for companies investing heavily in blockchain technology and services, such as IBM and Intel. The tech giants have been pressing lawmakers on this issue, according to a report this month in the Wall Street Journal [subscription required]. One of their goals, it said, was “to pre-empt a patchwork series of blockchain definitions from state governments.”
The Blockchain Promotion Act also seeks to prevent the Commerce Department from acting unilaterally, directing the Secretary of Commerce to establish a Blockchain Working Group that includes many federal agencies as well as companies of all sizes, advocacy groups, and academics.
Its goal would be to “develop a common definition of blockchain, and, perhaps even more importantly, recommend opportunities to leverage the technology to promote new innovations,” said Rep. Doris Matsui (D-CA), in a statement.
“Blockchain has the potential to be a catalyst for sustained economic growth across all industries in America,” said Sen. Todd Young (R-IN), another of the bill’s authors. “If America leads in its development, we can ensure that it’s benefits will be shared far and wide. I’m proud to join with my colleagues to ensure the U.S. is at the forefront of this revolutionary technology.”
When it comes to regulating cryptocurrencies, legal definitions are even more important as these virtual assets are by their nature international. This means, particularly given the secrecy built into bitcoin (BTC) and its offspring, they cannot be defined or even effectively regulated by a single government’s decree.
Creating these regulations effectively requires a standard terminology that does not exist, argued an April paper from the University of Cambridge’s Centre for Alternative Finance. It looked at regulations in 23 countries, including the U.S., EU, and China as well as smaller but more proactive countries like Switzerland and Malta.
“There is no standard usage of terminology across regulators and a variety of terms have been used to refer to cryptoassets in official statements,” according to the “Global Cryptoasset Regulatory Landscape” study.
Noting that this is true even among different regulatory agencies within a single country, the report also found that “[u]nclear terminology and classification… challenge regulators’ ability to robustly define their regulatory perimeter and implement regulations.”
This terminology problem is becoming more pressing as regulators focus on two legal areas grows more active: securities law, and crime-prevention regulations such as know your customer (KYC), anti-money laundering (AML), and countering the financing of terrorism (CFT) rules.
Particularly in regard to securities law, this can be an existential problem for companies trying to innovate in the field. Notably, the Basis stablecoin project backed by Google Ventures and Bain Capital Ventures recently shut down and returned $133 million to investors after extended talks with the U.S. Securities and Exchange Commission (SEC) led them to conclude that the coin could not avoid being classified as a security.
Beyond this, the “lack of harmonized and coordinated regulatory responses allows cryptoasset market participants to exploit regulatory loopholes and circumvent stringent regulations,” the studies’ authors claim. “International regulatory collaboration and cooperation can mitigate potential harms of regulatory arbitrage by creating a more consistent, harmonized, and coordinated regulatory framework, in addition to enforcement measures across jurisdictions.”
One positive development in this regard is the recent move by the inter-governmental Financial Action Task Force (FATF), which effectively requires all countries to impose strict customer identification requirements on both exchanges and their customers within a year.
The problem is, in some cases the anonymous design of bitcoin and other cryptocurrencies makes this not just untenable but impossible, noted Chainalysis COO Jonathan Levin and Global Head of Policy Jesse Spiro in a comment to the FATF before its June ruling.
Still, there is a long way to go before standard definitions of both cryptocurrencies have a common international language. This is most notable in the most basic definition required: what these new assets should be called.
The term “virtual currency” remains the most used by regulators, the study found. But its usage has dropped from nearly 80% in 2014-2016 to less than half this year.
In its place, the use of seven different names are growing: digital asset, digital financial asset, virtual asset, DLT (distributed ledger technology) asset, digital currency, and cryptocurrency.
This isn’t all bad. One reason for this change, the study found, is that regulators are increasingly differentiating between different types of tokens.
“Some regulators have recently started to use ‘cryptocurrencies’ more narrowly as solely a synonym for payment or exchange tokens in order to distinguish them from other token types, such as utility or security tokens,” the Cambridge study found.