Peter Van Valkenburgh: Crypto Regulatory Landscape Reflects Unregulated Sports Betting, Blockchain Regulatory Certainty Act Clarifies Crypto Jurisdiction and Why Decentralized Systems Are Critical to AI Development.

Key takeaways

• The current state of crypto is being compared to unregulated online sports betting, highlighting a disconnect between its purpose and reality.
• Coin Center is dedicated to protecting free and open source software development in the crypto space.
• Common sense regulation is necessary for trusted entities in crypto, but not for software development.
• AI development should use decentralized systems for better ownership and reward mechanisms.
• Legal standards for the distribution of cryptography and AI codes will likely align under the First Amendment.
• The public licensing regime for funds transfer is not suitable for crypto businesses due to different risk profiles.
• Equal treatment is advocated for banks and crypto companies when it comes to regulation.
• Software providing neutral infrastructure should not be subject to the same licensing requirements as traditional financial entities.
• Forcing decentralized systems to record and report user information is problematic.
• Decentralized systems reduce information asymmetries present in traditional brokerage contexts.
• The Blockchain Regulatory Certainty Act (BRCA) clarifies jurisdiction over money transmission in the crypto space.
• The BRCA aims to provide statutory clarity to FinCEN guidance, preventing it from being ignored by prosecutors.
• The Tornado Cash lawsuits lacked specificity and should have reflected changes to the software over time.
• The BRCA provides clarity on uncontrolled blockchain service providers, which is crucial for developers.
• Non-decentralized rulemaking is essential to determining obligations under existing securities laws.

Guest presentation

Peter Van Valkenburgh is Research Director at Coin Center, a nonprofit research and advocacy organization focused on public policy issues related to crypto and blockchain technologies. He previously served as a Google Policy Fellow at TechFreedom, writing policy and litigation briefs on technology issues. At Coin Center since 2014, he has testified before Congress and briefed U.S. and European lawmakers on crypto regulation, including DeFi protocols and non-custodial development.

The State of Crypto and Its Regulatory Challenges

• “The current state of crypto is akin to unregulated online sports betting, which is a disgrace to the industry.” –Peter Van Valkenburgh
• Coin Center focuses on protecting free and open source software development in the crypto space.
• “We are a civil liberties company dedicated to ensuring that people who want to develop free and open source software are protected from lawsuits or unwarranted regulatory treatment.” –Peter Van Valkenburgh
• There should be common sense regulation for trusted entities in crypto, but not for software development.
• “We believe in common-sense regulation of trusted people in space… what we oppose are attempts to license and permit the development of software or the operation of truly neutral infrastructure.” –Peter Van Valkenburgh
• The public licensing regime for funds transfer is not suitable for crypto businesses due to different risk profiles.
• “It’s strange that a Coinbase is regulated in exactly the same way as a MoneyGram or a Western Union because their risk profiles are different, the consumer protection issues are different…” – Peter Van Valkenburgh
• There should be equal treatment between banks and crypto companies when it comes to regulation.

AI and decentralized systems

• AI development should leverage decentralized systems for better ownership and reward mechanisms.
• “I would be more comfortable if the way AI was developed over the next few years was as much as possible with decentralized systems, like who owns the computational resources and how do we reward training data and things like that.” –Peter Van Valkenburgh
• The legal standards for distributing cryptography and AI codes will likely be similar under the First Amendment.
• “The same priority that will be established in the crypto world… will be the same with respect to the legal standards developed under the First Amendment.” –Peter Van Valkenburgh
• Decentralized systems reduce information asymmetries that exist in traditional brokerage settings.
• “The information asymmetries that we would normally worry about in the context of broker registration…start to disappear when we talk about truly decentralized systems.” –Peter Van Valkenburgh
• Forcing decentralized systems to record and report user information is fundamentally problematic.
• “The idea that we would force you to know everyone who bought and read your book and report them to the government…starts to seem very Orwellian and problematic.” » – Peter Van Valkenburgh

Blockchain Regulatory Certainty Act (BRCA) and its implications

• The BRCA aims to clarify jurisdiction over money transmission in the crypto space.
• “The first provision to focus on for this issue is the Blockchain Regulatory Certainty Act…it was intended to create a safe harbor from prosecution for unauthorized money transmission.” –Peter Van Valkenburgh
• The BRCA provides statutory clarity to FinCEN guidelines to prevent prosecutors from ignoring them.
• “Tom Emmer’s bill, the Blockchain Regulatory Certainty Act, simply took the FinCEN guidance and codified it and said we were going to make it a statutory rule so it couldn’t be ignored, because guidance is guidance…” – Peter Van Valkenburgh
• The BRCA clarifies what constitutes control-free blockchain service providers, which is crucial for developers.
• “I think BRCA’s definition of an uncontrolled blockchain service, service provider, or software developer is much clearer than anything we’ve had in the past, with the possible exception of the 2019 FinCEN Guidelines.” –Peter Van Valkenburgh
• The BRCA may exempt certain blockchain activities from money transfer liability if there is no ongoing control over customer funds.

Legal challenges and developer liability

• The Tornado Cash lawsuits lacked specificity and should have reflected changes to the software over time.
• “The biggest problem with this Tornado Cash billing was the fact that they weren’t specific enough with the facts because Tornado Cash obviously changed over time and they should have billed it accordingly.” –Peter Van Valkenburgh
• Non-custodial software developers could face criminal liability due to broad interpretations of money laundering charges.
• “I wanted to focus on the conspiracy to launder money charge because the reason I think it’s important is because, as you know, even if we got rid of the 1960s entirely, developers would not still be exposed to criminal liability under, in my opinion, the very broad and incorrect way in which prosecutors have applied the conspiracy to commit money laundering charge.” –Peter Van Valkenburgh
• The DOJ’s interpretation of conspiracy law as it relates to software developers is highly problematic.
• “So, to me, that was always a very problematic, very problematic reading of the federal conspiracy laws…I just never saw how we had all of these elements in these cases.” –Peter Van Valkenburgh
• Software developers should not be held responsible for how their tools are used by others.
• “You should not be found guilty of money transfer and unlicensed money transfer just because other people used your software to transfer money.” –Peter Van Valkenburgh

Implications of the new bill and financial oversight

• The new bill will create categories of federally regulated financial institutions with BSA AML obligations.
• “This bill will create new categories of federally regulated financial institutions that will have BSA AML obligations…this is actually a heavily regulatory bill that will create a lot of new data and collect data for law enforcement.” –Peter Van Valkenburgh
• The Blockchain Regulatory Certainty Act aims to focus law enforcement resources on actual criminals rather than software developers.
• “The bill in the Senate currently passing the House is that the BRCA rightly excludes the wild goose chase of going after software developers. So we hope that the Doj’s limited resources are spent properly to control bad behavior that harms victims.” –Peter Van Valkenburgh
• The DOJ needs better funding and resources to effectively prosecute serious financial crimes.
• “We emphasize the importance of better funding to ensure we have the resources to pursue these difficult prosecutions and develop these strict rules.” –Peter Van Valkenburgh
• Law enforcement must effectively prioritize resources to combat serious crimes rather than pursuing software developers.

Crypto Reputation and Future Directions

• Crypto has a terrible reputation and is often seen as a giant online casino.
• “We just have to be honest: crypto has a terrible reputation right now because it’s mostly like a giant online casino, which is unfortunate…” – Peter Van Valkenburgh
• Crypto needs to replace the existing financial system to avoid being seen as just online sports betting.
• “The fundamental level must be that of replacing the existing financial system, otherwise we will always be slaves to… just online sports betting without a regulator, that’s fucking stupid…” – Peter Van Valkenburgh
• The crypto industry should recognize its shortcomings and work to build a better reputation for itself.
• “We should talk about the fact that people don’t like it and find a way to build it better so that it’s something worth enjoying again…” – Peter Van Valkenburgh