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In honor of Peter Van Valkenburgh’s appearance before Congress yesterday, we’re reposting our interview with him about what it’s like trying to explain the blockchain to politicians and regulators.
Jay Kang: Alright, so our guest today is Peter Van Valkenburgh. He is a director of research at Coin Center, which is a non-profit research and advocacy group that’s focused on public policy issues facing cryptocurrency. Peter, did I get all that right?
Van Valkenburgh: Yeah, spot on.
Aaron Lammer: That was so formal, Jay.
Jay Kang: We’re trying to professionalize the show here.
Aaron Lammer: This is just a casual chat.
Jay Kang: (laughing)
Aaron Lammer: What is the Coin Center in a … you are on a airplane with someone who is, maybe not even familiar with crypto currencies. What does it mean?
Van Valkenburgh: Well, if I’m on an airplane, I’m not telling them anything about Coin Center, because the conversation could potentially last the entire flight at this point.
Aaron Lammer: (laughing)
Van Valkenburgh: But if they’re gonna ask what Coin Center is, we have an elevator pitch. It’s gonna be kind of regrettably formal as well, but we are an independent non-profit research and advocacy group based in Washington D.C. And we’re focused on the public policy issues, so government policy issues that arise with the emergence of cryptocurrencies and open blockchain networks. So those would be things like Bitcoin, Ethereum, Zcash, anything with an open consensus mechanism. Now, if I’m on an airplane and I just said, open consensus mechanism, I’m asking for problems,-
Aaron Lammer: (laughing)
Van Valkenburgh: … but hopefully that means something to your listeners.
Jay Kang: So what are the government and policy concerns then, right now, cause I imagine that they’ve changed over the amount of time that you’ve been working in this space. We just had these widely publicized Senate hearings. We’ve had a lot of people from the CFTC and the SEC weigh in on Bitcoin. So what is the state of, I would say the policy realm, right now?
Van Valkenburgh: Yeah, you’re absolutely right that they’ve evolved. And the hearing in front of the Senate Banking Committee, where chairman Giancarlo of the CFTC and chairman Clayton of the SEC, is pretty indicative of where they’ve headed. They’ve headed into the realm of the federal government looking at investor protection. And the two on point agencies there are the Commodities Futures Trading Commission, which regulates derivative financial products where the underlying is a commodity. And they’ve said, look the commodity that underlies the swap or future could be a Bitcoin. And so we’re gonna regulate for investor protection, and for market transparency, and things like that.
And the SEC has jurisdiction, not over commodity investments, but investments in securities, which are possibly some cryptocurrencies, Altcoins, or token projects, especially just to give the strictures of the test. There’s an investment of money with an expectation of profits into a common enterprise, where we rely on a third party or promoter to realize those profits. And what that means is not that these things are illegal of course, it just means that they have to comply with security’s laws, which means registering to have an IPO, which includes audited financials, and some really expensive lawyering, and some other things. Or maybe you fit into a safe harbor in the security’s laws. (laughing) Please interrupt me.
Jay Kang: No, no, no, no.
Aaron Lammer: I think this elevator is broken. (laughing)
Van Valkenburgh: (laughing)
Jay Kang: (laughing) Alright, so my question is, there are people in the Senate who now have talked about Bitcoin, right? And we know that from Sarah Huckabee Sanders in the one time she mentioned Bitcoin, is that the president is looking into it. But I think we can safely assume … Aaron and I being people who know a small amount of Bitcoin but not that much … but who talk to people all the time that know nothing about Bitcoin, that the vast majority of people in Washington probably know nothing about this stuff.
Aaron Lammer: Man, I just thought of the most viral story possible.
Jay Kang: What is that?
Aaron Lammer: Donald Trump revealed as a massive Bitcoin whale. (laughing)
Jay Kang: (laughing) It would be like $0.50 times like 500.
Aaron Lammer: You’d catch the internet on fire with that story.
Jay Kang: Every person who hates Donald Trump would start dumping immediately just in bankruptcies stock. But how do you get senators, congressmen, people in Washington, up to speed on the crypto space?
Van Valkenburgh: Yeah, and that’s actually the primary thing that we do at Coin Center. So we’ve developed a lot of research about things like how commodities laws or security’s laws intersect with the technology to try and have a sensible approach. But that’s actually secondary to our main objective, which is to just be the voice for these technologies in Washington D.C. and hopefully an unbiased voice that is optimistic about how these technologies can do good in the world. The internet is a fundamental infrastructure that’s incredibly important to our lives. We’re conversing over it right now. This podcast will go out over it. People use it for everything. And it has independent advocates in D.C.
There’s great organizations like the Center for Democracy and Technology or the Electronic Frontier Foundation, that are non-profits like we are, that have just one mission, which is to educate people in government about how these things work so that they don’t make lousy decisions. And so our day to day is actually usually having briefings to explain how Bitcoin works, to explain how Ethereum works, or tokens, or cryptocurrencies in general. And allay their concerns, cause there are actually usually a lot of concerns that can be allayed. For example, if you read the headlines especially years ago, but even today, Bitcoin was always mentioned as the anonymous cryptocurrency of the dark web.
And there might be some kernel of reality to that, in that yes, cryptocurrencies have been used on the dark web like SilkRoad and drug sites like that. But there’s a big problem with calling it anonymous. It’s not anonymous at all. In fact,-
Aaron Lammer: It’s not fair to Monero. (laughing)
Jay Kang: (laughing)
Van Valkenburgh: And even Monero is not necessarily anonymous. There’s a lot of forensic accounting you can do and police work you can do to identify users of these systems. And so the fears are often overblown, the hype is often too extreme. Ideally, Coin Center is the reasonable voice that someone in government can call when they want an unbiased explanation of how the tech works. And they wanna learn the moving parts and maybe how some of their laws or regulations intersect with this new network.
Aaron Lammer: Do you consider it your job at the Coin Center to promote and educate people about all forms of cryptocurrency or is there … I would think that Bitcoin is so different than a no name shit coin ICO that launched a week ago and you’re walking in there. Are you drawing distinctions between these projects are probably going to be good for America and investors, and these projects are probably going to be bad? How do you avoid taking sides when you’re explaining all this stuff?
Van Valkenburgh: Yeah and it is very important that we don’t take sides. We try very aggressively to be as coin-agnostic as possible. Where we do discriminate is between technologies that have an open consensus mechanism like I mentioned earlier.
Aaron Lammer: Does that include Ripple?
Jay Kang: Can you explain what that is just maybe a little more in layman’s term?
Van Valkenburgh: Yeah totally.
Jay Kang: We would say for the audience, but actually for me and Aaron. (laughing)
Aaron Lammer: (laughing)
Van Valkenburgh: What I’d say is this, if anybody can utilize the network to achieve some sort of functionality, say you can setup an address and receive payments in some sort of asset native to the network. And you can do that without going through a licensing process or an identification process where you get permission from some sort of coordinating central authority to join the network and setup that address, or be a node on it or interact with it, that’s one criteria. But I also say that it’s more than just being able to receive the functionality of the network. You have to be a part of the actual infrastructure.
Jay Kang: So what are some examples of projects that are not open?
Van Valkenburgh: At Core, we’re talking about consensus, right? We’re talking about getting a bunch of computers to agree over some socially important data. And most of those consensus algorithms, they keep all of the several computers on the network in sync by having a leader election. And Bitcoin actually has something like a leader election. Every 10 minutes a new leader is picked to set the authoritative list of transactions for that period, but it’s picked through an open process.
Previous to Bitcoin, all consensus mechanisms would have leader elections, in other words, one computer on the network gets picked to be authoritative for a period of time and then we switch. But the way that they were picked was through something like a round-robin. First, this computer goes, then this computer goes, then this computer goes, and you get to earn a place in line in the round-robin by being previously provisioned with a public private key pair. So you authenticate yourself to the rest of the network. The rest of the network only listens to things from the preordained key pairs and that’s how you keep the whole thing [thought 00:09:24] tolerant is by gating it or permissioning it.
So any consensus driven network where the nodes have to authenticate using a previously provisioned key, which they’re gonna get from the central authority, is what I would call a closed or not open block chain technology. And they may not even have block chains, it’s just we use the term block chain technology [inaudible 00:09:46] hot.
Jay Kang: Okay, so when a senator calls you, right-
Aaron Lammer: (laughing)
Van Valkenburgh: We don’t talk like this. (laughing)
Jay Kang: … or a congressman calls you-
Van Valkenburgh: You asked a pretty nuance question. (laughing)
Aaron Lammer: They’re like, how much time do you have? (laughing)
Jay Kang: Let’s say a congressman is calling you and they’re like, listen, my pal, Warren Buffet, has said that he doesn’t really know that much about Bitcoin, but my other pal, Jamie Dimon, says that he thinks it’s bad. What can you tell me about this thing? I guess I have two questions. The first is how much does your average person in the government know about Bitcoin right now or cryptocurrencies? And secondly, how do you sort of onboard them onto this is a good idea, given that the people that they generally talk to I would think, are either afraid of it or at least they’re weary of it?
Van Valkenburgh: So a few things, first, it’s important to differentiate between people in the government, because they’re politicians, who make law in Congress-
Jay Kang: True, let’s talk about politicians then.
Van Valkenburgh: Okay and regulators was the other category I was going to say, people who enforce the law.
Jay Kang: What about your average elected official, how much do they know?
Van Valkenburgh: Yeah, so then it’s gonna depend on the office and whether the senator or the representative has taken an interest. We find a few who are highly sophisticated, because they may have a technology background. So take Jared Polis of Colorado as an example. He’s a guy who before he went to politics, started an ISP, so he’s an old internet entrepreneur.
Aaron Lammer: He’s also on the Cannabis Caucus.
Van Valkenburgh: Yeah-
Aaron Lammer: Overlap of my interests.
Van Valkenburgh: … and he’s a gamer.
Aaron Lammer: And he’s a gamer?
Jay Kang: [inaudible 00:11:27]
Van Valkenburgh: Yeah, he does massive multiplayer [crosstalk 00:11:29].
Aaron Lammer: Maybe he should be CoinDaddy. (laughing)
Jay Kang: (laughing)
Van Valkenburgh: I think he should be president. I don’t know, but … (laughing) And Jared Polis actually co-founded the Blockchain Caucus, which we’ve done a lot of work with. So it’s just a group of congressmen in the house who want to talk about blockchain. So he gets it. And then at the other end of the extreme, you have … I won’t name any names, but usually older representatives who may not even be interested or knowledgeable about the internet. And so when you come to them and you start talking about cryptocurrencies that are powered by pure to pure networking, cryptography, and economic incentives, you’re gonna have to slow down and start, really at the beginning.
Jay Kang: Alright, so you don’t have to name any names, but if you do then feel free. We don’t have to put it pejoratively, but what was the most basic question that you’ve gotten from an elected official?
Van Valkenburgh: What makes Bitcoin valuable? Maybe I’m biased, because I did econ before law school, but the question of value is not a sensible question. (laughing)
Aaron Lammer: (laughing)
Van Valkenburgh: No it’s not, because everything is worth what people are willing to pay for it. And that is something that usually boils down to how much of it is in the world and capable of exclusive ownership or possession, and how many people want it. So it’s supply and demand. I don’t know. This is something that a lot of people have trouble with. So even if maybe they understand that there’s only 21 million Bitcoins and that there are exchanges where people buy and sell them, you might still get the question, yeah, but who sets the price?
Jay Kang: Yeah, there seems to be this weird cognitive block that people have, which is that. And I remember that I was reading somebody who was writing about it who will also remain nameless. But he was saying that, look, gold can be used for filling teeth and even tulips … cause he was using this sort of over used tulip mania example … even tulips you can plant in the ground and there’s a flower, but Bitcoin there’s nothing that you can use it for. But it seemed strange, because you do have these things like baseball cards. What actually is a baseball card? It’s like a tiny piece of cardboard.
Aaron Lammer: What is a piece of art?
Jay Kang: Where the difference for them, I think, is in sort of something that you can hold in your hand and something that exists entirely on the internet, which flies in the face of the fact that the vast majority of these people, regardless of how old they are, live the majority of their lives on some sort of network or another.
Van Valkenburgh: Yeah and not only that,-
Jay Kang: How do you go-
Van Valkenburgh: … but you look at their net worth and it’s all in their 401k.
Jay Kang: Yeah, there’s no-
Van Valkenburgh: It’s [crosstalk 00:14:22]. It’s digital.
Jay Kang: … vault at Etrade that I can go to and be like, okay, I’m gonna need all the promissory notes from all these (laughing) petty stocks that I bought.
Van Valkenburgh: And so I’m agreeing with you that this idea that things need to have an intrinsic value to have value is silly, because everything just has subjective value. And things are valuable, because you like it and if enough people like it, they’re socially valuable and they have a price. But I would also add that Bitcoin is useful. It’s impossible to deny that it’s useful, because when you have a Bitcoin, you have a unique capability on the internet. If you have a Bitcoin, you can write a message, which is a certain string of characters, and sign a transaction that will end up in the blockchain. And if it ends up in the blockchain, everyone will see it and honor it, everyone else on the network.
That is a unique capability that you have to have a Bitcoin to have. You can’t just send Bitcoins before you’ve received them. You have to get them first and then you actually have some utility. You can make a public transaction that everyone will put faith in, because they put faith in the entire Bitcoin platform as a technology, not as a shared delusion. But as an actual system for record keeping that has this requirement. You need a Bitcoin in order to send a Bitcoin.
Jay Kang: In terms of regulations … cause I think that is something that you’ve spoken about before whether to the press or I’m sure it’s something that you talk a lot about … if you look at a Bitcoin community, which is something that Aaron and I are starting to dip our toes into, you find a lot of people who are very, very, very strident about the idea that any type of regulation is bad. So you have Roger Ver going on CNBC and saying, insider trading is good.
Aaron Lammer: Should be legal. (laughing)
Jay Kang: And you have a lot of people who sort of ascribed to a Austrian school economics type of mentality where they believe that it’s a narco capitalism. I would imagine that you in your role need a more measured approach and that if you were talking to senators or people like that, where if they hear the phrase, insider trading is good, they’ll be like, okay, I need you to leave my office right now. (laughing)
Aaron Lammer: Go back to the Caribbean you. (laughing)
Jay Kang: Exactly. There’s a boat to Saint Kitts leaving. What are good regulations and what are bad regulations for crypto right now, in your opinion?
Van Valkenburgh: Yeah, and so Coin Center is not ideological in the sense that you’re describing. What we’re mostly focused on is pragmatism. We like this technology. That’s maybe the ideological part. It’s an affinity towards open blockchain networks and we wanna see it have the room to succeed, but that doesn’t mean that we have to get rid of government or something like that. I think it means that we can work to stop really bad policies from emerging. In other countries, not in the US, you see semi-earnest attempts to actually just ban the technology and I think that’d be unconstitutional. It would violate free speech and some other things in our constitution, but it’s also not necessarily on the horizon. But that would be one of the primary objectives, would be to stop bad policy like that.
And then with regard to regulating other … other regulations don’t actually regulate the technology, unless you’re talking about a ban on the technology. We’re talking about people regulating certain individuals when they do certain activities using the technology. And so, for example, one of those activities might be, I’m gonna start a business and it’s gonna be a node on the blockchain, but a very special node where I will advertise, hey, use my node in order to setup your wallet, and store your Bitcoin, and write your transactions for you. In other words, I’m gonna be a hosted wallet provider. I’m gonna hold people’s Bitcoins for them.
They’re not gonna interact with the network directly. They’re gonna interact through me. You are in a position of trust. You could be like Mount Gox, and have lousy cyber security, and get hacked, and lose those funds. And you’re also, by the way, a lot like PayPal or Venmo, where we rely on their honesty, integrity, and cyber security, to not lose our dollar balances that we keep in our PayPal wallet.
So what this means is if we regulate an activity like holding other people’s valuables, with respect to PayPal in dollars, then maybe it’s not insane to regulate the same activity when it’s a person holding other people’s Bitcoins for them. It’d be great if we had more common sense ways to regulate those custodians. So one of the big problems in the US is if you’re a custodian like that, you have to get a money transmission license in every state where you have customers. And that means you’re gonna need to get a background check and maybe finger printed in 53 states and territories, even though the 53rd background check and finger printing is not going to make customers safer.
So there’s bad things about money transmission licensing that we can reason about and advocate for improvements. But the basic premise that somehow because you’re holding people’s Bitcoins for them in a trusted relationship instead of holding people’s dollars in a trusted relationship, and therefore because they’re magical blockchain tokens, you shouldn’t be regulated as a trusted custodian. I don’t understand the coherence there. Now, maybe you’re just against all regulation and that’s fine, but in that case, you’re not even advocating for Bitcoin. You’re advocating for revolution. And really those people, if they’re ideologically pure, should also be against and some of them maybe are, but they should also be against hosted wallet providers.
Jay Kang: Yeah, for sure.
Aaron Lammer: Yeah, they are.
Van Valkenburgh: Like mountain men who live out in the wilderness and will validate every transaction that comes across their machine and have at least three computers running since 2008. [crosstalk 00:20:23]
Aaron Lammer: They want like a bicycle that powers a battery that powers a node.
Van Valkenburgh: And actually, I like that there are those mountain men out there. I hope that they’re out there. I don’t want them to take [crosstalk 00:20:36] against me, but-
Jay Kang: I also use a Coinbase. (laughing)
Aaron Lammer: (laughing)
Jay Kang: They’re like everyone else’s Coinbase account is bad, except for mine and I only use it to onboard Fiat, but they shouldn’t be regulated.
Van Valkenburgh: The other thing about these people, some of them, is if they’re Bitcoin Maximalists … and again Coin Center tries really hard to be coin-agnostic. And sometimes we get in the middle of a fight between a Bitcoin purist and an Ethereum person, and I just get headaches. If they are Bitcoin Maximalists and one of these anti-government people, I’ve seen people with a straight face say, it’s immoral to regulate Bitcoin and the SEC should go after this token sale, cause it’s a shitcoin.
Aaron Lammer: Yeah, I heard that a lot to.
Jay Kang: Yeah, all the way to like Ethereum. Ethereum should be illegal (laughing), but Bitcoin should not be regulated.,
Van Valkenburgh: And there should be no laws.
Aaron Lammer: What was your background? What were your first experiences in crypto? How did you end up running something like this?
Van Valkenburgh: So I’m the director of research, just to be clear, I don’t run it. I’d get in trouble.
Aaron Lammer: Yeah, how did you end up running the research?
Van Valkenburgh: (laughs) A long time ago I was trying to be a working actor in New York City, which meant I didn’t have any money, which meant that I could either wait tables, or tend bar like all my friends did, or I could teach myself web design and have all my friends pay me to setup their websites, which is what I did. Aaron Lammer: If you’re anything like me, those people are still emailing you saying, hey, my website’s down 15 years later.
Van Valkenburgh: Yeah, it’s the most thankless crap you could possibly do. But it was better than waiting tables actually, I think. So that got me into really lousy front end coding and I’m just absolute pants at anything that involves serious back end or real computer programming. And so I think I realized my limitations and I decided I should get a real degree and get a real job. And I don’t think I can do comp sci, unfortunately, even though I really liked the tech and I really liked the internet. And so I decided ultimately, to go to get a degree in economics from George Mason and then a degree in law from NYU. And when I was in NYU, a friend of mine told me about Bitcoin. I still have the Google Hangouts chat history and I can calculate how many years I ignored that conversation to my payroll.
Aaron Lammer: You know exactly what the price of Bitcoin was, at the moment that Google Hangout occurred?
Van Valkenburgh: Yeah, it was about 11 bucks. (laughing)
Aaron Lammer: (laughing)
Van Valkenburgh: And so I thought, oh, well this is something I could write about academically.
Jay Kang: Final question here, what’s the biggest policy hurdle for crypto in this upcoming year? What could happen or what won’t happen that you think could really hamper the space?
Aaron Lammer: Jay loves the Doomsday scenario.
Van Valkenburgh: Yeah, so the state by state money transmission licensing thing is still a real problem. It’s a huge barrier to entry. If you’re gonna put yourself in a position of trust with respect to your customer’s cryptocurrency, you’re gonna have to get licensed in a whole bunch of states and it’s gonna be really expensive.
Jay Kang: Just to clarify for our listeners here, you’re clarifying that something like Robin Hood would just open crypto, would only open in five states. So that to run in exchange or run something where you use Bitcoin, you need 53 separate licenses?
Aaron Lammer: This is why we don’t get any of the fun stuff in New York.
Jay Kang: Yeah, in New York. So go ahead, I’m sorry.
Van Valkenburgh: Yeah, right. And Robin Hood may already have licenses and Square … which Square Cash added Bitcoin recently … definitely has licenses in all the states, but they still often have to go to every one of their state regulators and explain why they want to add Bitcoin to the platform and explain why that isn’t going to make them forfeit their license or shouldn’t make them forfeit their license. So it’s just a nonsensical for internet payment companies, whether they’re cryptocurrency companies or whether they’re PayPal or Venmo. We should have a federal regulatory framework that still light touch, but doesn’t make it really hard to get a license and means that you’ll only have to get one rather than 53 state and territory licenses. So optimistically, maybe we see some federal preemption of state law overturning that policy. That probably too much to hope for this year, but maybe that happens and if it doesn’t happen, that is a real impediment to the technology.
And then the other thing I’d say is it’s true, the SC and the CFTC are taking a really hard look now at tokens, token sales, and cryptocurrencies. And a lot of token sales have not been compliant with the security’s laws and I think a lot of them have even been noncompliant while knowing that they’re noncompliant. They didn’t have a good faith excuse. They started selling them long after the SEC had come out pretty clearly and said, hey, these things are security’s and they just kind of ignored US laws.
Jay Kang: They even violate scammer law.
Aaron Lammer: They even violate plagiarism restrictions.
Jay Kang: (laughing)
Van Valkenburgh: And I don’t hold much water for the more fly by night ICOs. I don’t hold any water at all, especially the scams, cause there are pansy scams to. But I really do worry that if this gets bad, even worse than it is, and grandma and grandpa bought shit coin at whatever, and now they’ve lost their entire pension or their life savings or whatever, that these investment protection regulators, especially the SEC, will look at that. And feel pressure from Congress and from everyone else to take a strong response that is not only calibrated at stopping those kind of scammers.