Circle’s move offshore should alarm investors and regulators alike

Plus, Capital One’s surprise initial response to data breach and the need for decentralized blockchain systems to protect sensitive info

Tomer Federman
Aug 2 · 5 min read

Circle is moving the majority of its exchange operations offshore; time for new sensible U.S. regulation for crypto

On Tuesday the U.S. Senate Banking, Housing and Urban Affairs Committee held a hearing on regulation of cryptocurrency and blockchain technology. My sense watching that hearing was that some members of the committee realize the concept of banning bitcoin makes no sense. Blocking innovation and technological progress is never a good idea.

As Congressman Patrick McHenry put it a couple of weeks ago at a different hearing Congress held on Facebook’s Libra project, “the world that Satoshi Nakamoto, author of the Bitcoin whitepaper envisioned, and others are building, is an unstoppable force.”

Plus, it’s important to highlight that from a legal perspective banning Bitcoin isn’t really a feasible option. Bitcoin is code, code is speech and speech is protected, at least in the U.S.

One thing that is increasingly concerning though is the regulatory environment in the U.S with regards to crypto. The current regulatory framework doesn’t meet the demands of digital assets, leading major industry players to explore moving elsewhere.

Earlier this week Circle announced that it has received a full Digital Assets Business Act license in Bermuda for its crypto exchange Poloniex and will be moving the majority of its exchange operations there. This is no small matter. Goldman Sachs-backed Circle, which raised $246MM since its inception in 2013, is currently one of the major players in the crypto space.

Jeremy Allaire, CEO of Circle, talked about that decision during the Congress hearing this week. As Jeremy spoke about his frustration with current SEC regulation and lack of clarity with regards to digital assets, I couldn’t help but think about the need for regulators in the U.S. and other western societies to act swiftly. Circle’s move should alarm investors and regulators alike.

Crypto is a new asset class that doesn’t fit into the existing regulatory framework. Relying on the Howey Test, which refers to a 1946 U.S. Supreme Court case, to determine whether a digital asset should be considered a security doesn’t fully address the nuances of crypto and blockchain technology.

It would be a real shame if the U.S. doesn’t actively support and foster innovation on home turf with more relevant regulation. And unless things change soon, the U.S. may see other crypto entrepreneurs follow Circle’s lead and move their business out of the country.

As Jeremy mentioned during the hearing, “there is a fundamental mismatch between the regulatory structure and guidance that we have here (in the U.S.) and the nature of these digital assets. Markets around the world are adopting these, not just Bermuda but Singapore, Switzerland, even jurisdictions like France introducing…definitions of digital assets so that issuers can feel comfortable.”

To be clear, if the U.S. miss this opportunity to update its regulatory stance, it won’t stop global blockchain innovation. The country will just likely end up missing out on some great entrepreneurs, opting to develop their business in more regulatory-friendly domiciles.

Just imagine the impact on the economy and the missed job opportunities had Google, Uber or AirBnb moved offshore early in their journey.

New, sensible U.S. regulation for crypto is required. Pronto.

Capital One just suffered one of the worst data thefts in history and their initial response was surprising; the whole ordeal illustrates once again the need for better data security via decentralized systems

Earlier this week it emerged that Capital One suffered a massive hack. According to the company, a software engineer allegedly took advantage of a security vulnerability to access its systems back in March. Based on Capital One’s statement, the personal information of nearly 100 million of the company’s customers and applicants in the U.S in addition to 6 million in Canada were exposed.

It’s not news that major corporates store the personal details of millions of customers on centralized servers, making it prime target for bad actors and cyber hackers. Therefore, such an attack isn’t unusual and not the reason that prompted me to write about it. This hack is just the latest in a long list of data breaches suffered by companies around the world.

The most surprising aspect of this data breach was Capital One’s initial response. Among the personal data exposed were social security numbers, home addresses, names, credit scores, birth dates, transaction data and bank account numbers.

The company’s reaction to the massive data breach? Here’s a screenshot I took when they first published it (I was pretty sure they will alter it later):

Capital One’s Initial response

Copy that? Nothing compromised, other than, well, all the sensitive information that was compromised!

And sure enough, Capital One did change their response later. Here’s the current line from their website:

Capital One’s current response

The shift to blockchain technology and decentralized systems to better protect sensitive data is inevitable. This isn’t a question of “if” but rather “when” we will start to see mass-scale adoption of such solutions.

It’s time to build and accelerate the move to robust decentralized infrastructure, which will make it exponentially tougher for hackers (internal or external) to gain control of personally identifiable customer data stored on the blockchain. The first steps in that direction are happening now and in the coming years we will see the emergence of new blockchain solutions that transform how companies store and protect sensitive information.

One last thing

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Federman Capital

Federman Capital is a venture capital firm focused on blockchain technology and crypto assets. Our fund is led by Tomer Federman, a Stanford MBA alum who previously drove product strategy & global growth of major ad products at Facebook. Website: https://www.federman.capital

Tomer Federman

Written by

Managing Partner at Federman.Capital · Previously at Facebook, SAP, multiple startups · Stanford MBA · Podcast host, The Blockchain VC: https://bit.ly/2YxOBxF

Federman Capital

Federman Capital is a venture capital firm focused on blockchain technology and crypto assets. Our fund is led by Tomer Federman, a Stanford MBA alum who previously drove product strategy & global growth of major ad products at Facebook. Website: https://www.federman.capital

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