A Slow Awakening: U.S. Blockchain Policy in 2016

Rage Comment : In 2016, each US state adopted different regulatory measures and deployments for blockchain and distributed ledger technology. However, according to current analysis, important factors that hinder the development of blockchain technology and the formulation of regulations still exist. Therefore, if the government wants to truly gain practical benefits from this technology and achieve technological breakthroughs, it must first break through these huge obstacles. On the basis of current technical knowledge and development, further promote the standardization of the industry and deepen the interaction between the industry and government agencies.

Translation: Annie_Xu

At the 2013 Innovation Project Conference of PYMNTS, a US payment and business media, former US Vice President Al Gore gave a speech supporting the potential of Bitcoin and its underlying distributed ledger technology, which attracted great attention.

“I think it’s cool that algorithms in the Bitcoin world can replace government functions. I know there are a lot of innovators developing new models right now, and I’m looking forward to it.”

In 2016, local and national governments reached the same conclusion as Gore for the first time.

From the Federal Reserve's initial attention to Illinois' embrace of distributed ledger technology, the US government began to significantly adjust its understanding of financial technology in 2016.

Experts say that while the group hasn’t made any big moves yet, their apparent interest in blockchain technology is encouraging.

Carol Van Cleef

Carol Van Cleef, an Internet finance expert and partner at financial services law firm BakerHostetler, said:

"I've been in Washington for many years, and I've seen an unprecedented effort to keep up, even if they're not at the top of the technological trends."

“The investment in blockchain technology by various government departments is impressive; not only to provide better understanding for regulators, but also to change internal government processes and find loopholes in the current system.”

Summarize the direction of policy adjustments in 2016 and predict future trends.

New York's Struggle

Since 2016, there have been many major efforts to regulate cryptocurrencies, but these efforts have been met with increasing resistance.

In particular, the BitLicense, a digital currency license in New York State that sets clear guidelines for the enforcement of obligations for cryptocurrency companies, seems to have major problems of its own.

The policy has been hailed as a step forward in the field, and supporters hope that the clarity will remove uncertainty for digital currency businesses in the state. Opponents, however, say the policy will put unnecessary pressure on startups and violate important privacy principles that have made the technology successful.

Almost two years after the policy was introduced, it seems the naysayers were right.

Due to many obstacles in license applications, only 22 companies had successfully applied by the 2015 application deadline; and even fewer companies were granted licenses.

Until June 2016, when the state signed two BitLicenses, the other 20 companies still needed to follow the state government’s “safe harbor” regulations.

Uncertainty of implementation method

While New York is struggling to move forward, other states in the United States have been slow to start formulating relevant regulatory policies.

For example, California has been ambiguous and has not made any progress on following New York's BitLicense.

The Connecticut House Bill 6800 would make virtual currencies equivalent to currencies, but at the same time establish regulatory rules for businesses that provide virtual currency services that are different from those for legal currencies.

The move places a number of regulatory elements under the control of the state’s banking regulator, such as posting performance bond insurance, which they said would “address current and potential future volatility in the currency markets.”

In April, Georgia signed HB 811, authorizing state regulators to set rules for virtual currency companies, but did not clearly define the scope and applicable objects of the regulation; the definition of virtual currency was not clearly distinguished from software and protocols, making the law quite vague.

New Hampshire also chose to classify cryptocurrency traders as money transmitters this week, subjecting them to the same requirements and regulations as traditional money transmitters. This means that businesses that choose to buy and sell cryptocurrencies must apply for the state's money transmitter license and pay a $100,000 bond.

This is similar to North Carolina’s HB 289 legislation passed in June, which extended money transmitters to “organizations that act as agents for virtual currency” and set the bond at $150,000.

However, New Hampshire’s licensing requirements exclude individuals who use virtual currencies in private transactions, defining virtual currencies as cryptocurrencies that can be exchanged for fiat currency.

Pennsylvania finally passed HB 850 in November, extending the definition of currency to any kind of virtual currency, but the bill was temporarily shelved due to budget issues.

Wyoming did not pass HB 0026, so virtual currencies are still subject to the state’s money transmitter regulations, with the amount of a business’s reserves equal to the business’s repayment obligations.

The regulation has kept exchanges and other cryptocurrency businesses out of the state.

Unlocking the blockchain

Although state initiatives have been limited, regulators have begun exploring and learning about the technology in 2016.

For example, the Federal Reserve and the SEC have expressed their willingness to adopt distributed ledger-related products and have established a technical research working group.

The impetus for replacing the current complex incompatible databases with blockchain technology comes from the latest developments in blockchain technology: one is the ability to use it to automate enterprise processes, and the other is the ability to trade between different blockchains.

Lewis Cohen

In 2017, Lewis Cohen, partner at intellectual property services provider Hogan Lovells, believed that interconnected blockchains could allow regulators to directly participate in future innovation activities.

“The biggest surprise of 2017 may be the rise of interconnected blockchains. Otherwise, the failure to achieve this blockchain integration has become a pain point for the industry.”

Cross-chain technologies such as Polkadot, IBM HyperLedger, Overstock’s t0, and Ripple may enable nodes to participate in real-time cross-chain transactions, potentially including transactions controlled by regulators.

These, together with privacy-preserving technologies such as R3 Corda, allow nodes to select the information they wish to decentralize while protecting other information, providing a new approach to public ledgers.

The DAO Incident

In the short term, the upward trend of Bitcoin and Ethereum prices is promising, and it can be expected that the state government will continue to consider relevant legislative processes to simplify the state's taxation and new wealth tracking management methods.

However, the impetus for future legislation may shift to proof-of-concept projects that explore the technology’s role in real-time government management scenarios rather than testing how the currency can be tracked for transfers between fiat currencies.

Alan Cohn

Alan Cohn, former deputy secretary of the Department of Homeland Security, said:

“If 2016 was the year blockchain started to enter the public consciousness, 2017 will be the year blockchain pilot projects and proof of concept projects become mainstream in the industry.”

The DAO tells us that while blockchain technology can help address regulatory issues related to big data management, it also brings new issues that regulators need to pay close attention to.

The DAO attack on June 18 showed that if smart contracts are deployed improperly, they may lead to the loss of value in the system and put consumers at risk.

How to prevent these kinds of problems may be central in 2017. Unlike cryptocurrency networks, vulnerabilities in distributed ledgers that store data could lead to more than just the loss of wealth.

However, the possibility of loss of personal information, leakage of important data, and violation of existing security regulations are factors that hinder the public sector from adopting blockchain solutions.

Standards as a protective net

In 2016, crypto trading technology gradually matured and took the first step towards maturity.

So the government took steps to begin understanding the technology and adjust regulatory policies accordingly.

However, the new US president has brought uncertainty to this.

The new presidential cabinet includes both cryptocurrency supporters and opponents; it is unclear whether the new government will develop cryptocurrency and distributed ledger regulatory policies.

At present, uncertainty seems to be the biggest obstacle hindering public testing of blockchain.

For example, Mike Massaro, CEO of cross-border remittance startup Flywire, believes that regulatory uncertainty will be the biggest obstacle to moving beyond the proof-of-concept stage, and industry standardization is also an important factor.

"I expect there will be some real progress in this area."