The aggressive push for innovation in cryptocurrency and blockchain has been met with equally strong pushback by cautious banks and regulators.
The dynamic has made it hard to predict whether laws and standards concerning distributed ledger technology can keep up with the latest developments, according to Andrew Hinkes, one of the industry’s leading blockchain experts.
“It’s unclear as to whether some of the issues that need to change will happen in the next legislative session or in the next 20 years,” Hinkes said. “On the other hand, tech moves at light speed in this industry. Whenever someone says something is five years away, in my mind it seems to me mentally that I should look for it in eight to 16 months.”
Hinkes recently joined the corporate law firm Carlton Fields in its blockchain and cryptocurrency practice and hopes to quicken the pace of regulatory change for the industry. He argues whether regulators like it or not, crypto assets will soon affect people’s everyday lives: in insolvency proceedings, divorce and any case where lawyers need to understand how to collect against these assets. Hinkes also remains general counsel and chief legal officer at Athena Bitcoin, an investment bank focused on structuring and placement of tokenized securities.
Banks have an important role to play in legitimizing crypocurrency and blockchain, Hinkes said. While executives from companies like Wells Fargo and Bank of America are
“Banks may actually have something of a head start on cryptocurrency companies because banks have a culture of compliance,” he said. “They’ve been taking a smart, conservative approach … they should continue to engage with, hire, consult and employ folks who come from the cryptocurrency industry as opposed to training up their internal folks.”
What follows is a Q&A with Hinkes, which has been edited for length and clarity.
What can banks do to further develop this industry?
ANDREW HINKES: I would encourage banks to look at interfacing with technology that's not necessarily within their controlled ecosystem. Most of their experiments have been intrabank, and I would encourage banks to interface with external-facing systems.
Banks should also look to use this technology to reach out to the unbanked or underbanked. We take for granted in the U.S. that most folks have access to modern banking. Internationally the level of banking services varies widely. This technology can be used to reach new areas and customers for banks. It can be used as a way to democratize access to capital and bring more people into the modern economy.
Are there examples of that being done with certain companies now or is that a forward looking idea?
In the U.S. there are a number of banks available, and it's only for those that are living near the poverty line or below that have difficulty getting access. There could be a number of things they could do, including microloans and other things that we see in Third World companies that if made available in the U.S. might be helpful. I'm not an economist, so I can't go too far down that line.
I can speak to a company with which I'm associated, called Athena Bitcoin, which has been bringing crypto ATMs into Latin America. For better or for worse, certain countries in Latin America have track records of financial instability, whether it's because of national financial mismanagement or other factors. There are a lot of folks that don't have a tremendous amount of opportunity to invest beyond keeping money in their native currency or trying to get access to U.S. dollars.
What have been the biggest roadblocks to adoption of the technology?
The cryptocurrency community needs to do better for its customers and users. There are a number of financial intermediaries or companies that act like them in the crypto world that really need to get their acts together. Exchanges are the primary area where we can do a lot better.
Regulators can help by providing clarity and guidance with respect to custody of these assets. Once there is a custody law there will be a number of providers eager to fill that void, and it will open up tremendous opportunities for new products to come to market and for institutional investors to get involved.
What kinds of compliance issues can blockchain make easier for banks?
The technology derived from bitcoin and blockchain is wonderful regtech. It can streamline a lot of data collection and time stamping tasks, including gathering information for anti-money-laundering and know-your-customer. It’s a smart industry to look at when trying to figure out where to implement this tech.
Where will blockchain and crypto become most common in financial services?
One place where it shows a tremendous amount of promise is in the tokenization of securities. Especially for private placements that are functionally illiquid, because of not just regulation, but because of some of the regulation around transactions and private placements.
Tokenization along with some secondary architecture marketplaces being built around them provides amazing opportunities for folks raising money to access new investors and new pools of investors and have greater reach in marketing their products.
I'm very bullish looking at tokenized securities as something coming in the next year or two.
When you're thinking about legal guidance for the blockchain and cryptocurrency industry, which regulators do you look to first? Or are there certain well-respected companies that get the ball rolling?
When you ask this question, I'm reminded of the famous cartoon of the six blind men that are touching various parts of an elephant and saying, "It's a fan, it's a tree trunk, it's a wall." These assets and systems are distinct and different from what we've seen before, and depending on what regulator you are and what vantage point you take when you examine them, you see different things.
The SEC looks at offerings of tokens used to fundraise and has applied an old precedent that is obviously still viable in the how we test to determine whether these things are securities. If you're trading these things like they are an option or a future, you're obviously looking at the CFTC [Commodity Futures Trading Commission].
There's a doughnut hole in the middle for spot trading of crypto assets where it doesn't fit within the SEC or the CFTC jurisdiction.
As far as specific regulation that applies to the exchanges, you're looking at state and federal level money-service-business regulation.
When you start talking about states, you see that there's a patchwork quilt of regulations out there with certain states taking totally opposite approaches of other states. This is not the best situation for companies, because they don't know when starting up what they need to do.
It creates considerable legal expense and brings a lot of uncertainty into business models.
We have tax guidance issued by the IRS in 2014. It was very good guidance in the context of 2014 but does not work for the realities of 2019 in crypto. It's pretty burdensome, which doesn't mean it's legally wrong, but it doesn't speak to whether or not these assets are appropriate for things like retirement accounts.
A number of states have issued new laws or pending bills that after a Supreme Court case on Wayfair reflects the new rule in the U.S. that states can try to collect sales tax on remote transactions. Now states are introducing new laws that allow them to collect taxes on new things like internet transactions, but those laws may have some repercussions for the crypto world as well.
There's a lot of regulators that are regulating different aspects of the cryptocurrency world, which makes it a real challenge for companies.
