Sarah Oh: Hello and welcome back to the Technology Policy Institute’s podcast Two Think Minimum. It’s Wednesday, May 20th, 2020 and I’m Sarah Oh, senior fellow at TPI and I’m joined by Scott Wallsten, TPI’s president. Today we’re delighted to talk to Amy Davine Kim. Amy is the chief policy officer for the Chamber of Digital Commerce. Prior to joining the chamber, she advised financial institutions, blockchain based companies, marketplace lenders, investors and innovators regarding compliance obligations under financial services laws. In particular, she has advised on the Bank Secrecy Act and anti-money laundering requirements and the regulations and sanctions programs administered by the Office of Foreign Assets control. During her career, Amy has also advised companies on cross border, anti-bribery, and trade related compliance matters. She has advised investors and hedge funds, private equity funds, and real estate funds. She’s also assisted companies in advocating before the US Congress and other US government agencies. Amy holds a bachelor’s degree from Pepperdine University and her law degree from University of Notre Dame Law School. Thanks Amy for coming on the program.
Amy Davine Kim: Thanks Sarah. It’s great to be here, I’m a big admire of the work that you guys do.
Sarah: Blockchain development has been continuing around the world. The digital dollar made a brief appearance in an early draft of the CARES Act before being deleted and digital payments are becoming ever more important this year as well. I was curious to hear your views on policy priorities in 2020. What should Congress and policy makers watch in blockchain and crypto this year?
Amy: Yeah, Sarah, I mean it’s interesting too that you mentioned there the CARES Act and the stimulus packages and I think we have to be mindful and aware of the crisis that we’re in and really the acute dependence and necessity of using digital products and services and we’re all doing it, more so than we ever had been before. And I think that, while there’s great challenges that we’re facing and we will continue to face for some time, I think the opportunity in our industry is that technology can be a real resource to people, and to governments, and to businesses, as we think about how to grow out of this current situation. And so we’ve seen such a shift towards use and dependence on some of these digital technologies and blockchain I think is one such technology that can be a significant resource to government and to businesses and to consumers as we look at ways to grow and learn from the circumstances that we’re in and become better for it once we get to the other side. You see some glimmer of that understanding in a letter that several members of the congressional blockchain caucus sent to Secretary Mnuchin, urging him to look at blockchain technology in the context of aid distribution and just thinking in those circumstances. And I think that’s exactly the right message, that blockchain is an important technology. There’re many technologies, but blockchain is an important one and I think it’s a little bit disproportionately considered in the context of all the technologies that are out in the US and then of course in the US compared to globally.
Scott Wallsten: Do you, with the pandemic and blockchain, was the congressional caucus, were they able to bring this up just because Congress is paying more attention to digital technologies in general and it provided an opening? Or are there actual uses of blockchain that they’re either advocating for or would like to see or see the potential for in this specific circumstance?
Amy: You know, some of these things are public, some of these things are underpinnings that have been kind of going on in conversations that have been being had in the last several months. I think the obvious one is what you’ve raised, which is the letter referenced using blockchain technology as a tool for distribution of aid. Whether we could get a system up fast enough to do that, I’m not so sure, but we should, I mean it should absolutely be considered as we’re thinking of all the multitude of ways that the government is going to be helping states, cities, citizens, come out of this pandemic and these circumstances. There are other ways though. And you saw some glimmers of that right before the crisis hit and the pandemic hit US, there were two hearings that were scheduled in Congress, one on the Senate side in a subcommittee of the banking committee and the other on the House side subcommittee of financial services. And they were both, well the Senate banking hearing was looking at US competitiveness with respect to China. And so that’s broader than blockchain. But you know, I believe that the advances that China has made with respect to a digital Yuan, versus a digital dollar, was going to be one of the components of that hearing. On the House side, the title of the hearing was the global response to digital currency. Both touching upon what is the US response, or what is the US plan for looking at a dollar in a digital environment. And then, comparatively, from a competitive basis, where you have countries like China and others who are incentivized to try to use technology to their advantage and gain preeminence for their own currency.
Scott: So tell us a little bit more about the digital Yuan and what they hope to do with it and where that puts the US.
Amy: It’s interesting. On in the one hand, it’s hard to know exactly what they’re doing. I think there’s a lot, kind of a duck on the water, feet moving out fast, even though it seems calm on the surface. But we were fortunate enough to be able to conduct a study where we were able to pull dozens of patents, that were filed in China with the Chinese equivalent of the patent office, that related to their on digital currency project that were filed by the central bank. And when we piece those patents together, we were able to translate the abstracts, not the entire patent application, but the abstracts. It’s a very well, as you would expect, methodically thought out, all the components of what the central bank mechanism would do, how that interfaces with the banks, with the wallet providers and how transfers can take place. So they really have thought through quite well how this would function. I think there’s still kind of work to do there. And I think the pandemic of course maybe slowed down their launch plans a little bit, but I think we’ve seen news even in the last month that they’re moving ahead.
Scott: So not to interrupt, but how would it function and three questions. How would it function? Why would they want to do this? What do they get out of it? And then in terms of its impact on blockchain, obviously, well I assume, that they don’t want a distributed blockchain, that would be very counter to anything that happens in China. And so I assume that if a centralized blockchain system is very different from one of the advantages we normally think of for blockchain or I could be completely wrong.
Amy: It’s interesting. I guess I’ll address that one first and then, if I can remember, come back to the first question, but I mean I think they’re related. Of course, in some respects it has to be centralized in the sense that if you have a central bank issuing the currency, there is that kind of control in the programming of it and the understanding of, even the ability to track where that coin, the token is moving. I think that, depending on the government that issues a token like that, that can be concerning if there’s, well, certain censorship or other things at play, but if you think about it, it has to operate as a payment mechanism so it can’t be entirely centralized if you have to be able to use it through WeChat or Tencent or on other online marketplaces for example. There is a decentralization aspect to it in the sense that you have to be able to use it. So that’s an interesting dynamic there. To your second question about why, why would China be incentivized to do this? The US has the reserve currency and because of that we were able to influence so many things around the world, take for one, sanctions policy. A lot of international financial contracts are denominated in the US dollar, for even commodities, all those kinds of things. And so, you have to be able to have access to the US financial system, the US banking system in order to trade in dollars. If you no longer need dollars, you can go elsewhere. And that would diminish the US sanctions capabilities. If you think about how we’ve used economic sanctions so effectively in the last, it used to be trade sanctions, over time that evolved into more economic sanctions. So the last maybe decade or two has been dominated by economic sanctions. And if we no longer control that, that could have an impact on national security.
Scott: So how does the digital currency help them get there? Is it that they hope to actually provide the infrastructure that would allow lots of currencies to be traded this way? Or that they’re providing leadership in the next way that currencies are valued and moved rather than just having a digital currency itself. Because I don’t quite see how a digital currency will necessarily help them get out from being subject to the dollar as a reserve currency, by itself.
Amy: You have to think about global adoption and it has to get traction there. And I think the idea, and again, we’re constantly learning more and more about it. I’m not an authority on the Chinese government, so just a disclaimer there. But I think as part of its belt and road initiative, if they were to use this as part of the infrastructure that they’re building out globally, not just in the US but actually outside of the US, in other countries and other continents, it could catch on in that way and then become preferable if it’s easier to work with, if there’s other incentives to using. It just depends on how they go about that.
Scott: Right. I guess I realize that I’m asking questions that can’t really be answered. The report itself is kind of amazing because like you said, you got all that information from patents. It was quite remarkable.
Amy: I know. So it’s available on our website. It really was more of an information resource. We’re not trying to point the finger at China as any particular bad guy or anything like that. I think it’s more of here’s an example of a country that’s incentivized, motivated, and has built something over time. This takes time and they’ve put that time and money into it. They’re not the only one of course, but they’re a big one and it gets a lot of attention from this administration. So thought it was important to note that and really is in an effort to say the US needs a strategy, not saying that it has to choose one particular solution or another, but it needs to have a formal approach to addressing, will the US have a digital dollar like this or what will it decide to do?
Scott: I know it’s problematic to try to put everything as a horse race. But if we were to put it as a horse race, how’s the US doing? Do we have any real plans to go forward? I know there’s a committee in Congress and do they have much influence in putting us on a track towards this?
Amy: Yeah, there’s folks in Congress that are very interested in this. They may come at it from a different reason, some from the national security side of things, some from the economic stability, some from technology side. So I think there’s a lot of interest there. We’ve had some very good conversations in different agencies within the administration who also see the value of this. Certainly, the Fed has made some comments about this, publicly. More along the lines of we’re watching this and we’re studying it but not in the sense that they’ve announced any formal plan or approach. So I think the idea may be that we could be a fast follower. I think there’s some validity to, do we have to be the first government to do this? No. And actually we’re not, some governments have already done this and I think also there’s some, we do need to keep in mind that this isn’t easy to do and you don’t want to just kind of put it together to be the first one or to be fast in the horse race. You want to get it right and do it well. Cause a lot rides on how you transact and the dollar and your confidence in the US financial system. And certainly, we want to build confidence rather than take away from it.
Sarah: I think that’s a good point to make, and maybe you can update us on current anti-money laundering efforts, AML compliance, tax compliance. One good thing about the US is that we’re very well lawyered and maybe overly regulated, but that does build confidence in the US dollar as the reserve currency. So how are AML efforts going and are we building up the knowledge and infrastructure and regulations to go along with blockchain development?
Amy Yeah, I mean I’ll start with kind of a broader comment on what you just said, which is, I think the US approach to this has been, each agency has looked at this technology from its own governing statute, right? They’ve got their own authorizing statute, what they can and can’t do, and then look to apply that onto this new technology. You’ve seen that out of FinCEN and we’ve seen that out of the SEC, the CFTC, the IRS. And in some cases, the authorizing statutes they have are somewhat flexible, principles based, and they’re able to apply that in a proactive way. And in some cases they’re maybe not as flexible. And that’s where some of the challenges arise. So specifically, on the anti-money laundering side of things, I think FinCEN, who is the US anti-money laundering, the administrator of our anti-money laundering efforts, they’ve been very proactive, and I think flexible even, in the way that they’ve looked at this. I mean certainly they’re stern in preventing money laundering and terrorist finance. And that’s a primary objective. But I think they also have been, when I say flexible, they’ve issued guidance that I think has been very helpful to industry. They were the first out of the gate in 2013 with their guidance that says the Bank Secrecy Act applies to exchanges, for example. And then they followed up with that with a series of advisory letters that kind of fine-tuned, okay, but in this situation, here’s the principle, and they made sense. So what we’ve been looking at, the anti-money laundering side of things now, is at the multilateral level, we’ve been engaging with the financial action task force or the FATF, which is the global governments come together to think through recommendations and principles that they want to apply and then push that out to the other countries. The US held the presidency for the FATF a year and a half ago and really was successful in pushing forward their views into the global stage so that they then can be pushed down and kind of harmonize globally the recommendations around AML, which I think is very helpful to the US companies who maybe had a competitive disadvantage against maybe some of their competitors who are not dealing primarily in the US, but it is a steep learning curve as you all know. I mean, you got to keep at it and I learn something new every day. We’ve really been working hard to both educate as well as spearhead some strategies to help the industry come into compliance globally. We just, working with two other trade groups globally, put together a standard for information sharing around the world that people can utilize to help achieve compliance. And then also trying to help some of the software solutions that are coming online, being known to industry so that folks can kind of grow those and adopt those. So we’ve taken a really proactive approach towards compliance in this space. I mean, you just can’t argue around money laundering and terrorist finance. You’ve got to understand the risks there and get it right. So that’s been our primary approach.
Scott: It sounds like the international forums are very collaborative and seem to function well in what you’re describing; we don’t actually hear that very often. Is that, do you think, is that accurate?
Amy: I mean, mostly, I guess where I might make a distinction is that each country comes to the table with their own perspective. I think in the circumstance that I was just describing, the US had a clear agenda to bring the US regulatory environment into a global picture. I think there are countries that understood that but also were sympathetic to the fact that setting something like that up, it’s not easy and it’s time consuming for industry and you know there’s a balance, innovation versus regulation and which way do the levers work and making sure that you help an industry grow, but you don’t want any catastrophic circumstances coming up either. But yeah, I mean I think that’s a trend, actually, that I was thinking about sharing with you guys. One trend that I’ve seen in the last year is what you kind of mentioned, which is a lot of these multilateral organizations, looking at different developments, whether it’s the FATF with AML, whether it’s the BIS or the IOSCO or the FSB, all looking at kind of financial stability issues and banking and securities with the rise of a so-called global stable client or the prospect of a global stable coin. So we’ve seen a lot of papers written by those organizations.
Scott: Could you describe, could you define a stable coin? I know for all the crypto groups, they’re probably rolling their eyes that I’m asking this question, but a lot of other people don’t know what that is.
Amy: Yeah, I am rolling my eyes too. I mean I’m glad you asked the question because I think policy makers in particular use that term and it can mean different things to different people and it can also mean multiple things to the same person. So we’ve looked at stable clients as encompassing around three different aspects. They’re typically linked to some underlying value, so they can be pegged to a fiat currency, like one to one to the US dollar. So one stable coin, whatever it’s enumerated in equals one US dollar or one Euro. They can be pegged to something else, like a commodity. So one-to-one to an ounce of gold or any type of commodity like that, they can be pegged to other virtual assets to enable some stability that way. And then I’ve seen them also more purely algorithmically back. So they’re just pegged to an algorithm that tries to ensure its stability, but they all kind of have that same trend, which is trying to solve the issue of volatility that we sometimes see in, for example, the Bitcoin markets, to enable a more stable and a more dependable perspective and use of that as a currency. The interesting thing around stable coins, I mean it’s gotten a lot of attention because of Facebook announcing the Libra association and the Calibra. And I mean just looking back and have a retrospective, they made the announcement that they were building this a year ago. They still haven’t launched anything and we’ve had at least three congressional hearings on this, requests from Congress to stop the project, statements by global regulators, the financial stability board, the bank for international settlements, major global organizations. I think it finally opened their eyes to, wow, this technology really could have an impact. It really could have global reach. And how do our laws address that? The risks, the potential risks there, what are the potential risks and then how are we addressing them effectively? So it’s really an interesting, for something that has not even launched.
Scott: Is that the reason it hasn’t launched, because of a huge amount of interest from the various regulators around the world?
Amy: I mean it has been delayed. I think they’ve said publicly they won’t launch until they’ve satisfied regulatory concerns. And I know that they issued an updated white paper maybe two weeks ago with some changes designed to address, in particular, anti-money laundering and FinCEN and US regulatory concerns, as well as others globally. So, we’ll see. Hopefully they’ll get there. I think there’s many, many worthwhile projects out there. That’s I think a very interesting one, and I hope that that gained some traction and makes it over the line.
Sarah: One thing that’s interesting about innovation in this space is that you can’t really test the regulations until you innovate and launch a product. So there is a back and forth. Like the Securities Exchange Commission, they’ve been giving guidance on their framework for what an investment contract is. And one reason why they provided that guidance is because companies were actually doing ICOs and testing the technology. And so the SEC probably wouldn’t write a framework unless entrepreneurs were trying new technologies. And then you see that there are other projects coming out that aren’t doing ICOs, but they’re using tokens but not doing token offerings. So there’s still development happening with the regulators watching. Maybe could you update us on what’s happening with the definition of tokens and the investment contract analysis?
Amy: Yeah, as you mentioned about a year ago, a division of the SEC came out with some guidance on investment contracts and I think its intention was to help give a list of factors that industry could use. And I think it was helpful in showing that the SEC recognize that not all tokens are securities, that even if it was a security, at some point it could evolve into not being a security. And so I think those kinds of things were helpful. And I know that companies do use that now as a resource. I think where it’s encountered some difficulties is that it, depending on how you count the factors, it introduces maybe 60 plus factors into how to determine if you’re an investment contract or not. And it doesn’t assign weight to any one over another. And really the way the factors are, in my mind, every token platform would trigger at least one and probably at least a handful. And even then, in my mind, I don’t think I would consider them offering investment contract. Some could, but some might not. And it’s hard to, how do you, if you’re a lawyer for example, how would you give kind of a clean advice on well yeah, we think you’re probably not an investment contract, but you’d have to kind of caveat that advice. It’s very hard to tell under those criteria. I think it was a step in the right direction, but I think that’s still an area that needs greater clarity. One on what’s the dividing line there? Cause I think there are token platforms that should not be viewed as securities and should be able to run as a token that enables use for the platform. On the other side of that, we have members that offer tokens intended to be a security or offer infrastructure to enable trading in digital securities or tokenized securities. And even when you want to be in that regulated environment, there’s delays in getting the appropriate authorizations to be appropriately authorized and that environment or how do you satisfy some of the existing obligations that exist for custodians, for example, of customers’ assets. So there’s still more to be done there. And I think circling back to where we started, with the COVID pandemic and just the economic crisis that we’re all in and the health crisis, a lot of agencies and even, of course, Congress’s focus has been on relief in that environment. Number one, helping to relieve certain situations and then to looking at where companies may have some challenges in meeting their compliance obligations while they’re trying to push out quickly aid and things like that. So I think we’re a little bit delayed in getting some clarity on these particular issues, at least for the short term.
Scott: Is there a particular issue that you found especially difficult to resolve? I mean, I know there are a lot of them and you’ve described them, but is there one that you end of the day thinking, wow, how are we going to get past this? Or why doesn’t someone so understand why this is such a big barrier?
Amy: Yeah, so I’ll distinguish my answer to this as there’s lots of big issues that need addressing. We’ve kind of talked about a lot of them. So on the harder ones to deal with from a regulatory perspective. I definitely think the ones around the SEC are the hardest and really just the ones that we just mentioned. How do you carve out certain tokens from the securities frameworks, and what I’ve found, we’re a trade association. We’ve got all kinds of members coming from different perspectives. Lawyers who are members, securities lawyers who are members, trying to figure out how to appropriately define which tokens should be considered securities and what should not, on a principles basis. So you’re writing something that could potentially stand the test of time. Even people whose minds are all going in the same direction, disagree on how to do that. Getting to that, defining terms, is it an exception? Is it an exclusion? Is it a whole new separate regime? That’s not easy to figure out. I think that’s a big challenge. I think there’s folks that have just different perspectives there, so there’s some more work to do there.
Sarah: That’s fascinating. Do you think if there was more consensus among industry players, there would be faster progress here in DC? Is it kind of the rough and tumble of innovation? They’re figuring out the models as well in California, so to speak, and then we’re following?
Amy: Well, I mean the way I’ve described it as more of the intellectual challenge, how do you intellectually, as lawyers, as securities specialists, as an industry, figure that out? I think the other part of the challenge is that I think the SEC internally is mixed in how to treat this. I think there are some that are not inclined to move forward at a faster pace and are being quite cautious. And so when you have that kind of mentality, there’s more work to do. Certainly they’ve been very willing to talk with industry and hear what’s going on. Their finhub has been very dynamic and engaging. But I do think that there’s even differences within the agency on how to proceed here. And that’s another, it’s a political challenge rather than I think maybe the intellectual side of which T’s to cross and I’s to dot type of thing.
Sarah: Great. So, I guess just as a final question, what are your top priorities for 2020? What would you recommend Hill staffers who are reading up on issues or Congress people who are setting priorities. What would you recommend as important things to get done in 2020?
Amy: There’s really four things that I would say and we’ve touched on almost all of them except for one, which I’ll mention now too. We almost hit on them in order to be honest. The first one is the US competitiveness, making sure that the US remains at the forefront of technology and innovation. I think we’re behind there. I don’t think we’re irreparably behind, but we’re starting to get closer to real alarm bells going off, because other countries are just understanding the opportunity and putting money and time and resources into innovation. The second one is around anti-money laundering and you have to be confident in the proper functioning of the marketplace and helping and enabling industry to show that, but also kind of temper some of the, we do hear some, more opinionated views on, oh this is only used by money launderers or terrorists and that’s not true either. So it’s kind of tempering these overstatements at the same time, making sure we understand the risks and address those as best we can. The third is the token space. We’re focusing on helping to enable the two things we talked about, enabling digital securities and that infrastructure to grow. There’s a lot in the trading and settlement space that can be much more efficient with blockchain technology. At the same time, carving out inappropriate space for token projects that are not securities to develop. And then the last one that we didn’t mention yet, but around tax, tax drives, how people interact and it drives people’s actions and the way you’re taxed influences that. And so the IRS has issued some guidance in this space determining that convertible virtual currencies are treated as property under the US tax code, but that leaves open a wide array of different types of treatments within the designation of property and some of the unique aspects there, industry has reacted differently just to remain compliant and to show that they’re acting reasonably, but it’s been uneven and there’s still questions there. One of the areas that we’re looking at right now is around information reporting, what information reporting should look like, and that’s being looked at both by the US and globally. Again, Scott, back to your original point, the OECD is looking at how to look at the multilateral, more harmonized view of how we should be taxing, well, virtual assets is what they’re calling it at that level. So we’ve been very active there, both with the OECD and with the IRS, and they’re very engaged on that topic. There’s a lot of topics, but I think information reporting is the one that’s on deck right now.
Sarah: Great. Yeah, there’s so many issues and thank you. You’re an expert in this space and we’re glad to hear more progress and hope that blockchain kind of continues to take off and mature in 2020. Thanks, Amy.
Amy: Thank you. I appreciate all that you guys do. Really, really nice to talk with you this afternoon.
Scott: Thanks for joining us.
Amy: Thank you. Take care.