WASHINGTON — While regulators and law enforcement agencies are beginning to strike a more conciliatory tone with respect to digital currency, industry players complain the technology is still being stifled by its pariah status.
Complying with regulatory rules for digital currency companies has turned out to be a "poisoned chalice," Bill Schafer, the chief executive officer of technology company Epok, told a panel Thursday at the Chamber of Digital Commerce's first Blockchain Summit. Registering as a money-services business with the Financial Crimes Enforcement Network had the perverse effect of making the firm a high-risk client in banks' eyes.
Three banks have already dropped his business, and the only institutions that appear willing to take on firms like his are regional banks, which could limit his ability to scale.
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Federal and state banking regulators are still struggling with how to come to grips with banks whose clients are heavily involved in digital currencies like bitcoin and that may be curbing interest from many in the financial industry.
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Thirteen banks have joined an alliance to develop commercial applications of distributed ledger technology in the financial industry.
September 29 -
Services are cropping up that help banks analyze bitcoin transactions for signs of criminal behavior such as money laundering. But such services come with their own risks.
December 1
"The regulators scared the hell out of the banks," Schafer said. "Now, the regulators backed up a little bit, but the banks are still scared."
Law enforcement officials speaking at the conference said their position toward digital currencies and the blockchain technology that underlies them is evolving now that they have had more experience with it.
"There's nothing inherently illicit about using bitcoin," Catherine "Alden" Pelker, a money laundering analyst at the FBI, acknowledged during a panel discussion.
Law enforcement agencies were at first very suspicious of cryptocurrency, said Kevin Abar, an official at the Department of Homeland Security. "Then we came almost full circle," he said. "We can actually use that technology now that we understand it."
Yet that open-mindedness toward the technology appears far from uniform, and the industry is taking precautions on adopting the technology.
Banks are slowly embracing the idea of private or "permissioned" ledgers, a type of blockchain technology with access controlled by the participating institutions.
"I don't think we can clearly articulate why it's comforting," said Darrius Jones, assistant vice president of enterprise innovation for USAA. But his company's information security team trusts a controlled system more than an open one like bitcoin. "It's usually hard to win against the infosec guys."
The regulatory headaches uncertainties go beyond the domain of traditional anti-money-laundering compliance. If blockchain technology is used in the securities or foreign exchange market, "when does transfer of ownership actually takes place?" asked Bill Hartnett, a managing director at Citigroup. "When I put confirmation on the network [or] when the transaction gets written?"
Meanwhile, digital currency companies have to contend with the weight of pre-existing regulations.
"Basic consumer protections always apply regardless of the platform," said Helen Wong, an attorney at the Federal Trade Commission.
Industry representatives warn that applying older rules to new technology is difficult. "Appropriate consumer protections bring consumer confidence," said Justin Newton, co-founder and CEO of NetKi, a startup that is trying to make cryptocurrency more user-friendly. But "it's about regulating the applications — not regulating the core of the bitcoin blockchain."
In a back-of-the-envelope calculation, Carol Van Cleef, a partner at the law firm of Manatt, Phelps & Phillips, estimated that U.S. state and federal regulators with oversight authority over digital currency companies — just for consumer protection — numbered about 200.
And there is potential for more regulators to get involved, as has happened in other corners of fintech.
On Wednesday, the Consumer Financial Protection Bureau imposed an
"They did not care about how Dwolla was regulated," noted Van Cleef. "They just established jurisdiction because it was related to payments."
Since the blockchain is an inherently globally-focused technology, there is a risk that international regulators might get their wires crossed as they implement more tailored policies.
"Because of this international presence of these companies, I think there's an amplified risk of legislators and policy makers getting it wrong," said Marco Santori, a partner at Pillsbury.
On its face, forums like the private-public partnership
But there is a sense that the private sector does not have much of a choice in the matter. "Some companies are involved in this space because they think that they have to be," Santori said.
The feud between Apple and the FBI is a case in point, Santori said, where companies might be expected to cooperate with law enforcement whenever a "righteous cause" exists.
For regulators, it seems, "inside their head there's a pile of the good corporate actors and the bad corporate actors," said Dana Syracuse, a counsel at BuckleySandler and former associate general counsel at the New York State Department of Financial Services. "You want to be on the good corporate actor side."
