DATA reveals plans to get US government, states and banks on board with virtual currency
Two founders of the committee to form a self-regulatory organization called DATA (Digital Asset Transfer Authority) gave out some more detail about their plans to CoinDesk this week.
DATA was announced on Tuesday, and hopes to stave off the potentially aggressive regulation of virtual currency companies by federal and state agencies in the US. It will have a board, which will be advised by two other sub-boards.
One of these will be a technology advisory board, while another will be a community board, containing DATA members from the virtual currency industry and supporting community.
“We have been recruiting board members including ex-regulators, a prominent technology professor involved in privacy and technology, and someone from finance who understands what the potential innovations are,” said Constance Choi, secretariat lead and co-founder of the committee. “It will represent a broad cross-section.”
There will also be a series of subcommittees when DATA is officially formed, she added, although how many and what areas they will target has yet to be decided.
Choi is the general counsel at Payward, the company behind the Kraken bitcoin trading platform. She conceived the idea for an SRO with Stan Stalnaker, the founder of Hub Culture, a social networking service that operates the Ven virtual currency.
The pair developed the concept after the Bitcoin 2013 conference in San Jose in May. “Everyone was asking what the FinCEN guidance meant,” she says. “We needed a common answer to a common problem. Immediately after that conference, we started taking steps to build the coalition.”
“What we saw was that the technologies here have so many benefits, but digital coins suffer from a PR problem,” Choi continues. “As a tech lawyer, I have seen this happen in the context of copyright law and file sharing. The question is what do you do in that grey area of regulatory uncertainty? How do you establish trust at the digital level?”
The pair gathered a core group of early adopters who formed the core of the committee. They began courting regulators directly, speaking directly with the US Treasury Department’s FinCEN agency. They floated the concept of a self-regulatory body, and say that the Treasury Department liked the idea (although they add that the Treasury hasn’t officially sanctioned it as a way to stop regulatory involvement by the US Government).
The idea is to take the conversation to regulators, rather than the other way around, says Stalnaker. “As the people who created these technologies it’s important that we have a voice around the table as these standards are fought out,” he says. “What we don’t want to see is the ones that don’t get it derailing progress.”
More than one stakeholder
The US federal government is not the only stakeholder that the self-regulatory organization (SRO) has to get on its side. The US states mean that there are effectively 50 sovereign governments to court, points out Choi. “Each of these states define money and currency differently.”
There’s also the danger that a third obstacle could appear: the incumbent financial services industry. As it stands, bitcoin and other virtual currencies barely register on their radar. After all, the market cap of bitcoin today is less than Apple’s quarterly revenue. But the potential is there for it to grow dramatically.
As it stands, companies converting between bitcoin and fiat currencies who can’t get approval in every state need businesses with a money transmitting business licence (often a bank) for what is called an agency relationship. Under this model, the bitcoin business serves as an agent of the MTB, allowing it to carry out its business without regulatory interference.
The worry is that if the traditional financial community takes a dislike to bitcoin and other virtual currencies, it could easily render it illegal via government lobbying if it wanted to – SRO notwithstanding. “At the moment, banks see a big hole, with money coming out [of the financial system], and going in,” said one source close to the DATA movement, adding that this makes financial institutions nervous.
However, where there is money to be made, banks will rarely leave it on the table. DATA wants to provide more certainty for all stakeholders, including banks, by introducing acceptable standards for know-your-client (KYC) and anti-money laundering (AML) practices. This will hopefully placate powerful movers concerned about compliance, and make the virtual currency concept more palatable for them.
There are signs that tentative connections between the two worlds are already growing. At least one bitcoin company has already signed an agency relationship, while others are in talks to do so. And bitcoin-focused firms are headhunting veterans from the traditional financial services sector to help build bridges.
One of the biggest challenges for this organization will be to placate all sides. On one side is a community of developers and early adopters driven by the idea of anonymity and decentralization, who are suspicious of centralization and the loss of anonymity. They might hope for the currency to simply route itself around regulation. On the other hand, those companies wanting to build more intuitive, usable infrastructures and services for bitcoin are negotiating with regulators and traditional financial players who have their own requirements when it comes to user accountability.
DATA will find itself negotiating these issues. “At the institutional level, the exchange level, and the banking level, we need to understand who we’re doing business with,” Choi says. “But that doesn’t mean that privacy isn’t important. Privacy is an important issue for any sophisticated business.”
Why was the Bitcoin Foundation not an appropriate vehicle for such a venture?
In part, because this isn’t a problem exclusive to bitcoin. “Bitcoin is a digital asset with very unique attributes, but the organization has to address the largest asset class,” Choi explains. “That’s where we come in.”
The Bitcoin Foundation’s general counsel Patrick Murck is on the members list for DATA. Murck will be a valuable addition to the team, as the Bitcoin Foundation has been dealing directly with regulatory squabbles after receiving a letter from the Californian Department of Financial Institutions in June. Another supporter who was in from the start was OpenCoin, the company behind the Ripple payment network.
“We hustled. I had to call and convince people,” said Choi. “Everyone comes from a unique perspective. What was really important was to get everyone to coalesce on the issues that were common.”
People were still hopping on board relatively late as momentum gathered. One person phoned up on Monday night, asking to be on a list of members before the announcement went out early Tuesday morning. This gives a sense of how fluid things still are with the DATA effort.
So, what next? There will be another meeting this month (August) following two plenary meetings in July. The board will have been selected soon, and will meet in the autumn. “We are finalizing the candidates,” said Choi, adding that the organization will be able to report more in a month.