Virtual Currencies and the Rule of Law

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During the last weeks of the Trump Administration’s Treasury Department, the Financial Crimes Enforcement Network (FinCen) unveiled a rule that received more comments than any other proposal in FinCen’s history.  Over seven thousand commentors weighed in, despite only a 15-day comment-period stretching over the Christmas and New Year’s Day holidays. The proposed rule would impose certain Bank Secrecy Act reporting requirements on unhosted virtual currency wallets.  (An unhosted wallet is the digital equivalent of a physical wallet, whereas a hosted wallet is the equivalent of a brokerage account.)  Opponents argued that the proposed rule violated privacy rights, was ineffective, inhibited innovation, and violated the Administrative Procedures Act. Proponents asserted the proposed rule and its abbreviated review period were necessary to limit money laundering, and other illicit activity.

This disagreement represented a shift in positioning between the virtual currency industry and the regulators.  Previously, many virtual currency adherents had argued its unique characteristics made standard regulations inapplicable.  Regulators generally disagreed, imposing traditional financial regulatory frameworks such as the Howey-test, know-your-customer, and money transmitter requirements.  Now virtual currency advocates claimed they were being singled out unfairly, and instead should be treated as their equivalents in the traditional financial system.  Regulators argued that the unique characteristics of virtual currency justified a more stringent approach.  This debate has significant consequences for the scope of government, combatting terrorism and other unlawful activity, personal privacy, and the future of money.    


Sujit Raman, Partner, Sidley Austin

Jaikumar Ramaswamy, Head of Risk, cLabs

Shannen Coffin, Chair, Appeals and Advocacy, Steptoe 

Moderator: Paul Watkins, Managing Director, Patomak Global Partners



This call is open to the public - please dial 888-752-3232 to join. 

Event Transcript



Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's Practice Groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at



Micah Wallen:  Welcome to The Federalist Society’s teleforum conference call. This afternoon’s topic is on “Virtual Currencies and the Rule of Law.” My name is Micah Wallen, and I’m the Assistant Director of Practice Groups at The Federalist Society.


      As always, please note that all expressions of opinion are those of the experts on today’s call.


      Today we’re fortunate to have with us our moderator, Paul Watkins, who is Managing Director of Patomak Global Partners. Paul will be introducing the rest of our panel today and moderating our discussion. After our speakers have an opening remarks portion, we will then move to a live audience Q&A. Thank you all for sharing with us today. Paul, the floor is yours.


Paul Watkins:  Thank you very much, Micah. And thank you to The Federalist Society for sponsoring this important exchange. I’m very glad to introduce our distinguished panelists who have quite relevant and impressive private and public sector experience.


      I will start with Sujit Raman, who is a Partner at Sidley Austin. He was formerly the Associate Deputy Attorney General at the Department of Justice. There, he chaired the department’s task force that produced the report “Cryptocurrency Enforcement Framework,” which is quite an important report for this conversation.


      Next, we have Jai Ramaswamy. He’s the Head of Risk, Compliance, and Regulatory policy at cLabs. And formerly, Jai was the Head of Enterprise Risk Management at Capital One and the Global Head of AML Compliance Risk Management at Bank of America/Merrill Lynch. He was also the Chief of the Asset Forfeiture and Money Laundering Section in the Criminal Division of DOJ.


      Finally, Shannen Coffin heads the Appellate Group at Steptoe & Johnson where he frequently represents clients in administrative law challenges to government action. He also served as Deputy Assistant Attorney General in the DOJ’s Civil Division where he defended the government against the sort of challenges that he now brings.


      Thank you all for joining us for this conversation. Sujit, I’d like to start with you. We’re here to talk about unhosted wallets and FinCen. Can you start by telling us what is an unhosted wallet? What sort of regulatory structure does FinCen generally impose? And if you can put your regulatory hat back on, why does the government want to regulate more in this space, and what motivated it to propose the regulations that we’re talking about here today?


Sujit Raman:  Absolutely, Paul. And first of all, let me say thank you. It’s obviously great to be on this panel. It’s great to be here with such a group of distinguished co-panelists. And I thought I might obviously answer your question but take a few minutes to provide a little bit of background on virtual currencies generally. I know we’ve got a diverse audience, and many folks might be new to this topic. And I thought I’d take a few minutes quickly just to talk about what cryptocurrencies are.


      By way of background, as you mentioned, I did help lead cryptocurrency enforcement efforts at the Justice Department, especially from a policy perspective over the past few years. I am now in private practice, obviously, helping clients navigate this space. I should emphasize I did not play any role in the formulation of the rule that we will be discussing today, and so nothing I’m talking about today is confidential information or anything like that.


      In terms of the title of our event, “Virtual Currencies and the Rule of Law,” what is a virtual currency? In basic terms, virtual currency is a digital representation of value that, like traditional paper currency, functions as a medium of exchange. Virtual currency is a type of virtual asset that is separate and distinct from digital representations of traditional currencies.


      Unlike traditional currencies, which we typically refer to as fiat currency or real currency, virtual currency does not have legal tender status in any particular country or for any government. Instead, the exchange value of a particular virtual currency generally is based on agreement or trust among its community of users. Virtual currency can be convertible, meaning it has an equivalent value in real currency, or nonconvertible, meaning it’s specific to a particular virtual domain. So think about currencies within an online gaming system. And typically in those circumstances, it cannot be exchanged for real currency.


      Now, cryptocurrency refers to a specific type of virtual currency with key characteristics. The vast majority of cryptocurrencies are decentralized. They lack a central administrator to issue currency and maintain payment ledgers. So in other words, there’s no central bank. Instead, cryptocurrencies rely, number one, on complex algorithms, number two, a distributed ledger that is often referred to as the blockchain, and third, a network of peer-to-peer users to maintain an accurate system of payments and receipts.


      Obviously, as their name suggests, cryptocurrencies rely on cryptography, or advanced math, for security. And some of the cryptocurrencies that I think most people have heard of are Bitcoin, Lightcoin, Ether, and so forth.


      So how do you use cryptocurrencies? And Paul, this gets to your initial question. Cryptocurrency can be exchanged directly, person to person. It can be exchanged through an actual exchange like Coinbase or Bittrex or Binance, or through other intermediaries. The storage of cryptocurrency is typically associated with an individual wallet, which is similar to a virtual account. Wallets can interface with blockchains and generate or store the public keys, which are roughly akin to a bank account number, something that’s publicly known, and private keys, which function more like a PIN or a personal password, that are used to send and receive cryptocurrency.


      Cryptocurrency wallets can be housed in a variety of forms, including as a tangible, external device, what we call hardware wallets. It can be downloaded as software onto your personal computer, what we call a desktop wallet, or as an app on your smartphone, which is what we call a mobile wallet. And that’s going to be key to our discussion as we go forward. It can even be printed physically on paper as a public key or a private key as a paper wallet, or as an online account associated with a particular cryptocurrency exchange. And that’s something we’ll talk about as well.


      I’ll just make a couple final points before I turn it over to my co-panelists. How do you keep track of virtual currency? How do you keep track of cryptocurrency? I mentioned earlier the distributive ledger, the blockchain. That allows a decentralized system to accurately track payments and to prevent double spending and counterfeiting by cryptographically recording every transaction.


      So when a transaction is initiated, it’s shared with participants on the network associated with that particular cryptocurrency, let’s say Bitcoin, and especially users of that community, folks who are called miners, who verify that the units have not already been spent. And they’ll validate the transaction by solving a complex algorithm. The transaction has been added to the blockchain, with each block consisting of a group of reported transactions in chronological order. Now, in exchange for doing the service, in exchange for participating in this community validation process, miners generate and receive payment themselves in the form of cryptocurrency. And that whole process is known as mining.


      Let me make one final point, and then we can open up the discussion. It’s important to talk about privacy in this context because that is critically important to the broader conversation around virtual currencies. Cryptocurrencies can vary in their degree of anonymity, depending on the public or nonpublic nature of their associated blockchain. For example, Bitcoin addresses don’t have specific names or specific customer information attached to them. Typically, it’s an alpha-numeric string of numbers and letters. But Bitcoin’s blockchain is public. As a result, users can query addresses to view and understand Bitcoin transactions to some extent.


      Other currencies have a slightly different model and use either nonpublic or private blockchains that can make tracing those transactions more difficult. That traceability concern is something that, as we’ll talk about as we go forward, is something of great interest to law enforcement and national security officials. And that’s a very significant part of our broader conversation today.


      So with that background, let me pass it over to Jai, who can correct everything that I’ve gotten wrong and speak more specifically about unhosted wallets because obviously that particular concept and that particular terminology is very much an active topic of conversation and what had let to the rule that I think -- or the proposed rule that I think we’ll be focusing most of our time on today.


Jai Ramaswamy:  Thank you, Sujit. Yes, this is Jai Ramaswamy. I work in the crypto industry these days, although, as you heard, I came from traditional financial services and before that from an enforcement role at the Department of Justice. I think, Sujit, you gave a really nice description of the technologies and their various attributes. I think what I would focus on is really the tension that arises between the nature of these technologies and the regulatory system that has arisen to regulate illicit financial activity in our global financial system.


      And so starting off with the nature of the technology, what is really important to recognize about protocols or software like Bitcoin, or like some of the other similar coins that Sujit mentioned that many of you have probably heard about in the news, is that they’re all based on what is actually fundamentally a computer science discovery that has financial implications. And by that, what I mean is a lot of attention is paid to Bitcoin as a means of transferring value.


      But at its core, the white paper which was publicly published -- anonymously published white paper essentially solved a problem at the core of computer science that had evaded generations of computer scientists. And it was can you create a network that works not in the way that traditional networks do today, which is you have essential server that is the single source of truth, and other computers connect to it, that server can be added to -- information can be added to that server, but in the form of a database, can be removed from it, and you can alter that information.


      And as a result, somebody has to administer that server to make sure that that single source of truth is not corrupted. That fundamental architecture is what governs the internet and what governs the way banks process information, the way Google processes information, the way anything you can think of in the modern world that involves the internet processes information.


      What the Bitcoin paper showed, and it’s actually a pretty marvelous invention, is that you could actually come up with a completely decentralized computing network where that information that would traditionally be contained in a central server is actually distributed amongst anybody who wants to join the network. And so copies of that database are -- identical copies are kept on multiple computers on the networks, oftentimes hundreds, thousands, if not more, computers on a given network.


      And the way that truth is determined is that when X number, let’s say 60 percent, 70 percent, depending on what the algorithm determines is the right threshold, have the same information in it, that is now the truth. And these people who maintain disparate records are essentially incentivized by cryptocurrency to maintain the security of the network.


      And so the reason Bitcoin exists and other of these cryptocurrencies exist is really as an incentive mechanism to get people to maintain a distributed network where there’s no company behind it. And so there’s no Google behind it. There’s no Amazon behind it. There’s no J.P. Morgan behind it. And so you need, essentially, in a game theoretical sense, tokens and economics to align incentives.


      That’s the birth of Bitcoin. And it results in a financial vocation because once you have these tokens, they can be traded to anybody on that network. And if they have value in secondary markets, people will buy them for fiat currency, for dollars or yen or whatever else exists.


      The reason that that’s really important is that fundamentally, these networks are peer-to-peer networks, meaning you can just transact by sending value in these tokens to anybody on that network. And it essentially collapses what had historically been a distinction between information, the transmission of information and the settlement of value that has been historical in the banking industry.


      So all of you are probably familiar with the fact that if you send money today, it doesn’t get recorded in your bank account right away. It takes a couple of days. There are all sorts of reasons for that, but one major reason is that the information that’s sent is instantaneous, but the settlement at the end of the day occurs in back processing, and so it’s not instantaneous. And what the blockchain does is it makes the settlement of value and the transmission of information both instantaneous and essentially turns digital value into something very similar to a dollar, which is a bearer instrument.


      And in the same way that you can take a dollar and give it to somebody, and that transaction is instant and final, you can now do that with a digital token, which had never been able to be done before. And so physical cash could be settled immediately, but digital cash really couldn’t. It was based on aggregation and settlement principles.


      And as a result, it’s created the possibility that you could have peer-to-peer transactions not mediated by financial institutions but by algorithms, by computer programs, and it opened up the possibility that you could have things like a programable dollar where I can send you money—it’s called a smart contract in the lingo—but I can send you money on a condition that you fulfill certain things. And so if it’s an escrow, I can send you a dollar, and when the computer program has determined that certain conditions are fulfilled, you’ll receive that dollar. And so it opens up the possibility of programmable money and all sorts of very interesting things.


      Fast-forward to the regulatory regime and why this is important. When you think about money laundering, the statute -- it’s principally the Bank Secrecy Act that we’ll talk about in a few minutes. It’s focused on the existence of financial intermediaries. In other words, it’s trying to solve a very specific problem that arose from the nature of banking institutions that have existed since the 16th century as aggregation and settlement mechanisms for capital.


      And that problem was that because ledgers of these institutions were private, and therefore law enforcement couldn’t get access to them without a subpoena, if nobody knew what was going on in these institutions, it would be very difficult to actually understand if there was criminal activity going on. And you can think of it as the Swiss banking problem, and it’s why the act is called the Bank Secrecy Act.


      It was meant to overcome this issue of private institutions with opaque ledgers using privacy as a shield, if you will, for their customers’ illicit behavior and sometimes their own complicity in that behavior. And take with that that the nature of cash as essentially opaque because once it leaves any sort of formal system, you can’t tell where it goes. People and spend, and it’s not available.


      And so law enforcement authorities were often times frustrated trying to follow the money and understand where money was going by the opacity of private ledgers that banks held and the non-transparency of cash. And that was the purpose of the reporting requirements of the Bank Secrecy Act that essentially require financial institutions to, on the one hand, report suspicious activity, so if they think that something is potentially criminal, it’s reported to FinCen, our financial intelligence unit.


      On the other hand, if some legitimate transactions that just cross a certain threshold, say $10,000, need to be reported because they’re not illegal, but they could represent illegal activity, there’s a higher risk of illegal activity, and so reporting is sent to the government to allow them to analyze the data and understand it, and then subpoenas are issued by investigations to obtain further data. And finally, banks have to collect customer data which are also obtainable by subpoena.


      This entire construct is essentially a balance between privacy, which essentially means that a bank can’t turn this over unless there’s a predicate, unless it has a reporting requirement or unless there’s suspicious activity involved. Once it’s turned over to the government, it’s protected in a narrow sense. Privacy interests are protected through grand jury secrecy and sharing restrictions on the sharing of that information.


      And one aspect that’s often forgotten is that you could have banned cash and said, “Look, cash is the problem. We don’t want people travelling around the globe with bags of cash, and so let’s just get rid of bags of cash and have everything electronic and surveilled.” But the reality is that many people in society, typically people on the lower end of the economic spectrum, use cash a lot. And so there’s a financial inclusion perspective where we say, “You know what? We’re going to accept the risks associated with cash, but we’re going to also accept that there are going to be higher costs that banks will incur in compliance costs when they have transactions associated with cash instruments.”


      Now, you put these two worlds together and you get the tension that arises. There’s this careful balance that’s been created over 50 years in the Bank Secrecy Act, but the thing that it’s trying to solve is slowly disappearing. And it won’t disappear overnight, but I think Brian Brooks, the former Comptroller of the Currency, had this great article on his leaving called “Be Ready for Self-Driving Banks.” But you could see a future where capital markets are essentially mediated by algorithms, not institutions that aggregate and settle transactions. And the Bank Secrecy Act in that context doesn’t really have a place, and so regulators are trying to think through what they should do.


      The problem that arises is that because, as Sujit mentioned, many of these blockchains are radically transparent, actually, the default is transparency of transaction information. If you know who the owner of a wallet is and you combine that with the public nature of the blockchain, you actually have an open book. It’s easy for companies, for state actors, for anybody to track and surveil individuals using this blockchain technology if you know what their identity is. And that’s one of the reasons why, for example, China’s very interested in digital currency is as a surveillance mechanism.


      And so what we’ll talk about, I think, in a minute, and I’ll turn it over to Shannen to talk about some of these issues, is what the rule did was fundamentally transform the Bank Secrecy Act from this delicate balance to a place where banks were now going to collect information not on their own customers, out of fear that basically non-customers could circumvent banks, but would be obligated to collect information in the crypto space on non-customers, in other words, counterparties of customers, which would turn the Bank Secrecy Act into much more of a surveillance mechanism.


      And so in other words, a bank would not say, “Hey, this is my customer. They’re doing this transaction over $10,000. I’m going to collect that information, and maintain it, and report it to the government, or turn it over with a subpoena. But I’m actually going to report counterparty information of my customer.” So if you, John, send money to Micah -- sorry, Micah; not you, but just a general Micah -- you have to report the name and address of the individual who’s your customer as well as the individual they’re sending it to.


      And that is fundamentally different than anything else that exists in the Bank Secrecy Act and turns banks and crypto exchanges into surveillers of third parties, which raise a whole host of issues regarding the third-party doctrine that’s the basis of the Bank Secrecy Act without judging which way a court would rule on this. It just raises concerns that are of heightened nature. And they arise because of this tension that’s now coming up between the Bank Secrecy Act focused on financial intermediaries and these new technologies that really circumvent financial intermediaries. They open up enormous new possibilities, but they do so through the help of algorithms that mediate individual interaction.


      So that was a lot of words. I apologize for it. But with that, I’ll turn it over to Paul and to Shannen.


Shannen Coffin:  This is Shannen Coffin from Steptoe & Johnson. And by way of disclosure, my firm represents the Chamber of Digital Commerce, who represent a cross-section of cryptocurrency players and has great interest what the Treasury Department and FinCen have been doing here. And we prepared a comment letter for the Chamber.


      I want to start also by apologizing. Every panel has to have a weakest link, and after listening to an incredibly fascinating discussion from Jai and Sujit, I’m going to try to bring it down to the idiot’s level  because I am the guy who lives in fear of having to remember any passwords. So the notion of losing my encrypted key for millions of dollars in Bitcoin or other currency scares the hell out of me.


      But from an administrative law perspective, this regulatory proposal raised all sorts of issues. And that is a very good example of the Trump administration, which was focused on deregulating industries, a very good example of a deregulatory-focused administration not being very good at regulating, and what we would call midnight regulation, dropping the regulation in the dying days of an administration. Really, to do that right, I think you probably have to start, as I told my colleagues yesterday, probably have to start it at about 9 p.m., but this administration did not.


      The Friday before Christmas, without really any engagement with the industry on exactly what the rule was going to say, the administration dropped a proposed rule that really went at this what I think the Secretary of the Treasury considered problem of these unhosted wallets, these wallets that weren’t associated with any particular bank or exchange but might be on a mobile phone, might be on a piece of paper, only know to one person or a few people, and not identified -- not providing the identity of the owners on the blockchain.


      So the secretary proposed a rule, and it was just a proposed rule, that required disclosure not only of the regulated party’s -- the banks and exchanges, but as Jai suggested, the counterparties to these transactions.


      The immediate problem with the regulatory proposal was that it was cram down. It was the Friday before Christmas and a supposed 15-day comment period, which when you reduced it down to get rid of the holidays, was an 8-day comment period for a massive new regulatory system to be imposed. The industry did its best to respond to the proposed rule within that timeframe, getting in comments at the first of the year, but most of the comments were, “Good god, we don’t have time to respond to this.”


      So the proposed rule asked 24 different questions. And as Paul Clement, who was representing one of the players in this industry, noted in his comment letter, there were more questions than days left to answer them.


      Now, from an administrative law standpoint, there’s no minimum comment period in the APA, but the practice has generally been, and executive orders have generally suggested 30 to 60 days for commenting. This was a 7 or 8-day comment period. And while courts are hesitant to engraft new requirements onto the APA, they read the APA as at least providing minimal comment periods where there is notice and comment. So as the Fourth Circuit said, an exceedingly short comment period doesn’t provide meaningful opportunity for comments. So the pushback from the industry said this is too short a period.


      And the agency -- there’s some strange -- within the notice of proposed rulemaking, there were some inconsistencies of the agency’s justification that the agency said, “We’re going to give you this short comment period, but we don’t think we have to give you any comment period at all because the APA’s good cause standard to dispense with notice and comment was met.”


      The problem with that, of course, is that to dispense with notice and comment under the good cause rule, the APA requires that it’s actually the comment period itself that causes particular harms to the government. So when you’re providing a comment period but saying a comment period would cause some harm, there’s a contradiction.


      The agency also sought to justify this as a national security imperative. But again, that national security imperative was, “Well, if we tell people what we’re going to do and give them some runup to the effective date of this rule, they’re going to hide these unhosted wallets and their contents entirely on the grid.” Well, again, the problem with that is then there’s not a lot of a reason to give 15 days’ notice at all.


      But putting aside the procedural issues, there are some interesting issues going forward. So we’ve mounted the hurdle of the procedural issues because the Biden administration -- well, the Trump administration in its last days decided to extend the comment period by a few days, and the Biden administration has extended it for up to 60 days. So that issue is solved.


      But beyond the procedural issues, there are some very interesting substantive issues from an APA reasonableness or arbitrary and capricious standpoint going forward. One of the key things in my mind is the agency justified the rule. In explaining the rule, the agency said, “All we’re doing is extending -- modest extensions of existing Bank Secrecy Act requirement.” But as Jai has pointed out, the Bank Secrecy Act has never really required any disclosure of counterparties’ information. That counterparties’ information is sometimes impossible to discern. You can ask and ask and not get that information.


      So what might happen -- what might be the result of what the agency is doing, absent some tweaks to the proposed rule, is that they’re an effective ban on a lot of these of transactions that banks and exchanges who can’t verify counterparty information will just stop doing transactions or allowing transactions with unhosted wallets.


      Well, the rule’s rationale as a modest extension of disclosure requirements, doesn’t really provide a justification for an effective ban. And a lot of the comments that were received by FinCen in this process really pointed that out. So the agency is going to have to deal with that issue. And how it deals with it will tell whether there is really an effective litigation challenge on the other end.


      There are also the privacy issues which we can discuss which is that while the rule only requires disclosure of a particular transaction, because these are open ledgers that are available to anyone on the blockchain, the disclosure of the owner of one particular transaction of a counterparty in one transaction also effectively discloses all of the transactions done by that unhosted wallet. So while that information is supposed to be kept private, it’s subject to hacking, which has happened on these blockchain accounts. And so the agency has a lot of issues to grapple with.


      And one issue was pointed out to me today that I think these cases could really tease out is the issue of whether Congress has to decide this sort of issue itself—this is a major new form of regulation—or by delegating the power to an agency through some very vague and rather terse language, whether there’s a nondelegation problem with this sort of massive shift of regulatory power to an agency to cover a whole new realm of regulation, whether that issue is something Congress should decide in the first instance through a bill that’s really devoted to this issue, or whether our constitutional system can tolerate an agency making it up as they go along. And this regulation is really an example of the haphazardness of what can happen when an agency rushes its process.


Paul Watkins:  Thank you, Shannen, for the summary of the APA issues there. Sujit, I want to turn things back to you before we open things up for questions. We’ve heard about the technological challenges of imposing this regulatory framework on virtual currencies. We’ve heard about some of the problems with the APA process. We’ve all been in government. We’ve all served in government. Government acts for reasons, and hopefully they’re good ones. They try to make them good ones.


      You were part of developing this enforcement framework. You spotted a lot of issues that needed to be addressed here. Can you give the background and the rationale for FinCen to act here? What are they trying to prevent? Why do they think it is necessary to move quickly and take this action?


Sujit Raman:  Yeah, I’d be happy to, Paul. Look, there are a number of legitimate uses of cryptocurrency. That’s obvious from all the examples that we’re familiar with. In fact, the adoption of cryptocurrency and of, let’s say, Bitcoin as a method of payment is actually growing exponentially just in the last few months. So we’ve seen an increase in mainstream adoption of the use of cryptocurrency as a recognized medium of exchange.


      That said, there are also a number of illicit uses of cryptocurrency that I think is part of what’s motivating the federal government’s increased interest in this technology. It’s a demonstrated fact that terrorist financing is implicated by cryptocurrencies. There was a number of cases made public in 2020, last year, where the Justice Department seized millions of dollars’ worth of Bitcoin and other cryptocurrencies used by rogue regimes to evade sanctions.


      North Korea had engaged in essentially hacks of cryptocurrency exchanges around the world and used that money to fund its illicit activities around the world. Terrorist groups like ISIS and Hamas and others had raised funds through cryptocurrency. They had essentially advertised their Bitcoin wallet address and said, “Hey, if you want to send us money, please do so.” And millions of dollars, as demonstrated in a publicly filed DOJ complaint, accomplished that.


      Perhaps most importantly, the dark web, which is a very important area for law enforcement and national security inquiry because a lot of illicit activity happens on the dark web, whether it’s trading child sexual exploitation material, believe it or not, the sale of weapons of mass destruction, of malware, of cyber tools, narcotics, obviously. There’s a lot of illegal activity happening on the dark web, which almost exclusively the medium of exchange is cryptocurrency.


      So I think those are part of the concerns that is motivating law enforcement generally when it comes to the use of cryptocurrency, and frankly, the increased use of cryptocurrency, the increased popularization of it. I think law enforcement is running into hurdles and obstacles as it tries to investigate many of these crimes. Because there is no -- as Jai had talked about, the role of the financial intermediary. Because that concept really doesn’t exist in the virtual currency world, it’s very hard for an investigator to go subpoena somebody.


      If you’re trying to track traditional illicit financing, you go to a bank or you go to a correspondent account and try to serve an MLAT on a foreign bank. It’s typically done from record keeping, record gathering through established financial intermediaries. That is a completely different model, as Jai very eloquently expressed, in the cryptocurrency exchange. If you’re trying to build a case as an investigator, it becomes much more complicated, much more difficult, and in some ways, actually almost impossible.


      So I think that’s what’s motivating the concern. I don't think anybody would deny that concern. It is a legitimate concern. The question is, is a rule like this that has been proposed the sensible and the practical and the pragmatic way to address that legitimate concern? Paul, I hope that answers your question. Of course, I’m happy to elaborate further.


Paul Watkins:  Absolutely. Well, I’ve got some follow-up questions in my head already to that answer. Thank you. Micah, let me turn things to you to open the lines.


Jai Ramaswamy:  Paul, before you go on, could I add one thing here? I don’t want to take up too much time because I want to give the audience a chance to ask questions. But just one caveat to what Sujit mentioned is that while it’s true that there are institutions here, one of the radically different things from a law enforcement perspective about the blockchain is, in many instances, it’s transparency that’s far greater than cash.


      And so the one thing I would take issue with the description that Sujit gave, and I know that he’s familiar with this since he’s involved with many of these investigations, is if you talk to investigators on the ground, in many ways, tracking and tracing and forfeiting assets is easier in blockchain technology than it is in the traditional financial system.


      And because it’s an internet based technology, you don’t have many of the same issues that you do with MLATs because you can actually obtain information about transaction activity by opening a browser and looking at it on the blockchain, tracing it to a financial exchange where if there’s an exchange of any sort, from crypto to crypto or fiat to crypto, those institutions actually have obligations under the traditional Bank Secrecy Act. And as a result, there are nodes here and modalities here to actually manage risk.


      And I can tell you, as somebody who was in an institution doing this, you talk to anybody who went from a bank to a crypto exchange, and they’ll tell you that, actually, money laundering controls and risk controls in a crypto exchange that wants to comply are actually far easier than they are in a bank because of the nature of the blockchain and the transparency of it. So that’s one caveat.


      And the only reason I raise this is to say that, riffing on the point that Shannen was making before, in an area of this that involved complex technologies and modalities where you may need to think about the particular nature of the technology, both from a risk as well as benefit perspective, benefit to law enforcement as well as benefit to society, doing this in a hasty manner actually explains why the APA exists as a sort of critical corrective to the loss of the nondelegation doctrine.


      It’s in complex areas like this that you need input from the public that may come in the form of legislation and hearings and trying to understand it, or in the regulatory context from engagement with experts who can tell you what this stuff is. But it’s critical. And if you try to engage in regulation, you’re locking down issues that are going to have much, much longer-term consequences. So that was the only caveat I wanted to throw into the mix.


Paul Watkins:  Great. Thank you for joining in. Micah, if you want to let the listeners know about questions?


Micah Wallen:  Absolutely. Let’s go ahead and open up the floor for audience questions. I had three questions jump in right away, so without further ado, we’ll move to our first caller.


Caller 1:  Very interesting conversation. I appreciate the panelists’ input. Would anyone like to address one of the major levers that governments tend to wield is their own currency manipulation, being able to buy down interest rates, that kind of thing? We all see that all the time with the Fed, for instance. With cryptocurrency, would it certainly appear that they will lose or have been losing that lever? Go ahead.


Jai Ramaswamy:  I’m happy to take a stab at this. This is Jai Ramaswamy. I think that’s largely correct except for, as Sujit mentioned at the beginning, none of these cryptocurrencies are legal tender. In other words, they’re not a unit of account in any country. Aside from some areas of the dark web and potentially areas where the currency has collapsed, like Venezuela, they really aren’t used on a day-to-day basis.


      What you find is that people still prefer to use their local currency for a whole host of reasons, for exchange rate risk reasons, for convenience, over cryptocurrency. And so cryptocurrency is very useful for cross-border transactions from the legitimate perspective or other things like that. But at the end of the day, people want easy on and off ramps into fiat currency. And so while there’s a future that one could imagine where Bitcoin or some other cryptocurrency becomes the coin of the realm, if you will, and becomes a competing currency, that’s not what we’re seeing today.


      And in fact, if you look at the way that the industry is developing, the big thing that people are talking about now are Stablecoins, which are cryptocurrencies pegged to a national unit of account, like a crypto dollar or a crypto euro. And those don’t have as big implications. They have other financial implications in terms of potentially robbing -- not robbing, but having money migrate from bank accounts to private wallets, which might affect the banks and how profitable they are. But in terms of monetary policy, it’s not necessarily the case.


      Now, I think that central bankers disagree on this. But there was a paper that just came out—I believe it was about Bank of Australia—yesterday where the bank basically took the position that they don’t see Bitcoin being that much of a threat to financial stability. I don't think they’re necessarily the only voice in this, and there are many banks who are concerned. But it’s a nuanced question as to whether something that’s not legal tender can have that impact if it’s just really a payment rail. I don't know if that answers your question, but it was a stab.


Caller 1:  Yes. Can you hear me? And we’ve been considered the de facto international currency. For instance, the U.S. government, once they finally took us off the gold standard, there was nothing behind our money than trust in our government. Well, should that time -- should that trust wane, then they’re losing leverage.


      So at any rate, I am watching all of this as it’s developing with quite a bit of curiosity and interest because, again, getting back to what I mentioned earlier, governments only have a few tools or levers to manipulate, to try to change the outcome of things, for instance, tax codes. Why do they offer tax codes? For manipulation of something that the government feels is worthy.


      So I submit to you that governments around the world are, no doubt, in my opinion, not eager to see any form of cryptocurrency really come into mainstream use for that reason if nothing else. Okay. I don’t want to tie up the day. Thank you very much, again. Very interesting.


Sujit Raman:  If I could offer just a couple thoughts. I know we have other callers --


Paul Watkins:  -- Sujit, can we just move to the second question, and then maybe we can answer both the second question and that final point together.


Sujit Raman:  No problem.


Micah Wallen:  We’ll move to the next caller.


Caller 2:  Yeah, I echo the prior comments about how fascinating this was. I have hopefully what will be three quick and potentially interrelated questions. The first one is whether or not there’s been any resolution of the regulatory status of cryptocurrency being currency or property or a security or what exactly. It seemed like there was some flux on that, at least at the federal level at the outset.


      The second, I was just curious about the constraints of enforcing seizures. I would have thought that it would have been harder to enforce seizures, especially where some or all the servers involved might be outside of the enforcing jurisdiction. So I’m curious as to how it’s actually easier to execute or seize assets in this context.


      And then the final is whether or not the government might seek to address some of the real or perceived problems associated with this by offering legal tender status to a particular blockchain of cryptocurrency, either a publicly produced one or a privately generated one, sort of along how the U.S. moved to a fiat currency in its own history right around the time of the American Civil War.


Sujit Raman:  This is Sujit. These are all great questions, and I apologize to the caller. I lost track of the first and the third questions. I did note down the second question about seizures.


      You’re absolutely right. There are certainly some challenges associated with seizing cryptocurrency, particularly, let’s say, if the servers are outside of the jurisdiction of the United States. And often, criminal actors are looking to move their funds away from the scope of U.S. federal jurisdiction. So seizures become much more complicated and much more difficult if the funds are taken in a way that are outside of the reach of the U.S. or any of the U.S.’s law enforcement partners. Those are often very strong relationships, and that international partnership is a critical part of international enforcement in this area.


      But for those funds that are maintained within the jurisdiction of the United States, where technically savvy law enforcement agents are able to find the funds, they’re able to deal with the cryptography, and there’s a very active private industry right now of tools, companies that are developing tools to help trace transactions, help law enforcement identify where the funds are going.


      There was a very big example just recently announced, Dread Pirate Roberts. Many of you might be familiar with the person who created the Silk Road illicit marketplace. That individual was arrested, convicted in federal court. I think he’s facing a life sentence, so he’s in prison. But a lot of the money, the funds that were associated with his crime, was seized by the U.S. government and recently was moved, over a billion dollars’ worth of bitcoin just in the way that Bitcoin has appreciated. And that’s all now sitting in a U.S. treasury account, or a U.S. government account.


      So that seizure was accomplished through a partnership between the U.S. Justice Department and certain private sector companies. And it was all publicly known in the press release that the DOJ issued. So it is getting more complicated, but I think there’s also now vendors and third parties that are helping the government figure out where funds are being squirreled away.


Shannen Coffin:  On the question of the regulatory status of cryptocurrency -- and I think this is a very open question. In this particular proceeding, there was a -- the Treasury tried to have it both ways. They wanted to define crypto as a monetary instrument for certain purposes but not for others. The problem with the monetary instruments definition as it existed at the time of the rule being proposed was that it was not exactly set. The monetary instruments were defined as coins and currency and traveler’s checks and negotiable instruments and other similar material.


      Well, there was an argument there that material actually meant that, material; that is, something that had a material manifestation. And a lot of this cryptocurrency exists in the digital world and has no material manifestation. Well, I think Treasury, without admitting it, realized they had a problem and slid a provision into the National Defense Authorization Act that expanded the definition of monetary instruments to include the notion of value so that it was less about material manifestation and more about having a similar value to cash. But Treasury has yet to grapple with that.


      I think this is a real issue that has pretty substantial ramifications. And the way Treasury has tried to do this, which is for reporting purposes, it’s a monetary instrument, but for crossing the border purposes, it’s not a monetary instrument, shows that there’s a lot that Treasury really has to think about. And it’s part of the reason we said, “Well, hold on. You amended the statute during the comment period to change the definition of monetary instrument. We don’t think you should be rushing this.”


      So good question, and one that I think Sujit and Jai may have broader regulatory perspective on, but I think one of the key issues in all of this.


Jai Ramaswamy:  Yeah. And I would say that under U.S. law, it’s all three. It can be a security, it can be a monetary instrument, and it can be property. So the IRS taxes it as property, and so every time you spend cryptocurrency, it’s a capital gains sale. But it’s also regulated as money transmission and as potentially under securities law. Depending on which side of the bed the FCC got up on, a particular coin can be a security.


      And I think that’s one of the challenges in the U.S. space and why, to a certain extent, the U.S. is losing the competitive advantage here. Countries like Switzerland that have very clear definitions -- they have other issues and in some ways are stricter, but they’ve got very clear definitions. And so you’ve got things developing in Switzerland around tokenization of securities or other types of assets that’s happening at a more rapid pace, and other parts of Asia, whether it’s Singapore, etc., than it is in the United States. And that lack of regulatory clarity is one of the, I think, biggest reasons.


      The third question you raised I’ll just address very quickly because I think it’s one more question around what is essentially central bank digital currencies is an active issue, which is could, in a sense, the state take this entire industry over by just creating a central digital dollar? And the reality is that yes, there are definitely reasons to move in that direction.


      I think one of the challenges is it’s really technically hard to do. And again, I think the United States is behind the curve on this in terms of producing it. I think the Fed has been engaged actively in trying to think through the real complications. I think it’s also much more complicated when you’re a reserve currency to create a digital representation of your currency than if you’re not. And so I think the U.S. has a whole host of reasons why it might be more difficult, but you’re already seeing jurisdictions move towards virtual central bank digital currencies.


      And I think the Bank of International Settlements came out with a report about a week ago that suggested that in the next three years, 20 percent of the planet will probably be using some form of a central bank digital currency and that 80 percent of central banks are experimenting with central bank digital currencies and how the private monetary instruments in the form of cryptocurrencies and public monetary instruments, whether they are cryptocurrencies or something else, play out I think is one of the questions that’s out there in the open and that we’re all grappling with in the industry.


Micah Wallen:  We do have our third question in the queue, so without further ado, I’ll move to that question.


Bert Ely:  Thank you. This is Bert Ely calling. I have two questions related to Stablecoins. First of all, it seems to me that a Stablecoin has a lot of characteristics or similarities to a money market mutual fund in the sense that they’re not supposed to break the buck, which leads to the second question. And that is, with regard to Stablecoins, what kind of fraud protections are in place?


      In other words, supposedly a Stablecoin is backed by -- or the operator or the issuer of the Stablecoin has an amount in a bank account someplace or invested someplace equal in dollars to the amount of Stablecoin that is outstanding. But that money could easily -- those reserve assets could easily disappear. So my question is what kind of fraud protections are in place to protect the holder of a Stablecoin from being defrauded by the operator or the issuer of the stablecoin?


Jai Ramaswamy:  I think you’ve raised a couple of really good questions. The issue with Stablecoins is, again, this regulatory clarity. And right now, I think there’s several bills pending in Congress that would try to clarify what is the nature of these holdings. In many instances, the issuers of fiat-backed Stablecoins, which is one Stablecoin that you’re describing, are regulated by various money transmission and money services businesses licenses. The OCC’s charter would arguably cover some of these. But right now, I think it’s an area of developing law and regulation.


      The only part that I’ll throw out there that’s different from what you described, while fiat-backed Stablecoins are one aspect of the market, there’s actually another set of Stablecoins that you’ll see popping up increasingly which are algorithmically determined Stablecoins that aren’t issued by a central issuer. They are, in a sense, the Bitcoin of Stablecoins, and they’re issued by algorithms based on supply and demand matching. And so those are in this new world of what do you do when there’s not a financial institution at the heart of this, but an algorithm?


      And again, I think that the regulatory issues are percolating there. The various international bodies are considering what you do in these circumstances.


Micah Wallen:  All right. Well, that is the end of our question queue, so before we wrap it up today, Paul, I’ll hand it back over to you for any last remarks from you or our panelists.


Paul Watkins:  Well, thank you so much, and thank you to the panelists. I enjoyed this discussion. Jai, if I can, I’ll just end by asking you one more question.


      You’ve mentioned China a couple of times. One of the areas of rare bipartisan agreement in this country is that we need to be doing everything we can to compete with China in each respect. We’ve talked about how far along they are with the central bank digital currency, how much emphasis they’ve placed on the data that can be acquired through payments transactions. Should we be concerned that we can’t even figure out how to define this asset and give people clarity on how to develop these projects? Should we be concerned if we’re focused on competing with China?


Jai Ramaswamy:  My answer is yes, and I know that Sujit also has some thoughts, and Shannen may as well. My answer is absolutely we should, for two reasons. One, part of the reason that the dollar is successful as a reserve currency is its universality of value, but also the nature of some of the values of privacy that are inherently built into a bearer instrument that protect important values.


      And the system that China is setting up is transparently—and you can read various party pronouncements on this—is transparently about social control. And the issue of a digital world is fundamentally different than an analog world. In an analog world, privacy is actually your default. In other words, things are kept in segregated ledgers, they’re on paper, it’s hard to collect information. As we migrate to a digital world, and the blockchain is only one example of this but the internet is another example of this, things become more transparent and more manipulable, and as a result, in a sense, play into the hands of states that want to use it as a means of surveillance.


      And the U.S. spent a lot of political capital at the early days of the internet making sure that it embodied U.S. values of freedom of expression, freedom of association, all sorts of things that I think helped our soft power and worked together with the dollar as a, in a sense, arbiter of that soft power. My fear is that the world we’re moving into where, in a sense, surveillance takes on an outsized role -- and it’s not that it’s not important for law enforcement. I spent most of my career in that world and understand the problems with it. But if we over index, we’re actually playing into the hands of regimes that would want a much more transparent, if you will, system that may have much, much larger social implications down the road. And in some senses, we’re ceding our competitive advantage.


      And so to me, what I would like to see is a lot more thought put into how these cryptographic protocols could create digital currencies, a digital dollar, that both preserve privacy and enable law enforcement. And the beauty of programmability is you actually have novel ways of thinking about this and allowing information to be revealed under certain circumstances and hidden under other circumstances because money now becomes programmable.


      And I wish the United States would be spending capital trying to create and innovate an industry that can do this in a way that embodies our values because if we don’t, we will see systems arise that embody other values that are antithetical to the way I think that we think about the world. And it is a bipartisan issue. Whether you’re a Republican, a Democrat, or an Independent, we generally think about the important values that we hold.


      So I’ll get off my soapbox and let others opine on this, but that’s my perspective.


Paul Watkins:  Thank you, Jai. And thank you to Micah and The Federalist Society for this opportunity. Micah, I’ll turn things back to you.


Micah Wallen:  All right. Thank you so much, Paul. And on behalf of The Federalist Society, I’d like to thank all of our panelists for the benefit of their valuable time and expertise today. We welcome listener feedback by email at Thank you all for joining us. We are adjourned. 




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s Practice Groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at