Coin Center and the EFF Square Off Over Proposed California Digital Currency Busienss Licenses

Bitcoin Magazine
Coin Center and the EFF Square Off Over Proposed California Digital Currency Busienss Licenses

The ongoing debate about the role of governments in regulating digital currencies isn’t going away anytime soon. While the dustup over New York’s BitLicense program continues, another front has opened up in California where a member of the state assembly has introduced a bill to regulate California’s digital currencies businesses.

The Washington, D.C.-based Coin Center and the San Francisco-based Electronic Frontier Foundation (EFF) each have lobbied hard against the New York Department of Financial Services attempts to regulate New York businesses with its controversial BitLicense program.

But with the proposed California law, the two organizations have taken two separate forks in the advocacy road, with Coin Center supporting the California legislation and EFF adamantly opposed.

Coin Center supports while EFF opposes proposed California law

Coin Center is now supporting the proposed California legislation, saying it is the best possible compromise under the circumstances and would prevent a worse law – the current money transmission law – from being the default in regulating bitcoin.

Peter Van Valkenburgh, director of research at Coin Center, told Bitcoin Magazine the proposed California law is a “model for sound regulation in this sector,” not as flawed as the New York BitLicense regulations, and is much better than the status quo.

“A Bitcoin company that actually holds all of the private keys for some user is acting just like a bank or a money transmitter. It’s very difficult to convince politicians that between two companies with very similar risk profiles, one that holds peoples bitcoins and one that holds their fiat, the Bitcoin business should get special treatment,” he said.

“[T]he losses suffered by customers of Mt. Gox and other failed exchanges provide all the rationale they need to treat bitcoin custodians exactly as they would treat the legacy industry,” Van Valkenburgh said. “So what we’re left with, the sensible strategy, is to make sure that non-custodial and highly innovative uses of the technology, like multi-sig, sidechains, the lightning network, are exempted.”

The proposed law would require digital currencies businesses to obtain a license from the California Department of Business Oversight (DBO).

“Everybody — even Coin Center — acknowledges that this bill has serious flaws,” EFF Activism Director Rainey Reitman told Bitcoin Magazine. “But the biggest problems aren’t for large, established Bitcoin companies like those backing Coin Center. Many of those aren’t affected by this bill, either because they already qualify for a license exception or they have the resources to overcome the regulatory hurdles.”

What happens now?

The proposed legislation has passed through the California Assembly (although the vote was split), and through the Senate Banking and Financial Institutions Committee, and is due to be voted on in the California Senate in the near future.

Meanwhile, Coin Center will work to educate people on how the law will work.

“Coin Center has been transparent from the start when it comes to bill AB 1326,” Van Valkenburgh said. “While the bill began its life unfriendly to Bitcoin and blockchain innovation, it has evolved into a model for sound regulation in this sector, even if it can still be improved.”

EFF will be fighting the proposed bill through its online activism campaign.

Rainey noted the possible repercussions of this law.

“I don’t think this will stop in California. If this bill passes, I suspect it will be replicated in future states, with potentially worse provisions. That’s why this battle is so important,” he said. “Our mission is clear and we will continue to work on behalf of Bitcoin startups, innovators, and users of future virtual currency technologies that may never exist if this law is passed. EFF has to argue for the wider public interest.”

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False Alarm: Why The Japanese Ruling May Not Spell Doom for Bitcoin Ownership Rights

This is a guest post by Drew Hinkes, an attorney at Berger Singerman. Drew is also frequently published and cited for his work on IT and technology-related issues, including virtual currencies, smart contracts, distributed ledger-based technologies, computer data security/breaches, and technology regulation.

Tokyo District Court Judge Masumi Kurachi recently rejected a claim for relief brought by a Kyoto man against the Mt. Gox bankruptcy receiver for bitcoin lost as a result of Mt. Gox’s collapse. In his ruling, Kurachi opined that bitcoin is “not subject to ownership.”

The court ruled that Japanese law allows only for proprietorship of “tangible entities that occupy space and which allow for exclusive control over them.” Since transactions of bitcoin require the involvement of a third party, exclusive control over bitcoins was not possible. Although the ruling seems dangerously misguided, it will likely be relegated to its own specific facts and not govern future disputes over bitcoin ownership.

Why This Opinion Seems Dangerous:

Taking the court’s conclusions about bitcoin at face value could create problematic results. Many assets, including stocks and bonds, transact through third parties. Most large-value transfers occur through the SWIFT network, which itself reduces value to intangible digital information. Many intangible assets such as trademarks, franchises, patents, consumer goodwill and contract rights are recognized as legally protectable assets worldwide. The logic of the recent ruling could potentially disturb long-understood concepts of property law, and drastically alter the legal status of many payment methods.

The court’s conclusion seems confused, or based on an improper understanding of bitcoin. Use of bitcoin requires only an Internet connection. Thus, it requires less intermediate infrastructure to use than a credit card. The court also appears to have misunderstood “ownership” of bitcoin. Although bitcoin itself may exist as intangible computer code, ownership and control of the private key providing access to a specific wallet functionally establishes exclusive ownership of whatever value is represented by the bitcoin held by that wallet. The court’s conclusions appear to be the result of an improper understanding of bitcoin.

However, as discussed below, the facts here are critical, and probably rescue this decision from having a long-term negative impact, or more widespread application.

A Digression About Japan’s Legal System…

Japan has a code-based legal system that differs from America’s common law legal system because courts in code-based legal systems generally cannot act in the absence of a specific applicable law. Prior decisions carry much less weight and generally do not bind judges determining future controversies.

In Japan, judges consider precedent to fill gaps or clarify the meaning of statutes, but precedent is generally non-binding.  Thus, if a similar claim was brought before a different district judge in Japan, that judge may not be compelled to rule the same way on the same issue.

Both systems provide the right to appeal decisions to a higher court. If this opinion is appealed in a timely manner, the higher court will reconsider the arguments and evidence submitted to the district court. Thus the outcome of this case, may be changed.

The All-Important “Why”:

Although the court’s conclusion seems wrong, it likely ruled to uphold the bankruptcy receiver’s power to control the disposition of Mt. Gox’s assets and avoid the need to untangle commingled assets.

Former Mt. Gox customers who claim they lost bitcoin can assert claims for recovery through the claims administration and investigation process set up by the Japanese bankruptcy receiver. The claims process, which closed on May 29, 2015, may result in claimants from Mt. Gox’s remaining assets.

The lawsuit could be viewed as a collateral attack or “end around” of the claims process, seeking to obtain a better result than would be available by submitting a claim. This sort of gambit is not available in the United States because debtors in bankruptcy liquidating assets through Chapter 7 of the United States Bankruptcy Code are protected by an automatic stay of litigation pursuant to 11 U.S.C. §362.  This stay shuts down litigation against the bankrupt entity and establishes the bankruptcy (generally) as the exclusive means for claimants to recover against the debtor. Japanese bankruptcy law, however, does not provide the same stay unless it is requested by the debtor. The court’s ruling may have been intended to prevent an “end around” to the bankruptcy liquidation claims system.

Even if the lawsuit was not an attack on the bankruptcy claims process, the court may have dismissed it to avoid tracing and separating commingled bitcoin assets. Recent news from a self-professed insider suggests that Mt. Gox operated a single bank account. Other reports suggest that client wallets previously held on the site were commingled. The claim brought in district court may have required the bankruptcy receiver to attempt to identify specific coins among its commingled assets, which may be burdensome or impossible. The litigant’s request for the return of specific bitcoin, as opposed to cash, may have provided a second reason to deny the claim.

What This Opinion Means for the Future:

It is likely that this opinion will be limited to its facts. This was a claim alleging entitlement to bitcoin held by a third party in bankruptcy where specific identifiable assets sought by the claim may not have ever existed, and where relief was available through a bankruptcy claims process.  The very specific facts of this case may render the ruling not applicable to future claims regarding bitcoin.

Further, another lawsuit regarding bitcoin in Japan is unlikely to present the same facts. Finally, as noted by the Japanese Times, the presiding judge may have felt constrained because bitcoin is not directly addressed by any existing Japanese law. This suggests that the decision may have been a request to the National Diet of Japan to “fix” this opinion by creating law directly addressing virtual currencies. It remains to be seen whether this opinion will create valid precedent, or later be fixed through legislation.


Although the headline is sensational, there are reasons to suspect that the opinion issued by Judge Kurachi may be limited to this specific lawsuit. Based on the structure of Japan’s legal system, the precedential value of the decision is limited, so that judges are not bound to the argument when deciding future disputes over ownership of bitcoin. Future cases could easily distinguish this case on its unique facts. Finally, because there is no specific law related to virtual currencies in Japan, the precedential value of this ruling may be mooted by future legislation.


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Bitcoin XT Big Block Fork Spurs Debate and Controversy

Since its release on August 6th, Bitcoin XT, a patch set on top of the existing Bitcoin Core, has focused the bitcoin community’s attention on the block size debate. Core maintainers and highly influential CEOs alike, like Peter Smith of Blockchain and Steven Pair of BitPay, have entered the online fray, fueling passion-laden discussions across Reddit, Twitter, Medium, and GitHub.

Multiple solutions have been proposed to alleviate the block size debate, like 8MB blocks, 20MB blocks, and dynamic block size limits, among others. However, Bitcoin XT is gaining traction as a viable solution as it would create a hard fork in the protocol by permanently splitting the blockchain into two different ledgers. This fork will occur if 75% of miners adopt the new patch after January of 2016, and at that time, nodes running outdated versions of the software will not accept the valid larger blocks. One of the chief criticisms leveled at Bitcoin XT is the low threshold for adoption, with many core devs suggesting that 90% or 95% threshold for adoption would optimal. As of August 16th, 7.2% of all nodes were running Bitcoin XT, with the count growing steadily. Current statistics are available, updated hourly.

Gavin Andresen, Chief Scientist at the Bitcoin Foundation, and Mike Hearn, the creator of Bitcoin XT are the chief proponents and the public faces of the patch, actively engaging with those who do not support an increase to the block size limit. Andresen developed the current patch to Bitcoin XT, which implements his BIP101 proposal. Under BIP101, the maximum block size will increase from the current 1MB to 8MB, and will double every 2 years after that until it reaches 8,192MB.

In addition to an increased block size limit, Bitcoin XT includes several other changes to Bitcoin Core such as double spend relaying, anti-DOS measures, support for new apps that use partial transactions such as the Lighthouse crowdfunding app, and DNS seed changes.

Since Bitcoin XT is a patch to the current infrastructure, Core users will not be forced to redownload the entire blockchain. It is also important to note that at this time, running Bitcoin XT is equivalent to running Core. Bitcoin XT will create a hard fork from the current Core implementation only if a 75% majority is achieved.

Critics of Bitcoin XT often point to the inherent technical risks of a hard fork. In addition, many experts, including three out of the five Core developers, believe that an increased block size limit would cause significant problems for bitcoin’s infrastructure down the road. The larger blockchain, they argue, would force certain nodes to shut down as storage space requirements become unfeasible for privately owned nodes. As nodes close due to climbing costs, the network could shrink towards centralization.

“I strongly urge that we return to the existing collaborative constructive review process that has been used for the last 4 years which is a consensus by design to prevent one rogue person from inserting a backdoor, or lobbying for a favored change on behalf of a special interest group, or working for bad actor” said Bitcoin Core developer Adam Back in an email.

Current attempts to debate Bitcoin XT’s feasibility, unfortunately, have been censored in many discussion forums. A single moderator on the Bitcoin subbreddit has been caught deleting “hundreds of, what appear to me, to be perfectly valid comments,” according to /u/jratcliff63367, another moderator. Since Bitcoin XT would create an alternative blockchain that’s incompatible with the current bitcoin blockchain, several moderators have called Bitcoin XT an alternative cryptocurrency and removed posts discussing the changes on the Bitcoin subreddit, instructing users to discuss the topic in alternative forums.

Despite the passionate conflicts, rational heads seem to have prevailed. As core developer Mark Friedenbach commented in a post, “[T]he block size limit should be raised, but only in step with what can reasonably be accomplished with engineering improvements to ensure a decentralized, policy neutral network. There are many in this space working to identify criteria for that, and a couple of different proposals for actually raising the limit in a way that would be more sensitive to these issues. All that we ask for is the time for due process, not ultimatums and hostile forks.”


Photo Martin Sharman / Flickr (CC)

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