In the past 5 years, we've heard a lot of buzz about bitcoin. Canada is the second most popular destination for venture capital invested in bitcoin companies, behind the United States and ahead of China. Revenue Canada became the first Canadian government authority to issue an official statement declaring bitcoins to be simple goods exchanged under a barter system. What does this mean? Retailers must declare the revenues from transactions that involve bitcoin as the method of payments, and if bitcoins are bought or sold for purposes of investment, any profits or losses must be considered capital gains or losses and will be taxed as such.
Thanks to the wonderful world of social media, I was virtually introduced to Lisa Cheng, coined the "Bitcoin Wonder Woman," and founder of Vanbex, a full-service cryptofirm that specializes in digital currency, blockchain protocol, and decentralized technology. Although we're physically located less than five miles apart, I first discovered Lisa from her engaging and thought-provoking tweets about bitcoin and the blockchain. Follow @lisacheng for some educational and entertaining insights from the digital currency world.
We reached out to Lisa and asked her to give us some insight on her hands-on experience working with emerging tech startups in the virtual currency space. She is sought after for her expertise in business development and product management. Her background includes Fortune 500 companies, enterprise sales, big data, and SaaS applications.
Bitcoin Girl in a Bitcoin World
KH: We understand that you've been living off of bitcoin for over a year now. Will you please describe your experience thus far?
LC: Living off bitcoin was better last year when the price was closer to $1000 because people were more excited about spending and using bitcoin.
KH: What were some unforeseen challenges?
LC: Converting bitcoin to fiat currency on short notice at a good exchange rate, although there are ATMs found locally I prefer to use local traders. Thankfully I met some through the local bitcoin meet-ups.
KH: What's your favorite experience so far?
LC: When I tell people that I get paid in bitcoin, it still surprises them as if I am living in an alternate reality. Sometimes it feels that way.
KH: Where does Vancouver stack up in regards to being an early adopter of digital currency?
LC: Vancouver has a really strong grassroots bitcoin community with more retailers accepting bitcoin than San Francisco, New York, Los Angeles, Toronto, and Austin.
KH: I recently attended Canada's first Fintech Conference, Digital Finance 2015, where the focus of conversation and debate surrounded bitcoin, Anti-Money Laundering (AML) and financial technology (fintech). During the innovative fintech panel discussion, the Founder & CEO of Payfirma, Michael Gokturk, said "humans by nature iterate" and gave an example of our iteration with social networks, such as Friendster, MySpace and Facebook. And he believes that bitcoin is "the spark" offering an early iteration of digital currency. Do you agree or disagree with his comment? Is bitcoin simply an early iteration of digital currency that will be followed by a new form of currency that will catch on in the future?
LC: I do agree with the statement that bitcoin is an iteration of cryptocurrency that will continue evolving as needs develop. However, Mr. Gokturk may not be familiar with Hashcash or B-money, the earlier versions of crypto which Bitcoin evolved from. There are some important and highly debated issues in bitcoin such as the block size, confirmation time, and data size which indicate bitcoin may not be the last cryptocurrency to reach mass adoption. These debates are continuing today on forums like r/Bitcoin and Bitcointalk.org so there are solutions being proposed and lots of people working on projects such as Sidechains or the Block size increase, but these discussions are very limited to those technologically aware. For the average user, they want to know if bitcoin will be easy to use and they don’t want to wait too long for a transaction confirmation (though startups like BlockCypher provide a solution for that).
KH: You've been involved in developer evangelism, growth hacking, community building, product launches and white paper research, which means you have first-hand knowledge of the regulations that affect bitcoin companies. What would you say are the top three things entrepreneurs need to know before entering the space?
LC: I have had the opportunity to write and collaborate on white papers involving tokenization, Smart Contracts, and decentralized technology. If anyone is looking to launch a startup in the bitcoin space, I recommend that they first get their hands on some bitcoin and get involved with the community. Find out the pain points of users, learn what unresolved challenges are potential opportunities, and don’t be shy to ask questions. Also, you don’t need a white paper to launch a startup – sometimes a GitHub repo is good enough.
Bitcoin: A Regulatory Nightmare?
A heated topic of discussion surrounding bitcoin is regulation. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), whose mandate is to facilitate the detection, prevention and deterrence of money laundering and the financing of terrorist activities, indicated to several bitcoin companies that they were not considered money services businesses (MSBs), making them exempt from money laundering laws. However, last summer, the government enacted legislation regulation bitcoin and other virtual currencies. The provision of a budget law amended the country's ant-money laundering and counter-terrorist financing laws to regulate virtual currencies, making digital currencies subject to the same reporting requirements as other MSBs.
Christine Duhaime, a barrister and solicitor at Duhaime Law, says the law may mark the first national regulations relation to bitcoin, and is certainly the first time a country dealt with bitcoin under national anti-money laundering law. It is not only important because it may be the first Bitcoin national law but also because most countries may now follow suit because of their membership in the Financial Action Task Force (FATF). Countries that fail to implement FATF standards risk being blacklisted as high-risk or uncooperative jurisdictions, making it more costly and difficult for them to do business with the banking systems of FATF member states.
KH: Earlier this month, the New York State Department of Financial Services (NYSDFS) issued its final version of "BitLicense," a comprehensive regulatory framework for digital currency firms and the first of its kind in terms of state regulation. Will you share your thoughts on BitLicense? Does this offer a solid regulatory framework for worldwide adoption?
LC: The NY BitLicense is going to filter out a lot of businesses that can’t afford the compliance costs involved with applying for and maintaining a BitLicense. Although it does provide a form of standardization which is good in terms of moving the Bitcoin industry forward – it will likely frame regulation that global governments will establish in their own jurisdictions. This may lead to more consolidation between bitcoin businesses merging or leaving the industry altogether.
KH: In Canada, where does digital currency stand today in regards to legislation?
LC: Bitcoin’s growth was driven in the early years by Deep Web users who saw the advantages of transacting in bitcoin over fiat currency, such as the pseudo-anonymous nature and the irreversibility of bitcoin transactions between global users. Legislation from governments has namely focused on bitcoin companies, letting the digital currency aspect of this technology to be viewed as an asset rather than a currency for personal taxation. Jurisdictions like US, Canada, Brazil, and Switzerland regulate bitcoin companies by requiring registration as an MSB and complying with AML/KYC regulations which include appointing a compliance officer and providing SARs. Recent regulatory changes like the NY BitLicense add to the above by requiring companies to meet user privacy and information security standards and appointing a Chief Information Security Officer. This is in line with the evolving industry that is bitcoin, overall these regulations are good because it means companies can’t expect to startup, hold coins, and then cash out without responsibility. There are regulations in every commercial industry and bitcoin is not exempt.Though it holds a unique position of being both a technology and digital currency - there are still concerns about consumer protection, investor protection, taxation, terrorism financing, and organized crime. I believe the approach by governments towards regulating bitcoin companies is the right approach and if bitcoin is to continue on this upward trend of mainstream adoption, companies should look to these compliance requirements as a form of validation that bitcoin is open for business.
KH: As I'm sure you're well aware, Ripple Labs was recently fined by FinCEN. How do you think this has affected the industry?
LC: Ripple was fined recently $700k for operating as an MSB without proper registration and failing to provide proper AML/KYC as part of selling its own cryptocurrency, known as XRP. I met with the founder of Ripple Labs a few days after the news and it’s clear that Ripple took this very seriously and is interested in having a relationship in good standing with the SEC. This is furthered by the recent news of Ripple’s Head of Research on the Business Development team elected to the Federal Reserve’s Faster Payments Task Force Steering Committee. For the rest of the cryptocurrency community, it should serve as a warning against the ideals of some Bitcoin communities who believe they don’t have to register as an MSB or comply with FinCen (in the US) or FinTRAC (for Canada) despite the fact that they may be exchanging money, selling their own currency, or allowing people to buy/sell digital currency without proper identity checks (AML/KYC). It’s not that they don’t want to prevent people from using cryptocurrency but rather want to make sure it’s not being used to finance terrorism or organized crime.
Banks Adopting Blockchain Technology
KH: A recent article from American Banker mentioned that banks such as BNY Mellon are experimenting with using blockchain technology without using bitcoin. Is this part of a growing trend that you are seeing with other banks? How likely are banks to adopt the blockchain as an industry standard?
LC: There has been a lot of interest from financial institutions looking to adopt or leverage the bitcoin blockchain’s technological advantages. There is undoubtedly a trend occurring where Citibank, UBS, USAA, and Satander have each taken an interest in the blockchain and indicated they are working on the technology internally. Whether they will use the bitcoin blockchain itself that is uncertain, but there will be discussions happening in the future about the use of blockchains for internal clearing and settlement (which is what Ripple is going after) or historical record keeping (such as what Factom is offering). Nasdaq has taken it a step further with their announcement of creating crypto securities via the Open Assets Protocol (Colored Coins) which will let them issue, transfer, and manage private company securities on the bitcoin blockchain. These are examples of how institutions can and will be able to use the bitcoin blockchain without necessarily the use of bitcoin as a currency.
KH: For worldwide adoption of blockchain technology, what would need to happen?
LC: I think it’s already starting to happen – governments and banks are making press announcements about their interest and use of blockchain technology. Isle of Man government and Honduras are using the blockchain internally for record keeping purposes. I think worldwide adoption of the blockchain will happen because it involves less centralized management of data heavy records that previously required IT budgets and hardware to upkeep, without compromising security and access. Backend systems will be able to implement the blockchain without disruption to end user interfaces, people won’t necessarily know they’re using a blockchain.
Digital Currency & Financial Inclusion
KH: At Trulioo, we are particularly interested in the role of digital currency in developing countries. Do you think the bitcoin will help enable financial inclusion? Why or why not?'
LC: There is a lot of interest in getting bitcoin to the unbankable populations of the world – those who are unable to get a bank account because they don’t have an address, phone number, or Social Insurance Number. There are companies like mPesa and Trestor which are looking to solve the problem of how do we get transferable value to people who barely have enough. I think these projects will be successful with introducing new grassroots economies to these populations. Where the dangers of inflation, currency controls, and distrust in the government outweigh the ability for people to participate in the economy – the promise of digital currency is like a black swan that introduces new opportunities previously not possible.
KH: What are your thoughts on the future of bitcoin?
LC: There is a lot of investment pouring into bitcoin companies and this is the predominant reason bitcoin will continue to grow and be used as more and more related products and services are offered to Bitcoin users.