Vancouver lawyer Michael Stephens is working on cryptocurrency regulation
Ian Mulgrew
The Vancouver Sun
Vancouver lawyer Michael Stephens was at a recent convention in the Bahamas socializing in a crowded room when he couldn’t help watching and eavesdropping on two men.
“Their eyes just locked,” he recalled. “One said, ‘I have 10,000 bitcoin I want to sell you,’ and the other guy said, ‘I have X-amount of dollars I can pay you for them.’ They sat down with their laptops and transmitted the bitcoin and cash went the other way.”
Two years ago, you wouldn’t have found a major bank, big accounting firm or top lawyers like Stephens, a partner at Fasken Martineau DuMoulin LLP, anywhere near cryptocurrencies.
The reason for the sea change is that digital money has become too profitable and beneficial to leave to the crooked and brazen.
What has until now been the grease of the Dark Net, a black-market barter system, cryptocurrencies are moving into the light, from the Back Street to Wall Street.
Bitcoin, Ethereum, Zcah, Monero, Ripple, there are thousands of them — putatively worth nearly $300 billion in capitalization and generating $500 billion a day in daily volume of unregulated trading.
In Jan 2017, bitcoins were pegged at about $1,000 a token, by December they were reputedly worth more than $25,000 and this week they were going for about $12,000.
Still how do you get them and where do you spend them?
“You can buy them from individuals personally — like I saw — or on unregulated crypto exchanges,” Stephens explained. “But there are relatively few commercially viable ways you can spend your bitcoin.”
In the eyes of the law, bitcoin transactions are simply bartering.
“You can’t buy a Big Mac with 10 bitcoin, but maybe that day will come. Though 10 bitcoin is a lot of money right now (about $120,000), that would be an expensive Big Mac.”
Some cryptocurrencies are the equivalent of the trade beads, the coloured glass once used as money within the West African slave trade, others are like Canadian Tire money that you can use it to buy items from that particular retailer.
“Most transactions using Bitcoin or Ether are transactions to acquire other cryptos, other tokens within a crowd sale or an ICO (initial coin offering),” he pointed out. “I’m not a banker, but I’ve heard on the street that these crypto-millionaires are keeping the ICO market afloat because they need to keep rolling their gains into new crypto offerings.”
Most of his clients are creating one of two types of tokens: The first is designed to be used and consumed solely on their platform, to reward certain interfaces with users, grow their user base and increase engagement with their software program. The other is a form of fund-raising like a security or share offering.
“A simple equity fund-raising, like a junior mining company — send me the money and I’ll send you securities in the form of tokens. That’s really the direction that things are going.”
Regardless of their purpose, cryptocurrencies are all children of the 2008 global financial crisis.
“People lost their jobs, people jumped off tall buildings,” Stephens remembered. “This was a sort of visceral reaction by crypto-enthusiasts to find a better way to transact that essentially did away with the middleman. This is the fundamental principle of a cryptographic token — you have essentially a trustless system that doesn’t require brokers, middlemen, bankers to facilitate transactions for goods and services.”
Bitcoin was the first, created in 2009 according to lore by an apocryphal figure named Satoshi Nakamoto. There had been attempts to produce digital cash before but ultimately success required advances in encryption methods and digital distributed ledger technology, better known as blockchain.
“You literally have a token that has a storage value that is recognized across the user base and every transaction using that token can be tracked for time immemorial and is immutable and is not capable of being re-written, or collateralized or kind of played with,” Stephens explained.
That’s why regulators are paying attention and want to bring the market out of the shadows.
“What we are going to move to in the future is treasury-backed, cryptocurrency that essentially replaces the currency of a jurisdiction,” Stephens insisted. “The Canadian dollar will become a crypto-coin that people will hold in their (electronic) wallet and that will result in instantaneous, trustless transactions without the requirements of Interac, without the requirement for bank fees, without the requirement for banks to hold deposit reserves.”
That’s going to fundamentally change banking, he added.
“There’s nobody who needs to manually do anything. So there is no human error. If one system breaks down, you have 27 other systems still running (the “distributed” ledger in operation) and other nodes that can update that one node when it comes back on line. I think adoption is going to be massive.”
Europe already is experimenting with eliminating notes and coins; China is considering it.
Cryptocurrency technology can enhance transparency (transactions are pseudonymous not anonymous — each is attached to a specific computer address) which aids regulators and taxation authorities.
But the big boon is eliminating the lag time that physical recording and implementation require — a huge saving.
For example, Stephens said settlements on stock exchange trades take two days to process.
“It’s two days of risk they would no longer have to deal with, which means they don’t have to post capital, which means their overhead on trades is lower, they’re saving a ton of money and sadly it means that a lot of admin people will be redundant in these banks and institutions because there is no need for anyone to manually update a silo-ed ledger.”
With such a spectacular upside, Canadian regulators are mulling a proposal to allow cryptocurrencies to legally trade.
“That doesn’t exist anywhere in the world,” Stephens said. “If we were to create a regulated marketplace to clear and settle trades in a cryptographic security — not necessarily an equity — that would bring a ton of new issuers to B.C. and the crypto-marketplace would exponentially grow here. The last chat I had with the (Canadian Securities Exchange) was that they are about nine months away. Detractors, including the TSX Venture Exchange, would have you believe it’s a longer runway. I think it’s probably somewhere between that and 15 months. Which is very cool.”
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