Digital Advocacy Groups Critical of California Bitcoin Regulation

opposition, arrows

While members of the bitcoin and blockchain industry have been vocal in their praise for proposed regulation in California, more broadly focused digital advocacy groups are taking a surprisingly critical stance.

In the latest bill analysis on AB-1326, filed on 13th July, the Electronic Frontier Foundation (EFF) and Copia Institute entered opposition arguments, a position that places them at odds with bitcoin advocacy firm Coin Center, which has called the newest version “vastly better” in interviews and published materials.

The EFF’s response, portions of which are now public via the state’s website, suggests that the non-profit digital rights group believes the bill to be “premature” and “technically inaccurate”. Founded in 1990, the group was an early supporter of bitcoin as a technology, accepting it for payments and supporting students who have faced legal issues as a result of industry-focused experimentations.

The EFF’s filing reads:

“Virtual currencies are still developing, and this bill threatens to both stunt the growth of this innovative industry and hamper the enthusiasm driving consumer interest. Also, privacy and free speech are central issues in the virtual currency space, which the bill fails to adequately consider.”

Digital think tank Copia Institute was perhaps more broad in its criticism, arguing that the bill made little sense given the need for innovators to create without boundaries.

“We should be exceptionally careful when implementing rules that have the potential to shape – or strangle – the very roots of innovation,” the Redwood City-based firm wrote. “New York, for instance, has already established BitLicense regulation, chilling bitcoin innovation in the state that is the financial center of the world.”

The comments notably follow more positive remarks by some of the industry’s best-funded startups including BitGo, Blockstream, Chain and Xapo that lauded the bill even while suggesting it should provide more leniencies for early-stage firms.

The bill passed a final hearing in the Banking and Financial Institutions Committee today by a vote of 7-0, and now moves to the Committee on Public Safety for further deliberation.

EFF arguments

The EFF  argued in its opposition to the bill that the state’s definition of a “virtual currency business” was still “overbroad”. This comes in spite of supporting filings from digital currency advocacy groups like Coin Center, which has argued the wording implements its preferred definition of custody.

The EFF, however, suggested that smart contracts, or agreements automated using blockchain-based technologies, could make custody frameworks more complex, as such arrangements could involve multiple parties.

“The vague language of the bill will leave those in the virtual currency space unclear about their obligations and may also deter those who are thinking about getting involved in the nascent industry,” the EFF wrote.

Technical issues with the bill, according to the EFF, include its assertion that transactions on a blockchain are approved in a fixed amount of time, a property the group says is not shared by other alternative blockchains such as those offered by Ripple, Stellar and Tendermint.

“More generally, it is a mistake to mandate this kind of technical description given the large variety of possible technical designs,” the EFF states.

The EFF further argued that the definitions are perhaps so broad they could be read as capturing video game currencies.

Copia’s concerns

Copia suggested that it felt the bill had improved from initial versions, but went on to question whether licensing would be in the best interest of the industry’s innovators.

In particular, Copia called attention to the rising interest among the general public in the blockchain, bitcoin’s underlying decentralized ledger.

“Bitcoin is just the currency aspect, and the blockchain itself is much more powerful. And there’s a real risk that when you set up a permission-based system for bitcoin you slide down a very slippery slope towards regulating all blockchain-based innovation,” the group wrote.

Copia went on to note how understanding of the technology remains in the early stages, and that it believes it is crucial for this investigation to continue undeterred. It also evoked a letter issued by major bitcoin firms, which he asserted aimed to draw a similar conclusion.

“Saddling new core infrastructure like Bitcoin and the blockchain with a permission-based framework sets the wrong tone entirely,” the statement reads, “and virtually ensures that Silicon Valley won’t be home to the leading innovators in this new and exciting space.”

Coin Center’s take

Alternatively, Coin Center’s Neeraj Agrawal and Peter Van Valkenburgh have suggested the bill remains improved in its current form when compared to New York’s BitLicense, especially in wording that it feels excludes blockchain-based innovation.

“The possibility of clearing and settlement and doing things on a ledger, you don’t want those being swept up into a money transmission regime,” Agrawal told CoinDesk. “The BitLicense is so broadly drafted…the California bill seems to do a pretty good job with language.”

Agrawal and Van Valkenburgh went on to voice their belief that regulations like the California bill are meant to be “narrowly focused” on the traditional definition of money transmission.

“It’s odd they’re applying it to a technology that can do so many things, but that’s the role we’ve seen states play in the legacy payments industry and that’s the field we’d like to see them play in the digital currency industry,” Agrawal continued.

Coin Center also lauded the bill’s clarity regarding multisig technology, arguing the bill overall does better than the BitLicense in zeroing in on rules that are typically the focus of state rather than federal regulators.

In this light, the team further voiced their hope that the current bill does not change, at least for the worse.

“This is just now hitting the Senate, it can still be amended,” Van Valkenburgh said. “We still need to fight for what we have.”

Opposing arrows image via Shutterstock

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